There are many reasons why people choose to invest in real estate. When done wisely, with the expertise of an experienced Realtor, it is one of the best ways to build wealth and prepare for your financial future. Compared to traditional investments like RRSPs, stocks and bonds, your dollar goes much further when invested in real estate.
Individuals who have invested in the Toronto condo market in the last five to ten years have seen amazing returns on their investments. However, with the success of the market, prices are at an all time high making it harder and harder for first-time buyers to get their foot in the door. With downtown condo prices growing steadily each month, it seems that the time to buy is today, but yesterday was definitely better.
A REAL ESTATE REALITY CHECK
For those of you looking to get into the condo market expecting a cash-flow positive investment property, the reality of the market today is that this is not as easily achieved as it once was. Put simply, the higher the market gets, the more you’re going to need to cover your carrying expenses. Gone are the days where 20% is going to cover you.
This is not meant to discourage you from investing in real estate. The market is still a low risk, high return investment plan. My intention here is to set expectations: while your investment may not be cash-flow positive, there are ways to approach your investment that will reduce those margins, as you build equity.
PURCHASE REAL ESTATE FOR WHICH YOU CAN CHARGE A PREMIUM
Determining what sets a premium really depends on the market at the time. Right now, corner units with a split floor plan are in high demand and will typically rent for much higher than an interior unit with side by side bedrooms. Prices also favour properties on the transit lines, so finding a location with a 95+ transit score will allow you to rent your investment for more.
When it comes to square footage, a smaller 2 bedroom condo will rent for a higher price per square foot than a larger 2 bedroom condo. For example, a 680sqft condo with 2 bedrooms and 2 baths will rent for a higher price per square foot than a larger 2 bedroom condo with the same amenities. Why?
Because the average rental price for 2 bedroom condos is based on what the area commands; the size won’t have too much of an impact on the overall rental price but it could impact your overall purchase price. Opting for a smaller 2 bedroom investment condo allows you to net a higher return and reduce carrying costs.
If you’re planning on holding your investment as a long-term rental property, you can invest in a disadvantaged unit which will be cheaper on signing for reasons like poor view, proximity to garbage chute, and so on. If the building is in a prime location, you’ll still be able to charge a competitive rental price for a unit that cost you far less in comparison to the premium units in the building. However, when it comes to resale of your investment, you get what you pay for. The same reasons that made your unit inexpensive on signing, will affect your resale price.
BUYING RESALE REAL ESTATE FOR A POSITIVE CASH FLOW
Some older properties will have a lower price tag and are typically larger in size. This way, you’re able to take advantage of the high rental prices on a property with a lower purchase price. Take The Summit in King West, for example, which was built in 1984. Currently there is a 2 bedroom plus den 1,047sqft condo listed for $659,900. Rent prices in the King West area for 2 bedroom units currently range from $3,200 to $3,700 a month. According to condos.ca, the average price tag for a 2 bedroom plus den in the area is $1,080,221 which means your mortgage will be a heck of a lot lower than that new neighbouring building. You’ll be able to charge the high rental rate that King West commands while paying lower carrying costs, therefore earning a better return from your rental income.
In order to capitalize on the Toronto rental market, keep an eye out for vacant owner buildings. With no tenants to assume, you can price the rental units at market value to ensure you’re in line with the prices at the time. If you are assuming the tenants of the seller, you are obligated to honour the lease agreement the seller had established with their tenants.
INVESTING IN MULTI-RESIDENTIAL REAL ESTATE
This will most certainly have a higher price tag and require much more up front, but if it’s within your means to do so, multi-residential properties are one of the best ways to reduce your margins. With a higher rent roll, your carrying costs will be largely, if not fully, paid for by your tenants.
THE BENEFITS OF BUILDING EQUITY
The bottom line is anyone looking at real estate as a means for creating wealth that hasn’t yet gotten into the market is missing out. Point blank. The sooner you’re able to get your money to start working for you by getting into the market, the better. To ensure that you are comfortable, choose an investment that fits your financial situation and risk tolerance.
We know by precedent that by holding a property it will increase in value. Historically in Toronto real estate averages a 5% increase year-over-year, though the market has been out-pacing this average in recent years. Have a look for yourself. While you may not be generating cash flow, you are building equity — and fast. As your mortgage goes down and rent prices go up, your rental income will continue to increase.
As your investment builds equity, you’re able to borrow that equity (up to 80% of the property’s market value) allowing you to leverage that money into additional properties. The beauty of investing in pre-construction condos is that it requires very little up front so you’re building more equity with very minimal initial cost. As your portfolio grows, you’ll eventually be able to sell one of the properties allowing you to pay off balances, leaving you with several properties building equity, no remaining debt, and a healthy positive cash-flow from your rental income.
So while it’s much harder to land a cash-flow positive investment in today’s market, if you invest in the market wisely and within your means you’ll begin building equity, growing your portfolio and amassing wealth.
Using a Realtor throughout the process who can guide you towards investment opportunities that have great margins and profit potential is the best way to kick start the process. As your finances grow, you can invest in properties with terraces and other features that give you a competitive edge come resale. For a more in-depth look at how you can use the Toronto real estate market to build your wealth, download our free guide and learn How to Retire on $10 Million through Real Estate.