Toronto Triplex vs. Duplex: What Should You Invest In?
Appreciation
It’s not easy to get the appreciation rate for triplexes in Toronto since there’s no public database with this information, so we ended up gather data for our analysis instead. Based on our analysis, we found that over the past five years, triplexes saw an average annual appreciation of 11.8 percent per year, which was amazing. I think the numbers might have been a bit skewed because of the major gains in property prices over the past year. So, we went further out and with a 15 year horizon, the annual appreciation for triplexes was at 7.3 percent which is still very good.
Now, let’s compare how Toronto semis did over the same period. We chose semis as a metric for duplexes because most duplexes in Toronto are essentially single family homes with a secondary suite, and the most popular ones are semis because they have a lower price point. In the last 5 years, Toronto semis gained 12.2 percent per year, 0.4 percent better than triplexes. Over the last 15 years, duplexes saw an even better 1.2 percent appreciation per year.
To put things into perspective, that’s a 12 percent difference over 10 years, and after leverage of four times, that’s a 48 percent higher ROI for duplexes. The reason for this is simple – there are more semi buyers since they attract both investors and end users whereas triplexes are solely traded by investors, and only those investors who can afford these more expensive real estate investments. More buying demand will point to better long term price growth if you choose the duplex market.
Rent Yields
On the rental income side, yes, you will have higher absolute cash flows with a triplex because you have more units. But since the property price is higher, is it actually higher as a percentage? For this part, it’s important to remember that our current rental situation isn’t completely reflective of long term trends because COVID threw the rental market out of whack in Toronto. Most units saw a decline in rents in Toronto but units with less bedrooms saw a much bigger drop compared to larger units.
So with this new info, you might be able to figure out what’s happened in the past year. A typical Toronto triplex is more or less like a box. Each unit is around the same size, with two bedrooms in each unit. Two-bedroom unit rentals got slammed with COVID and so triplexes saw a huge 15 to 20 percent drop in rents in the last year. On the other hand, duplexes usually have a bigger upper unit with say four bedrooms and a smaller basement unit with one bedroom. Four-bedroom units weren’t as impacted and that’s a major portion of total rents, so duplexes as a whole saw a much smaller decline in rents of around 5 to 10 percent. The end result is that even though triplexes have a slightly lower expense ratio, net rent yields, or cap rates, got shot down and are now only at 4 percent. Duplex gross rents didn’t drop as much, so now duplexes have the exact same cap rates at 4 percent.
Now let’s look at how things might look like if things go back to normal. If triplex rents rebound by 20 percent, triplexes will see long term cap rates of around 5 percent. Duplexes might see a smaller 10 percent bump in rents, which means duplexes have long term cap rates of 4.5 percent. So if you’re looking for better holding power, triplexes do have better long term cash flows and might be a better choice if you’re looking for a safer investment.
Value-Add Potential
Value add differences can also make a difference. I’d say there’s less room for creativity for value add with triplexes and you’ll pretty much limited to repairs and cosmetic upgrades. On the other hand, if you convert a single family home into a duplex, it’s more work but you’ll be able to reap better value add appreciation here. So when we put all the pieces together, you can see that total long term returns are in fact better with duplexes because the higher market appreciation already trumps the lower cash flows. Then if you want to actively boost your real estate returns, there are also more opportunities if you convert a single family home into a duplex compared to cosmetic value add opportunities with lower ROI in triplexes.
Financial Risk
Now, are there other considerations besides ROI? I’d say triplexes have lower overall financial risk. First of all, it has better cash flows, which means better holding power. I’d argue triplexes have lower tenant risk as well. Like I mentioned before, a triplex is a box with three similar-sized units paying similar rent. So if one tenant doesn’t pay, you’d still be able to capture two-thirds of your total rent. On the other hand, if the upper unit in your duplex decides not to pay, you’d be losing out on over 60 percent of your total rent, which would be a much harder hit.
Financial Situation & Investment Goals
Your personal financial situation and investment goals might also affect your property choice. If you’re tight on income and that’s the biggest concern when qualifying for mortgages, you would want to choose triplexes with better rent yields, which would benefit your debt servicing ratio and help you get a bigger mortgage for your target property and future properties as well. On the other hand, if want to come up with the downpayment for the next purchase more quickly and you’re not capping out on your income qualifications, then a duplex would be better because it has better market and value add appreciation, which means you can refinance and take out more capital at a quicker pace.
How We Can Help
So from purely a single investment standpoint, a duplex is typically the way to go but there can be other reasons why some investors would choose a triplex over a duplex. Our Elevate Realty brokerage specializes in real estate investments in Toronto, and if you’re ready to get started, we’re ready to help you figure things out! Here’s our process – we’ll get to know you so that we can match you up with the best real estate investment opportunities on the market. Then we’ll help you buy it, give you tips on how to renovate it, then our leasing team rent it out for you and our property management team can even manage it for you if you need a hand with that.
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We’d be happy to learn more about your situation and help you find the best investment opportunities for you.
