What Are The Best Toronto Neighbourhoods To Invest In?
Introduction
If you’re currently living or investing in Toronto, you probably know that it’s not all the same. Toronto has 140 neighbourhoods, and they can vary a lot in terms of prices, accessibility, demographics and upcoming developments. What’s more is that the place that you might want to live in might not necessarily make the best investments from a numbers standpoint.
To prove this, I’ll compare three investment neighbourhoods in Toronto that vary in terms of price, rent, and appreciation potential. And at the end of this video, I’ll reveal the best investment neighbourhood out of these three neighbourhoods.
The Three Neighbourhoods
Let’s get to know the three neighbourhoods first. The first one is the Annex, which is to the west of the U of T downtown campus along Bloor. We’re looking at south of Dupont, North of Bloor, sandwiched between Bathurst and Avenue Road. It’s at the heart of downtown along the subway line and has wide assortment of restaurants, cafes, and stores at its footsteps. The average detached property price in the Annex is $2.08M right now in early 2021. We call this a mature neighbourhood, since property prices are higher than other less central neighbourhoods in Toronto and there’s fewer up and coming developments because many buildings are protected by the Toronto Historical Board. On the rental front, there is a big tenant pool in the Annex because it’s close to universities and it’s also a desirable location for many office workers who prefer living in a house instead of a condo downtown.
The second neighbourhood we’re going to compare is the Junction on the West end of Toronto – it’s between St Clair West and Annette, and Runnymede and Old Weston. This location is less central but still close enough to downtown and is easily accessible by public transit. In the past 10 years, this area has attracted a lot of attention from condos developers and investors and now the area attracts a good population of young professionals who are looking for less expensive rental options. The average detached property price in the Junction is around $1.36M.
The last neighbourhood we’re going to look at is on the east end, close to Woodbine and Danforth. It’s even further from the core compared to the Junction but still easily accessible by public transit since it’s along the Bloor-Danforth line. This area is developing and a few years behind the Junction, as condo developers started investing heavily in the area is more recent years. The average detached property price in the Woodbine neighbourhood is the least expensive at $1.245M.
Rent Yields
The first thing we’re going to compare these properties on is the rent yields, and we like to use cap rates as a metric. Right now in early 2021, the cap rate in the Annex is the lowest out of the three neighbourhoods at 3%. On the other hand, the cap rates in the Junction and Woodbine are close to 3.5-4%, so you’re getting better rental income in the latter two neighbourhoods.
Now this is why: when you’re an end user owner, you’re more likely to pay a premium to buy a property that has better schools and better neighbourhoods. On the other hand, things like this aren’t as important to renters especially since a lot of them are in a different stage in life – they might be early on in their career and many renters don’t have kids so they don’t need to worry about schools.
What this means is that rents don’t differ as much by neighbourhood compared to property prices. Because of this, you get lower rent yields in mature neighbourhoods compared to properties that are lower priced and developing.
Appreciation
Next, let’s look at historical appreciation. The 10 year appreciation are not all that different. According to listings.ca, the Annex has a 10 year appreciation of 134%, then Junction is at 135% and the Woodbine are is highest at 138%. First off, the appreciation in all three locations have been amazing for a 10 year run.
But as you can see, because the Woodbine area is in the beginning of its gentrification period, its experienced the most growth so that’s why it has seen the most appreciation. The Junction is further on in its gentrification process and it’s slowly maturing, which is why it’s not growing as quickly as the Woodbine area. The Annex is fully mature, which is why it has the lowest rate of appreciation out of the three neighbourhoods.
Let’s take a deeper look at what drives potential gentrification. On the public side, it’s driven mainly by transit plans. If you’re willing to purchase properties very early on in the gentrification process with more uncertainty, then you’ll see a big uptick in property values if the plans actually come into effect. Right now, the more uncertain plans are things like Smarttrack, the Ontario Line, and the South Relief line that cuts across the city and areas like the Junction and the Woodbine area will be at the crossroads for these plans.
On the private side, condo developments attract a lot of new residents to a neighbourhood, and they are typically young professionals. So if there’s still more room for private developments, this will further increase density and improve the demographics. And once that happens, you’ll see more businesses pop up, and this will continue to drive up property prices near those condo communities as well.
You can look at it another way as well. Before gentrification, growth is pretty much stalled just like the flat part of a hockey stick. But once the neighbourhood starts gentrifying, prices surge. Gentrification never lasts forever, so you’ll see appreciation slow down again after it has fully matured.
Now because the Junction has undergone a longer period of gentrification, future private sector developments may be more limited compared to the Woodbine area so we’re towards the top of the hockey stick. The Woodbine area is lower down the hockey stock so it should see longer periods of higher appreciation.
Value Add Returns
Finally let’s talk about value add. If you put in a big Reno of $100,000, your property price might go up by $250,000, and if that happens you pocket $150,000. Now if you had a lower priced property at $1M and assuming it’s all cash, this value add appreciation would give a rate of return at 15%. Compare this with a $2M property, your rate of return would be half at 7.5%. So from a value add potential standpoint, you can reap the better value add ROI for lower price properties which means value add potential is highest in the Woodbine area, followed the Junction, and lastly the Annex.
The Winning Neighbourhood
So if you tally all of this up, you’d be able to see that out of these three neighbourhoods, the Woodbine area has the potential for the highest returns based on rent yields, appreciation and value add returns. In other words, developing areas have better expected returns compared to maturing or matured areas.
If you want to remember one thing from this video: the best or most loved neighbourhoods – the ones that you would want to live in – might not actually make the best investments. So it’s important to keep this in mind when you searching for investment properties.
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