A Detailed Guide for Toronto
Real Estate Investors
Looking to make money in Toronto’s real estate market? You’re not the only one. Historically, investors have richly profited from buying, renting, flipping and selling properties in Toronto. This guide will outline the various options to make money in Toronto’s real estate market.
The Basics of Investing:
Financing
Getting a mortgage for a second 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 properties, you’ll likely need a down payment of 50%.
If you are a nonresident-Canadian living abroad, your down payment should be 35% as per the current rules, you can get a mortgage based on the salary you make outside Canada. However, this varies from one country to another.
​
Taxation
In Canada, any money collected from rent is considered income, thus subject to regular taxation. 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 (we can also provide one) 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 is the difference between what you collect in rent and the expenses you payout. In Toronto, cash flow positive properties (purchased with 20% down-payment ) 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 down-payment and mortgage terms.
Cash Flow
​
Appreciation
When you sell your investment property for more than you paid, that’s called appreciation. For example, you buy a triplex for $1,000,000 and later sell it for $1,300,000, that $300,000 difference is the appreciation in the value of your investment. Toronto properties have historically appreciated favourably for investors.
Equity
When a tenant pays down your mortgage, you’re building equity. For example: you buy a property for $400,000 with an $80,000 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 $450,000, you’ll have built up $370,000 in equity (and you’ll get your original investment of $80,000 back).
Return on Investment (ROI)
​
Investors use different calculations and tools to calculate the returns on their real estate investments:
​
Cash flow
Is the net amount of cash moving in and out of an investment Calculation: Income – operating expenses – financing costs
Capitalization Rate
Is the rate of return on a real estate investment property based on the income that the property is expected to generate. Operating Income / Purchase Price
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 pays down and appreciation.
​
Option 1: Investment Condos
Ever wonder who’s buying all the condos you see changing Toronto’s landscape? Investors.
This is why
Pros
Cons
A good investment condo will break even
(or be cash positive) with a 20% down
payment (which you require for a mortgage
anyway). Opportunity for both cash flow and appreciation in value over time.
The rental market is at an all-time low for vacancies, so finding a good tenant should be easy.
Generally less maintenance/repair work than being the landlord of a house
Unique condos in good locations have historically appreciated more than the stock market
Lots of obligations and little flexibility due to the Residential Tenancies Act.
​
Make sure to read our Complete Guide for Landlords for more information.
​
Works best as a long-term strategy.
Make sure to read our blog with all our tips about investing in Toronto Condos.
Option 2: Income Properties
Income properties: houses that have self-contained apartments that are rented out, are HOT, HOT commodities in Toronto.
Cons
Pros
Having a basement apartment that you can
rent out just might make the difference
between affording the home of your dreams and not.
At current interest rates, $1,000 in rent can cover over $200,000 in mortgage!
​
Historically, houses have appreciated faster than condos, so if you’re looking to make money when you sell, then an income property may be a safer bet.
​
With a 20% down payment on a multi-residential house, you should be able to break even (or ideally be cash positive)
If you’re living in the other upstairs (or downstairs) apartment yourself, you’ll need to cope with the noises and smells of your tenant
Landlord headaches: repairs, renovations, tenants that don’t pay their rent.
​
Having tenants in leases may make it harder to sell your home when the time comes.
Option 3: Flipping
Renovations always take long and cost more than you expected. With a flip, every dollar spent and every month where you have to pay a mortgage counts.
​
No matter what HGTV tries to tell us, flipping for profit isn’t easy – it takes a lot of time and can be a risky venture for someone who isn’t a contractor or tradesperson.
​
There are just as many examples of houses bought for $600,000, renovated for $150,000 and sold for $725,000.
​
If you’re considering buying a home to flip it, make sure you’re working with a REALTOR, who knows the game and can make sure you buy the right property, put the right amount of money into it for the neighborhood and sell it at the right time.
A proper quality flip in a good neighbourhood
will be in high demand (many of today’s buyers
want the fully done-up house)
​
Cash! There are certainly lots of examples of houses bought for $600,000, renovated for $150,000 and sold for $1,000,000
Pros
Cons
Buying a rundown house and renovating it for profit in under a year) happens every day in Toronto. It can be very profitable
