Where Are The Best Neighbourhoods To Buy Real Estate Investments In Toronto?

Where Are The Best Neighbourhoods To Buy Real Estate Investments In Toronto? (Freeholds & Houses!)


In the past few years, more and more Toronto condo investors have told us they want to invest in houses instead. Yes, the cash flow is better, but there are better places in Canada for that. The big reason most investors choose Toronto because they see the better growth in Toronto and that is what contributes to the better performing real estate returns in Toronto compared to the rest of Canada.

Honestly, most investors don’t need the cash flows. They are also about to choose from more options nowadays because they’ve gained a lot of equity over the past few years. They are just looking for the investment that can give them the best returns, which leads them to zero in on houses in Toronto.

But when we look at houses, the big question that I get asked all the time is, which neighbourhoods in Toronto make the best freehold investments? So, in this video let’s talk all about appreciation trends, rent yields, and value add differences between neighbourhoods in Toronto. And hopefully, this helps you make a more informed real estate investment decision.

Appreciation Trends

What really sets Toronto apart is our impressive appreciation track record. Ever since 2015 until now, Toronto has seen an amazing 9% average annual appreciation in detached homes.

I broke it down a bit more and looked at the average appreciation by neighbourhood. Here are some more interesting insights. When I sorted the neighbourhoods from highest to lowest appreciation, you end up seeing a mix of east and west and neighbourhoods at the top of the scale.

And then once you scroll down the scale, you’ll see most of the central locations sitting at the bottom of the appreciation scale. If you’ve been around Toronto for long enough, you’ll know that the areas in the more central locations are the better, more mature neighbourhoods, and they are generally more expensive. Simply because of the price, there is a drop in demand.

Because of this, it probably makes sense to see slower price growth and so I decided to plot price against appreciation to get another perspective. 

As you can see, there’s actually not a super clear correlation between price and appreciation. Instead, I would say that there is a price threshold to watch out for. Anything under $1.6M sees higher average appreciation. Once you go beyond that point, the appreciation drops to a lower average range.

Besides price, I’d say that gentrification is always something to take a look at as well. If you end up picking up a property in the earlier stages of gentrification, it might be higher risk in case plans don’t pan out but you would also get a potential longer period of better growth.

Differences In Rent Yields

Next, let’s take a look average rents by neighbourhood. Once you do this, you will probably notice that rents don’t very all that much across the city. For example, if you look at a one bedroom apartments, the most expensive ones are in Rosedale costing an average of $2600 per month.

On the other side, the cheapest one bedroom apartments are on the west end hovering around $1700 per month. So basically, renters pay a 53% premium if they choose to live in Rosedale. But let’s look at the premium for real estate prices. A detached home in Rosedale averages around $4.3 million, which is almost four-fold of detached homes on the west end that start at $1.1 million. So the price ends up being a key driver for rent yields, and that’s why there’s a very clear correlation between price and rent yields as you can see in this chart.

Now, if you want to improve cap rates, you can choose to invest in a multiplex instead of a home with a secondary suite. Basically, once you have more units, your rent yields will improve and so you can see here that a triplex in the same starter neighbourhoods get a jump in rent yields compared to a 2 unit house in the same starter neighbourhood.

Next is the question about whether cash flows matter? Normally, as long as you have break even cash flows on a house, I’d say it’s fine and to look at total returns to steer your decisions. But we are in an exceptional time where we are expecting half a percent rate hikes possibly for the next couple of months. So in this case, as a safety net, you might want to choose properties that have better cash flows to make your investment safer from a risk standpoint.

Value Add Differences

The last thing I wanted to touch on are value add returns. All houses in Toronto are allowed to build secondary suites and we also have garden suites coming soon, so I’d say there’s less of a difference here between neighbourhoods. Perhaps the biggest value add difference right now is zoning, and this is what really sets apart different neighbourhoods.

The R zone is the most permissive and you can build anything from apartment buildings multiplexes to townhouses, semis and detached homes. The least permissive zone is RD, where you are only allowed to build a detached home. So if you are planing on taking on a multiplex conversion to bump up rents and appreciation, then you’d have to look into zoning too.

For example, Scarborough might have the best returns but the zoning isn’t very permissive which means aren’t allowed the multiplex conversions. So, it might make more sense for you to invest in Riverdale, for example, where total annual returns are only 2% less but you might be able to benefit much more from the conversion.

How We Can Help

To sum it all up, real estate investing is not a one size fits all answer even if we are looking at Toronto freeholds specifically.

There’s also other factors that I haven’t talked about like if your’e thinking about retirement, you might want to focus even more on rental income or if you’re in an earlier stage in life, you’d probably want to prioritize appreciation so that you can defer gains and taxes for further down the road.

If you are confused and want to invest in Toronto real estate, don’t worry because our team can help you out! We can look at your requirements and preferences and then match you up with the best investment property that fits your needs. After we help you buy it, our team also provides renovations guidance, leasing and property management if you need it. Just connect with us if you want to learn more about our services!

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