If you’re in the market for a positive cash flow investment property, let it be known that they are very hard to come by. With Toronto market prices being among the highest in the country, your monthly carry expenses are higher too.
Before you get discouraged, know this: just because it’s not cash flow positive, doesn’t mean it’s a bad 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 should be treated as a long-term investment plan.
Not unlike why we discourage those who want to flip pre-construction condos to make quick profits, you’re doing yourself a disservice as an 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 long term.
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 PARAMOUNT TO RENTAL CASH FLOW
When approaching the economics of a finding a good rental property, you always want to have a long term vision. Sure, the rental cash flow is a nice bonus, but in a market like Toronto, you make the most by investing wisely and building equity.
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.
SO, HOW MUCH MONEY DO YOU MAKE ON A RENTAL PROPERTY?
Each month, not so much. But each year, you’re generating anywhere from 4% to 20% 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 generate 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 ANALYZE PROPERTIES FOR MAXIMUM RENTAL CASH FLOW
While you may struggle to find a positive cash flow investment property in Toronto, there are ways to approach your investment and finding a good rental property that will serve to reduce your margins as you build equity. Your real estate agent will be your best advocate in sourcing your investment properties, whether in the pre-construction market or the resale market, that will better your bottom line.
Look for Rental Properties for Which You Can Charge a Premium
An experienced agent will know which floor plan layouts are in high demand or will generally rent for more.
In a similar light, don’t dwell on the size of a unit. What we mean is that the average rental price for two 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. 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.
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 up front, 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.
In the end, it’s important to decide what your goals are when investing in real estate. Pierre’s experience both as an investor and a real estate agent gives him the ability to guide his clients towards investment properties that will yield high returns.
His experience selling Toronto real estate means he has an eye for spotting profit and only recommends properties with the best investment potential. He won’t recommend anything he wouldn’t personally buy himself. Have a look at the returns he’s been able to achieve for some of his clients and then book a call to get started on your investment journey.