Which Has The Best Returns? Comparing 3 Toronto Freehold Investment Properties With Varying Renovations

Which Has The Best Returns? Comparing 3 Toronto House Investment Properties With Varying Renovations

We compare three different freehold investment properties in Toronto, each requiring $250,000 in capital. Which property generates the best real estate investment returns? Watch the full video see us break it all down!


What kind of returns can you get if you have $250,000 to invest into Toronto real estate? If you’ve watched our other videos before, you’ll probably know that our team focuses on freeholds in the Toronto core and $250,000 is generally the threshold that you need to get started right now in 2021.

We invest in freeholds because of better cash flows and more stable appreciation, so long term returns tend to be better than Toronto condos. But within that freehold space, there’s still different options and that’s what I’ll be talking about.

In this video, I’ll compare three different Toronto freehold options that each require around $250,000 in capital. If they have different purchase prices, renovation requirements, and rent yields, how would their total returns vary?

Let’s talk about what’s included in the $250,000 capital requirement first. I’m assuming all three properties are strictly investments, so they all have a 20% downpayment. We’ll also be paying additional closing costs which include land transfer taxes and legal fees. Finally, if the property needs renovations, they’ll also come out of the pocket and be added to the total capital requirements.

On a separate note, I’m also assuming that the appreciation rates of all three properties are the same at 5% growth per year.

Property A: $1,100,000 Purchase Price & $30,000 In Renovations

Property A is our most expensive property at $1,100,000, but it’s also turnkey which means there’s no renovations required. The investment capital comes primary from a higher downpayment of $220,000 and $38,000 in closing costs so the total actual capital requirement is $258,000. The rest of the investment is paid with a mortgage of $880,000.

Because it’s a bigger property, there’s a higher barrier of entry which also brings better cap rates at 4.2%. If you don’t know what cap rate is, it’s basically a rent yield metric – the higher the better – and you can learn more about it in this video here. This property has three units which rents out for a total of $4,900 and the net monthly cash flow is $800.

So let’s look at the total returns after 5 years. We’ll use percentage returns since it’s better comparison because our investment capital will vary slightly between the three properties I’m going to go through. The 5 year total returns for Property A come from market appreciation, cash flows and mortgage pay down and it’s at 145%.

Property B: Price $950,000 Purchase Price & $30,000 In Renovations

The next property, Property B, is our mid priced property at $950,000. This property requires some cosmetic renovations of $30,000 before we rent it out. The investment capital is similar at $252,000, with $190,000 in downpayment, $32,000 in closing costs, the rest in renovations.

It’s a smaller property, so it only has 2 units and lower cap rates at 3.7% Total monthly rents are at $4000, bringing the monthly cash flow to $500. Even though we have lower cap rates, we get value add appreciation here because we renovated the property. So the 5-year return is actually better with Property B at 148%.

Property C: $850,000 Purchase Price & $60,000 In Renovations

Property C is our lowest priced property at $850,000. It also requires the biggest renovations at $60,000 before we can rent it out. The actual investment is more of less the same at $258,000 – with $170,000 in downpayment, $28,000 in closing costs, and $60,000 in renovations.

After renovations, the rents are similar to Property B and when you combine this with a smaller mortgage, we have better cash flows at $800 per month. We also get the most value add appreciation here so the total 5 year return for Property C is 165%.

Which Is The Right Property For You?

If you look purely from a returns standpoint, Property C looks the most attractive – but it might not be right for everyone!

You’d actually choose Property A, if you don’t want to deal with any renovations. Even though you don’t get value add appreciation, a higher priced property has better cap rates so your total return is still very good. You can also argue that there’s lower tenant concentration risk here because there’s more units. The hardest part here is mortgage qualifications – because it’s a higher priced property, you’ll need a bigger mortgage which might be your biggest barrier.

You’d choose Property B if you want more balanced returns from more sources of income: cash flows, market appreciation, principal paydown plus value add appreciation. In exchange, you’ll have more upfront work here, but the renovation risk is low since it’s just cosmetic. Another thing is that you might be limited to these options if you can’t qualify for a bigger mortgage.

Property C has the best returns because you can get the biggest benefit from value add work. However, this typically involves more renovation risk so you would need be more experienced to come out successful. These properties are also lower priced, which means they are easier to qualify for and have better cash flows.

Finally, if you are looking to grow your real estate portfolio quickly, many real estate investors choose these properties because value add appreciation can give a big bump in values over a short period of time. If you want to learn more about this strategy, you can check out this video.

Key Takeaway

Now if we look at this in a different way, we can see that the best real estate returns come from a combinations of better cap rates and additional value add appreciation. So if you have more capital and can qualify for larger mortgages, then choosing higher priced properties that require renovations can generate the best returns.

On the other hand of the spectrum, if your limiting factor is capital, then you can look into house hacking to qualify for a lower downpayment. House hacking is a fancy term that basically means that you live in one of the units in your investment property. When you live in a property – instead of 20% downpayment, you can qualify for a lower downpayment with mortgage insurance. This can mean the difference between the ability to only invest in a condo while renting a separate place to live vs. now being able to invest in a house.

When you compare these two options, there is less outgoing cash flow if you house hack, you’ll get more appreciation and principal pay down in absolute terms, and you’ll have better leverage as well. So from a returns standpoint, you’ll get better returns if you’re alright with living in part of your investment property.

If you’re not sure what type of freehold investment property in Toronto is right for you, we’re happy to give you some recommendations. Head over to the link below to connect with us!

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