Should You Invest In Toronto Real Estate Before You Buy Your Own Home?

Should You Invest In Toronto Real Estate Before You Buy Your Own Home?

If you live in your own property, you save on capital gains tax, but some people who might want to maximize their returns are thinking perhaps they can live for cheaper, and rent out their property for more and so they can make more as a whole. In this video, we’ll walk through three examples with ROI numbers to help you understand what you should actually do!

Example 1

If you don’t care about how big or nice your home is because it’s temporary, should you buy a house, live in the basement and rent the bigger upstairs unit out (known as house hacking), or rent out the whole house, and then you can rent somewhere even cheaper for yourself?

For this analysis, we’ll have to make a few more assumptions. Let’s assume the house you buy has 2 units. The upstairs is a 3-bedroom unit and is around 70% of the house, and the basement is a 1 bedroom unit. In terms of returns, you can get net rent yields of around 4% per year, plus average appreciation of 5% per year. We’ll also assume your income tax rate is around 50%.

When you rent out part of the house, you have to pay capital gains tax on the part that is rented out and only half of your capital gains are taxed. So if you get 5% appreciation per year, you’re going to pay a bit of that towards capital gains tax if you rent out part of the property, and so your net appreciation after tax is around 4.1%. Then, let’s look at rental income. Net rent yields are 4% and only 70% of the house is rented out. And so after income taxes, we’re looking at around a net operating income of 1.4% on the home’s value.

But wait, there’s a bit more. If you have a mortgage, and the interest used for the investment portion can help to offset your investment income tax. So instead of paying a 2% interest, the tax savings from the offset actually mean you’re effectively only paying 1.3% in interest expenses.

When we put everything together and assume we are around 4 times leveraged, our net returns on capital if we house hack living in the basement is an ROI of 18%. Then if we use similar assumptions to see how numbers would look like if we rented the whole house out, you’ll find that that the ROI is 20.2% before you include your own cost of renting a separate place to live. So if you can’t find a place to live that costs you 2.2% of your investment capital per year, then living in your own basement would be better.

If our investment capital is $300,000, that means annual rents can be a maximum of $6,600 per year, or $550 per month, which is really impossible in Toronto unless you’re living with family, or living with a bunch or roommates, or you rent somewhere else outside of Canada. In other words, the most likely case is that living in your own basement is the better decision from a financial standpoint.

Example 2

Now let’s look at the second example. If you need a bigger space, should you live in the upper unit of your own house and rent out the basement, or should you just rent out the whole house and then rent somewhere else?

The math here is actually a bit different compared to the first example because of capital gains tax. Typically, you’d have to pay capital gains tax on the portion that you don’t live in, but the CRA has an exception if the primary purpose of your house is for your own use and the rental portion is “relatively small”.

So it’s highly likely that the entire property can still be considered a principal residence for capital gains tax purposes. Honestly, this is pretty vague, so definitely check with your accountant to clarify this but most accountants we talk to do agree that if we’re looking at a basement rental of your house, then the entire house that you live in can still be exempt from capital gains tax.

If this is the case, then you can get the full 5% in annual appreciation without deduction. On the other hand, you do get lower rents because you’re only renting out the basement, so after deducting taxes and interest and then including leverage, we’re looking at an ROI of around 16.6% which is of course lower than living in the basement.

And then from our first example, we know that if we rent the whole house out, we can get 20.2% in ROI. So in this example, if you can’t find a place to rent that’s 3.6% of your investment capital, or $900 per month, then living upstairs is still better. Of course, finding a 3 bedroom unit for $900 per month is also impossible in Toronto. So, the best financial decision in this example would be to live in your upper unit.

Example 3

Let’s move onto the third example. In this case, the investor doesn’t want to house hack because they don’t want to live with their tenants. So what should they do? Should they buy 2 condos, one as an investment and one as their home OR should they buy a house to rent out and then rent a separate condo for themselves?

Here, if the investor buys 2 condos, one is subject to capital gains tax, so you’re looking at a total portfolio appreciation after tax of 4.4%. Condos have a lower cap rate of around 2.5%, so the ROI in the case is 14.9%.

Now, if we compare this to getting 20.2% by renting the whole house out, the difference is now 5.3% which can be our maximum budget for rent. Based on the same $300,000 of capital, that’s maximum of $1,325 per month that you can spend on rent. So here, this scenario is definitely a closer call, but it’s still likely not possible in Toronto, so buying 2 condos and living in one of your own properties is still better.


As you can probably see, after these three examples, there is a common theme. Because appreciation is stable and good in Toronto and you don’t have to pay capital gains tax on the part you live in, it is usually better to live in your own property. Having said this, there are a couple of exceptions where renting might make sense.

The first exception is if you need to move around every few years for work for example. In this case, it won’t make sense to live in your own property because you’d have to buy and sell every few years, and buying and selling can be very expensive, so that will eat into any extra gains you’d get from living in your own property.

The second exception is, I’d say, an emotional one. Sometimes, you are motivated live in a certain area or type of property but you can’t afford to buy there, say you either don’t have enough downpayment or you can’t get a high enough mortgage for it, but you are able to pay for the monthly cost of renting it. Emotions aren’t always rational but they can drive your decision when it comes to homes that you personally live in. So if this is your case, even if it’s not as good of a financial decision, you might still end up renting and then you can invest the excess cash that you have somewhere else.

The third thing I wanted to touch on is that the examples that I walked through just now are based on a few assumptions that general but don’t apply to everyone. So if your income tax bracket is lower, or if appreciation rates, cap rates, or interest rates are different, then your own answers might be slightly different from what we came up with in this video.

For example, if we assume condo appreciation is much lower than a house’s appreciation, then that will make condo returns lower as a whole. And so, investing in a house and renting a separate condo for yourself might actually end up being the better choice. Just know that every property is different and everyone’s scenario is different, so if you’re trying to make these investing decisions on your own, make sure to use the right assumptions for your situation so you arrive at the correct solution for you.

How We Can Help

Of course, if you need help making better real estate investing decisions in Toronto, that’s what our Elevate team is here for. We can look at your requirements and preferences and then match you up with the best real estate investment solution that fits you! After we help you buy your investment property, our team also provides renovations 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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