When it comes to financial investing, there are many factors to consider. Cash upfront, the risks, and of course, the long-term gain.
If you’ve been keeping an eye on the real estate market, you’re aware that home prices are on the rise. Even if you purchased a property last year, the value has likely gone up – as of December 2017, the average price of a condo has increased from $466,592 to $532,700! With the rising home prices, it can seem like the time to jump on the real estate investing train has passed. So, with where we are in the market at this time, you may wonder should you invest in real estate and is it a good time to invest?
The answer to your burning question depends on the type of investment you plan on making.
Below, we’ve outlined the types of residential real estate investments as well as the types of properties available to help you gauge your needs. Whether you’re new or a seasoned investor, there’s always room to learn and we hope that you find this post helpful!
Let’s get started and see should you invest in real estate:
Likely the most glamourized investment option when deciding should you invest in real estate. There are numerous television shows that make flipping look like a total breeze. All you need is good taste, a contractor, and a bit of willingness to get your hands dirty…right? Well, yes – for the most part. However, house flipping is a serious undertaking, and requires a large investment of both time and money.
If you’re willing to roll up your sleeves to sand, paint and lay tile yourself, or happen to have a handy friend who’s willing to exchange work for a few beers, you may be able to turn a serious profit with a flip. Bonus points if you have a contractor in the family or can snag a discount on labour in some way! There are always deals to be found when it comes to materials, and some contractors and designers will have connections that can offer some serious discounts if you use their recommended flooring or lighting company. Considering the consistent rise in house prices, your property will likely increase in value regardless of improvements, meaning a newly renovated turnkey home will result in even higher gains.
However, if you’re inexperienced with home renos or unable to do any of the labour yourself, you’ll be forking out funds for not only your trades, but likely for an interior designer or experienced contractor to oversee the process. You’ll also need to consider at the condition of the property. Chances are, if you’re purchasing a property that’s simply outdated and in need of a “lipstick” makeover (painting, replacing tiles, knocking out a wall or two), you’ll still be paying a fairly high price in today’s market, making it harder to ensure a high profit. With larger undertakings where the house is sold ‘as is’ or hasn’t been well maintained, you’ll have to consider things like mold, rot, structural issues etc. – fixes that could potentially blow your budget right off the bat. Your Realtor will be able to advise you of potential risks when considering a home or condo, and in this case, a home inspection is of the utmost importance.
The Resale Condo
Probably the most popular of all investment options, resale condos are the most readily available real estate commodity in Toronto. In December of 2017, condo apartments made up 57.1% off all units sold in the city.
Since the vacancy rate in Toronto is VERY low, you will have very little trouble renting out your unit. Unlike renting out a house (which also comes with its own costs), you’ll also have to factor in maintenance fees on top of your monthly mortgage when it comes to setting the rental price. Although the landlord is still responsible repairs – like a faulty dishwasher or a washing machine leak – the condo corporation is responsible for maintaining common areas, landscaping, window washing, etc., making a condo a much lower maintenance rental option than a house. Being a landlord is a BIG responsibility, so you’ll have to ensure that you’re readily available when issues arise or have someone who is when you’re out of town (or, if you’re an out of town investor yourself!).
Seems like the ideal choice when asking should you invest in real estate, right? However, as an investor, you’ll have to consider not only where the market stands, but where it’s headed. Although Toronto properties have shown a consistent rise in value throughout history, recent findings have shown that the condo market is expected to hit a plateau. If you’re looking to buy, rent, and then quickly flip for a profit, you may have to be more patient in holding onto your investment than you would have been if you’d purchased a year or two ago.
The Pre-Construction Condo
Another popular option, pre-construction condos are known for their beneficial payment schedules, lower entry prices, and low competition. For end users, the risk in buying pre-construction is that a project may be delayed and disrupt long-term life plans, or the finishes won’t be quite what you envisioned when you purchased, leading to disappointment. For investors, profit is the only goal – meaning that if you’ve selected a good layout and exposure, and the building is in a desirable neighbourhood, you’re likely to make money in the end. The most appealing aspect of pre-construction is the low upfront cost since your down payment is split over the range from the purchase date to close, giving you time to save, and offering less of a financial commitment right off the bat. You’re also locking in a present-day cost, to be sold later. Since most projects take upwards of 2-3 years to build, it’s almost guaranteed that your property will increase in value. There are also no bidding wars with pre-con, and the price that you see is what you pay*.
TO NOTE: As of a recent report, the average price per square foot of a resale condo is less than a pre-construction condo. Therefore, although you’re paying less money up front, and your unit is very likely to increase in value, you are paying more for the property itself vs. buying one that is already constructed with the same number of bedrooms/square footage.
*There are other costs associated with buying pre-con (like closing costs and developer levies), which are explained in this post.
If you’re fortunate enough to be able to purchase a house in the city, there are many benefits to this type of investment. If the property is large enough for multiple units, you may have the option for more than one rental income stream. Better yet, if the property is already zoned/equipped with multiple units, you’ll save the upfront cost of renovations and permits.
As an end user, a house may be an excellent opportunity for you to offset your mortgage with supplemental income from a rental. Whether the house is a multi-unit dwelling or just has a lower-level apartment, you have the option of occupying part of the home and residing in another part of it yourself. This also offers the option of split utilities and internet with your tenants, bringing living costs down. Although purchasing a house is a larger cost up front, the Toronto housing market shows no signs of slowing down, meaning you are VERY likely to make a large profit if you hold long term (whether you’re personally living in it or not!).
However, when wondering should you invest in real estate, as with any landlord/tenant situation, you’ll be responsible for all maintenance, late night leak phone calls, and of course, any possible noise/mess complaints from neighbours. A property manager can make this easier, however that cost will then need to be considered in your monthly costs. If the home you purchase is a single-family property, you will need to factor in the time and financial factors of renovations and permits to convert it to a multi-unit dwelling.
Closing Points/Things to Consider
Remember, rental income is INCOME, meaning that you’re still obligated to pay tax on any monthly earnings you make on the property. For example, if your mortgage + maintenance costs are $2600 and you’re renting your property for $2800, you must pay tax on the $200.
If you choose to rent out your property, you’ll need to consider the responsibility, monetary and time commitment of being a landlord. We advise you to become familiar with The Landlord and Tenant Board, especially when it comes to matters like finding a suitable tenant (look to your Realtor!), creating a rental agreement, raising the rent and evicting tenants.
So, should you invest in real estate? We hope that this post has provided some insight! If you still have questions, feel free to leave them in the comments and we’ll reply as soon as possible. If you’re looking to make the move into real estate investment, get in touch by emailing, calling, or using the form below. We look forward to chatting with you!