Is It The Right Time To Enter The Toronto Real Estate Market?
With COVID-19 hitting the world, we saw the stock markets tumble, bounce back and continue to recover as I speak. We also saw it freeze the Toronto real estate market. Prices took a dip for a few weeks and now it’s recovering, with semis reaching all time highs and detached houses almost recovering back to preCOVID levels.
On our end, we have been seeing a lot more investor interest since June. We noticed who are buying aren’t as focused on catching those lower prices, but rather are going into the market to take advantage of these all time low interest rates to expand their real estate portfolio.
We’re also seeing people who are showing interest but still observing the market. The main reason for this is because they’re afraid they might be buying at the wrong time. I don’t blame them for not knowing where the market is going to go because things are still pretty uncertain in terms of whether there’s going to be a second wave, or how quickly our economy will actually recover.
Let’s start by looking at a turnkey property in Toronto – your returns come from three main sources:
- Cash flow which is what you’re left with after you deduct all operating expenses and mortgage payments from the rent you receive.
- Equity gained which is the principal that you build up when you make monthly mortgage payments.
- The last one is market appreciation. Just so you know, between 2001 to 2019, we saw an average of 6.7% appreciation per year in Toronto.
Based on these three sources, how do actual numbers look like for a Toronto property? For simplicity’s sake, I’m going to use quick and dirty math and not go into compounding. Basically what this means is that our numbers will be more conservative compared to what they actually are.
So for a typical property priced at $1,000,000, we’re looking at an initial capital of $235,000 with a 20% downpayment and closing costs. In 10 years time, the total cash flow accumulated is $96,000 based on around $800 of cash flows a month. Equity gained is around $200,000. And I’m going to use a more conservative at 5% appreciation each year vs. the 6.7% that we saw in the past which takes us to $500,000 in appreciation at the end of 10 years.
This means the Total returns will be $796,000, or a 34% ROI annually. 34% ROI annually is pretty amazing that’s why we love real estate as an investment.
Now if you look at historical prices, you’ll see that real estate doesn’t fluctuate nearly as much as the stock market:
- During the financial crisis in 2007, property prices dropped around 10% below the trend line.
- In the hot 2017 market before the bubble burst, prices rose around 10% above the trend line.
- During COVID, we saw a 10% drop in prices again.
So based on history, we can say that 10% is a reasonable deviation from the norm for both the lows and highs. In this cycle, it looks like we’ve already reached that point and are now recovering.
But let’s assume that you did purchase at the lows with a 10% discount, how much better would your returns look like compared to a normal market over a period of 10 years? With an extra 10% bump, your appreciation would be $600,000 giving an annual ROI of 38% instead of 34%.
So yes, returns are better if you buy at the low, but when you’re at that point, it’s actually pretty hard to tell. During our latest chance, you’d have to run out during the start of the lockdown in early April looking to buy a house. Honestly, it’s pretty risky. There was a lot of economic uncertainty then and it’s also physically risky! And, the extra 10% discount isn’t as significant when you distribute it over a long period of time.
Now just to complete the best and worst case scenarios, let’s see how things would look if you purchased at the peak of a cycle with a 10% premium. We’ll have an appreciation of $400,000 over 10 years or an annual ROI of 30%. This is not bad at all! Just like how a 10% discount on isn’t that significant, a 10% premium on real estate though not ideal, still offers really great returns.
While buying at the lows is always a bonus, it’s hard to identify that point when you’re in it and the one time discount will get diluted over time. I don’t have a crystal ball and as a more conservative investor, I think speculating the market isn’t worth the added risk.
What I do know is that mortgage rates are at an all time low and buying real estate will offer great double digit returns even if you buy at a premium. So instead of trying to find the right time to enter the market, here’s three better tips from us:
- Consider your opportunity cost if you wait for the right time to buy. Even if you buy at the peak, your returns are around 30% a year so holding off might actually mean losing out on more!
- Instead of timing the market, you have to know that real estate markets aren’t actually as efficient as say the stock market. So, it’s very possible to find individual great deals if you know where and how to look, which helps you get better returns than normal in any market. I made another video specifically about this so you should definitely head there to check it out if you’re interested.
- Don’t underestimate the benefits of a great agent! Yes great agents can find you great deals so you don’t have to watch that video I just talked about, but they can also be amazing negotiators. This means figuring out the best buying approach based on the seller & selling agent’s personalities so you can buy at the best price, which ultimately can get you higher than typical returns.
If you’re looking for an investment property in Toronto, that’s our specialty. We’ll look at your requirements and preferences, so that we can find you a good deal on the market and help you buy it at the best price.