How To Quickly Grow Your Toronto Real Estate Investment Portfolio (Our Best Refinancing Tips!)
When I talk to new clients, sometimes I dig a little deeper to understand more about long term investment goals. I’m not doing this because I want to know all about your life, but understanding long term goals is key to structuring the right investing roadmap for you: the types of properties you should invest in, the type of mortgage to choose, how to structure your investment and how to rent out your property.
It’s not as complicated if you are just looking for one property, but if you have more aggressive goals and want to grow your real estate investment portfolio quickly, you might have to be a bit more strategic. In this video, I’ll give you my top strategic tips I you’re looking to grow your real estate portfolio quickly.
Taking Apart The Toronto Real Estate Investor Into Three Roles
If you take the “real estate investor” apart, into three distinct roles:
- Capital Generator
- Mortgage Holder
- Active Partner
A lot of times, these three roles are filled by the same person, but it’s also possible to have different people fill each of these roles. Each of these roles play a different, but equally important part when buying real estate, and there’s better ways to do things when growing your real estate portfolio. So I decided to organize my tips into these three parts. Let’s start with the capital generator role first.
Capital Generator Tips
The capital generator role is the one that comes up with the money to invest in real estate. Typically, when you buy an investment property, you can get up to 80% of the purchase price with a new mortgage, and the rest of the money, the downpayment, closing costs, and renovations, will have to come from somewhere else. Believe it or not, getting the money for your first property is the hardest and it just gets easier after that if you choose to refinance and grow.
Let’s assume you buy your first property for a $1,000,000. It appreciates at 5% per year, so in three years time, you gain $32,000 in cash flows, plus $64,000 in equity when you make your monthly mortgage payments, and $170,000 in equity appreciation. If you refinance at 80%, then you’ll have $220,000 cash for you next property.
If you want to grow even more quickly, here are some more tips to boost your refinancing amount. Our favourite way is the update the property with newer and nicer finishes and this is typically stuff that you can do with older houses. You can also take it one step further and increase the number of rooms or the number of units in a property. When you do these things, you end up improving the rents you can get on your property, and as a result you boost your property’s market value.
Don’t underestimate the rents portion – rental income increases your existing property’s market value which speeds things up for the downpayment of your next property, and it also adds to your total income which benefits your borrowing capacity for your next mortgage as well. There’s more to this and since this ties into the mortgage part, I’ll save this for later.
Going back to the capital part, you can see that a lot of it has to do with the bank’s appraisal of your property, so helping your appraiser with their homework won’t hurt at all. After all, you probably know your property best. Providing the latest market comparables, what your current rents are, details on the upgrades you’ve done can help you maximize your property’s appraised value.
Choosing the right type of mortgage is also important. There can be huge penalties in the tens of thousands if you break a fixed rate mortgage, so going with variable mortgages might be a better idea if refinancing is something you plan on doing regularly. I have a detailed video about fixed vs. Variable mortgages, so check it out if you want more details on this too.
Finally, your appraisal is obviously correlated to market price at the time of the appraisal. So investing in markets that have more stable appreciation like Toronto freeholds gives you lower refinancing risk compared Toronto condos where prices fluctuate a lot more.
Mortgage Holder Tips
Once you’ve maximized your capital generation, let’s talk about mortgage holder role. I mentioned earlier that coming up with the money gets easier. But when you get more properties, your borrowing capacity starts shrinking so it does get harder here. If you’re a real estate investor who’s looking to grow, pay close attention to this.
There’s a few ways that you can qualify for mortgages and I dive into things here in this video, but the most common way a bank lends you money is by checking to see how well your income can pay for your outgoing expenses and mortgage payments. We mentioned that higher rent is important to maximize your property’s appraisal, and higher rent can bump up your borrowing capacity too.
Besides renovations, try to see if there’s other rental streams you can optimize. For example, renting out a garage separately might help you generate higher rents compared to including the garage with your residential tenant’s rent. Instead of doing coin laundry, better quality renters might pay a premium for the added convenience of in-unit laundry.
If you’re refinancing a property that you recently purchased, I’d recommend that you get tenants in there first. The rent estimates that banks use are often lower than actual market rents, and this can make a big difference for income qualification purposes. Let’s also talk about timing as a mortgage holder.
Your refinancing based on your personal situation is also important. If you know your income situation might change – for example, if you’re going on mat leave or if you’re switching from a salary job to self employed status, these can make a huge difference in your borrowing capacity so try to get your mortgage before your income drops significantly if possible.
You want to increase rents and reduce outgoing payments, and one tip to reduce your outgoing payments is to choose a 30 year mortgage instead of a 25 year mortgage.
The last thing on the mortgage side is to consider how to structure your purchase. If you buy a property and get a mortgage with your spouse under both names, this can reduce the borrowing capacity for the both of you. If you buy some properties under your name, and some property under your spouse’s name, you might actually get a bigger combined borrowing capacity as a couple. Of course, there are other considerations like probate tax and income splitting so it’s best to speak to your lawyer and accountant about this before you make any structuring decisions.
Let’s move onto the last role, the active manager. No it’s not just money or the mortgage, once you have more units, you might run into the problem of not having enough time to manage everything. Our best tip on the bookkeeping front is to maintain separate bank accounts for each property. So instead of seeing Toronto hydro, Enbridge, Toronto Utility and even Email Transfers five times each month in one bank account and having to spend hours reconciling everything, it will all be organized for you if you maintain separate bank accounts.
Digitalizing processes can also save you time and money. Instead of picking up post-dated cheques every so often, go with email transfers. Instead of dealing with paper contracts, choose electric signature apps. When a tenant needs help, ask them to send you pictures or videos or even video chat with them to trouble shoot first. You can even take it one step further and install smart thermostats so you can control more things remotely.
Finally, one thing that real estate investors often decide to do once they continue to grow is to outsource certain roles, and the active manager role is definitely that can easily be outsourced without making a huge impact to your bottom line.
How We Can Help
The reason we created a property management arm for our real estate sales brokerage is because we wanted to solve this headache for our clients. When you work with us, we can team up and split up some of the work.
We can definitely help you with the property search to help you buy the best investment opportunities on the market, but that’s just the beginning. After that, we can also help with leasing, property management, and when the time comes where you are looking to grow, we continue to be here for you.
We’ll help out with reviewing your portfolio, look for efficiencies and then create an investment strategy that can you reach your goals quickly. If you want to connect and learn more about our all in one sales, leasing and property management services, just reach out to us.
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.