Should You Wait For A Clear Bottom Before Investing In The Toronto Real Estate Market In 2022?
Demand has come down by over 40% on average, and so more and more sellers are willing to ease on their selling prices, which makes for pretty great deals lately. But you might say, interest rates are doing a vertical up these days, and so you feel that prices might have to come down even more for the numbers to make sense.
So let me ask what you think. Is it better to get a great deal now with interest rates currently at 3.75%, or does it make sense to wait for prices to come down even more and buy when you see a visible bottom once interest rates peak? In this video, I’ll walk you through a complete numbers breakdown so that you can make more informed real estate investing decisions.
Typical Toronto Real Estate Returns
First and foremost, we want to start with the fact that real estate investing should be a long-term commitment. And like all investments, prices can go up or down, and the reason we believe in investing in Toronto is because we believe in Toronto’s long-term growth.
Ever since 1976, the annual growth of Toronto real estate has been 7% per year. And if you add that to a net rental income of around 1% of the purchase price per year with a 20% downpayment plus closing costs, you’re looking at an amazing average ROI of 24% per year.
Returns If You Buy Now With Variable Rates @ 3.75%
Now I agree that buying in today’s market seems like a risky move. All you hear on the news these days is that interest rates are going up and real estate prices are supposed to come down. But like always, we believe in making numbers-based decisions, and if you have strong holding power, real estate investing will still make sense as long as you are committed to a long-term horizon.
Let’s take a look at an example of what a good deal on the market might look like. Here’s a sample investment property in core Toronto selling for $1.1M, and the seller is motivated and willing to sell for 20% off the peak prices from earlier this year.
Is 20% off a good deal? Nobody knows for sure. Prices are dropping all around, but the level of drops depends on where and what type of property it is. The biggest impact is probably in the suburban end-user market, and the Toronto investment property market should be more resilient, so our team thinks 20% is a really good deal.
The catch here is that, just like most freehold good deals nowadays, you have to do renovations. Here, we’re looking at around $40K of renovations. Once it’s done, total rents are $5,500 and after deducting expenses and the mortgage using an interest rate of 3.75%, you are still cash flow positive at $600 per month.
If we assume prices rebound towards the end of 2024, and the appreciation goes back to normal after that, then that’s an 8% appreciation per year using a simple average, which is better than the typical 7%. And so, based on current interest rates, the 5-year total return is around $690K, or an annual ROI of 27%.
Returns If You Buy Now If Variable Rates Go To 5.5%
We know we’re not in an average market these days, and because interest rates are going up, you probably want to check that the numbers still make sense when rates go up. So let’s see what happens if variable rates go up to 5.5% after you buy and stay that way for the next 5 years. Honestly, it’s probably more likely to come back down to more average levels at around 4% in the later years, but we’ll use this as our worst case scenario for number crunching.
So here’s another thing to remember. Because of the way variable mortgages work with the big banks, if you buy the property and you enter at a variable rate of 3.75%, your monthly payment will stay the same even when variable rates go up. The interest goes up, the equity gain goes down, but cash flows stay stable.
But because the borrowing cost goes up, your 5 year returns will drop to close to $615K, or an annual ROI of 25%, which is still not bad at all.
Returns If You Buy Later
Now is the part that you’ve probably been waiting for. Let’s see how this compares to waiting for the bottom. If you do that, it’s very possible that you end up getting a bigger discount, but you end up buying when rates peak, so let’s use the same 5.5% just like before.
But because you waited, instead of getting 20% off, it’s now 25% off, and this means you managed to buy a similar property for $1.045M. So, what would cash flow look like here? The big difference would come from the mortgage payments, which go up quite a bit from $4000 to $4700, so in this example, the holding power is much weaker and the cash flow negative.
If we look solely at net income, it doesn’t actually change that much from buying now. What ends up happening is that the equity gain and cash flows kind of get flipped. The big difference in returns does come from the extra 5% off. So total returns might end up being better at $670K, or an annual ROI of 27.5%. But note the big catch. Instead of cash flowing comfortably if you buy now, your holding power is much weaker if you want that potentially bigger bump in ROI per year.
How We Can Help
At the end of the day, a good deal will always be a good deal. In the worst case, if interest rates stay high at 5.5% over the next five years, your holding power and ROI might actually be even better than buying in a normal market. Also, if you compare real estate to stocks, we’d say that real estate returns are much better than investing in the S&P 500 index and can help you diversify and reduce the fluctuations in your overall investment portfolio.
So if you want to learn more about real estate investing opportunities in Toronto, just reach out. We are big believers in investing in Toronto freeholds and we’d be happy to share more about what deals look like these days.
Once you’re ready to buy, we will match you up with the best investment property that fits your needs, help you buy it, give you our renovation guidance, and help with leasing or property management if you need it. So just connect with us if you want to learn more about our services!
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