Our Top Reasons Why We Invest In Toronto Real Estate (And So Should You!) Updated For 2022

Introduction

If you’re trying to figure out how to grow your wealth, this might be a good hint. 90% of all millionaires become so by owning real estate.

So if you’re curious to learn more about why real estate should belong in your investment portfolio, stay tuned. In this video, I’ll walk through why we invest in real estate in Toronto and how the numbers stack up.

Stock vs Toronto Real Estate

Here’s the first thing you need to know if you’re already investing in stocks. Real estate will lower your portfolio’s risk as a whole. You can see that stocks and real estate do not always move in the same direction. What this means is that if you diversify and add real estate to your portfolio, you can reduce the fluctuations in your total portfolio and lower your risk-adjusted returns.

If you zoom in a bit more and look at month over month trends, you might be able to spot something else more clearly. Real estate prices have been following and lagging the stock market by around 2 to 3 months.

First of all, stocks and real estate are both influenced by the economy, but stock traders are definitely more forward-looking and price stocks based on where they think the economy might go. Real estate is dominated by home owners who aren’t as technical, so they tend to be more reactive based on what’s happened already.

Then, if we look at investors specifically, the big causation is that less money in stocks end up translating to less real estate activity. I talk to real estate investors on a daily basis, and quite a few of them can’t invest in real estate right now because their stock portfolio has been hit, and they simply don’t have the cash to enter the real estate market. So once we see a stock market recovery, we might see real estate pick up a few months later.

Toronto Real Estate Risk & Returns

Besides lowering the overall portfolio risk, real estate is actually a lower-risk investment itself compared to stocks. Here’s what we hear a lot: interest rates are coming up quickly, and so many people expect real estate prices to continue to come down and because of that, it’s not a good time to buy. Consumer confidence in real estate is definitely low but here are more facts.

416 detached homes are already down 27% from their peak and rents have gone up 19% from last year. If you start crunching numbers, you’ll realize rental income is actually 50% better than before, plus you are already getting a 27% discount. So it’s actually a pretty good buy these days.

The most important thing to note, though, is that investing in real estate is lower risk than investing in stocks simply because rents and real estate prices move in opposite directions most of the time and end up giving you more stable returns at any given time.

I talked about the risk side, but what do returns look like? Since 1957, the S&P 500 index has seen an average annual return of 10.5% – it’s great. In Toronto on average, appreciation is closer to 7% even though there are specific higher growth pockets with much higher growth at 11% per year.

But again, real estate is not just about appreciation. There’s also rental income, and the combination of the two does make the returns better. Right now, you can get a 5.5% net rent yield on an investment property that’s a house in Toronto, and so that makes a combined return of 12.5% on average in Toronto if you invest purely with cash.

Leveraging With Real Estate

But I’ve actually saved the best for last, and this is the main reason why you should invest in real estate and that is leverage: using borrowed money to make more money.

Yes, you can do this with stocks on a margin as well, but it is a lot more risky and limited: you can borrow less, your rates are much higher, and you’d be much more likely to be subject to margin calls which limits your growth. With real estate, you can borrow up to 80% of the property value and get the best borrowing rates out there, which is how most real estate investors end up growing their wealth quickly.

I talked about how you can get a 5.5% net rent yield before interest. Now, if you’re borrowing 80% of the property at 5.25% these days, your effective interest expense is 4.2% which takes your net rental income down to 1.3% of the property price.

Then, you make the entire 7% from appreciation each year, and you’re only putting out 20% of the property price to invest with. So using simple math, you’d be closer to 40% ROI if you use leverage.

Real Estate Tax Advantages

Buying with a mortgage also leads to tax advantages. Instead of needing to cash out by selling and needing to pay a big chunk of capital gains tax and reducing the amount you can invest next time, you can actually refinance to cash out, which defers the need to sell and pay capital gains taxes. So this allows you to invest pre-tax funds, which can improve your returns drastically.

How We Can Help

I could go on and on about the benefits of real estate investing! If you’re looking to invest in Toronto and you want to learn more about this, we’d be happy to chat separately with you! We’re a real estate sales brokerage that focuses specifically on real estate investing, and this is what we love to do. When you work with us, we’ll take the time to understand your profile and what you’re looking for.

Once you’re ready, we’ll help match you up with the best investment property that fits your needs. 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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