WHERE and WHAT Real Estate Investment Should I Buy For 2023? Toronto, Barrie, Windsor, Guelph
2023 will very interesting year because you do have the potential to get some really great deals. But there are a lot of real estate choices – which one makes the most sense? In this video, I’m going to be walking you my methodology to figure out choosing where and what to invest in.
Here we have Windsor, Barrie, Guelph, and some other options in the GTA. First off, you can see that the price varies. So if you’re limited by budget, then it gets easier because you have less to choose from. If there’s still a few options, I prefer the one with the best risk-adjusted returns.
But what does that mean? Well, even if there are similar returns, one might have better cash flows and another might have better appreciation. If that’s the case, then I would go with the one with the better cash flows, and it’s pretty easy to explain why these days. Higher cash flows can help you in case your monthly costs go up so it ends up being a safer investment.
From a high level, you can see that the GTA does give better total returns compared to the smaller towns in Ontario.
It turns out smaller towns have the edge here, with better cash flows. But because appreciation makes up more of the pie and they see lower appreciation, that’s why their total returns end up lower. That 2.5% difference in returns before leveage is actually a big deal. Becuzse of that, and I’m leaning towards the GTA here as long as holding power is strong.
In the GTA, 416 properties see better cash flows than the 905 – and that’s because city renters lare willing to pay a premium to live closer to the core. Within the 416, semis and detached properties don’t see big differences in rents but you buy semis at a discount. So semis end up having better cash flows.
From a risk-adjusted return standpoint, I personally feel that a safe level of cash flow needs to be slightly positive. I’m not looking for major cash flows to fund my lifestyle, and 2.5% less in returns before leverage is a lot to lose if I choose the small towns. So given that 416 semis have positive cash flows and higher long term returns, 416 semis seem to be the best risk-adjusted choice here.
What Should You Choose?
The total returns is largely based on appreciation, so we should get a better understanding of what’s happening here. Based on past data for a longer period of 2005 to 2020, GTA has seen the best growth. Then once the pandemic hit combined with record low interest rates, we saw much faster growth in the suburbs, especially in areas with lower purchase prices.
You can see it clearly here if we use 2020 as a baseline and you can tell that the small towns all rose more in price compared to the GTA. You can also see it within the GTA, with 905 detached homes going up the most. Now if those big price gains over-stretched because of low rates, then it’s possible to see to see an unwinding now that mortgage payments are much higher – and if that’s the case, then there’s still more room to go.
Just remember, analyzing data is tricky. If you choose different start and end times, especially for shorter timeframes, you might end up getting completely different results, and so the timeframe can make a big difference. If you believe there was a permanent COVID shift in prices because more people are still working from home now, then maybe the start of 2020 shouldn’t be in the baseline.
So if we make 2021 the reset time, the story gets changed. You can see that condos still have a lot more room to drop, but the drop in 905 detached homes isn’t as far off from the 416 anymore.
I don’t know which story is more accurate, but I like to defer to fundamentals to process my thoughts. When rates go up, the biggest drops will happen in markets that are the most stretched. Because the suburbs went up so much more since 2020 compared to the 416, and these properties are usually in the starter home neighbourhoods where home owners have a higher debt ratio, I think it’s pretty likely that they are more stretched than the 416 house owners.
We also know there’s more speculative buying in condos, and more investors here already had negative cash flows before rate hikes – so these home owners are probably also tighter on cash. So based on these assumptions, I would suspect that the suburbs and condos should see bigger drops compared to the houses in the 416.
I always say timing the market is extremely hard and we usually buy when you’re ready. If you can afford 416 semis, then they are the best long term risk-adjusted investment choice here, and the charts tell us we might be closer to the bottom here. But if you need to buy in the suburbs or a condo, then it’s possible to see prices come down more than houses in the 416.
Here’s another thing: if you have a lower budget to work with and are choosing between Toronto condos or small town houses, then the small towns is probably the safer option. You see similar total returns, but better cash flows. So houses make more sense.
Plus, keep in mind that there’s also more things you can do with a house like adding more rooms, adding more rental units or even take on build projects on the land you own. These things can get you a bigger, faster bump in appreciation and there’s just less options for condos.
How We Can Help
As we kick off another year, you might be planning out your real estate investment roadmap for 2023 so hopefully this helped you figure things out. And if you are looking to invest in Toronto and want to bounce ideas off of our Toronto sales team, just reach out!
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