| Investing

Since we get tons of questions regarding buying and selling investment properties in Toronto, we thought we’d put together an investing in Toronto FAQ to make your life easier. Don’t see the answers you need? Click here to reach out to our team today! 

How do I know when to invest in real estate?

There’s an old saying that the best time to invest in real estate was five years ago. That said, there are two things to keep in mind:

  1. If you a) have the money based on current market factors, b) mortgage interest rates don’t scare you, and c) you can carry your mortgage alone for at least a few months, buying now is always best.
  2. If you a) have the money based on current market factors, b) high mortgage rates scare you, and c) you can’t carry the mortgage for a month or more, buying now is not suitable for you.  

Here’s the thing. Interest rates are scary. They impact your ability to qualify for a mortgage and your monthly mortgage payments. So, although buying now is best in theory, you need to beat the stress test. Next, you also need the cash to wait out possible issues such as not having a tenant for several months, or worse, having a tenant that doesn’t pay their rent on time or at all. So, assessing your finances, and deciding what your risk tolerance is, is a must. We can help you look at the pros and cons of investing now so you make smarter decisions. 

Successful investors are those who keep themselves informed and aren’t afraid to ask for help. You’ll find plenty of other valuable resources in the posts below:

How good of an investment is real estate? 

Very good. Here’s a look at housing prices over the past 10 years:

  • 2013: $522,951
  • 2014: $566,611
  • 2015: $622,611
  • 2016: $729,824
  • 2017: $822, 510
  • 2018: $787,842
  • 2019: $819,153
  • 2020: $929,636
  • 2021: $1,095,475
  • 2022: $1,189,730

There isn’t a single year, including the pandemic years, where you would have lost money. Better yet, your tenants would have paid your mortgage for you. The more you put down, the lower your monthly mortgage fees and the more you pocket. 

Is it better to purchase a pre-construction condo or a resale unit?

You want to choose a condo that fits your financial situation. So, let’s compare how it works for each:

Preconstruction

Pros:

  • You will usually pay less overall
  • You have more choices based on location
  • You choose the unit you want
  • The new unit will appeal to buyers as it’s “fresh” and has never been lived in
  • You’ll have lower maintenance fees at the start and then can incrementally raise the rent as the maintenance fees increase over time
  • You’ll have brand-new appliances, so there is less worry about replacement costs
  • You’ll have a higher ROI when you sell
  • You can probably charge higher rent depending on the location and amenities
  • You buy at today’s pricing and lock in ROI
  • Although the condo is not yet built, it continues to create equity between the time you purchase and the time the apartment is built
  • There is usually a more flexible amount of money needed upfront compared to the 20% down payment for resale, based on an extended deposit structure 
  • You hold onto more of your own money over the time the condo is built, which you can save or invest 

Cons:

  • You don’t see the unit until it’s finished and although you aren’t living there, tenants will notice poor quality, which can interfere with finding a tenant even in this high-demand market
  • There is no guarantee when the property will actually be ready to rent, which can interfere with your ability to earn passive income from the investment
  • The deposit arrangement is not always as appealing as it seems, costing you more in the long wrong 
  • You have to pay HST and can’t leverage rebates as an investor 

Resale

Pros:

  • You can start covering your costs right away via rent
  • You know what you’re getting for your money as you can walk through the unit and experience its condition IRL
  • You don’t pay HST or GST 
  • Mostly move-in ready  

Cons:

  • You’ll have higher maintenance fees, as the older the building, the higher the maintenance costs, which in some cases could mean the mortgage and fees are too high to measure up to the rent you can charge
  • Your appliances, plumbing and general apartment is usually older, which increases the risk of replacement costs
  • The older unit might not be as appealing to today’s savvy tenants
  • Unless you plan to pay cash, you’ll need a 20% down payment upfront 
  • You can’t get special pricing often offered by developers before breaking ground 

The bottom line is that it still depends on your finances when choosing. We can discuss your situation to help you find the best condo investment opportunity for you. 

What size rental unit is best for my investment? 

Bigger isn’t always better. More tenants are finding larger units beyond reach. For example, a family might opt for a two-bedroom and have their kids share a bedroom instead of investing in a 3-bedroom. You’ll also find studios and 1-bedrooms appeal to a broader range of people, such as students, singles, and couples, so you’ll usually have a wider assortment of applicants. That said, you need to consider the type of tenant you want to attract. Students can be more challenging as they are financially strapped and more likely to party. You also face higher turnover as they only live there until they graduate or drop out BUT you’ll likely enjoy ongoing demand if you have a rental near campus. Overall, professionals are usually more dependable and would be looking for a 1-bedroom or a unit that offers something like a den, sunroom, or second bedroom they can use as an office. We can help you find a great rental investment AND trustworthy tenants to reduce risk. 

How do I know what type of property is the best investment?

The best type of investment property depends on a few things:

What are your investment goals?

If you want to earn a “passive income,” investing in a rental property can pay down your mortgage. You will then eventually see the full amount of rent go directly into your pocket once your mortgage is paid.

If you want to build equity and are in no rush, it makes sense to seek out opportunities such as land where you won’t face taxes if the property isn’t occupied. You can ride it out until you decide to sell or some big-time developer comes knocking at your door. 

What is your risk tolerance level? 

Risk is not always as much of a concern with real estate, which is part of its appeal. However, the higher the risk, the more the earning potential. Here are a few examples or real estate investment risks: 

Pre-construction condos: You limit the capacity of collecting rent because you obviously have to wait until the condo is built before you can have tenants – But as time goes on, the rentability will likely (and notice we italicized likely here because there are no guarantees this is the case, hence the added risk) increase and the rent will probably be higher. 

Land: Although land tends to be an exceptional value for ROI, some unknowns can impact the value of land. For example, the government might decide they need your land for something like a highway. In this case, they are supposed to offer fair market value. However, they will never offer as much as a developer primed to make millions and millions off housing developments. 

How much money do you have available to invest?

This is always a big question, as you need to have the money for a down payment and tolerate loss due to things such as vacancies. We mentioned land above as an excellent long-term investment, but you have to afford to pay the mortgage until you sell. Also, knowing when to sell to maximize that profit takes some expertise and knowledge of the market. 

As you can see, there is an ongoing struggle between the money you have, the money you can earn, and the money you can stand to lose when it comes to the “right” real estate investment for you. 

How do capital gains taxes impact my real estate investments?

This is, of course, important and, frankly, something many novice investors don’t consider. No doubt taxes are always complex. When it comes to taxes and property investments, the main thing to understand is how capital gains tax is applied to profits made when selling an investment property. The way they work is that if you pay $1 million for a property, sell it for $1.2 million, and make a profit of $200,000, you need to claim 50% of your profits as income.  Sad. So, when you do your income taxes that year, that would be $100,000 more on your income. However, you do get to keep the other $100,000 tax-free, which is more than impressive. 

Has the time come to sell your investment property? If so, the posts below will help you stay on track:

I heard capital gains taxes are more complicated with real estate due to something called ABC. Is this true? 

Yes – “ish.” Your ABC is the “adjusted base cost” that includes costs for things like commission and legal fees. It also includes the cost of any additions or improvements you make while you own your property. So how the ABC works is when you sell, you add up the costs related to the purchase and deduct that from the price when you sell. Let’s do some quick math:

  • You paid $250,000 for the property
  • You also paid $7,000 in applicable fees
  • That means your ABC is $257,000
  • Pretty simple so far.
  • Now, you sell the property for $450,000
  • You have to deduct your $257,000 ABC from that number to get your profit 
  • So, your profit is $193,000
  • Now for your taxable capital gains, you split that in half
  • So, you end up claiming only $96,500 on your income, and your profit is $96,500

Although that sounds like less ROI, without ABC, you would pay taxes on $100,000, meaning your taxes eat more into your profits. 

How does rental income impact my taxes?

Because rent is considered income, it has to be reported on your taxes. However, you can also deduct costs for annual maintenance to help offset how much you pay in taxes. 

Real estate investment can be complicated, but it doesn’t have to be. Call The Christine Cowern Team at 416.291.7372 or email us at hello@christinecowern.com for guidance. We’d love to work with you!