How To Evolve & Grow Your Toronto Real Estate Investment Portfolio As You Grow

How To Evolve & Grow Your Toronto Real Estate Investment Portfolio As You Grow

Do you feel like you need to change up your real estate portfolio as your life situation changes, but you don’t how exactly to go about? Changes in your life like changing goals, constraints and your financial situation will likely mean that you’ll have to change up your real estate portfolio.

In my last video, I started a three part series that focus on how to help young investors get started sooner with real estate. Now, let’s move up the timeline. In this video, we’ll talk about what changes might need to be made to your real estate portfolio as you move from that first stage to the next stage in life as you continue to grow in your career and as your family size starts to expand.

Real Estate ROI

To kick things off, let’s see how life might look like in the starting second stage in life. You might have started real estate investing a handful of years ago and right now you’re well leverage with a loan to value ratio of 80% in your real estate portfolio.

From our last video, if your money is in your principal residence, then you’re generating around an 8% ROI annually. Condo investments generate around 19% ROI. House investments generate the best ROI at 25%.

Changes As Your Grow In Life

Now things are changing. You’ve progressed in your career, so now you have a better salary and more investment income, which means you can qualify for bigger mortgages. 

You also have more savings, which means you have more money to invest. 

Perhaps the biggest difference is that your family size is growing, so you want a bigger house in a family friendly neighbourhood. At the same time, you will have less time to put into real estate investments moving forward, so you’ll shifting towards investing in more turnkey properties moving forward.

What you should note here is that because you’re less focused on value add, finding properties with the best and most stable appreciation becomes increasingly important when it comes to refinancing for growth. You’ll want the best appreciation so that you can pull money out more quickly and you’ll want more stable markets so that you’ll actually be able to pull money out to reinvest when you’re ready compared to markets that have higher fluctuations in price which means a bigger degree of refinancing uncertainty.

Now even with changes in this stage of life, your overarching goal is probably more or less the same: you still want to continue to grow your wealth and because you’ve been investing in real estate for a few years now, you might already have a general idea of what you should be investing in. But what’s probably less clear is how exactly you should change up your portfolio given this new stage in life.

Example 1: House Hackers

There’s a lot of possibilities so perhaps the best way to explore the answer is by walking through a couple of examples.

For the first example, we have house hackers who bought an $800,000 house which is now worth $1M. They’ve been living in the basement which is 1/3 of the house and rent the rest out. Now they need more space for a growing family. An easy way to do this if they are still ok with living with tenants is to switch things up. Instead of living in the basement, they can take over the main & second floor of the house, and then rent out the basement instead. So the investment percentage will change from 2/3 to 1/3, and so their ROI will drop to 14%.

There can be a better way to do things if they have extra savings of $100,000 to buy a second house and get more privacy at the same time. What will happen is they can refinance their current house to take out an extra $160,000 and then add that to their $100,000 savings. With $260,000, that will give them enough room to buy another $1M house. We now have one house that’s completely a rental property and one second house that’s completely a principal residence, and so our investment percentage becomes a weighted average ROI of 16.5%. Note that besides getting a bigger ROI vs just taking over the upper part of the house, they also have more capital parked in real estate, so they’re able to achieve better absolute returns too.

Example 2: Condo Owners

Let’s look at example two, where we have condo owners who have two similar priced $500,000 condos: One condo investment plus a second condo that’s their principal residence. Condos have lower rent yields, so at the current moment they have a weighted average ROI of 13.5%. If they have enough from refinancing plus savings to buy a new house, that’s always the best choice for growth because they can save on transaction fees and possible taxes. But let’s see what happens if our condo owners don’t have enough capital to refinance and grow.

In this case, they will have to sell their condo home in order to buy their bigger $1M house for their principal residence. This means investment percentage would go from half to a quarter, taking their new ROI to 10.75%. On top of this, they also have to pay selling fees of around 5% of the condo selling price. In other words, if their long term goal was to maximize long term returns, house hacking would have been the better option to start with.

How Your Portfolio Looks Like During This Stage

This current stage in life stretches for the longest period of time and as you move along, you’ll find that your investment as a percentage of your total portfolio will start to zig zag. In the beginning, your investment percentage might drop as you grow your principal residence portion, but because the investment ROI grows at a quicker pace compared to your principal residence, your investment percentage will start to catch up again. Later on, you might decide to improve your principal residence and buy a better forever home which means your investment percentage will go down once again. Finally, after you purchase your forever home, your investment percentage will start going up more permanently until you approach the next stage in life where you start planning for retirement.

Even if you’re not in the retirement stage yet, I think it’s a good idea to get more clarity on the whole real estate investing roadmap which can help you make better investment decisions along the way. For example, if you knew what’s to come a few years down the road, a condo investor may have gone with house hacking instead which generates better total ROI in the long run. So if you’re looking to complete your real estate investing roadmap, please stay tuned for next week’s video for the final one of this series.

How We Can Help

If you’re at a point where you need or want to change up your portfolio, but don’t know how to go about, our Elevate team is here to help. We’re a real estate brokerage that specializes in real estate investments in Toronto and when you work with us, we’ll take time to review your existing portfolio, make our best recommendations, then help you grow your real estate portfolio and align it better to your goals. 

We offer end to end services because we know some of you might be strapped for time. So besides real estate sales, we’ll also connect you with our reliable contractors, help you with leasing and property management if you need it. Just connect with us if you want to learn more about our services!

Do You Want Help 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.