Canada GICs Supercharged! Where Should You Be Investing?

Canada GICs Supercharged! Where Should You Be Investing?


With sky rocketing interest rates, GICs are getting supercharged! One year ago, GICs were at 1.4% and rent yields were at 4%. Nowadays, 1 year GICs are at 4.5% and rent yields are sitting at around 5.5%. The gap between the two is definitely compressing and GICs are looking pretty good these days. 

But is it a better choice than investing in real estate these days? It really comes down to risk and reward, and so let’s break it down and take a deeper dive into this topic for this video.

GICs vs. Rental Income

Just as a refresher, the way most real estate investors compare rents is by looking at something called a cap rate, which takes your net rental income before mortgage payments and divides that by your property price. So, if you buy a rental property with cash, the cap rate is essentially the yield from rental income. 

Right now, cap rates are between 5 and 6%, and GICs are at 4.5%, and the difference is getting closer. The other thing to know is that the risk is different. GIC’s are lower risk since they’re guaranteed by the government; you don’t need nearly as much money to invest with; and it’s a lot less work compared to managing a rental property. So, from purely a rental income standpoint, GICs probably seem like a good choice nowadays. 

Not a lot of people buy real estate with straight cash, so let’s see how yields compare if we realistically take on a mortgage. If we use future peak rates at 5.5% and a 20% downpayment plus closing costs, your net rental income as a percentage of your investment capital ends up being 4.7%. When you compare this with GICs at 4.5%, the gap is even closer, and yet your risk goes up with a mortgage, so GICs probably win again from purely an income standpoint.

Toronto Long Term Total Returns

But with all of these comparisons, we’ve left out one big reason why we invest in real estate, which is the fact that real estate prices go up over time. Ever since 1977 to now, Toronto real estate has seen an average of 7% in appreciation, and once you add that to your return calculations, you’ll find that real estate returns end up looking much better in the long run. 

Of course, past performance doesn’t always predict the future, and so if you believe that real estate price growth should be more in line with long-term inflation, closer to 2-3% per year, then this would make a big difference to your returns, but it would still look much better than putting money in GICs in the long run.

Canada Real Estate Outlook

Now I know. There is a real risk that real estate prices could still come down from here on. RBC recently said that they believe Canadian markets will bottom out in the spring of next year, 2023, falling 14% from the peak at the bottom. Right now, it’s down 7.4% so far across the country. So if you’re looking at Canada as a whole, I do agree that it’s a real risk, and if you think so too, you should probably wait until there are clearer signs of bottoming.

Looking at Ontario, RBC expects bigger declines of 16% from the peak. But check this out. 416 detached homes have already fallen 21% from the peak, 416 semis have already fallen 27% from the peak, and it’s only condos that haven’t reached there yet, down 11%. 

And you’ve also probably heard me say this before. Investors tend to be more sophisticated, and so they usually price in future rate hikes ahead of time, which makes prices more responsive to interest rates. If you believe this too, then it’s possible that we might be close to the bottom in the Toronto investment property market already. 

Toronto Medium Term Returns

So let’s walk through an example. Say you end up buying at a 30% discount from the peak, and after that, prices would probably still fluctuate in the short term. But in the end, prices will recover in three years’ time by the end of 2025. This means your property will appreciate by 12.6% per year over the next 3 years. And once you crunch the numbers and add that to your rental income, this translates to a 58% return on your investment capital each year during the next three years. 

After that, things might stabilize at the long-term rates that we talked about before. Again, real estate is definitely higher risk than GICs, but if you are willing to accept that risk, then you’d get the potential for much better returns in the long run.

How We Can Help

With the end of rate hikes getting closer and closer, we’re seeing a lot more investors come to us asking what Toronto real estate deals look like these days. Honestly, it’s very seller dependent and the truth is that you just have to keep trying. 

If you’re looking to invest, first of all, get prequalified with a mortgage so that we can narrow down your sandbox, and then just connect with us. We’re a real estate sales brokerage that focuses on investing in freeholds in core Toronto, and we can help guide you in figuring out what’s best for you. We’ll show you different opportunities from a numbers, time, and work commitment standpoint, so that you truly know what you’re in for, which helps you make better investing decisions. After we help you buy it, 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!

Want To Get Started 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.