When Should You Start Investing In Real Estate In Toronto?

When Should You Start Investing In Real Estate In Toronto?

Investing in real estate is a big deal because it’s probably the most expensive single asset you’ll be investing in and if you’re starting out, it could most likely take up all of your savings. You hear that you shouldn’t put all your eggs in one basket, so if your main investing goal is maintain a safe, diversified portfolio while maximizing returns, is there a best time to get started in real estate?


I know .. the stock market has been making massive gains recently but honestly this is actually not very normal and really risky. The big swings are caused by a lot of speculation and noise and a lot of times it’s completely detached from fundamentals. So when I refer to stocks in this video, I’m not talking about higher risk positions that have big swings.

Instead, we’ll focus on investing in index stocks where you can buy and hold, and you’re not trading on margin, and you’re don’t need to worry too much about short term fluctuations because in the long run, business returns as a basket does go up. According to Investopedia, the long term average annual return for the S&P 500 index from 1957 to 2018 is around 8%.

And now on the real estate side, I’ll also assume that you are in it for the long haul. So your returns come from appreciation and rental income and it’s magnified though leverage. This means if you’re looking at a typical Toronto condo, we are looking at total returns of 15-20% based on a 20% down payment and 5% annual appreciation.

Now real estate without leverage is lower risk than stocks. If you factor in leverage, then their risk levels become more comparable. If you want to learn more about this comparison, you can check out this video right now. Now comparing just the two investments, I’d have to say real estate is the better performer based on risk / reward – it has higher long term returns but similar risk.

But of course, unpredictable things can happen and real estate often doesn’t move in line with stocks – so if you’re a responsible investor, you’d want to diversify your portfolio so that you can lower your total investment risk … especially when you total pot of wealth gets bigger and bigger. So our goal in this video is really to figure out how we can maximize the time where our portfolio is diversified, while still optimizing for the highest possible returns.

Alternative 1

I can dive into a detailed financial analysis here but the answer is pretty obvious once I walk you through it, so we’ll just do back of the napkin calculations to keep things simple. So let’s assume you have $115,000 to invest. The first alternative is to put all of it into a Toronto condo that costs $500,000.

At the end of 3 years, you gain $78,000 in appreciation at 5% growth per year and because of that, you can go back to the bank to refinance 80% of it, and you’d free up $60,000 to invest in stocks starting year 4. Based on a 10 year investment timeframe, this is how your portfolio would look like. You’d have a big amount of real estate in your portfolio for a full 10 years, and only 3 years where you portfolio isn’t diversified.

Alternative 2

Let’s look at alternative two, where you invest in stocks first and once you save enough to keep $60,000 in stocks, you would take the rest of your money to buy real estate at that later time. When you’re investing in the S&P500 index, it’s take you around 6 years to make $60,000, which takes you to a total portfolio size of $175k. Then when you sell the stocks, you’d have to pay capital gains tax. This would take you down to around $100,000 of net capital to invest in real estate, assuming you’re taxed at the highest tax bracket. With this budget, you won’t be able to buy a condo 6 years especially since property prices which be much higher then, so you’d have to buy an older apartment if you don’t have extra money, or top it up with extra savings or continue to wait a bit longer if you want to buy into a condo.

Comparing The Two Alternatives

So from this basic comparison of the two scenarios, here’s a few things to note:

  1. If you’re looking at total time diversified, you’re better off with buying real estate first since you only have 3 years holding one type of asset, whereas buying stocks first means you’d have at least 6 years with only stocks.
  2. When you buy stocks first, your portfolio’s total returns would be lower because you have less time and money in real estate.
  3. When you buy stocks then buy real estate, you’d have to sell your investments so your money is reduced from capital gains tax. This reduces the amount you can reinvest compared to refinancing real estate.

So we have a clear winner here – alternative one – investing in real estate earlier can help you diversify better and at the same time, generates better total returns. Now even though it can seem like a big decision to put all your money in real estate, most real estate investors actually start this way simply because real estate costs a lot of money. If investing in real estate is part of your investment goals, consider starting as early as possible in your investment journey. Real estate has higher returns, so you can grow your money quickly but safely compared to other riskier investment options that have similar rates of return.

On top of this, when you’re refinancing to reinvest, you’re putting your money to highest and best use because you’re deferring capital gains tax. All of this helps you get to the point where you can start diversifying sooner – and you can achieve a higher performing, lower risk portfolio if you start investing in real estate sooner.

How We Can Help

When you work with our Elevate team, we’ll get to know your situation – your budget, your mortgage qualifications, your preferences, your risk tolerance, and your investment goals, so that we can guide you to make the best real estate investment decisions for you.

Do You Want To Learn More About Real Estate Investing Or House Hacking In Toronto?

We’d be happy to learn more about your situation and help you find the best investment opportunities for you.