Best Investment Property Bargains That Cash Flow In Today's Toronto Real Estate Market
Newer investors are sometimes surprised to learn that even with our current much higher mortgage rates, Toronto investment properties can cash flow. It’s true that many don’t. Condos, towns, and single-family homes definitely don’t cash flow these days. But some two-unit houses and most three-unit or more homes in Toronto still do.
We are also in a buyers’ market, and if you choose the right type of property where there are even fewer buyers than in the average market, you might be able to get a sweeter deal.
So let’s walk through general trends in today’s market, and then I’ll go through a couple of submarkets where you can get really good deals these days.
TRREB data from Jan 2021 to Oct 2022
Before I dive into the submarkets with the best deals these days, I want you to understand more about what’s going on lately in the Toronto freehold market.
Buyers have stepped to the sidelines ever since rates started hiking, and so monthly sales have halved compared to last year. And even though new listings are very low because sellers are also holding back, properties that end up selling are sitting on the market for a lot longer than normal.
Let’s take a look at this chart, where you can see that the active listings are around 50 percent higher these days compared to the average in 2021. But what’s been happening is that after the big shift in sales and listings when interest rates started rising, both sales and active listings have stabilised for around four months now. And because of this, prices have held steady since July.
Financing Cap & Larger Multiplexes
If you look carefully, you can see that buyers are starting to come back, and the sales-to-active listing ratios are improving. In a normal market, prices would start to come back up, but the rebound is going to be capped in our market because interest rates are high; they’re probably going to go higher, and this is creating a hard cap on prices.
Here’s the thing: When stress test rates were at 5.25 percent back in February, a couple making $200,000 a year might have been able to afford a $1.6 million home. But now that stress test rates are at 7.5 percent, this same couple’s budget is now capped at closer to $1.2 million. This is exactly what’s happening if we look at the sales data.
In February 2022, 50 percent of the transactions were priced at $1.6 million or more because banks could lend people enough money to buy them. As of October 2022, the fifty percent mark is now at $1.2 million, completely in line with lower mortgage affordability. As a reference, only 25 percent of buyers are now buying above $1.5 million these days, whereas it was at $2 million before.
With a dwindling buyer pool at higher price points, on the investment side, you end up seeing the bigger multiplexes sit on the market for a longer time, and eventually they get bought by an investor who is buying with lower leverage and more cash. So if you can afford it, investing in bigger properties makes for some of the best deals these days.
Bigger Renovation Projects
Now if you’re tapped out just like most of the population, then the other alternative that is seeing a lot less action these days are properties that need major renovations. Just think about who won’t take on big renovations.
You have those who don’t have the time to deal with renovations. You have those who don’t want to take on renovation adventures because of the higher risk. And then, even if someone has the time and risk appetite, they still might not have enough money.
Here’s a simple example. You can buy a $1.1 million turnkey house. If you put down a 20 percent downpayment, you’d need $260,000 in capital, including closing costs. Instead of that, you can also choose another house that needs $100,000 in renovations.
From a numbers standpoint, you might end up making more money, but the downside is that you actually need $60,000 more in capital, which not a lot of people have these days.
But these are also some of the best deals out there. If a property has been sitting on the market for a while, you might end up getting some really great discounts, which is obviously the big upside. You are also lowering your financial risk if you’re paying for renovations out of pocket. Instead of having a higher loan-to-value ratio of 80 percent, it’s lowered closer to 70 percent, so you have better cash flows and better holding power.
This also means that mortgage ratios will improve, which will be important for the future growth of your portfolio.Some people also argue that since you’re doing the work yourself, you know exactly what’s in those walls and what work was actually done, and you end up with fewer repair and maintenance issues down the road too.
How We Can Help
And when we put two and two together, the opportunities that have the best bargain power in the investment property market are multiplexes that need big renovations. List price didn’t mean much in a hot market because everything ended up selling for much more. These days, it still might not mean much, but selling prices might end up going the other way if there’s not much action on the property.
This isn’t the case for all properties so this might be the confusing part for you. If you’re buying an end-user house in a trendy neighbourhood that checks the boxes for most people, you might be disappointed to hear that we’re seeing multiple offers. And it’s actually not that easy to tell what’s really going on unless you’re very familiar with that market and poke around with property and seller specifics, and that’s what our sales team is here for.
We’re a real estate sales brokerage that specialises in investing in houses and multifamily homes in Toronto. When you work with us, we take the time to understand your needs, teach you the ropes, show you these deals, crunch all the numbers, and eventually find you the best opportunities that fit you. But that’s not all. Our team also provides renovation guidance, leasing, and property management if you need it. So, just connect with us if you want to learn more about our services!
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