Introduction
There’s a big housing supply and demand gap to fill and recent policy has been favouring more missing middle type projects.
So it’s getting obvious that Toronto real estate is shifting towards better opportunities and growth potential in the freehold market, and the recent better appreciation is freeholds is probably only the start.
Once you combine this with better rent yields, it just makes investing in houses even more attractive than before. But with the softening real estate market these days, you might feel that selling a condo isn’t the best move at the current moment.
Now if repositioning is in your plans, here’s what you need to know. It’s actually a smarter choice to reposition today and we’ll prove it into this video with actual numbers. Let’s dive in.
Benefits Of Repositioning Today
If you’re just selling, then clearly the higher the selling price, the better. But repositioning is very different from just selling. What happens is that you sell at a lower price and you’re also buying at a lower price. And because the house is a higher value asset, you essentially have a net purchase, which means you end up with net benefits in a down market.
Another thing to consider are fees and taxes which are a percentage of prices at the time of reposition – doing this in a down market means you end up with less fees.
The last thing to keep in mind is the benefit of deferring capital gains taxes today. If you reposition when prices are higher, you pay more capital gains tax upfront, and less later. So even if you make the same in both situations, deferral capital gain taxes to a later date is actually better from a time value of money standpoint – and that’s another thing going for selling today.
Comparison Of Repositioning Now vs. Repositioning Later
If all of this still sounds a bit too abstract for you, let’s dive into an example with actual numbers. Let’s say you bought a condo in Toronto in the summer of 2020 for $650,000. In March of 2022, prices peaked at 20% higher than purchase price but now we’re back down to around 10% above your purchase price. The house market is a similar story with bigger swings. So right now, you can buy a house in Toronto for $950,000, which is a deeper discount at 20% less than what we saw at the peak in 2022 at $1.15 million.
Now let’s look at two scenarios:
- Reposition today
- Reposition when prices recover back to previous peak prices.
In both situations, you’ll sell the house at the same time when house prices go up 20% above the previous peak.
As you can see, repositioning today gives you higher net gains because of the reasons I talked about earlier:
- You end up in a net buy position, so buying when prices are lower end up giving better gains overall.
- Your land transfer taxes and selling fees are less because you’re repositioning at lower prices.
- Even though your capital gains taxes are higher because you have better gains, most of these capital gains taxes are deferred to a later date.
These end up making repositioning today a pretty good idea.
What If You Buy Now, Sell Later
Now, another scenario our clients have been exploring staggering the buy and sell.
How do the numbers look like if you
- buy first today at lower prices
- take on a private loan to do so because you haven’t sold the condo yet
- then sell the condo later once condo prices come back up more.
It’s creative and it could end up giving you better returns, but it is a lot more work, stress and risk, and might also affect your future growth potential.
The risk part is a huge unknown. Say you’re looking to sell when prices rebound back to the previous peak, which means you’d make around $45,000 more. This only makes sense if your carrying costs are lower than that, and there’s no way to find out what the carrying costs are right now which is the big risk.
If it’s a year for prices to rebound, it might still make sense. If it’s anything more than that, it might not make sense anymore – either way, we think the risks outweigh the rewards when you do this, so we don’t recommend this.
The other thing to keep in mind is that doing this racks up a lot more debt so before you even consider this an option, check with a mortgage agent first to see if you actually qualify.
And even if you do, this will eat into your further borrowing room and potentially cripple you. So if you’re looking for flexibility to grow your portfolio, repositioning today ends up being a much cleaner, better risk-readjusted return solution.
How We Can Help
These are just the basics and there will be small differences in each person’s situation might this video doesn’t cover. So if you want to talk out your individual situation with us, let’s chat.
We’d be happy to look into your unique scenario and explain your options to you. Just reach out by heading to the link below to book a discovery call with us!
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.
