The Secret to Finding Great Toronto Investment Properties In Toronto's Competitive Market (2023)
When you invest in real estate, you want to look for a great deal. But honestly, it’s pretty hard these days.
There are a few ways to find a good deal, but looking for a fully done-up home that has much better than average investment numbers is pretty hard because you’re competing with a lot of people, and so the market dictates the price, which usually means it ends up being an average deal.
This is still decent most of the time and has been outperforming the stock market for the past 20 years.
Annual Growth: Toronto Real Estate vs. S&P 500
But if you’re willing to put in some elbow grease and, perhaps more importantly, really understand what types of homes have the highest potential for much better returns, that’s when you end up getting that extraordinary investment opportunity.
In this video, let’s dig into how this is done so that you know what to look for. So, if you’re ready to put in the work, let’s dive in!
The Typical Real Estate Investment In Toronto
The average starter rental house in Toronto might have a purchase price of $1.05 million and a net operating income of $50,000 per year. In other words, the cap rate, as real estate investors call it, which is basically your NOI divided by your property value before you take into account financing costs and leverage, ends up being around 4.7%.
With our current interest rates, this ends up being slightly negative cash flow based on a 20% downpayment. As a whole, you benefit from principal paydown and long-term appreciation, so real estate numbers look pretty good.
But here’s the big question: how can you improve these numbers to make them better than average?
Adding Extra Bedrooms
If you’re looking to increase your rental income, the easiest way to do it is by adding extra bedrooms, and the key is to find a layout that makes this really straight-forward.
A lot of times, renters don’t care as much for a separate dining room and a separate living room, so rents don’t change as much if you have one or two of those. But if you convert one of them into an extra bedroom, that ends up being a big bump in rent! So once you understand this, the ease of carving out an extra bedroom is the key to substantially increasing your rental income.
For example, let’s say you have an existing 1-bedroom unit that rents out for $2,000 per month. By converting it into a 2-bedroom property, you could potentially raise the rent to $2,400 per month. That’s an extra $400 per month, or $4,800 per year (huge when you annualize your returns!)
If you build that into cap rates, your cap rate goes from 4.7% to 5.1%. You’re now cash flowing sightly positive, so you’ve lowered your risk that way and improved your investment returns with this relatively simple renovation.
Upgrading The Unit
Making cosmetic upgrades to kitchens and baths is also another team favourite. If you change up a kitchen for $10,000, it’s definitely possible to get an extra $200 in rent each month.
Nothing beats the extra bedroom, but this is still a very impressive 24% annual return. Just like adding bedrooms, the cap rate goes up, and so you also improve your risk-adjusted returns this way too.
Adding Extra Units
Next, splitting a home into more units is also well worth it.
For $50,000, you might be able to add a secondary suite to a house. If you add a basement apartment in, that’s a $1,600 bump in rents, which ends up being a 34% annual return.
Building An ADU - Laneway or Garden Suite
You’ll see that our budget is going up, and next time, one isn’t something that everyone will be willing to take because it’s in the semi-development space. But when you take on bigger projects, your absolute returns end up being much better, so it’s something that you might want to consider sometime down the road.
Here’s an example: Renting out a garage might give you $150 in rent. If you convert that into a 3-bedroom laneway suite, which costs around $400,000 to build, your rent goes up to $3,500, and that house alone will have a cap rate of 10.5%, which is very impressive.
Most people don’t fork out this money out of pocket but finance it via a HELOC or by refinancing another property, and so once you take into account leverage and appreciation there as well, it’s definitely worth it if you’re willing to take something like this on.
How We Can Help
Hopefully this video helped give you better insights in terms of what real estate investors go through. The most reliable way to “find” a great deal comes from a combination of knowing what to look for and being willing to do some work on it.
And the truth is, this requires a lot of work, expertise, and understanding of the local market—analyzing the layouts and site plans of every single individual property to see what’s possible and really understanding what type of work creates the most value.
But this is where our expertise comes in. As a Toronto investment real estate brokerage, we search our local market every day looking for these opportunities for our clients. If you’re interested in learning more about how we can help you achieve your real estate investment goals, we would be more than happy to chat with you about this!
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We’d be happy to learn more about your situation and help you find the best investment opportunities for you.