What Would Investment Returns Look Like If You Entered The Toronto Real Estate Market In 2022?

What Would Investment Returns Look Like If You Entered The Toronto Real Estate Market In 2022?


Real estate headlines are definitely scarier these days. We know interest rates are going to go up, but we don’t know by how much or how quickly. If the Bank of Canada gets more aggressive with rate hikes, psychologically, that’s going to cause a lot more fear, which will shake up the real estate market in the short term.

We also know that inflation is up, gas prices are up. These things, along with higher borrowing rates, mean that we’re likely looking at higher rental property carrying costs for the real estate investor. But then, there’s also the other side of things. More offices are opening up again and students are going back to in-person classes, and these are positives for the rental market in core Toronto. 

With so many changing factors these days, it’s not that simple when it comes to what real estate returns look like these days if you are thinking about buying an investment property in Toronto today. So, in this video, let’s clear things up. We’ll look at upcoming changes to rents, expenses, and appreciation and then show you what to really expect if you buy an investment property in the near term.

Rental Income

Real estate returns come from rents minus operating expenses, minus mortgage interest, plus appreciation, so let’s tackle these one by one. In the rental market, things are getting better. In COVID, there was a huge influx of newly converted investment properties combined with renters leaving the core, which caused rents to dip. Right now, we’re still not completely back to pre-COVID levels, but we’re close and the pace of recovery is picking up. In Q1 of this year, we saw a 6.5% annual increase in apartment rents, and condos and single-family homes saw a huge jump of 20%. 

Right now, Torontorentals.com forecasts an 11% increase in rents in 2022. Looking at current prices compared to December of 2021, prices have gone up 2-3% so far, and Torontorentals.com forecasts a 11% increase for 2022. So this means we still have a 9 to 10% room for price growth in Toronto if tenants turnover. If they don’t, we can still expect higher rents based on the regulated percentage. The guidelines for 2023 haven’t come out yet, but given higher inflation rates and how much things have gone up over history, I’d conservatively assume that this annual rent increase should be around 2%+.

On the expense side, we have operating expenses and mortgage interest. The one thing that we all know will skyrocket are gas prices, and the market is pricing in an annual 9% increase from this point on. I’d say other expenses are also expected to go up, but they’d look more in line with CPI at around 5%. So overall, we can expect operating expenses to go up by around 6%. Now if we plug in the math, rents going up 2% and expenses going up 6% actually means not much will change, with freehold cap rates staying around 3.7% and condo cap rates staying around 2.8%.

The factor that’s probably going to make a more significant difference is interest rates. Variable rates follow overnight rates, and right now, the market is expecting a 50 basis point rate hike for Q2, another 50 basis points in Q4, and another 25 basis points in Q1 of next year. So overall, that’s a 1.25% increase in interest rates in a year’s time. Assuming a loan-to-value ratio of 80%, this will reduce the net income for freeholds from 2.2% to 1.3% of the purchase price.

Cash Flows

As a real estate investor, we don’t just look at net income, and many investors feel that cash flow is king. In case you don’t know, each mortgage payment includes a portion of the principal that you need to pay every month. It’s not an expense, and you’re actually building your own equity, but this amount needs to come out of pocket and go inside your piggy bank each month.

The annual principal paydown amount at the start of your mortgage is approximately 2% of your purchase price. Assuming you’re going with a variable mortgage at 1.8% right now, when rates go up 125 basis points to 3.05%, your monthly mortgage payment amount actually stays the same up to a certain point. What happens is that the bank will redistribute your payment breakdown, sweeping a bigger portion towards the interest and shrinking your principal paydown portion.

Because your cap rate doesn’t change and your mortgage payment doesn’t change, your net cash flows also remain stable up to the trigger interest rate. At the moment, this trigger rate is around 4.5%. When rates go higher than this, the monthly payments won’t be enough to pay for the interest portion, so that’s when you’d expect your monthly payments to start going up.


So far, we’ve covered rental income, which will be compressed because of interest rates, cash flows, which should stay unchanged over the next year, and now we’re left with appreciation, which is probably the trickiest part. Real estate prices have gone up very quickly in the first couple months of Toronto. Detached homes have gone up 22% since December, and semis and condos have gone up around 13%.

That is a lot already, but CREA just updated their 2022 and 2023 price forecasts for Ontario. Previously, they expected an 11% increase for 2022 for Ontario, but now it’s gone up to 23% for 2022 and another 5.7% for 2023. If this pans out, that means detached homes in Toronto are likely going to stay more or less at the same price by year’s end, and there’s another 10% room for price growth for semis and condos for this year.

We all want to make numbers-based decisions, but the reality is that real estate price movements are largely driven by emotions and fear. Right now, the market is expecting a half-percent rate hike in Q2, hopefully going up more gradually at 25 basis points each time. But if the Bank of Canada gets more aggressive and bumps it up by 50 basis points in April, June, and July, this might be what is needed to rock the real estate boat in the short term.

When things get rocky and you’re in the market to buy and you meet the right motivated seller and selling agent, then it’s very possible to snag a deal with a 5 to 10 percent discount. Even if detached homes aren’t going to change by year end, you might be able to buy the dip and end up 5 to 10% better off by year end. If you buy a semi or condo, then you might get that discount plus an extra 10% expected price growth by year end, which means you’d be very well up to 20% by year end.

There are so many scenarios that we can play out, going with a lower appreciation rate of 5%, 2%, 0% or even negative appreciation rates. Honestly, real estate returns nowadays are primarily coming from appreciation, no matter what market you’re looking at, and this is our biggest unknown at this point. 

If we assume the biggest 20% price growth with the semi and a motivated seller, you might get total returns of 21% of the purchase price or a ginormous ROI of 91% post leverage. With a more conservative 5% price growth, ROI is closer to 27%. With no price growth, you’d be solely making money from rental income, which comes in at 5% post leverage.

How We Can Help

When there’s change, there’s opportunity. There is a chance that real estate prices will dip when rates rise more, but I don’t expect that to last long in the Toronto core based on my previous analyses, which you can watch here. In rising interest rate situations, prices in Toronto typically go up, and Toronto has outperformed other cities like Markham, Barrie, Hamilton, and Newmarket in the past. You can also see that Toronto prices fluctuate less than the other markets, which also makes it a lower-risk investment class overall.

I don’t like to speculate, usually recommend that you buy when you’re ready because time in the market always wins. But again, we are in a more volatile time right now, which means it’s possible to stag better deals that might come and go pretty quickly in Toronto. So if you are monitoring the real estate market and watching for deals, what’s extremely important is that you have to get your financing sorted out now. Refinancing for your downpayment usually takes a couple of months, and if you need another mortgage on top of that, you’ll need to give yourself even more time because spacing out refinancing and mortgage applications can help you qualify for bigger total amounts.

If you want us to help figure all of this out, we can help! We can look at your requirements and preferences and then walk you through a real estate investment roadmap so that you can secure that perfect investment property on schedule. 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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