What You Need To Know If You Want To Invest In Toronto Real Estate In 2022!

What You Need To Know If You Want To Invest In Toronto Real Estate In 2022!

Investor expectations for real estate have really evolved over the past 2 years. So in this video, I’ll dive into these changing investor sentiments, what might continue to happen throughout 2022, and ultimately, what will make the best real estate investments if you are planning on buying real estate in Toronto soon.

What's Happened Over The Past 2 Years

When appreciation is similar across different real estate investments, what you find is that investors looking for the best returns would choose those with better rent yields, and these are typically houses as opposed to condos. 

But then the pandemic hit, and we started entering an emergency interest rate situation with record low rates. So, as interest rates came down, borrowing money to buy real estate started looking even better. And even though prices were up, rates were down, too, so cash flows were able to look more or less the same. Then, prices continued to go up. 

Right now, prices have gone up so much that low interest rates don’t help to keep cash flows stable, and so rent yields have been compressing. Now, we’re expecting interest rates to actually rise, which means rent yields will be compressed even more when that happens. 

Who's Investing In Real Estate Now

Freeholds, which used to have positive cash flows, are edging closer to cash flow flat, with cash flows compressing. Investor demand for real estate isn’t slowing down. The reason for this is that investor preferences are definitely changing, with the main theme being a bigger focus on appreciation versus cash flows compared to before. 

This might be because the types of real estate investors are changing and growing; newer investors look at real estate as more attractive and stable compared to other investments you can get into right now, like stocks and crypto. You collect rental income each month, and you can get the best leverage out there. Supplementing a bit of cash flow isn’t an issue because most investors have good income and, with inflation being so high, the reality is that real estate is a good inflation hedge.

What To Expect If You Want To Buy Real Estate This Year

Investors getting into the market right now have some good points there. From a total return standpoint, returns might even be better now because of the impressive appreciation, which outweighs the lower cash flows. 

But here’s the thing: when your returns are so heavily weighted on appreciation, we think it’s important to get a better understanding of short-term appreciation trends. Right now, the price swings are a lot bigger than before. We’re seeing very quick price increases. 

This is not just in the past 2 years, but it’s sped up even more in recent weeks, and this is mainly because there’s not enough supply to go around to meet the huge demand we’re seeing. At this moment, we’re looking at around one month’s worth of inventory for sale on the market, whereas in a normal market, it’s typically closer to two months. 

On the other hand, we’re expecting more intervention ahead, which could push prices down the other way as well. We have interest rate hikes that are coming very soon from the Bank of Canada. And that’s not all. We might also see mortgage regulators making it harder for real estate investors to buy and grow. 

So, higher risk, higher reward. What I’m trying to say is that yes, you might have the potential for better returns, but because more of your returns are coming from appreciation, and prices swing a lot more these days, it is a higher risk to invest in real estate compared to before. 

How To Lower Risk-Adjusted Returns

If you want to lower your risk-adjusted returns, you’ll want to buy properties that have lower price swings. When rates start coming up, we’re going to see end-user properties, especially those in the suburbs, get more affected than in Toronto. In the suburbs, prices have gone up over 50% in the last 2 years, and honestly, a lot of homeowners are already stretching themselves, so there’s not as much wiggle room to increase their monthly living expenses. 

If interest rates go up by 2%, home owners with a $1.2M mortgage will need to figure out a way to pay for that extra $1,200 in higher mortgage expenses each month, which isn’t easy. So, raising interest rates and raising them quickly will likely start to push property prices down.

Toronto homes seem like they’ve gone up a lot, but in reality, they’ve only gone up by half of what the suburbs saw in the Toronto investment market. And with rents helping to pay for the monthly expenses, investment properties are still cash flow positive right now. 

On a $1.1M investment property in Toronto, you might be looking at $500 of positive cash flow right now. If rates go up by 2%, then we’re looking at a negative $400 per month. Of course, it’s not ideal, but it’s not as difficult for investors to hang onto compared to end-user properties. 

If we’re looking at bigger multiplexes of around $1.6M in Toronto, the previously $1,600 of cash flows might turn into only $300 of positive cash flows, which means nothing needs to come out of pocket from the investor still. So this means investment properties, especially in the core, might fluctuate less in the short term.

The Best Opportunities For 2022

Now knowing these facts, and you’re looking to get into the real estate market this year, what would be the best opportunities? 

If you’re looking for the best short-term risk-adjusted returns, the condos aren’t looking bad on a relative basis, even though we’re big on freehold investing. Right now, freehold rent yields are still better, but the difference between condo rent yields and house rent yields is getting closer. Then, if you factor in the fact that condo prices haven’t gone up nearly as much as houses over the past 2 years, there is the potential that they can catch up, especially when condo rents continue to recover. And if the government actually starts tightening capital requirements for real estate investors, it’s possible to see a shift in investor demand back to lower-priced real estate investments like condos just because they’re priced out of other options. 

If you’re looking for the most stable long-term returns and the best holding power, then go bigger. Bigger multiplexes have a bigger barrier to entry, so you’d see fewer short-term price swings when the government starts to intervene. Multiplexes also have the best rent yields, so these investments make it the easiest to hang onto even when rates go up. 

Houses have slightly better long-term appreciation and rent yields compared to condos, so they make the better investment in the long run as long as you can ride out the short-term volatility and stress-test your holding power. That should be high on your requirements if you’re planning to get into the market right now. So, rather than using 1.5% as your borrowing rate, see if you can hold out if rates rise to 3.5% or 4%. 

Another way to reduce your short-term risk-adjusted returns is to take on value-add work. You put in sweat equity for a bigger bump in returns, which can offer you more reliable short-term returns as a whole, compared to just passively investing in real estate, and you can watch this video here to understand how that works. 

How We Can Help

If you need help getting into the Toronto real estate investment market, we’re ready to chat with you. We can talk about your requirements and investment goals, and then help you find the best investment property to help you achieve your goals. After we help you buy it, our team also provides renovation guidance, leasing and property management if you need it. Just connect with us if you want to learn more about our services!

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We’d be happy to learn more about your situation and help you find the best investment opportunities for you.