Buying an investment property in the Toronto Area Housing Market requires careful planning. Here are six strategic steps we recommend before buying your first Toronto investment property.
1. Find a Real Estate Agent
A realtor Toronto investors trust is your best resource to help you get a feel for the current state of the market. We’ll review recent sales for the various investment options whether it is a single-family home, condo, townhouse, or multi-unit home such as a duplex or triplex. Understanding the cost of homes for sale in Toronto, as well as current rental rates, helps you decide if investing now makes sense. Housing costs also determine if you have the minimum 20% down payment required for an investment property.
2. Consult a Mortgage Specialist
Speak to a mortgage specialist or your bank to find out if you qualify for an investment property mortgage. You’ll need a good credit history and enough income sans the potential rent to cover your mortgage payments. Remember, if you have a single rental unit, and you lose the tenant, you’re on the hook for 100% of the mortgage payments until you find a new tenant. When your credit isn’t in good standing, and/or your current income isn’t enough to pay your mortgage, it’s not the time to apply for an investment property mortgage!
3. Consider Equity
Although you only require a 20% down payment, you can see better returns from your rental property if you increase your down payment. Even 5% will reduce your monthly mortgage payments and provide more equity. You also increase your potential to see an actual profit in the first year.
4. Set a Budget
As a landlord you’ll need to set a budget and be sure you can afford the following costs:
- Property insurance
- Legal fees and administrative costs for rental agreements, background checks for tenants, registration fees, end of lease inspections, etc.
- Income taxes less landlord expenses such as mortgage interest, repairs, tenant ads, etc.
- Tenant advertising
- A savings account with 5% to 15% of the property cost to cover repairs and maintenance
- A savings account with 10% of the property cost to cover possible vacancies
Keep in mind you can offset some of your costs by including utilities and/or common expense fees in the rent.
5. Calculate Profitability
Profitability is calculated using a basic formula dividing a property’s net income (rent less expenses) by the amount invested in the property. The factors that impact your return on investment include your mortgage, the maximum rent you can charge, tax and insurance, possible rent increases, and upgrades prior to renting (if any). Remember, your equity continues to build with each mortgage payment. Equity is the original cost of the property and its current
market value less how much you owe on your mortgage. But it can also include increased home value due to renovations. You can use the cost method to determine your ROI by dividing the equity of the property by its costs.
6. Supply and Demand
Toronto condos tend to have high tenant demand especially in downtown neighbourhoods. For example in the third quarter of 2021, Toronto condos saw record lease activity with vacancies filled in 16 days. Rents also increased year over year by almost 14% in November 2021. Combine this with the fact condos continue to see impressive gains in value and this tends to make condos quite appealing. Also, take into account your condo rental income has to cover not just your mortgage costs but also your condo fees.
If you’re looking for a team of Toronto realtors to help build your wealth with a solid investment property strategy, the Christine Cowern Team’s got you covered. Give us a call at 416-291-7372 or email us at hello@christinecowern.com. We’d love to work with you!
