Introduction
Interest rates might start to come down sometime in 2024 but recession and mortgage renewal risks are real. So these might end up balancing each other out and limit short term.
This is precisely why we’re big on rental income – because it’s a more reliable way to make money with real estate and also helps you scale better. That’s why we always go back to houses as our go-to investment in Toronto.
And moving forward, we also see good prospects for a stronger market in Toronto just because there’s been a lot of housing policy changes in low-rise market in Toronto and more keep coming.
What this means is that it’s good for those who are willing to take on more development and news of this will also attract more attention to the Toronto market, too.
Two types of houses in Toronto stand out for us as the best opportunities for 2024:
- Gentrifying areas that have good growth potential with amazing cash flows
- Major areas where prices have come down a lot more than average over the past year and a half.
Now out of these two, which one would be our top pick?
Gentifying Vs. Mature Areas In Toronto: The Basics
Let’s take a closer look at our top 2 investment options.
Option 1: In gentrifying areas in Toronto, you’ll find lower entry prices, better rent yields, and very strong positive cash flows. The added perk is the potential for substantial growth as the area develops.
Option 2: mature and pricier areas, saw big drops in prices over the past two years so they are now more affordable. They’re not as strong in positive cash flows but they have the potential to bounce back more than average on recovery.
Comparison Of Total Real Estate Investment Returns
Let’s look more closely at the numbers and for this we assume a market appreciation of 3% per year and a ten year investment period.
In option 1, this is something pretty typical for new investors. You buy a $900K property in Toronto, add in $70K for renovations, so you’d need around $280K to get into this investment and after you do the upgrades, the property might be worth around $1.04M
Now, let’s look at rents. What we usually look at is the cap rate, which is basically the rent yield on the property, by taking the net operating income annually and dividing that by the property’s value. When we do this, option 1’s cap rate is around 6% and generates around $1,000 of cash flows.
On the appreciation side, there’s the potential for a 1% better-than-average appreciation because of gentrification. This translates to a total return of 10.7% per year if someone bought in cash and it can be better if you invested with borrowed funds.
A typical option 2 investment today in Toronto’s mature market where w’re seeing big discounts are those that need a lot of work of around $200K. In today’s market, you might be able to buy at $1.1M so that takes the capital requirements to a much higher $460K.
The plus here is that more renovations typically mean better value add and the property might be worth $1.5M once all the work is done.
This translates to a lower cap rate, less cash flows but if we factor in 10% more in price rebound compared to the average market over the next 10 years, we’re looking at pretty good annual returns without borrowed money.
Both options look good, but option 2 means more money invested and less cash flows and returns so we’d have to say option 1 the gentrifying areas would be our top pick in general.
What Else To Consider When Investing In Toronto Real estate
One thing to keep in mind is that every purchase is different and if you wanted a more accurate analysis, you can go through this method to compare individual deals.
I’d also say that the best choice also depends on another factor – whether you’d be building on the property. Here’s what I mean.
If you choose to build a backyard house, the cost is the same regardless of where you build but rents are much higher in mature areas so the rent yields can actually look substantially higher in the mature area.
And once you enter more of the development space, the returns in the mature areas can look even better, especially once more policies get approved in the coming months with the potential to build townhouses and up to 30 unit apartments on all major streets.
How We Can Help
The main point here is that there’s no one-size-fits-all answer.
One or the other can be the better option for the right investor and it all depends on things like your goals, budget, risk comfort, and timeline. Still don’t know what’s best for you?
Reach out to us because that’s what we’re here for!
