Pickering vs Toronto! Which City Has The Best Real Estate Investment Returns?

Watch this video for a real estate investment return comparison between Pickering and Toronto, plus get extra insights on where things might head moving forward!

Introduction

Real estate seems to keep fuelling itself. Low interest rates are attracting more demand, which is causing property prices to appreciate very quickly, which attracts more attention and attracts more new demand. Now if you’re a new real estate investor,Real estate seems to keep fuelling itself. Low interest rates are attracting more demand, which is causing property prices to appreciate very quickly, which attracts more attention and attracts more new demand. Now if you’re a new real estate investor, there’s a lot to think about. Your first question might be, “what should you invest in?”” If you ask us, we like to invest in freeholds because there’s better returns and better cash flows which translates to better holding power. If you want to learn more about that, check out this video first.

So if you’re convinced that freeholds are better, then your next question might be, “where should you invest?” Historically, Toronto is more expensive so if you can’t afford Toronto, you would have no choice but to go outside of Toronto. But the pandemic has really made things more equal now with other parts of the GTA appreciating a lot quicker than Toronto, making the property prices across the GTA pretty close to Toronto prices. So given that the entry price for properties are now more or less the same, where is truly the best location in the GTA to invest in?

In this video, I’m going to do a specific investment return comparison between Toronto and Pickering freeholds. I picked Pickering because of its impressive appreciation over the past year! Pickering has seen a whopping 43% appreciation year over year as of March 2021 whereas Toronto has only gone up by 10%. I’ll walk you through how historical long term returns compare, how returns have changed over the past year, and give you some insights on where returns might head moving forward. there’s a lot to think about. Your first question might be, “what should you invest in?”” If you ask us, we like to invest in freeholds because there’s better returns and better cash flows which translates to better holding power. If you want to learn more about that, check out this video first.

What Makes Up Real Estate Returns?

In the simplest terms, real estate returns come from rental income plus appreciation. If you factor in a mortgage, on one side, your expenses do increase but on the other more significant side this improves your leverage, so the net effect makes your total returns look much better.

But if returns before leverage are better, and the leverage multiple for different properties, then as long as your returns as percentage are better pre-leverage, then post leverage returns are directly correlated and will automatically also be better. So let’s simplify our comparison and just look at returns before leverage.

Appreciation

Let’s look at appreciation first. Based on TRREB numbers, the earliest data for Toronto and Pickering on TRREB is from March 2012. So let’s look at historical appreciation between this period. Over the eight year period, we see an annual appreciation of 7.6% for Toronto and 8.1% for Pickering. Pickering is still at the growth stage whereas the majority of Toronto has matured, so Pickering does see slightly higher appreciation vs. Toronto.

Then the pandemic came and Pickering knocked it out of the park last year with 43% appreciation, whereas Toronto as a whole saw 10% appreciation – which is good but not nearly as good as Pickering. If you factor in leverage, this difference is even more massive and congrats to you if you owned property in Pickering over the past year.

Now given the impressive appreciation last year, what will happen in the future is actually entirely subjective. Pickering’s appreciation won’t be 43% forever, and if you believe that Pickering has already over extended itself for the next 4 years, then we might see much slower than average appreciation for the next few years.

This isn’t the case in Toronto, so we’ll most likely see more stable appreciation here. There’s also the recovery story, where Toronto will likely benefit with more job growth opportunities and people moving back to Toronto because of this. Plus there’s more public and private development focus in the core so gentrification potential in Toronto is also higher once Pickering starts to mature.

Unlike Pickering which might see very low rates of appreciation in the next few years, Toronto’s appreciation might dip a lot less than Pickering because Toronto’s didn’t see as much appreciation last year. Toronto’s appreciation went up 2.4% more than average, so you can argue that might be 2.4% lower in Toronto spread over four years. In other words, instead of 7.6% annual appreciation, we’re looking at only 7% over the next four years which isn’t bad at all.

Rent Yields & Cap Rates

We like to use cap rates, which is basically our net rents as percentage of your property’s value. If you want to learn more about cap rates, check out this video here. Before the pandemic, Toronto cap rates were better than Pickering. Right before COVID, cap rates for Toronto freeholds that we invest in were close to 5.5% whereas Pickering’s cap rates were closer to 5%. The reason cap rates were better in Toronto is because renters were wiling to pay a premium to live in Toronto.

So let’s see how cap rates changed after the pandemic. Toronto rents dropped by 20% and property prices went up 10% over the last year, so the New Toronto cap rate is definitely lower now, sitting at 73% of the old Toronto cap rate pre-pandemic or a new cap rate of 4%. Pickering rents didn’t change much, but property prices sky rocketed 43%. So math tells us that Pickering cap rates are also lower, sitting at 70% of the old Pickering cap rate pre-pandemic, or a new cap rate of 3.5%.

If you invested in Pickering last year, you might be like it doesn’t matter how cap rates did because appreciation was so awesome, it’s rents aren’t that significant. That’s true, but I found the cap rate adjustment very interesting because even though appreciation and rents moved at different paces in Toronto and Pickering, the net effect to cap rates post pandemic were very similar.

So having said this, if cap rates in Toronto are higher, Toronto cap rates will most likely remain the percentage higher even if rents or appreciation changes in the future. In other words, Toronto cap rates will likely stay consistently at around half percentage higher than Pickering.

Total Returns

Now that we have all the parts, we can look at total returns. Historically, Toronto’s appreciation is at 7.6% and cap rates were at 5.5% so Toronto’s total returns are 13.1%. Pickering’s long term annual appreciation is at 8.1% and cap rates were at 5% so Pickering’s total returns are also at 13.1%. From a total returns standpoint, the two cities saw the same awesome total returns before leverage.

Now what you might be concerned about is where things will head moving forward and again, this is highly subjective. We mentioned Toronto’s appreciation might dip by a bit to around%. And if you assume cap rates to stay at 4% conservatively, then you’re looking at 11% total returns in the next few years.

On the Pickering end, if we’re expecting really low appreciation rates, say 2.1%, and cap rates are half a% lower than Toronto at 3.5%, then Pickering total annual returns would be at 6% per year over the next few years.

This 5% difference, when you factor in leverage of four times, would be a twenty% difference, so this makes Toronto’s investment returns a lot better than Pickering. Again, nobody has a crystal ball and these are just projections based on our assumptions and views. Actual returns moving forward will differ based on where actual appreciation and rents will go, and it’s important for you to do your own analysis before making investment decisions.

Other Insights

Besides number crunching, we do have a few more insights to share. First of all, both cities have great long term returns and it’s hard to go wrong if you hold them for the long haul. Pickering has been in a growth stage in the past and that’s why we’ve been seeing higher appreciation in Pickering. Once it becomes more developed and mature, we might see growth slow down a bit to Toronto’s average appreciation rates. And if you look at Toronto, different pockets might have different appreciation rates. If you choose neighbourhoods undergoing gentrification in Toronto, then you’ll see higher than average appreciation rates. Another thing to consider is active management. If you do decide to manage your rental properties on your own, living closer to your properties can reduce total travel and active management time, so this is another thing to take into account. Finally, remember there can be differences in tenant profiles. Suburbs tend to have more renters who are families, and families tend to stay for a longer time. On the other hand, core Toronto sees less family renters, meaning they are more transient. Now when you combine this with the fact that market rents increase at a much faster rate than regulated rent increases for existing tenants, you’re able to have better returns if you have tenants that turn over more regularly vs. tenants that stay for a long time.

How We Can Help

We are a full service real estate investment brokerage specializing in properties in Toronto. When you connect with us, we take time to learn about your requirements and preferences so that we can find you the best performing real estate investments for you. Once you buy a property with us, we also guide you through the renovations process with optional services for leasing and property management. If you want to learn more about our services, please feel free to connect with us!

Do You Want Help With Real Estate Investing In Toronto?

We’d be happy to learn more about your situation and help you find the best investment opportunities for you.