Overcome Your Real Estate Fears & Start Investing In Toronto Real Estate in 2021!
If you have been thinking about investing in real estate for a few years now and you still haven’t taken the plunge, you are not alone. Every week when I talk to new clients, I hear similar stories and two big reasons why people hesitate to start is because they get scared: scared of failing because they don’t know where the markets will head after they get in or scared of failing because they don’t know what they are doing.
If you’re in the same boat, listen up. In this video, I’m going to address these two big fears and then try to help you work through them so that you can finally start investing in real estate.
Fear #1: Will The Real Estate Market Tank?
Let’s address the first big fear: you’re scared that this big investment will end up going south. It’s true that real estate is a big investment. A Toronto condo will need at least $150,000 in starting capital and a starter house with two units in Toronto will need closer to $250,000 in capital. Now assuming you do have sufficient investment capital for all of the options, the wiser thing to do isn’t to choose your investment based on how much they cost but rather choose the option that can generate you the best expected returns at a risk level that you are comfortable with.
Once you do this, you’ll realize that real estate offers the best risk-adjusted returns, and it’s a safer investment compared to stocks and bonds. Here’s the thing: the majority of our Canadian population are home owners and in fact, our government is the biggest real estate owner in Canada, so principal protection is extremely important when it comes to shaping housing policy. So even though the government doesn’t want real estate prices to go up too quickly, they can’t afford to have real estate prices come down either because this will tank our population’s net worth and hurt Canada’s GDP which is super reliant on real estate.
From this perspective, in a way real estate is actually lower risk because it offers a good level of principal protection. Take a look at this chart from Thompson Reuters where they stack different investment options based their risk and expected reward. According to their analysis, you can see that real estate is comparable in terms of risk to the safest investment out there, government bonds, and it’s safer than corporate bonds and of course any stocks out there. And at even such a low level of risk, its expected long term returns trump everything else.
But you feel like you can’t rely on past results to predict future results, let’s look further at fundamentals. In Canada and especially Toronto, we have a housing supply shortage and increasing supply takes time: it requires availability of land, zoning changes from various levels of government, financing complexities, and then time to build. So, it’s not that easy to increase supply quickly. At the same time, demand continues to build up quickly so this combo is the basic recipe for housing prices to continue to climb upwards in the long run.
Now besides demand from end user buyers and mom and pop investors, we’re now seeing increasing demand from institutional investors, too. Fixed income funds who have traditionally invested in bonds are seeking alternative investment through real estate as an inflation hedge. Public pensions are also starting to invest in residential real estate. Even other real estate funds that used to only invest in bigger commercial properties are now redirecting their focus to single family homes because of great rent yields, low vacancies and better appreciation compared to other real estate opportunities. At current rock bottom interest rates, bonds can’t protect against inflation so that’s why funds have to look for other ways to generate better yields.
In the long run, prices are headed upward because of supply and demand. In the short term, as long as rates stay lower than inflation, we’re also going to see higher real estate investment demand simply because funds need better yields who will add to the buying momentum.
Fear #2: You Don't Know What You're Doing
If you can move past the first fear and are now determined to start investing in real estate, let’s move onto the second big fear, being scared of failing because you don’t know what you are doing. Of course it can be scary when you’re doing something that you’ve never done before. But many of your unknowns are known by experienced investors, like what makes a good investment property or how to find good tenants. The key here is to get help from experts in the field, follow their roadmap, build up your experience and confidence so you can keep moving forward. I hate to break it to you: there will probably be problems along the way, but the more important thing is that you will be able to overcome them if you have the right team to back you up.
The harder part is to overcome is probably the psychological aspects. Nobody knows the answers to everything that’s going to happen in the future and this the the thing that bogs down many new investors and prevents them from making decisions and taking action. But just because we don’t know all the answers doesn’t mean we can’t make great decisions.
Fact Based Decision Making Process
If you ask us, we’ll guide you through this 4 stage process so you can make more fact-based decisions effectively:
- Know your constraints are so that you can narrow down your sandbox. Budget is a big one and that’s why getting a mortgage pre-approval is always step number 1. At this point you should also mark down any other requirements like if you need it to be close to your home.
- Once you know your constraints and share it with us, we’ll show you different investment options along with our insights – what’s involved and what expected returns are like. There might also be qualitative considerations – for example, this big renovation can generate better returns but it’s a massive undertaking – there’s enough things to learn as a new investor so we’ll steer you in the right direction based on where you stand.
- This is where you compare expected returns, weigh the qualitative pros and cons, and then choose the investment option that will generate the best expected outcome for you. Instead of going with your gut, this removes a lot of the bias and so you make better decisions quickly. At the end of this stage, we’ll have a clear narrow investment scope to focus on and so we’ll be able to search for opportunities more effectively.
- Get the ball rolling and actively search for properties on the market! We have everything ready and know what we should be looking for so it’s all about making fast decisions at this point so you can actually catch great investment opportunities when they come along. When there’s doubt like should you wait for a better opportunity or wait for the markets to come down, just remember this.
When you wait, you might get better returns but you’ll definitely miss out on returns that you can get otherwise during that waiting period. Let’s say you can get 16% ROI per year on property A, but you might possibly get 18% ROI per year if you eventually find that perfect opportunity. If you find that perfect opportunity but it takes you a year more, then you lose out on 16% in ROI. At 2% difference per year, this means it’ll take you 8 years to just break even with property A, so starting sooner is actually very important!
How We Can Help
When you work with us, we’re the real estate investing experts that you can count on. We’re not just your regular real estate brokerage, we specialize in real estate investing so we’ll take time to understand your requirements and your preferences, provide you with data, projections and insights so that you can make data driven investment decisions effectively.
Things don’t stop after we help you buy your investment property, we continue to guide you through renovations advice, connect you to our network of contractors, plus we can help you with leasing and property management if you need it. Things still don’t stop there – the goal is really to grow with you so you can count on us to be there to help you review your portfolio and make recommendations to help you grow when you’re ready for your next investment property.
If you want to learn more about our services, we’d be happy to schedule a call to answer all of your questions. Just connect with us by heading to the link that I’ll put in the description below.
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.