According to TREB Market Watch April 2018, the average price of a detached Toronto home tumbled 14.4 per cent over the last year. Along with declines in the average price of semi-detached homes and townhouses, the current market may worry some Toronto real estate investors. However, condo apartments are still ripe for investing, with a 3.2 per cent increase in their average price over the last year.
If you’re looking to make some money in the Toronto real estate market, a condo investment might be your best bet. Even with the stricter mortgage rules partially causing a downturn in property prices, condo apartments remain resilient against declines.
What’s more, a condo investment can also generate income through rent. And the Toronto condo rental business is piping hot right now. A 2018 Rental Housing report found that 47 per cent of households currently rent and that this percentage looks to rise in the coming years. As well, 65 per cent of these renters live in apartments with five or more stories—making high-rise developments a great investment opportunity. Lastly, the study found that 2017 had the lowest rental property vacancies in the past 16 years.
Both capital appreciation and rental income look enticing, but which one reign supreme? Toronto Real Estate Agent Jamie Sarner chimes in:
At the moment, capital appreciation beats out rental income when it comes to making money on your condo investment. Condo prices are so high that it’s hard to find rental income that can keep up with the amount that condos are appreciating.
While capital appreciation and rent will make you money, there are a few things to keep in mind to get the most return on investment.
To buy a property, you’ll likely need a 20 per cent downpayment, at least. However, it’s advisable to put down as much as you can. The more money can invest from the get-go, the less you’ll have to pay on a month-to-month basis moving forward. This can help make the cash flow (rental income – mortgage payments and other condo expenses) breakeven or positive. If you can’t put down enough money, it may lead to a monthly negative cash flow. Thus, leaving you with a new, monthly, out-of-pocketexpense.
Fees and Taxes
There’s more to a condo investment than scoring a low price. Make sure to check the condo’s maintenance fees before signing the deal. If you’re looking to hire a property management company, remember that this is another expense that will affect your month-to-month cash flow. Upon finding one, make sure that the property management company has fair and transparent fees. You can write off these costs as well as the interest from your mortgage payments to reduce the taxable amount from your rental income, which is taxed as ordinary income. An accountant can best advise on how to reduce your investment’s taxes.
Appreciation Isn’t Promised
It would be nice if property price appreciation occurs indefinitely but that’s close to impossible. There are always periods of price readjustments, where property prices fall, and these circumstances commonly bring out other financial problems which may force an investor to sell in a less-than-ideal period. And while condos are doing well at the moment, one study found that 866 transactions in 2017 failed to close and had sold for less money once it was put back onto the market later in the year. These transactions were most likely for detached homes which are currently facing price adjustments.
To prevent selling for less than what you paid, Sarner advises:
The number one thing to consider is buying [real estate] properly. You can’t necessarily control what you sell it for but you can control what you pay for it.
By keeping your buying price as low as possible, you shield yourself from capital depreciation.
Developers and Locations
To hedge against depreciation, it’s best to find a property with strong intrinsic value. This means a condo from a good developer in a good location. Especially if the condo is a pre-construction, researching the developer is highly important:
By buying from plans, you can’t fully see what you’re buying. That’s why it’s important to research the developer and make sure they have a good tracker record to understand the quality they deliver,
The area is also important. Some locations may be good to rent out, but noise pollution and other problems can make it a poor place to buy. Buying in a bad location can lead to lower-than-average appreciation, or even depreciation. In terms of condo areas to purchase, Sarner suggests:
It’s very tough to recommend an area right now, but some upcoming projects on Dupont Street between Spadina and Dufferin look appealing. Most of them have yet to launch, but when they do, the price will likely skyrocket over the coming years. Yonge and Eglinton is also always a good bet with the Eglinton subway on its way in the next few years.
The Right People
As mentioned before, an accountant can provide plenty of insight into making the most out of your investment. They can help you find ways to reduce the tax you’re paying and also make sure you’re paying the right amount. This is true for both taxes on rental income and on capital gains tax, which is paid upon sale of the property.
Sarner also suggests hiring a lawyer when buying new developments:
Hiring a lawyer who understands new developments [is important] to know that everything is in place and that you’re getting a sound deal.
Hiring a real estate agent is also important for the condo investment process. They can help do due diligence on developers, know which areas are good investments, and look out for red flags when choosing your investment property.