How To Compare Toronto Real Estate Investment Opportunities Objectively!
If you are comparing different properties, make sure you’re comparing things accurately! In this video, let’s talk about key things to consider and how the ROI may change based on varying assumptions.
When you are looking at similar properties in the same neighbourhood, you can use rent yields to objectively compare them to find the best opportunity. You can do this because their appreciation rates will be similar because it’s in the same area. The rental situation is also similar, which means other variables like vacancies and tenant turnover are also more or less the same.
But if you are comparing different types of properties like condos vs houses, or properties in different areas like Toronto vs Hamilton, don’t forget to factor other variables in as well on top of rents. In this video, let’s talk about key things to consider when you’re comparing different types of properties in varying locations and how they might impact your final ROI number.
Varying Rates Of Appreciation
Let’s talk about appreciation first. Different locations and different types of properties can have pretty different appreciation rates. If you ask us, this is actually the most important factor in the real estate equation. To put this into perspective, if you are comparing two opportunities that have a 2% difference in appreciation, over a 5 year period, that’s a 10% difference. On a $1M property, that’s a $100,000 difference in returns!
So now that you have a better perspective, let’s see how much properties have appreciation in select cities across Ontario over the past 10 years based on data from Listings.ca. In the last 10 years, Toronto has seen the best appreciation, followed by Vaughan, then Oshawa and Barrie, and surprisingly a city that many investors are attracted to, Hamilton, actually had the lowest appreciation over the past 10 years.
So if you bought that same $1M property 10 years ago, today it would be worth $2.3M in Toronto, and you would have made $1.3M. If you bought a $1M property in Hamilton instead, then it would now be worth $2.03M, meaning you made $1.03M. A 27% difference in appreciation is equivalent to a huge $270,000 difference in returns on a $1M property, which is why we continue to insist that finding properties with the best appreciation is so important.
Appreciation In Select Cities In Ontario (2012 - 2021)
Varying Rent Yields
The next one on our list is of course rent yields, which most investors already factor in. Historically, there’s a premium to buying Toronto real estate, so that might translate to lower rent yields in Toronto compared to other cities with lower property prices.
A lot of times when people talk about gains in rent yields, they’re looking at a percentage of a percentage. So a 10% gain means the rent yield goes from 4% to 4.4%. On the other hand, when they talk about appreciation, they are looking at absolute differences. So they might be comparing 5% to 7% and calling that a 2% difference. Remember this is not the same scale. That 2% difference is actually a 40% gain so it’s actually a huge difference in the grand scheme of things.
If you look at it another way, to break even on the 10% difference in rents on a $1M property in Toronto getting $40,000 annual rents, appreciation only needs to be $4,000 more per year. In other words, Toronto just needs 0.4% more in annual appreciation. We just saw that Toronto had 27% higher appreciation vs. Hamilton over 10 years, that’s definitely more than 0.4% per year, so Toronto still wins by a mile.
Varying Vacancy Rates
Another thing to keep in mind is that vacancies might be different. For example, if your tenants turnover every 2 years, and each time in between tenants you have a one month vacancy, that’s a 1 / 24 = 4% vacancy rate. This means you will need to reduce your rent assumptions by 4% and so effectively this would be the same as if you’re investing in another property that has 4% lower rents but no vacancies.
Varying Tenant Turnover Rates
The final thing to keep in mind is the turnover frequency. When tenants stay in your property, you are limited with rent increases by a government regulated percentage. This year it’s 0%, last year it was 2.2%, and in 2019 it was 1.8%. On the other hand, actual rents actually grow at a much quicker rate.
Rents have dropped 15-20% in Toronto because of COVID but we’ve appeared to be slowly recovering now. For your information, torontorentals.com predicts that we’re looking at 13-14% increases to rents in Toronto in 2022, and even at that point, we’re still sitting slightly below the rent price peak set back in 2019.
Now let’s consider a more conservative rental growth rate at 4%, which is what’s been happening in Toronto over the past 10 years. Having tenants that turnover less means you’ll have getting 9% less rents by year 5. If you add up the difference over the 5 year period, you’ll be getting 21% less rent over the 5 year period in total so turnover is definitely an important factor to consider.
How We Can Help
The best tip is that if you’re comparing opportunities in different markets, you need to understand the in’s and out’s of that real estate market: what the appreciation is like, what the rents are like, how vacancies are like, how often tenants typically turnover so you can have better return projections which will ultimately help you to make better investment decisions.
If rent yields are lower, remember that a 10% drop in rents on on a $1m property might only mean $4,000 lower annual returns, and the difference might even be less when you factor in differences in vacancies and tenant turnover so it’s not actually as important as a 10% drop in price which has a much bigger impact to your ROI.
If you’re looking to invest in Toronto, we’ll help you fill in the blanks. We can give you historical data, future projections, and more details like how the tenant profile in different pockets which might affect vacancies and turnover rate. If you want to connect with us, just reach out!
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