Top Investment Trends For Toronto Real Estate Investors In 2022!
Learn about the top 5 real estate investor trends to look out in the Toronto real estate market in 2022.
We all know that interest rates are about to go up so that we can tackle the rising and persistent inflation that’s happening. Inflation causes money to be worth less and things to cost more. This means real assets like homes will also cost more, and so they can be a good hedge against inflation. The rising cost of everything also means rents are also projected to go up. From an investment standpoint, rents going up will balance rising home prices, so rent yields are expected to remain stable even when property prices go up.
The end result is that, if you’re comparing investment returns, real estate continues to be a front runner, and therefore, investor demand for real estate is not slowing down. But having said that, we are in more uncertain times. We are seeing changes in terms of investor behaviour, and we expect these trends to become even more prominent in the next few years. So, in this video, I’m going to talk about the top 5 trends to look out for in Toronto real estate in the coming months, which might help you make better decisions as a real estate investor.
1. More Money In Real Estate Investments
The key theme is that we are going to be in a prolonged seller’s market in Toronto. And the first reason is that more and more investors are entering the Toronto real estate space. Based on data from Teranet, we see that only 19% of home buyers in Toronto were investors back in 2011, but as of this year, it’s reached 30%, a 58% jump.
We also did a poll on instagram and most of our followers are investors or interested in investing in real estate. And from our poll, a huge majority of respondents have bumped up the percentage of real estate in their investment portfolio. Of course it’s not the most accurate gauge but from our sample size, but it’s just another gauge that investments in real estate is growing.
Unlike end users, whose purchase price is more limited by affordability to pay for the downpayment and monthly expenses, investors will continue to buy as long as the numbers make sense. As prices increase, their existing assets go up as well, so they are able to access more equity to buy. Rents also tend to go up as prices and inflation go up, so that will also help to balance out the outgoing increase in mortgage payments caused by rising prices.
2. Larger Purchases From Investors
We’re also finding that investors are more comfortable with larger purchases for the same reason, if the numbers make sense. If you’re familiar with real estate, you’ll find that returns tend to be better when you go up in price and there are a few important thresholds to watch out for. The first jump is from condos to houses. Rent yields aren’t as good in condos, which have less rentable space per dollar invested and higher costs because of condo fees. There’s also a lower barrier of entry, so there are more new investors and speculators in the space, which makes prices more volatile, so the risk-adjusted appreciation also doesn’t look as good.
Once you get into the freehold space, the under $1M mark will also have more investors because of CMHC loans. You can only buy homes with a lower downpayment for properties under $1 million, and this is why you will get more buyer competition in this space, which push prices up more in these markets. Once you get past this point, things start looking better. There’s less qualified buyers here, which means it’s more likely to get a better deal on the purchase, and if that happens, you will get better appreciation.
You also have more space, which means more rentable units and better rents per dollar invested. On the other hand, expenses are split amongst more units, so better rents and lower expenses mean better rent yields. To sum it all up, there are better returns with bigger residential properties: a triplex will perform better than a duplex, which will perform better than a single-family home or a condo.
3. Demand Continues To Outpace Supply
On top of more investors, we’re also expecting population growth to outpace supply growth in the next few years. After close to two years of backlog in immigration, things are starting to get cleared up and so immigration is back. September’s numbers show a record month for the number of permanent resident arrivals into Canada, and almost 50% of those new residents came to Ontario.
When demand grows, supply needs to grow as well, but unfortunately, we’re seeing the opposite effect right now with new housing starts crashing downwards in October. Developers aren’t stopping because they expect demand to come down, but rather because it’s hard to stay profitable when raw material costs are all over the place. Many builders are putting their projects on hold until the supply chain issue stabilises a bit more, so that they can be able to make more accurate projections for profitable sales. So when demand continues to outstrip supply, we all know what that means for rents and real estate prices. It will just have to keep going up.
4. Deleveraging Is Starting
Next up are changes to leverage. Financially, leverage increases your investment risk, and because we are in more uncertain times, investors are more prone to starting deleveraging. We saw a spike in debt to GDP in 2020 because of cheap debt and government support to prop up the economy, but as things are starting to recover, people and companies are flooded with cash and rates are going up, so they’re starting to deleverage. According to Statistica, they’re expecting deleveraging to continue into 2026.
From a retail investor standpoint, most investors can afford to deleverage because they’ve made a lot of money over the past 2 years, they have a lot more cash saved up from not going anywhere, and so they can afford a bigger downpayment if they want to lower their leverage and risk.
The end goal for all investors is to maximise risk-adjusted returns, and so if they are able to get similar returns with lower risk, that’s where they will go. What we’re seeing is that they’re combining the previous trend of bigger purchases with better returns with the current trend of deleveraging, and the end result is that they are able to achieve similar returns, sometimes even better returns, when they change up their portfolio.
Here’s an example where an investor has $350,000. In scenario 1, they invest $250,000 in real estate to buy a house for under $1M, which generates 4% in cap rates and 4% in appreciation. After some minor renos and closing costs, they’re four times leveraged here, and so the annual ROI is close to 24%. They have $100,000 left, and they put it into index stocks, which have a similar level of risk compared to our leveraged real estate, but generates 7% in returns. So their entire portfolio generates $67,000 per year, or an average total ROI of 19%.
The second scenario is to invest the whole thing in real estate, but with lower leverage. In this case, they put the whole $350,000 into real estate, but instead of a 20% downpayment, they go with a 25% downpayment to lower their risk. Here, they’re going to be 3 times leveraged, but their appreciation and their cap rates are better at 4.5%. Even as leverage is lowered, total ROI is still better at 21%, and they’re able to generate more absolute returns at $73,500 per year.
5. Increasing Interest In Value-Add Opportunities
Along with increased uncertainty in the real estate markets, we’re also seeing a bigger emphasis in seeking value-add opportunities Investors are looking for stable growth, and renovating a unit to bring up the value will mean more reliable appreciation and this is a strategy that can help you refinance sooner so that you can grow your real estate portfolio quicker. In general, you can achieve better value-added returns from bigger renovation projects. Here is what returns might look like.
If you put in more typical cosmetic renovations, you do benefit from some value-add. But if you take on more challenging renovations that are higher risk, then you will be compensated with a better return on your efforts. Of course, major projects are not for everyone, so we always recommend working your way up. Your first renovation project might need to be simpler to get your feet wet, and then, once you build up confidence, you can tackle more complicated projects.
I’ve talked about this before, but it’s important to talk about it again because we believe Toronto will see better rent growth in the next few years compared to the suburbs because Toronto rents still need to be adjusted upwards after dropping quite a lot from COVID. From the supply side, Toronto has an even bigger issue with new home supply simply because we don’t have more land. New supply is limited to condos, which still involves a much longer process of rezoning, knocking down old properties and building new ones.
How We Can Help
We’re investors in our team, and we genuinely believe in Toronto’s prospects. At the same time, what to buy for each person might be different depending on your capital, time available, experience, and risk tolerance level. If you’re trying to figure out what’s right for you, we can share our knowledge and experience and help you sort this out. After we help you buy it, our team also provides renovation guidance, leasing and property management if you need it. Just connect with us if you want to learn more about our services.
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