The Basics of Real Estate Investments
Real estate investment is like any other investment is about how much you’ll have return on your money ( equity ) after a certain period of time. Real estate is amongst one of the few investments (other than short selling ) that you can use high leverages. In Canada leverage to values of 80% or 65% are common. With the interest rates being historically low, leverage is what most of the investors use in real estate investing in Canada and it’s biggest city, Toronto’s real estate. Real estate investing in bigger cities is not much different from suburbs. A Toronto real estate agent can help you with real estate investing in a city like Toronto.
Financing
Getting a mortgage for an investment property isn’t as easy as borrowing for your primary residence – you’ll need at least 20% of the purchase price for a down payment, and only a portion of the income you get from rent will be considered in qualifying you for a mortgage (usually 80%). For commercial property investments, you’ll likely need a down payment of 50%.
Taxation
In Canada, any money collected from rent is considered income, and thus subject to income tax. Increases in the value of your investment property (from the time it becomes an investment property to the time you sell it) will be subject to capital gains taxes. If you’re thinking of buying an investment property, make sure to talk to your accountant to fully understand the tax implications.
Timing
Most real estate investments should have longer-term objectives. Because of the unpredictability of the real estate market, expecting to profit in a short period of time is risky.
Goals
What are your investment goals? There are three ways to make (or lose) money by investing in Toronto real estate:
- Cash flow (cash return) – Cash flow is the difference between what you collect in rent and the expenses you pay out. In Toronto, cash flow positive properties (purchased with 20% downpayment) are hard to come by, though it’s fairly common for investors to break-even on a monthly basis (meaning that the rent they collect is equal to the expenses they pay). Cash flow is affected by factors outside of the real estate market, for example, it depends on your downpayment and mortgage terms.
- Appreciation – When you sell your investment property for more than you paid, that’s called appreciation. For example, you buy a triplex for $1,300,000 and later sell it for $1,600,000, that $300,000 difference is the appreciation in the value of your investment. Toronto properties have historically appreciated favourably for investors.
- Equity (mortgage paydown) – When a tenant pays down your mortgage, you’re building equity. For example, you buy a property for $600,000 with a $120,000 downpayment and you apply the rent to the mortgage and rent it for 25 years. Eventually, you will have a mortgage-free property. When you then sell that property for $800,000, you’ll have built up $680,000 in equity (and you’ll get your original investment of $120,000 back).
Return on Investment (ROI)
Real estate investors use different calculations and tools to calculate the returns on their property investments:
Cash flow is the net amount of cash moving in and out of an investment
Calculation: Income – operating expenses – financing costs
Capitalization Rate (cap rate) is the rate of return on a real estate investment property based on the income that the property is expected to generate.
Calculation: Operating Income / Purchase Price
Return on Investment (ROI) – a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments
Calculated by adding the cash return + mortgage pay down + capital appreciation.
There are many tools out there to help you predict the ROI of investment properties (and of course, the BREL team has a proprietary Income Analysis tool for our clients).
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Where to invest in real estate in Toronto in 2024
Average Toronto home price: In January 1996, the average Toronto home price was $203,121. As of early 2024, the average price has risen to approximately $1,150,000. This represents an increase of about 4.7 times, reflecting significant growth in the real estate market over this period.
To split it into annual appreciations: The average annual appreciation is around 6% YoY. This updated growth rate reflects a more stable but still positive trend in property values compared to the 13% YoY seen in earlier years.
Best Places to Buy Investment Property in Toronto for a Budget of $450K-$1M
2024 Update: In the current market, properties under $1M remain highly sought after. Here are updated top areas to consider:
- Mimico: Asset Type: Condo Apartments
- 2024 Update: Mimico continues to be a popular area with a strong demand for condo apartments, driven by its proximity to waterfront and transit options.
- Downtown Toronto, East Side: Asset Type: Condo Apartments
- 2024 Update: The East Side of Downtown remains a hotspot for condo investments due to its vibrant lifestyle and access to amenities.
- Scarborough: Asset Type: Condo Apartments, Townhomes
- 2024 Update: Scarborough has gained prominence with increasing demand for more affordable housing options and new developments.
Best Places to Invest in Real Estate in Toronto for a Budget of $1M-$2M
2024 Update: For this budget range, these areas are currently recommended:
- Bloor Ossington: Asset Type: Walk-Ups and Detached Houses
- 2024 Update: This area remains attractive for its blend of historic and modern properties, and continued growth.
- Leaside: Asset Type: Detached Homes
- 2024 Update: Leaside continues to be a desirable neighborhood for detached homes due to its family-friendly environment and good schools.
- Danforth Village: Asset Type: Detached or Semi-Detached Homes
- 2024 Update: Danforth Village has become increasingly popular for its diverse housing options and community feel.
Best Places to Invest in Real Estate in Toronto for a Budget of Over $2M
2024 Update: In the higher budget range, consider these updated areas:
- Bloor St West Corridor and Roncesvalles: Asset Type: Multiplex Properties
- 2024 Update: This area remains a prime location for multiplex properties with its mix of historic charm and modern amenities.
- St. Andrews: Asset Type: Detached Bungalows
- 2024 Update: St. Andrews continues to be an exclusive area with high demand for detached bungalows.
- Rosedale: Asset Type: Detached Properties
- 2024 Update: Rosedale maintains its status as one of Toronto’s most prestigious neighborhoods with a strong market for detached properties.
Additional Considerations
- Interest Rates: As of 2024, interest rates have been rising slightly from their historically low levels in 2020. This could affect borrowing costs and investment strategies.
- Market Trends: Keep in mind that Toronto’s real estate market is dynamic. Monitor local market reports for the most current trends and data.
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