How To Invest In Real Estate In Toronto

How To Invest In Real Estate In Toronto

When we talk about real estate investments in Toronto, we usually mean income properties because it’s our recommended way!  But it’s actually not the only way to make money with real estate in Toronto.

When you decide how to invest in real estate in Toronto, it all comes down to your risk tolerance. If you are able to take on higher risk, you have the potential to make more money with real estate.  Let’s dive into 6 ways to invest in real estate so help you understand more about your options.

6 Ways To Invest In Real Estate In Toronto

Primary Residence

Buying a home that you can afford is a great investment because you can get high real estate appreciation in Toronto and low mortgage rates.

Income Property

As a landlord in Toronto, you gain appreciation like a primary residence, plus rental income which helps pay for your mortgage and can bring you extra cash flow.

House Flip

You make money when you buy an undervalued property, renovate it, and sell for a profit. This works well in houses that need a lot of work and are bought at a steep discount.

House Hack

As a hybrid between a primary residence and an income property, this happens when you live in one unit of a house and rent out the other units.

Wholesale

You make money when you agree to buy a property with a seller, then turn around and assign the contract to someone else before closing for a profit.

REIT

A real estate investment trust (REIT) manages a portfolio of properties for shareholders and split the returns through fees and profit sharing. Public REITs are traded on the stock exchange.

Minimum Capital Required

One major constraint when choosing real estate investments in Toronto is your budget. If you want exposure to real estate but don’t have enough capital, buying a publicly listed REIT is a good alternative but you do get lower returns. Wholesaling doesn’t involve money upfront but requires a lot of effort and higher risk.

Primary Residence

$115,000 for condos
$240,000 for houses

Income Property

$115,000 for condos
$240,000 for houses

House Flip

$300,000 with renovations

House Hack

$240,000

Wholesale

$0

REIT

$20

Investment Period

As a long term real estate investor in Toronto, you are less concerned about cycles in the market since you are able to ride it out. It’s important to note that capital gains for short term investments can be taxed as income by the CRA, whereas only half of the capital gains are taxed on long term real estate investments.

Primary Residence

Long term

Income Property

Long term

House Flip

Short Term

House Hack

Long term

Wholesale

Short Term

REIT

Varies

Investment Risk

Toronto real estate is more stable due to strong fundamentals but still comes with high costs like land transfer taxes, transactional costs, and legal fees. These costs are not as significant relative to total returns on a long term basis. Short term real estate investments are higher risk since its harder to make money through forced appreciation, major discounts in purchase price, or unusual upward thrusts in the market especially with high costs.

Primary Residence

Low Risk

Income Property

Low Risk

House Flip

High Risk

House Hack

Low Risk

Wholesale

High Risk

REIT

Varies

Renovations

If you buy a condo or a turnkey house in Toronto, you probably won’t need renovations. If you want to get better discounts on houses in Toronto, you will likely need to renovate it. Costs of renovations do vary based on what do you do, the type of finishes you pick, and who you choose. Cosmetic renovations for investment properties in Toronto are around $40,000 and go up when you add higher-end finishes, structural, plumbing and electrical work.

Primary Residence

$50-$100 per sqft

Income Property

$50 per sqft (lower end finishes)

House Flip

$100,000+

House Hack

$50-$100 per sqft

Wholesale

$0

REIT

$0

Active Management

Owning your own real estate property requires your time or the need for a Toronto property manager. Condos typically have lower active management since many issues are covered by condo fees.

Primary Residence

Repairs & Maintenance

Income Property

Tenant Management, Repairs & Maintenance

House Flip

None

House Hack

Tenant Management, Repairs & Maintenance

Wholesale

None

REIT

None

Cash Flow

Income properties generate cash flows from rental income. You can typically get better cash flows from houses compared to condos in Toronto because of higher rents and lower expenses. Cash flows from REITs are passed onto shareholders through dividends or distributions.

Primary Residence

No

Income Property

Higher cash flow / sqft in houses vs. condos

House Flip

No

House Hack

Higher cash flow / sqft but reduced due to owner occupied portion

Wholesale

No

REIT

Lower cash flow due to fees and profit sharing

Market Appreciation

Over the 10 years, the Toronto’s average market appreciation has been over 8% per year and may be higher for areas undergoing gentrification. Different types of properties also behave differently in Toronto – condos have slightly lower appreciation with higher fluctuations compared to houses. Similar to cash flows, short term investments don’t benefit as much from market appreciation and the returns from REITs are reduced.

Primary Residence

Higher and less fluctuations for houses vs. condos

Income Property

Higher and less fluctuations for houses vs. condos

House Flip

No

House Hack

Higher and less fluctuations

Wholesale

No

REIT

Lower and more fluctuations for public REITs

Forced Appreciation

If you renovate a house in Toronto, the upgrades bring up a property’s value and have the most impact right after renovations. The more value add work you put in, the better forced appreciation potential.

Primary Residence

Yes

Income Property

Yes

House Flip

Yes

House Hack

Yes

Wholesale

No

REIT

No

Other Benefits

Primary Residence

  • Capital gains are exempted from tax
  • You can refinance equity to grow other investments
  • Government first time homebuyers incentives

Income Property

  • Rental income generates cash flows and pays for mortgage
  • You can refinance equity to grow other investments
  • Upgrades can be used to defer income tax using Capital Cost Allowance (CCA)

House Flip

  • Higher return potential when annualized due to shorter investment period

House Hack

  • Rental income pays for mortgage​
  • Capital gains from owner occupied portion of property not subject to taxes
  • You can refinance equity to grow other investments

Wholesale

  • Highest returns potential when annualized due to low / no capital requirements and very short investment period

REIT

  • No time needed to manage real estate investments

Other Things To Consider

Primary Residence

  • More maintenance responsibilities as an property owner

Income Property

  • Rent risk but is lower vs. other cities due to high demand for housing and can be mitigated with better tenant screening

House Flip

  • Requires higher capital since it's only achievable in houses
  • High cost of transactions mean a major increase in property value is required for a profit
  • Capital gains are considered as income for tax purposes due to the short term investment nature

House Hack

  • Requires higher capital since it's only achievable in houses​
  • Rent risk but is lower vs. other cities due to high demand for housing and can be mitigated with better tenant screening​
  • Close proximity to tenants may be a deterrent for you

Wholesale

  • May incur a significant loss if market takes a downward turn
  • High stress while looking for a buyer to take on the assignment within a short period of time
  • All returns are considered income for tax purposes

REIT

  • Lower returns since it is split with the trust
  • Public REITs have higher price volatilities
  • You may lose your money due to poor trust management
  • Private REITs may have restrictions for redemption

Variations To Buying Real Estate

Joint Ventures

Instead of investing on your own, you can buy with a partner to split costs, roles, and profits.

There is added partnership risk, with issues arising if a partner does not perform or needs to exit sooner than agreed upon.

Actions can be slower with multiple decision makers, which can be a disadvantage for capturing the best deals on the market.

Airbnb

In the past, investors made higher returns operating entirely as an Airbnb home. This is not possible with new short term rental bylaws so investors need to convert properties back to long term rentals.

Airbnbs are still possible for primary residences if you are looking for additional side income with restrictions on size and time periods, which is a variation of house hacking.

Vendor Take Back

Vendor take back is variation to a mortgage where the seller extends a loan back to the buyer during a property sale.

This happens less frequently for properties in Toronto since the housing demand is strong.

We see this in rare cases for larger properties in Toronto, usually multiplexes or mixed use properties, that are harder to sell.

How Can We Help

We believe buying and holding real estate in Toronto is the most stable way to build wealth in Toronto. If you are willing to take on higher risks, can have the potential for higher returns by taking on wholesaling or house flips.

Income properties offer the highest risk-adjusted returns, with balanced returns from cash flows, market appreciation, and forced appreciation. As your equity increases, you can further reinvest and grow your wealth more effectively.

If you are looking to buy investment properties in Toronto, we are here to help. We’re happy to look at your requirements and preferences, and recommend the best real estate investment route for you!

Do You Want To Invest In Real Estate In Toronto?

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