Lately, with the market picking up again, there’s a noticeable difference in Toronto investment property profits between renovated and unrenovated projects, making the returns look even better.
We’re not big fans of flipping because it’s riskier, especially with the market changing quickly. Plus, when you sell, you have to deal with high fees and taxes. So a smarter move with Toronto investment properties is to refinance after renovations to cash out.
But with cost of borrowing much higher these days, this does make it harder to take on big projects for Toronto investment properties – even if the numbers work.
So in this video, let’s talk all about how to practically finance renovations for investment properties in Toronto today.
Flipping vs. Hold & Refinancing Toronto investment properties
Let’s break down how the Toronto investment property numbers are working recently in hot neighbourhoods in Toronto:
For a renovation project with a purchase price of $1.1 million plus $200,000 in renovations, totaling $1.3 million, the renovated property at the same time could be worth $1.5 million – quick math tells us that’s a value add gain of $200,000.
If you’re flipping – you’re left with one exit strategy and the net returns might still not be worth it. After factoring in $87,000 in selling fees and $100,000 in income taxes (since flips are taxed as income), there’s not much actual gain.
So a better approach here for us is always to hold and refinance for Toronto investment properties. The difference between the initial purchase price and the new value is $400,000. So in this case, you could pull out 80% of that in cash after renovations, which is $320,000.
Just keep in mind, there’s always risk involved, whether you’re flipping or refinancing, especially if the market takes a dip.
But if you’re leaning towards holding onto the Toronto investment property and refinancing, you’ll have more options even if the market takes a short-term dip.
Holding it and renting it out gives you stronger holding power compared to a flip, even if you can’t refinance as much as you hoped after renovations. The key is having that long-term mindset so you can wait it out and maximize your gains on your Toronto investment property when the market picks up again.
The Real Issue With High Interest Rates
Let’s shift gears a bit and look at the real issue with the high cost of capital these days.
Is it really because rates are too high that the numbers don’t work for Toronto investment properties?
Picture this: You might be looking at an 8% interest rate with a HELOC for 6 months on a $200,000 project. That means you end up paying out $8,000 for a $200,000 value-add gain. Clearly still worth it for Toronto investment properties in our view.
The real issue with the high cost of capital is that it makes accessing capital much tougher because of much tougher qualifying rules. But if you can access this capital, Toronto investment property returns can are pretty lucrative.
Typical Ways To Finance Renovation Projects In Toronto
- Savings: here’s always those who have the cash or they might sell some stocks to finance the investment projects.
- Conventional Refinancing: Most investors end up refinancing another property if they’ve got equity built up. And many are opting for a conventional refinance these days to fund the projects – you’re looking at a pretty decent 5.5% for a 3-year fixed rate loan.
- HELOCs: HELOCs are tied to the prime rate, meaning you’re dealing with higher costs, around 8% these days. Plus, qualifying it stricter, typically maxing out at 65% loan-to-value, which can make getting a HELOC tougher compared to the 80% LTV you could get with a conventional refinance. The big benefit with HELOCs is the flexibility of repayment, so you’re only facing those higher rates during the renovation phase and then you can refinance the new value with a conventional mortgage once renovations are wrapped up. If you ended up with a conventional refinance to fund renovations, you might end up actually holding off on refinancing post-renovations since the extra you’re cashing out would only be the value-add portion, which isn’t as big in this case.
- Joint Ventures: There are also a few clients in Toronto who are teaming up to take on investment projects together. It’s a way to lighten the load financially for each person involved. Just remember, trust is everything in these partnerships, and having shared goals is essential for making it work.
Government Rebates & Credits For Renovation Projects In Toronto
In this case, you’ll need to pay upfront but you do get reimbursed later once you’re done renovations.
- HST New Rental Rebate: You pay 13% HST upfront when creating new rental housing and receive a portion of it back as a rebate. The rebate amount depends on the fair market value of the new rental unit. If the value is under $400K, you can expect around a 7-8% rebate, not bad.
- Multi-Generational Home Renovation Tax Credit: This credit is the lesser of $50K or 15% of the value if you create a new secondary unit for a qualifying individual: someone 65 years or older, someone 18 years or older with a disability, or for a relative of a qualifying individual.
Toronto investment properties: Buy Now, Renovate Later?
Some of our clients are thinking about buying land now, rent it out first, and building later, but there are risks involved in that Toronto investment property strategy, too.
First off, your Toronto investment property cash flows might not be as strong if you rent it out as a single family home temporarily, so you may find yourself needing to put in extra money each month to cover any negative cash flows.
Then, once the house is rented out, there’s also risk here. You’ll need to provide a N13 notice to the tenant 4 months in advance, and the tenant may delay the move-out.
You’ll also have to compensate them with one month’s rent. And if you’re only doing cosmetic upgrades, the tenant has the right to move back in afterward.
From our experience, waiting to start a project just makes things more complicated. That’s why we recommend diving in right after you buy your Toronto investment property.
How We Can Help
if you want to see how actual numbers and returns for Toronto investment properties look like today – you’re stumbled upon the right team!
Every week, our team comes together to search and share the top investment projects in Toronto – so just reach out to us.
We’re not your typical real estate sales brokerage. Instead, we focus on using numbers to make better real estate investing decisions in Toronto. That can mean looking for stronger investments with positive cash flow, thinking about risk management, and looking for ways to boost returns like value-add renovations and gentrifying areas.
If you want to discuss your private real estate situation with us, just go to this link below to set up a time to chat!
