If you’re in the Canadian real estate market looking for a cash flow positive rental property, I’d like to let you know that they are very hard to come by. With home prices in Toronto’s housing market being among the highest in the country, your monthly carrying costs are higher too.
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Before you get discouraged, know this: just because a property is not cash flow positive, doesn’t mean it’s a bad real estate investment. The thing to be mindful of when finding a good rental property to invest in is that you can’t go in expecting quick wins. Real estate investment is for those who are willing to play the waiting game to reap great returns!
Not unlike why we discourage those who want to flip pre-construction condos to make quick profits, you’re doing yourself a disservice as a real estate investor by taking this approach. Those that make the most money in real estate aren’t doing so by buying rental investment property for cash flow, they do so by thinking about the long-term property value.
In this blog, I share my insights on finding cash flow-positive rental properties in Ontario while comparing home equity with positive cash flow as a real estate investment strategy.
What You Need To Know Before Investing For Cash Flow In Real Estate
What Is A Positive Cash Flow Property?
A positive cash flow property is one where the annual cost of ownership does not exceed the rent received. It’s a great source of passive income for the homeowner. Traditionally, these properties have offered high levels of cash returns in the short term as rental income. A property is truly cash flow positive only after tax deductions and depreciation have been accounted for.
Ultimately, a positive cash flow property makes you feel as though you’re getting paid to just sit and collect the monthly rent.
How Do You Calculate Positive Cash Flow?
To calculate the cash flow of any property or investment, you can use this simple formula:
Annual Cash Flow = Total rental income (yearly) – All costs of ownership (including maintenance fees, tax, and depreciation)
If the balance you get is positive, then you’re generating positive cash flow from your investment. If it’s negative, you’re generating negative cash flow for your investment!
What’s A Good Cash Flow For A Rental Property In Ontario?
From a month-on-month perspective, you might not be earning much. But each year, you’re generating anywhere from 4% to 20% of your investment as returns – depending on the market and the type of property you’ve invested in. And as your mortgage goes down and rent prices go up, slowly your investment can turn into a positive cash flow rental property.
The beauty of real estate and why it can be such a great investment compared to the stock market is that you’re putting a small amount down but generating equity based on the full value of the asset. Read more on the difference between good debt and bad debt in How to Use Equity to Build a Comfy Retirement
How To Find Cash Flow-Positive Properties In Ontario?
Look for trends and identify rental properties that command 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 searching for income property for sale in Toronto in a location with a 95+ transit score will allow you to rent your investment for more.
When it comes to square footage, a smaller two-bedroom condo will rent for a higher price per square foot than a larger two-bedroom condo. For example, a 680sqft condo with two bedrooms and two baths will rent for a higher price per square foot than a larger two-bedroom condo with the same amenities. Why?
Because the average rental price for two-bedroom condos is based on what the area or location commands; the size won’t have too much of an impact on the overall rental price but it could impact your overall purchase price. When it comes to rental property cash flow analysis, opting for a smaller two-bedroom investment property allows you to net a higher return and reduce carrying costs.
Look for ‘disadvantaged units’ in popular neighbourhoods
If you’re planning on holding your investment as a long-term rental or income property in Toronto, you can invest in a disadvantaged unit which will be cheaper on signing for reasons like poor view, proximity to the 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 the 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.
Consider investing in multi-residential real estate
While investing in multi-residential rental properties will most certainly have a higher price tag and require much more upfront, 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.
Capitalize on vacant owner buildings
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.
Give older properties a second glance
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 II in King West, for example, which was built in 1984. The average selling price of a 2 bedroom condo + den is between $695,000 – $823,000. The last 2 bedroom + den sold for $735,000 and was 1152 sq ft big. The average rental price for these condo units is between $3300 – $3400. Condos in the Summit II are nearly $200 cheaper per square foot when compared to other condos in the neighbourhood.
Cash Flow Vs Equity: What’s The Better Investment Strategy?
If cash flow is what you’re after when finding a good rental property, you could always buy an investment property in the suburbs or outside of Toronto where price points are low, reducing your carrying costs and potentially increasing your cash flow. However, will you get the same equity gains on your investment? Equity is where the real value lies if you’re trying to build wealth through real estate.
Why Equity Is As Important [If Not More] Than Cash Flow For Real Estate Investment
Let’s say you own a rental property that cost you $600,000. When you put all of your expenses into your investment property calculator — monthly mortgage, property taxes and insurance, condo fees, etc — and deduct that from your rental income, let’s say you actually lose $300 a month to carry that rental property. Seems crazy right?
But what if I told you at the end of that year you’ll have actually earned 5% in equity on your property? So while on paper you may have lost $3,600, in the grand scheme of things your property’s value went up and earned you $30,000. Meanwhile, someone else is paying down the principal on your mortgage and that negative cash flow can also be written off against your capital gains.
By reframing the way you look at your investment, it costs you $3,600 to make $30,000.
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 succeed in finding a cash flow positive or income property in Toronto, 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 upfront so you’re building more equity with a minimum investment. 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 cash flow positive rental income.
So while it’s much harder to land a positive cash flow rental property or income property in Toronto, 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 toward 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 when it’s time for resale. Here are some links 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 M
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