Toronto Real Estate Investors: Should You Sell, Wait It Out, Or Do Something Else?
Introduction
With every rate hike, a home owner’s holding power gets weaker if they’re on variable rates.
It might be possible to stick it though for a few months and stretch yourself, but since nobody really knows how much more Bank of Canada has to go and how long rates will stay high for, it might be even tougher to figure out if this is actually sustainable for you.
So, you might seriously looking into options while you can have them.
In this video, we will try to weigh these options and hopefully, this will help you make more informed decisions as a real estate investor. Let’s get started.
Improving Rents
Are your own cap rates significantly lower than market cap rates?
How you should be calculating cap rate is diving your rents that you get by the market value not the purchase price of your home. If it is, here’s a few things you should be doing.
The Ontario guidelines allow you to increase rents by a maximum of 2.5% this and next year. But there could be a possibility that you can get a bit more than that if your costs went up. One allowance cost increase that will allow a higher rent increase are property taxes.
Here’s an example. If your current lease’s first rent increase happened in 2020 when the guideline was at 2.2%, an extraordinary increase would be 50% more than that, or 3.3%. This year, property taxes went up 5.5% so most people would be able to increase rents by more than 2.5% this year!
Note that the maximum that you are allowed to increase by above the guideline is 3% so what this means is that you’d be limited to 5.5%, which might still to be enough to help you cover all your costs.
Adding More Units
A more effective way to improve rents more substantially could be to split it up into more units. The benefit here is three fold:
- A house with more units generally will give you better rent yields
- You’ll refresh rents to market rents when you do this
- You’ll be able to track market rents better in the future because new units created won’t be subject to rent controls – which is huge.
And so we definitely recommend you looking into this if you are allowed to do this and have the money to get this done.
Deleveraging
If adding units isn’t an option and you have extra savings, it might be time to consider to deleverage to reduce your monthly mortgage payments.
The math is simple here. If you have some money sitting in a GIC generating 5.5% – that looks great but it actually doesn’t make sense if you’re paying 6% interest on your mortgage on the other side.
So really think about paying down your loan to improve your cash flows and total returns.
Repositioning Your Current Portfolio
But if you don’t have the power to hang on after exploring ways to improve your cash flow for at least the next year to year and a half, then reality is that you will have to think about selling your investment.
Selling when you don’t want to obviously isn’t ideal. What you’ll lose out on for sure are selling fees, legal fees, land transfer taxes that you paid out when you bought, and potential be hit with capital losses because you’re selling a down market.
However, if you’re not just selling but you can actually reposition your money into a better long term investment, it could still be a decent move.
For example, let’s say you are sitting on a couple of condo investments. Even if you optimize market rent yields, there’s no way it can be high enough even pay for today’s higher borrowing costs.
What could make a lot of sense is if you are able to consolidate a couple of condos into a single better yielding real estate investment, which most likely has better growth prospects too. And this time, think defensively when you’re choosing your new investment:
- Choose stronger rent yields. A single family house is better than a condo, two units is better than that, three, four five, even better. Toronto houses definitely stand out in Ontario since you now have the potential to create up to 4 units in the main house plus the backyard house – a total of 5 units, compared to other areas in Ontario that may only allow three units in total.
- We talked about the importance of being able to track market rents. When interest rates go up, market rents also go up so that helps improve your holding power. and besides holding power, it also helps your home value because properties end up selling at a discount when rents are low. This is only possible if you have new units built after November 2018. So even though creating new units in a house is a lot more work, in our opinion, it’s worth it.
- Finally, repositioning is different from just selling. When you sell and buy, you sell at a lower price because of the market but then you also buy at a lower price because of the market. Essentially, you’re deferring your capital gains to your next purchase. Less money taxed away means more funds for the next investment, which could mean you end up being able to reposition to a better, higher value asset compared to if repositioned in a hot market with more capital gains tax implications.
How We Can Help
Of course, everyone is different so there’s no simple answer for investors facing cash flow issues. The main takeaway is try to actively improve cash flows first. If that’s not possible, consider repositioning into stronger investments before just cutting losses your real estate exposure.
Rental income and appreciation might be compressed right now but in the long run, fundamentals for real estate haven’t changed. Once rates come back down a bit, rental income should improve and the combination of high immigration and low housing supply growth give good prospects for long term real estate price growth too.
We’re a real estate sales brokerage focused on helping people with real estate investing in Toronto – we’re here to help you buy, sell, and optimize your Toronto real estate investment portfolios. If you need help to review your existing situation to see how you can improve it, just book a free discovery call with us!
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