We just finished going through the CBRE report on how things are shaping up in the Canadian real estate scene for 2024, and guess what? There’s some pretty interesting stuff to share!
There are still hurdles, but this year is likely going to be a pretty good year to dive into Toronto real estate investing and based on the report, we’ve narrowed down some of the best opportunities you should consider.
So, sit tight, because we’re about to break it all down.
G7 Countries With The Best Growth Potential
If you’re looking at the country with the best growth potential, Canada is at the top of the list, ranking highest in terms of population, GDP, and employment growth.
But here’s the twist: when we zoom in on GDP per capita, we’re not expected to do as good compared to some other countries and it’s already showing with the latest GDP releases.
And as this trend becomes more noticeable, it’s crucial to shift our focus to cities in Canada with stronger economic growth potential – which is where Toronto will definitely stand out.
If you think of the city with the long term economic growth, Toronto is probably top of mind for many people because we have a very diverse economy spanning finance, technology, healthcare, and education.
At the end of the day, because of this, Toronto will end up weathering economic storms better than other cities that rely more so on single economies.
Canada Interest Rates, Cap Rates, And Property Values
The next insight comes from cap rate trends. Here’s the scoop on cap rate trends: they’re closely tied to interest rates.
When borrowing costs are high, investors will need to see a higher rent yield (aka cap rates) to justify their purchases. As interest rates stabilize and then start to fall later, we’ll likely see cap rate trends follow.
Alright, let’s break it down for real estate investors. When we’re looking at a potential purchase, we use market cap rates and expected rents to determine its value. So, if cap rates start to stabilize, it’s a clear indicator of more steady property values ahead.
And later on as cap rates begin to drop with falling interest rates, property values could see an uptick in values based on math.
This dynamic spells good news for real estate investors looking to make a move in the market right now.
Toronto Housing Supply Trends
Let’s take a closer look at the multi-family real estate trends highlighted in the report. The major takeaway here is the ongoing struggle with a housing affordability crisis probably won’t go away.
The first reason is that the supply crunch isn’t easing up anytime soon. Right now, we’re grappling with high interest rates and material costs, but the real long term barrier is the shortage of construction labour.
And because of these barriers, this gap between the number of units needed to meet affordability targets by 2030 is only getting wider. And guess where the biggest challenge lies? You got it, Ontario.
Toronto Multi-Family Vacancy Trends & Rent Trends
We touched on huge population growth earlier and when you combine this with the supply crunch, rental vacancies will continue to drop as you can see from this chart.
And at the same time, rental rates will continue to climb. Her’s another interesting chart stacking wage growth, homeownership cost growth, and rents growth.
It looks like things were moving in line with each other until around 2015 then it became harder and harder to buy a home. But now it seems like this trend is starting to trickle in for renters too.
Now, here’s where it gets more interesting. The gap between market rents and existing rents is keeping tenants from moving. In Toronto, for instance, the turnover rate is a mere 8%.
What this means is that even though rent growth can be high at 25% for 2 unit rentals if they turnover, if rental units aren’t turning, then you end up seeing a much lower 5% growth – which isn’t actually that bad.
Top Strategies for Toronto Real Estate Investors For 2024
Taking a step back, CBRE thinks 2024 is a year of opportunity and we’ll even add a year of cautious opportunity to make it more clear.
- First off, the cost of capital is expected to improve, making it more attractive for investors to jump into the market.
- Property values have the potential to climb higher, driven by stable or even dropping cap rates and rising rents.
- The rental market is set to remain strong, with low vacancies and continued rent growth.
But let’s not forget the challenges still, especially when it comes to units under rent control. As market rents going up more quickly, this gap could keep growing.
So if you’re stuck with lower rents not only will your rental income not be as good, but your property values would be impacted just as much because of cap rate valuations.
With the government pushing more missing middle growth and making it easier for us to create new rental units in houses, this looks even more attractive once you factor in new units not being rent control.
The biggest red tape before was that zoning limited new units in houses so even if you wanted to pay to get it done, you simply can’t.
But starting last year, every single house in Toronto is now allowed to create four units, which is huge.
Other things got scrapped like parking requirements and we’re also seeing lower development charges to which makes the numbers a lot more attractive.
Plus, there’s the added boost from increased HST rebates at the federal level, so that’s why we’re seeing a lot more investors consider these initiatives which is great for everyone.
The most popular option for newer real estate investors would be to take a single-family home in a rental neighbourhood and convert it into two or three units to boost rent yields and likely boost values too.
If you want to go one step up, our clients are also planning backyard house builds afterwards to improve rents even more.
And for maximum return potential for the most experienced investors, a lot more are looking into the development space lately since Toronto zoning rules now allow 4 units as of right. This is definitely not for everyone but what you can do to maximize rent yields on a house is to build a new fourplex.
And for the rare wider lots, you might even take it one step further, sever it to create not just one by two fourplexes side by side to get maximum value lift.
How We Can Help
If you’re curious about what Toronto real estate investment projects might suit you best, just give our team a shout and we’ll take a look at your situation and help you weigh your options.
We’re not your typical real estate sales brokerage. Instead, we focus on using numbers to make better real estate investing decisions in Toronto.
That can mean looking for stronger investments with positive cash flow, thinking about risk management, and looking for ways to boost returns like value-add renovations and gentrifying areas.
Just go to the link below to set up a time to chat!
