I’ve Heard Rental Properties Are A Good Investment, Are They Really?!

So you’ve heard that rental properties can be a good investment have you?… But what about interest rates increasing? What about the foreign investor’s tax? Where do I start?!

Well, the term “investment property” can mean anything from a hotel to a farm.. The first piece to the puzzle is understanding what is it which you are trying to achieve and how big of an investment are you looking to make?

I think it’s important to touch on the most obvious questions which I receive from anyone looking to invest…

1. Are properties still appreciating?

2. Where should I invest?

To begin I’ll answer the first questions because, its a rather complex one. “Are properties still appreciating” this is a pretty broad question. I’ll focus my attention here on condo’s in the cities core spanning from Leslieville east, to the Humber west and north to St. Clair. I’m noticing that the entry-level market ($300,000 – $500,000) market has stayed very consistent and has continued to appreciate despite the foreign investor’s tax along with rising interest rates.. Don’t get me wrong, if its a bad layout in a garbage building, you’re not going to see gains on your investment. The market between $500,000 and $800,000 has not quite appreciated as quickly as the entry-level market due to the demand not being as high.. That’s not to say they are not a good investment, it’s just to say that you may make a 15% appreciation year over year on your $400,000 investment compared to a 10% appreciation on a unit between $500,000 and $800,000.

I think its obvious that after last springs FRENZY things have calmed.. The dust has settled and interest rates and the foreign investor’s tax do play big a role in this.

For example if you were to get a $500,000 mortgage at 2.6% fixed (which was the going rate in the spring) you would be paying $1812 a month to carry your mortgage with a 20% deposit.

If you were to get a $500,000 mortgage at 3.25% which is the current going rate, you would be paying $1945 monthly, which is a difference of $132 per month. This has cooled our market, but the demand is still there, which is driving our market forward.

So for the sake of creating a clear picture of what it would take for the average Joe to get into the market Ill break down the following numbers which will give you a clear idea of “what it takes” to get into the market.

On a purchase of $400,000 which will be what it costs to buy anything of quality, and is a healthy long-term investment you can expect the following..

20% deposit = $80,000

Lawyer Fees = $1,500-$2,000s)

Land Transfer Tax $8,950 (first time buyer would only be $475 based on government rebate)

I always suggest a client investing paints the unit and professionally clean for the new tenant, this would equate to approx. $1500.

So all in on a $400,000 investment, your entire overhead costs to get the investment up and running would be $92,450 (if you’ve purchased property before). This means when your property appreciates 10%-15% yearly, you’re going to make $40,000 – $60,000 on your purchase, which is more than half of your initial investment, while a qualified AAA tenant pays down your mortgage. There are factors to making this engine run efficiently, and they come down to two things…

Selecting the right unit, in the right building, in the right neighbourhood.

Selecting the right tenant.

You can easily have the perfect property with a terrible tenant who will destroy the property. Or, you could easily have the wrong property with a terrific tenant who will pay rent on time and baby the property, but not see appreciation because you bought in a bad building, or got a bad layout, or invested in the wrong neighbourhood.

To keep things simple, the goal is to have the rental income cover your carrying costs… (Home insurance, property tax, condo fee’s, mortgage) but this is not exactly realistic anymore with the market we are in. The reality is to buy a AAA property, you will likely lose between $50-$150 on your monthly carrying costs vs. rental income. At the worst case scenario your $150 x 12 will equate to a $1,800 loss after one year of tenancy… If we rewind back to our appreciation numbers for a quality property.. You can deduct the $1,800 loss from the $40,000 appreciation and end up with a $38,200 gain from your initial $92,450 investment in a ONE year period.. That’s over 35% ROI… Not bad!

This is a pretty broad example… But I will say that these are real statistics based off of investment work I’ve done with clients as of recent. I had a client who was frustrated by the lack of returns she was seeing with her money invested in stocks and bonds… I was connected with her through a client and she notified me she wanted to purchase 3 investment properties. We accomplished our mission by purchasing 3 top quality units in good neighbourhoods and great buildings. She’s made over $100,000 on each property in the last year! Of course she bought at the right time last December “pre-frenzy” but even if her investment only saw 50% appreciation compared to what she got (worst case scenario) she would of made $150,000 in one year on her initial ($92,450 x 3 = $277,350) which is more than a 50% appreciation on her initial invesmtnet in one year!

This works guys..

If you’d like to chat more about these numbers or facts.. Give me a call and lets grab a coffee to chat about how you may be able to invest in your future in Toronto’s market.