Why We're Buying and How to Invest Objectively in Any Toronto Real Estate Market
Introduction
We’re hearing news everyday that the real estate prices are coming down, so it’s very normal to take a wait and see approach. The thing is, demand has dropped at least 30 – 40% from the same point last year, and so we are seeing a lot more properties, some really great deals, just sitting on the market not moving at all.
As crazy as it might seem to you, a few people on our Elevate team did buy real estate in the past few weeks. So in this video, I’m going to share with you how we go about making real estate investing decisions in any market, even in markets like today.
Where Is Toronto Real Estate Headed?
We’re expecting this rate to get to around 3.8% in US by next year based on the Fed’s projections in mid June. So in Canada, we’ll probably have to get to similar levels just to keep our loonie stable and this will take real estate prices down as a whole and prices might have to come down more than 20% just to keep mortgage payments stable.
In my last video, I did talk about how investors do have a bit more of a buffer compared to end users from rental income. So if rents stay the same, Toronto freeholds will need to come down 13% to stay cash flow positive. And if we see rents rebound another 5%, then prices might see a smaller drop of 8%.
Why We Are Investing In Toronto Real Estate
There are many investors out there who have funds ready to buy and we know this because we get asked every week from different people when we think prices will bottom out. But at the same time, these investors are still holding out, and we get it.
Prices are all over the place and pointing downwards, and so the risks of buying probably outweigh the benefits if we look at the real estate market as a whole. We are going against the grain by buying in this market, but only when the numbers make sense.
And so in this video, we wanted to take you back to real estate investing basics and share with you our core principles that we use to make real estate investing decisions in any market. Hopefully, this can help you make better decisions even in times like today.
Principles For Real Estate Investing
Our first principle is that a great real estate deal is less about average prices and more about who you buy from. We are in a very uneven housing market right now. Some sellers are still expecting prices that was seen back in early 2022, and other sellers might be very motivated to sell because they need the cash elsewhere.
But the fact that we are in a buyers market now and we’re going to be in an even deeper buyer’s market soon mean we are seeing more and more motivated sellers lately. And when you meet the right seller who’s willing to give you a great discount, it’s more likely these days to score a deal that is probably just as good, or even better than where prices will be at the bottom.
Our second principle is that the bottom is just really hard to time just right. Looking at historical trends, the way down typically is steeper and shorter than the way up, and it’s probably going to come a lot sooner than most people except simply because of these extremely fast rate hikes.
Honestly, you will most likely realise that we hit rock bottom when prices come up again. And by that point, we’re probably going to be back to prices that we are at today. The bigger difference between now and then will be your competition: it’s definitely a less stressful time now. So if you prefer to include financial or inspection conditions and you don’t like to be pressured by bidding wars and offer dates, this is the time to buy.
Our third principle is that because we are going to experience very high interest rates, you will want to prioritize better cash flows. And if you buy now, you will get better cash flows because you end up locking in lower monthly payments.
Here’s an example: If you buy a $1.2M property now when variable rates are 3%, your monthly payment is $4,000 and will stay that way even when rates go to 4.5%. On the other hand, if you buy when variable rates are at 4.5%, your monthly payment is closer to $4,800, which means you will be out an extra $800 per month.
Prioritize Rental Income
You should always focus on fundamentals to make better real estate investing decisions and the safest way to make money from real estate investing is from stable rental income, which you probably should prioritize these days.
This might mean focusing on investment neighbourhoods and types with the best rent yields which can help you maximize your rent yields.
Choose More Stable Real Estate Markets
We also recommend that you choose more stable markets. And the fact is that Toronto is a more stable market compared to the suburbs. Based on historical trends, suburb prices usually go up faster when interest rates are low and also see bigger drops when rates go higher.
Choosing Toronto if you can afford it can help lower your risk in shaky markets like today, and end up giving you better risk-adjusted returns.
Consider Value Add Renovations
Another way to generate more reliable returns with real estate is to take on value add renovations. I mentioned earlier that overall demand has dropped over 30% already, and if you search specifically for properties that need a lot of work, the demand drops even more, and so there is a higher chance of scoring great deals.
Here’s what it might look like. Instead of paying $1.3M for a 3-unit home that is ready to move into, you might be able to get a similar house for $1M that needs major work. If the upgraded property is worth $1.3M, and it costs you $150,000 to renovation, this is a more dependable way to use sweat equity to make $150,000.
Deleverage For Stronger Holding Power
Leverage can increase your returns but it can also increase your losses. So, this might be the time to think about deleveraging if you need stronger holding power. Typically, investors go with a 20% downpayment but we are seeing more investors putting more money down.
And here’s the interesting bit. You can also reduce your leverage when you take on a big renovation, which is kind of like killing two birds with one stone in this market.
Let’s go back to the renovations example. Because you bought the property that needs work for $1M, to took on an $800,000 loan. After renovations, the property is worth $1.3M so you end up being in a similar position as if you bought a turnkey property with a 38% downpayment. In other words, on top of making more reliable gains, you also have better cash flows and stronger holding power.
How We Can Help
If you zoom out and look at the big picture, real estate should really be a long term investment. So the most important thing really is to have strong holding power so that that you can benefits from stable rental income and long term appreciation and so you have to be very specific with your search in this market.
If you are interested in learning more about Toronto real estate investing, just reach out to us. We’d be happy to show you properties where numbers make sense, walk you through what you might be in for in terms of renovations, and connect you with our network of reliable contractors to help you get value add work done.
After we help you buy it, our team also provides leasing and property management if you need it to give you that end-to-end real estate investment experience in Toronto. So, just connect with us if you want to learn more about our services!
Want To Get Started With Real Estate Investing In Toronto?
We’d be happy to learn more about your situation and help you find the best investment opportunities for you.
