If you’ve ever had a conversation with friends about their experiences with real estate agents, you’ve likely heard some horror stories about uninformed, unmotivated, and unprofessional agents.  When you delve into the specifics, the key failing is often a lack of specific knowledge that would have helped make the process go better for the client.

When it comes to real estate investment, the situation is similar, and is arguably even more pronounced.  Take a look at some of the key results of a survey of real estate investors by the Real Estate Council of Ontario.

• 21 per cent of investors wished they had looked at more properties.
• 26 per cent of investors wished they had a better grasp of the buying process.
• 32 per cent of first-time investors said they were not prepared or knowledgeable about the home buying process.
• 43 per cent of investors said there were sections of the real estate contract that they did not fully understand.

As we read the list above, one thing became abundantly clear – most investors are poorly served by their real estate agents.  Let’s reframe the points above from the perspective of how agents failed their clients.

• About 1 in 5 agents pressured their investor clients to buy a property early in the process rather than showing them more investment options.
• More than a quarter of agents couldn’t adequately explain the process of buying an income property.
• Almost 1 in 3 agents working with first-time investors didn’t prepare or educate those clients.
• Almost half of the agents involved in helping investors buy income properties had clients who didn’t fully understand the contract they signed.

The simple fact of the matter is that while all licensed real estate agents can help investors buy an income property, a lot of them shouldn’t be doing it.

The process, the terms, the calculations to determine which option is the best investment – these are all aspects of buying an investment property that can be confusing and intimidating.  Add in changes to government rules and regulations, financing qualifications and shifting markets and you have a challenging situation to handle properly.

The good news is that picking a real estate agent for your income property purchase isn’t rocket science.  It’s all about making sure that the person you’re trusting to help you navigate you through the process actually understands the process.  Without further adieu, here’s our three rules for picking an agent to buying an income property.

Rule #1 – The agent has to be an investor as well.

If the agent is not a real estate investor as well, don’t hire them to be your agent.  They don’t need to own a slew of properties, but if they haven’t bought and sold investment properties of their own, and if they haven’t owned and managed an investment property, don’t hire them.  An agent who is also an investor is able to bring that knowledge and perspective to the search for your investment property.  They’ve spent the time in the past to figure out how to do it properly, because they’ve actually put their own money on the line.

Within the Refined team, we have years and years of experience owning investment properties.  We’ve bought and sold our own investment properties, renovated to increase rents, found and on a few occasions evicted tenants and overseen property managers, contractors, and tradespeople.  Does that help when we work with investors?  Absolutely.

Rule # 2 – The agent has to be able to do the math.

If the agent can’t calculate cap rates, fill in all the pieces of the ROI formula and generally provide you with the information you need to compare properties and decide, then they aren’t doing their full job.  If you are the one struggling to gather this information and assess what it means, you will miss out on fast moving opportunities and won’t have the time to see as many options.  You don’t need your agent to be a tax accountant but they have to be very comfortable with the math.  It’s an investment of your funds and needs to be treated as such.

Within the Refined team, we have agents who have taken courses in statistics, financial statement analysis, macro economics, accounting, Canadian taxation, international taxation and intergalactic taxation.  Well, the last one we made up, but the rest is true.  We’re very comfortable with numbers and analyzing them and we have used that knowledge to create spreadsheets to analyze real estate investments quickly and thoroughly. 

Rule #3 – The agent has to see the big picture.

In any real estate purchase, an understanding of the overall market as well as specific neighbourhoods or streets is crucial.  For investment properties, the agent needs to be able to also consider macro economics of the region.  The strength or weakness of the area’s economy impacts rental rates and vacancy rates, which in turn impacts housing appreciation or depreciation.   When the provincial or federal government announces funding for a major project that creates thousands of jobs, those new jobholders need places to live and rental properties in that area are in demand.  When a major employer in a town closes down or lays off hundreds of people, those jobseekers move elsewhere and rental properties that used to rely on them are now vacant.  The agent you hire needs to be able to place the different real estate investment options in a bigger context than just the land and building.

Within the Refined team, we have access to detailed demographics and economic data for the various neighbourhoods, communities, and regions within the GTA.  When we combine that information with specific market conditions, rental rates, vacancy rates and purchase prices, we give our investor clients confidence in their decision to buy or pass on a given investment. 

As the survey we discussed shows, there are a lot of investors out there who, in a weak moment, choose a weak agent.  By following the above rules, you can make sure that doesn’t happen to you.  If you like the sound of that, then get in touch with us.  We’d love to make sure your next income property is a star in your portfolio!

We work with investor clients all the time and the journey to finding and buying a great income property often starts with the same question these days.

“Are there really still good income properties out there?”

The answer to that is yes, but not that many and it very much depends on the parameters of your search.

Let’s review what qualifies a real estate investment property as a “good one”, what’s changed over the years and how we help our investor clients find their next purchase.

Gimme the good stuff.

A “good” income property can be defined in many different ways, depending on what’s important to the investor.

• Some investors want a passive investment that requires very little management, so a “good” income property for them is one that they can largely ignore for years and let the market appreciate over time.
• Some investors are after the best possible exit result and look for real estate that appreciates the highest during their planned length of ownership, regardless of what the cashflows look like during ownership.
• Some investors can’t stand the idea of having to put money into an income property on a monthly basis and consider anything that generates positive cash-flow to be a good income property.

While different investors place different emphasis on the above options, the holy grail is of course a combination of all three.  When we talk with an investor client about a “good” income property we’re talking about a place where:

• There are quality tenants who pay the rent, don’t trash the place and who stay for quite a while.
• The property itself shows great appreciation over time so that you’re building significant equity in the property based on market changes during ownership.
• The purchase cost relative to the down-payment, the cost of financing and the rental rates all combine to give you a positive cash-flow each month.

Before we get into where such properties are located, let’s review a couple of key points.

Put enough money down and anything is cash-flow positive.

Years ago, one of our agents was showing a condo unit and as he was waiting for his client, a fellow in the lobby asked him if he was a real estate agent.  The man proceeded to tell our agent how he owned a dozen investment units in the city, including four in the building and how all of them were cash-flow positive.  Our agent congratulated the investor and asked how he managed to do that despite real estate price growth exceeding rental rate growth and the man proudly told him he put down at least 50% on each property.

We still reference that story as it illustrates a very important point when it comes to investment properties.  It is easy to have a cash-flow positive property if you put down enough money.  If you paid cash for a condo unit and received one dollar above your maintenance fees and property tax obligations, you technically own a cash-flow positive property.

We’ve previously written about capitalization rates and how calculating cap rates for various investment property options is a great way to compare apples to apples by stripping out the down-payment or financing costs.

When we identify a “good” income property, it isn’t one we’ve made look good by requiring our clients to put down lots more money than other properties.  We most often start by asking our clients how much of a down-payment they have available and then look to see where that down-payment is best invested.

That has become more challenging in recent years due to one simple reason.

Rents are up but so are all your costs.

We’ve seen a marked increase in the rental rates that can be charged in most markets in the GTA in the past number of years, but at the same time, we’ve also seen costs increase in many different areas.

The most impactful increase in costs for some investors has been the cost of financing.  Variable mortgage rates are based on the bank prime rate, which in turn is based on the Bank of Canada overnight rate.  Back in March, 2020, the rate was lowered to 0.25% as a result of COVID and concerns about the economy.  We had two years at that rate and then in March, 2022, it started going up, and up, and up.  From March 2, 2022 to July 13, 2023, it went from 0.25% to 5% and that made any variable rate mortgages go up with it.

For investors who had bought properties with as little down as possible and who choose a variable rate mortgage, this created the perfect storm.  A high mortgage amount, with a rapidly increasing cost of financing.  While rental rates did go up during the same time, it was at nowhere near the same level of as the cost of financing so many “good” investments became bad investments.

In addition to the cost of financing, the level of inflation has risen sharply in the past couple of years as well, meaning that everything related to the property has also increased.  Whether it is a freehold or a condo property, the costs of owning and maintaining real estate has increased over the past few years.

With costs higher on a number of fronts, the key factors for what makes a “good” income property remain how much the property costs to buy (as that directly impacts how much it costs to finance it) and the rental rates that can be charged for the property.

Let’s discuss rental rates, shall we?

Oh wait, rental rates are mostly unknown.

One of the biggest challenges with general extrapolations of where the “good” income properties exist has to do with a major variable in the equation, namely rental rates.

This is because data around rental rates are disbursed among a number of different players and gathering any sort of accurate and timely data is quite difficult.

The Toronto Regional Real Estate Board regularly releases rental rate data, but it is focused on condo apartment rentals and doesn’t look much at freehold property rentals.  This is due to the majority of rentals on the MLS system being condo apartments of defined types – 1 bed, 1 washroom, 2 bed, 2 washroom, etc.

When you start to get into freehold rentals, there are so many variables that impact rental rates, any averages are inaccurate or flat wrong.  Ask us for how much a house rents on average and we’ll ask you how many bedrooms it has, whether it has a backyard, if there is a garage, if the basement is included and so forth.

In addition to the fact that the data held by organized real estate is quite variable, it is also only a portion of the rental data out there.  Unlike homes for sale, which almost exclusively sell via the MLS system, many rentals are done privately or via platforms that don’t receive or track rental rates.  For every property rented via MLS, who knows how many are rented by platforms like Kijiji or via signs on lawns or in apartment lobbies?

When we work with investor clients, we can determine likely rental rates for a specific property by looking at all the data sources we have available, but we can’t do an aggregate analysis to push our clients to one neighbourhood or area in particular.  The data just isn’t available, so we have to focus our search for “good” income properties on a key factor we can determine.

The cheaper the purchase price, the higher the chance it qualifies as a “good” investment.

While there are some exceptions to this statement, by and large, if you buy real estate as a lower price than other comparable properties in different areas, you stand a greater chance of it being a “good” income property.

While rental rates do vary depending on area, our experience has been that the variability of purchase price is much more than the rental rate spread.  While a home in Toronto may be able to charge more rent than a home in Ajax, the difference in rental rates is nowhere near the difference in purchase price.

Our starting point for conversations with investor clients is therefore a series of simple questions that lead to us identifying some good options that fit their criteria.

• What makes a “good” investment property in your mind?
• How much of a downpayment do you have?
• Are you willing to go to where the best return is? If not, where are you willing to invest?
• Will you invest in any type of residential real estate? If not, what types will you consider?

The above questions give us the ability to start focusing the search.

Consider an investor who has $150K for a downpayment, hates paying CMHC mortgage insurance fees, who wants to stay within a reasonable distance of their primary home in Markham, and who thinks condo apartments are terrible investments.  Such an investor has a budget of $750,000, is limited to York and Durham region and wants a freehold property.  Understanding these requirements means that we look to find a “good” income property within them – or, if that isn’t possible, showing the investor why their requirements don’t allow a purchase to take place and figuring out what we can adjust.

Once we have the parameters set, our focus becomes finding properties that fit those criteria, determining rental rates for those properties and analyzing the results.  In some cases, investor clients shift their preferences as they understand the potential returns and in others they choose to move forward with a property that makes them feel comfortable, with a rate of return they find acceptable.

Despite the run-up in real estate prices in the past couple of decades and the increased cost of financing in the last few years, we regularly work with investors who are buying income properties that suit their requirements.  We can find you “good” income properties that suit your comfort level, or we can help figure out what you’re willing to accept if the numbers work.

By helping clients understand the options based on their preferences, we are able to search for the needle in their particular haystack!  If that sounds like an approach you’d be comfortable with, then don’t hesitate to get in touch with us.

We regularly work with investor clients to buy and hold income properties.  It’s a proven strategy to build wealth over time by having tenants pay your mortgage down while market appreciation builds even more equity in the home.

While most of our investor clients are thinking mid to long-term for their purchases, we also work with some clients who like short-term purchase and sales.  Flipping real estate can be exciting and very lucrative if it is done right, but there are significant transaction costs in buying and selling.

On the purchase side, the land transfer tax is the biggest transaction cost that buyers incur and if it is in Toronto, it is doubled due to the Toronto Municipal Land Transfer Tax.

On the sale side, real estate agent commissions are the biggest transaction cost, typically at around 5% of the sale price.  We always work hard to make sure our clients receive value commensurate with those costs and one of the best ways to do that is for us to be involved from start to finish in a flip project.

Broadly speaking, the biggest benefit our clients receives when they work with us on flipping real estate is our experience in the market and seeing what works and what doesn’t.

• We’ve seen sellers trying to make $200K on a property in three months after just putting in new floors and painting the walls.
• We’ve seen dilapidated properties go on the market, sell and then come back on the market a year later as stunning homes that cause bidding wars.

Mostly though, we’ve seen sellers make mistakes and fail to make much money on flipping a property.

While there are a number of factors that impact the profitability of a flip (buy-renovate-sell) project, the most crucial is your purchase budget.  Specifically, having a big enough budget.

Here’s why.

The cheaper the place, the more people can afford it.

There is an old axiom in real estate which states you make money in real estate when you buy, not when you sell.

If you overpay for a property, it is quite difficult to make up for that overpayment with your sale price.

The biggest factor that leads to a buyer overpaying for a property is competition.  The more people who want a home, the more it likely sells for at the end of the day.

The lower priced a home is, the more competition there is from other would-be house flippers.

With every $100K up you go in purchase price, there are fewer people who can afford the purchase, carrying costs and transaction costs (land transfer tax for example) of the home.

While we’re currently in a market with very few homes for sale, our experience has been that homes in GTA that are listed as “handyman specials” and marketed to flippers show the result of competition at different price points.

On the lower end of the price scale, homes that were listed between $700K to $900K sold for, on average, 107% of the asking price.  It’s reasonable to assume that implies a fair bit of competition from flippers who could afford the home.  Even if some were interested in the home for their own use rather than a flip, the lower price point still resulted in more competition.

In contrast, if we look at homes that were listed a bit higher, between $900K to $1.1 million, we see they sold on average for 99% of the asking price.

Paying less than list price sounds a lot better than paying more than list price, don’t you think?

Percentages stay the same but the dollar value goes way up.

The second reason higher purchase prices are better for flip properties has to do with return on investment in dollar terms.

We often talk about ROI in percentages, which makes sense when you are trying to compare apples to apples.  At the end of the day though, our clients want to make a certain amount of money.  If you received a 14% return on investment, that sounds pretty appealing, but it is how much that turns out to be in actual dollars that determines if you want to do it or not.

Consider two scenarios that returned similar profits in terms of percentage ROI.

In the first scenario, we found a good flip option for $750,000.  With land transfer taxes and 10% of your purchase price set as a budget for renovations, you put about $100K into it, so your total investment was around $850K.  If we sold for 33% more than your purchase price, you’d sell for almost $1M and clear a profit after commissions of around $121,000.  That’s about 14% return on your $847,000 investment.

In the second scenario, we found a more expensive property that was also a good flip option and we bought it for $1.125M.  Your land transfer taxes and a 10% renovation budget brings your total investment to about $1.275M.  We sell for the same 33% more than your purchase price and that means a sale price of $1.496M, which allows you to clear $178K in profit after commissions.  That is also about a 14% return on your investment.

Two options, both using similar assumptions and both returning about 14% ROI. The lower priced property nets you $121,000 in profit and the higher priced property about $178,000.  That’s $57,000 more in actual dollars.

If it took six months for the flip and you were the only one involved in funding the purchase and renovation and you also oversaw the renovations, the first option sees you make you make about $20,000 per month before tax.  That’s $5K a week, or about $680 a day if you’re there all the time.

The second option sees you clear almost $30K per month, which is $7,500 a week, or just under a thousand bucks a day.

Obviously the above calculations are just examples and how much you buy, spend and sell for makes the results very different, but if you’re using the same percentage assumptions about costs and returns, then the higher the purchase price, the more you are rewarded for your investment of time and money.

When you’re looking at a flip property, you need to think beyond simply the ROI, because you want to make reasonably decent money if you do a flip project.  It has to be worth your time and at the lower price points, it becomes pretty easy to find yourself working hard to make not much actual money, regardless of what the percentage looks like!

Renovations cost a bit more with higher budget purchases

Finally, let’s go over something that seems pretty counter intuitive.  We view the fact that renovations cost more with higher budget purchases as a positive reason to buy more expensive properties.

We say that’s a positive because they only cost a bit more than they would with a lower budget home, yet the benefit can be a lot more.

The reality in real estate is that more expensive homes are often not much bigger than cheaper homes.  The location of a home has a huge impact on the price of real estate and we have shown many $2M plus homes that are not bigger than $1M homes in other, less desirable areas.

When you renovate a home that has a lower price point, there is a limit to how much additional value you will add to the home.  If you spend $100K on a $800K home in a not great area, that home is not going to get you an additional $100K in appreciation on top of your work and sell for $1M.  It may not even sell for $900K.  Put simply, people will love the home, but they won’t be willing to pay that much for the home in that area.

In contrast, if you spend $150K on a $1.3M home, you might very well be able to get $1.6M for it and realize a $150K profit on top of your expenses.  You put more money into the property, but the upside on the renovation is increased on higher priced properties.

When you can realize much greater returns on renovations with only slightly higher renovation expenses, you see that higher priced homes offer much better opportunity to make more actual dollars.

As it became obvious to us that higher purchase prices often result in higher margins and higher actual dollars of profit, we developed an investment structure that allows individual clients of ours to combine funds and see better returns together.  In many cases, we partner with the clients as well.

If you are interested in investing in real estate and wants to make more money on a flip by combining your investment with other like-minded investors, then we’d love to help make it happen.  The first step is getting in touch with us so we can sit down and talk about how it works.  Talk soon.

We regularly work with investor clients in different stages of their real estate investing business.

We’ve recently made the case as to why an investment property is almost always a good idea and it seemed like the right time to update an article from back in July 2017 where we talk about where you should buy an income property.

This time around, we’ve examined where multi-unit properties have been sold in the past year, i.e. March 2021 to March 2022, so that we get a sense of where such properties are available and at what price.  Rather than simply giving you a table or chart, we have analyzed the data and come up with some key points.

Let’s start with the elephant in the room.

Toronto is…expensive.

We’re based in Toronto and know the city well.  While there are options for multi-unit properties within Toronto, the run up in real estate prices in Toronto over the past few years has continued to push down the cap rate for investment properties in the city.

In addition, the increase in average sale price in the city (February 2022 saw us hit another all-time high for the average price in the city of $1,210,889) has meant that some income properties have been purchased by end-users who convert them back into single-family homes.  It’s a type of competition that investors aren’t used to seeing, with decisions being made emotionally rather than on the economics of the purchase price and rental income.

It doesn’t mean there aren’t some opportunities within the city, but it absolutely means that the average sale price for each type of multi-unit property in Toronto is considerably higher than the average for the surrounding municipalities.

For our review, we looked at Toronto and all of the municipalities in the surrounding regions, namely Durham, Peel and York.

• The average sale price for a duplex in Toronto is $1,634,000, which is $552,000 more than outside the city.
• The average sale price for a triplex in Toronto is $1,736,000, which is $298,000 more than outside the city.
• The average sale price for a fourplex in Toronto is $2,505,000, which is $1,238,000 more than outside the city.
• The average sale price for a multiplex in Toronto is $2,886,000, which is $995,000 more than outside the city.

While rents may be higher on average in Toronto than in outskirts, the average price is significantly higher and in our work with investors, the best options for multi-unit properties exist outside of the Toronto boundaries.  Given that such purchases also benefit from only one land transfer tax (whereas in Toronto it is doubled with the addition of another municipal land transfer tax), our first recommendation is simple.

As of March 2022, investors looking to buy multi-unit properties should focus outside of Toronto.

Clarington – Home of the Bargain Duplex

Let’s begin by looking at the lowest use multi-unit property type, duplexes.  A duplex is broadly defined as a building that is divided into two separate dwelling units, each of which has a separate entrance either directly or through a common vestibule.

There were 112 duplex sold in Durham, Peel and York regions in the past year and 74 of them were located in Oshawa.  With an average sale price of $809,000, Oshawa doesn’t have the lowest average sale price for outside Toronto (that honour goes to Clarington, with two duplexes sold and an average sale price of $600,000), but it is definitely one of the lowest price options.  Mississauga has the highest average price for a duplex, at $1.918M!

Here’s the table of all duplex sales in the past year.

If you’re looking for a duplex just outside Toronto, Durham region is where the most of your options will be and it also has the lowest average price.

Oshawa – Land of Triplexes

Moving on to triplexes, we aren’t surprised to see that the definition of a triplex is a building divided into three separate dwelling units with each unit having a separate entrance.

Oshawa continues to be the most popular place for sales of multi-unit properties, with 13 triplexes sold there in the last year.  It also has the lowest average price for a triplex, at $933,000.  With only 28 triplexes sold across Durham, Peel and York regions, this is not that common a housing type.  The most expensive triplex sold in the past year was in Whitchurch-Stouffville which has one triplex sell for a whopping $2.3M.

Here’s the table of all triplex sales in the past year.

With an average price of $933,000, Oshawa is the clear focus area if you’re looking to buy a triplex.  Given that is only about $125,000 more than a duplex in Oshawa, it seems likely that you can achieve a higher cap rate if you can push your budget for an income property up to this point.

Brock – We don’t have many multi-unit properties, but they’re a heck of a deal!

When we look at fourplexes, the numbers drop down considerably, with only 9 sold in the area outside the city in the past year.  The definition of a fourplex is a bit more varied, namely a building which consists of two (2) attached duplex dwellings, or a building containing only two storeys exclusive of basement, divided vertically into four (4) dwelling units with either one or two complete walls in common with adjoining units and an independent entrance, either directly or through a common vestibule.

Durham region once again takes the prize as the best source for multiplex units, with five of the nine fourplex sales taking place there.  Oshawa was the most common location, with four sales, but the township of Brock, with just one sale, wins for the best price, at only $700,000.  That’s the only multi-unit property in Brock sold in the past year, so while the price may be great, you might be waiting a while to buy a place.  Mississauga takes the prize for highest average price, with a fourplex sold for $2.6M in the past year.

Here’s the table of all fourplex sales in the past year.

Much like the relatively small price difference between duplex and triplexes, we see that if you can push your budget up a bit, you can move into the fourplex range.  With average sale price of $1,076,000 in Oshawa (site of the most options for this type of property), you’re looking at about $140,000 to add another rental unit to your cap rate calculation.

Want a cheap multiplex?  Scugog, here we come!

The final category for multi-unit  properties is multiplex.  While it would seem logical that this would be any property with more than four units, we run into an issue with this type of property and how listing agents categorize it on the MLS system.

It is not uncommon to find agents listing a duplex, triplex or fourplex as a multiplex.  It seems particularly common with triplexes being mistakenly listed as multiplexes, perhaps for the silly reason that when you go down the pull-down menu, M comes before T, and the agent says “That will work.”.

We will take the data for multiplexes with a grain of salt as a result.  In Durham, Peel and York we are showing 21 sales of multiplexes in the last year.  Much like the other types of properties, Durham region is where the majority of sales took place, with 13 of the 21 sales there.  Oshawa is the most common location, with six sales, but Whitby shows up with a surprising four of the sales taking place there.

The lowest sale price for a multiplex takes place in Scugog, with one sale taking place at $1,080,000.  If that was genuinely a building with more than four units it, that seems like a great price!  In a surprising move, Clarington comes in at the highest average price, with one sale there of a multiplex for $2.8M.

It is worth noting that for financing purposes, most lenders view properties with more than four in a different light than other income properties, often categorizing such properties as commercial, even if they are strictly residential.  If you’re buying a property with five or more units, make sure you discuss that with your mortgage broker or lender.

Without a doubt, Durham region is where the most options are for multi-unit properties, and it is also the location with the lowest average sale price for each type we’ve reviewed.  If you’re considering investing in multi-unit properties, we’d love to get into what makes the most sense for your needs.  Don’t hesitate to get in touch with us to discuss next steps.

Given we’re based in Toronto and work with clients largely in the GTA, our approach to income properties is a bit different than smaller real estate markets where prices haven’t seen the same price appreciation over time.

The primary challenge with buying an income property in the greater Toronto area is that while the rental rates are high and vacancy rates are low, the cost to buy is high enough that it often doesn’t make financial sense.

Way back in 2016 we wrote about what makes a great income property and in that article we explained the concept of a capitalization rate, or cap rate.

While the cap rate is a great way to compare income property options, it’s worth noting two important things about cap rates.  They’re both fairly self-evident but it can be easy to forget them if you are just doing simple math and moving on if it doesn’t work.

First, if you buy for less, the same income generates a higher cap rate.

The first thing impacting the cap rate on a property is the price you pay to buy it.  Any property can be an amazing income property if the purchase price is low enough.

Secondly, if you increase the rental income, you increase the cap rate.

The second part of the cap rate equation is the rental income.  When you buy a property the income (or potential income) is what allows you to calculate your cap rate.  If you can do something after purchase to increase the rental income, you also increase the cap rate.

Yes, both of the above are obvious if you stop and think about how cap rate calculations work.  The implications are less apparent and there are ways in which you can structure your search for an income property that allows you to realize an improved cap rate.

Here are our three rules on how to buy an investment property so you get the best deal – and therefore the highest cap rate.

Rule #1 – No properties holding back on offers.

These types of listings are inherently competitive, which means that sellers and listing agents often do not provide all the information we should know about the property.  It is a function of our current market that buyers are taking huge risks on homes that may have serious defects.

As an investor in real estate for income purposes, you need to go into a purchase with as complete an understanding of the property as possible.  This includes information such as surveys, home inspections, permit and notices of deficiency review and much more.

Listings that are holding back on offers until an offer date are often priced below-market value to attract multiple offers and most sellers are expecting a clean offer with no conditions.

If you are constantly in competition with buyers who don’t have the same perspective and who are willing to overlook concerns (or missing information) that they shouldn’t, you will regularly be outbid by buyers with more money than sense.  The alternative is to overpay for a property which may have costly work to be done, resulting in a lower cap rate.

Rule # 2 – No properties that are fully renovated and in near perfect shape.

The principal behind this rule is an extension of the thinking behind Rule #1.

Properties that have been significantly renovated (or appear to be significantly renovated) attract greater interest from buyers who have no ability or willingness to do renovations.  As a result, they sell for a higher price and any current or estimated rental rates have already built in the impact of these renovations.  This is particularly troubling as we have no idea if the work that was done was to a high quality or whether the cosmetic updates conceal troubling issues with the home such as water leakage, structural issues or more.

The cap rate for such renovated properties could be higher based on the higher rental rate (on the assumption that a premium rental unit commands a premium rental rate) but the higher purchase price means that the cap rate is often the same or worse than a property that needs work.

In essence, the sale price that incorporates the renovations is often higher than a similar home without those renovations.  The end result is that the home costs more than the renovations actually are worth and it means that you have no opportunity to add value through doing some renovations.

Contrast this against a home that needs updates and work in order to show better and to command a higher rental rate.  Fewer buyers are willing to consider the property as many investors are looking for turn-key solutions and are not interested in a renovation project.  As such, the sale price is likely to be lower due to less competition.

At the same time, the rental rates (either currently being charged or estimated) are lower due to the lower level of finishes in the home.  By arranging vacant possession, you can do the necessary renovations to increase the appeal of the property and then rent out at higher rental rates to a better class of tenants.

A lower purchase price and a higher rental rate after our renovations equals a better cap rate.

Rule # 3 – No properties that also appeal to an end-user directly.

The attributes of a good income property can be quite different from the attributes of a good family home.

• As an investor, you want to be close or on transit routes to appeal to tenants who have no vehicle of their own.
• As a home owner, you want to be on a quiet side street where you aren’t bothered by the noise of buses or streetcars.
• As an investor you want as many units as possible within a property to maximize rental income while minimalizing potential replacement costs.
• As a home owner, you want a property that works for your family and gives you privacy and space.

Whether it is location or housing type, when you’re looking for an income property, you need to focus on properties that aren’t appealing to end-users themselves.  By doing so, you realize significant benefits, including a much higher likelihood of:

• Appropriate zoning (such as for a legal triplex)
• Renovations done with permits (properties with a history of being used an income properties have often come under increased scrutiny over time and required permitting for work)
• Legal secondary suites and registration with the local municipality

Individual or families buying a home have far different metrics for their purchase considerations and income properties typically sell at a discount compared to end-user properties.  If you focus on properties that are inherently less appealing to an individual or family who would live in it themselves, you reduce the level of competition, which should mean a lower sale price.

All real estate is bought and sold within the prevailing market conditions for the area, but not all properties have the same opportunity to be bought for a lower price and to increase the rental income from the property.

If we follow the above three rules, we have:

1. Sellers who are motivated to deal with our offer and who provide the information we need rather than simply sell to another (non-existent) buyer who doesn’t ask questions.
2. Properties that we can buy for less, where we can oversee some renovations after purchase that add value in terms of increased rental rates and valuation over time.
3. Properties we can buy at better prices as we don’t compete against emotional end-user buyers who drive up the price.

If you’re keen on buying an income property, make sure you work with agents who know and appreciate what it takes to find a good investment.  We look forward to hearing from you!

Any homeowner who has bought a home to live in that also has an income suite in it knows it can have a huge impact on the affordability of the home.  While income suites take away some of the space in the house that could otherwise be used by you, the cashflows that come in with the renting of the space change your carrying costs considerably.

Let’s review some key points and then consider an example.

Most Lenders Take Rental Income at 50%…

If you’re looking at buying a home with an income suite, the good news is that the income from renting the suite increases your income in the eyes of a mortgage lender.  If there is a tenant already in place at the home, paying $1,500 a month, that’s $18,000 in annual income.

The bad news is that most lenders discount that rent, often at 50%, in order to account for vacancy.  Unlike a salary, lenders are concerned that the rental income won’t always be there and while it does allow you to increase your approved mortgage amount by some, don’t count on the full 100%.  A good mortgage broker might be able to find you a lender who will take 75% of the rental income, but expect it to be discounted by some amount.

… but the Cashflow is absolutely 100%.

Regardless of how a lender looks at the rental income, when you have a tenant, you are absolutely getting the full amount of rent they pay deposited into your bank each month.

With current mortgage rates (1.99% for a fixed, five year term, amortized over 25 years), every $100,000 in mortgage costs you about $425 per month.  If you’re considering buying a home with an income suite or two, you can figure out how much of your mortgage can be paid by the rental income by dividing it by $425 and multiplying it by $100,000.

• $1,000 per month from a basement suite? That rent pays for $236,000 worth of your mortgage.
• $1,500 per month from a bigger, nicer basement suite? Now $353,000 of your mortgage is covered.
• $2,500 per month from the other half of the duplex you just bought? Congratulations, that rent pays for $589,000 worth of your mortgage.

There are two ways of looking at the impact of your rental income and both are pretty great.

First, when you do the math like above, you can consider the mortgage amount that the rent pays to effectively be a discount on the home.  After all, if you buy a home with $1,500 in rental income, you’re going to paying the same each month as a home that costs $353,000 less.  In exchange for giving up some of your home’s space until you want it for yourself and your family, you are getting a heck of a discount on the effective price of the home.

The second way to look at it is that the rental income means your home cashflows the same as a home that costs $353,000 more.  You can buy a home for $1.2M with no rental income, or a home for $1.5M with $1,500 in rental income and it costs you the same on a monthly basis once you add the rental income into the equation.

If one income suite is good…two are even better.

Let’s go over an example of a listing our team has coming out shortly.

144 Quebec Avenue is a massive (over 2,700 sf above grade, plus another 900 sf of finished basement) detached home just north of High Park.  The home has five bedrooms, four full washrooms, a detached garage accessed by a back laneway, two upper level decks and a backyard patio oasis.  It has absolutely everything you need in a home.

The home is zoned as a triplex and it is currently configured with the owner suite on the main floor and basement, and two updated, attractive income suites.   The one on the 2^nd floor brings in $1,325 in rental income (and that is actually below market rates) and the 3^rd floor unit brings in $1,500 per month.  That’s $2,825 per month in rental income and it could easily be over $3,000 when the rent for the 2^nd floor is brought up to market rates.

With current mortgage rates (1.99% for a fixed, five year term, amortized over 25 years), the $2,825 in rental income pays for over $650,000 of the mortgage.  Let that sink in for a moment.  $650K.  If we look at it from the other perspective, this home cashflows the same as a home that costs $650,000 more.  You can buy it, or a home that costs over half a million dollars more, and your monthly mortgage costs are going to be the same.

Check out the virtual tour here or by clicking on the house below.  If you or someone you know loves the idea of buying a massive home at what is effectively a massive discount, let us know and we’ll arrange a showing.

While being a landlord isn’t for everyone, there are absolutely huge benefits to having an income suite in your home.  If you like the idea of effectively getting a huge a discount on a home, get in touch with us so we can help!

If you own investment properties or are considering one, it’s worth understanding how such properties are treated when you sell them, whether in a short-time frame (a “flip”) or in a longer-time frame after renting it out to tenants for a length of time.

While primary residences in Ontario are exempt from capital gains (any increase in the value of the property since you bought it), non-primary residences are subject to capital gains tax.

What is this capital gains tax you speak of?

Put simply, capital gains tax is a tax you pay to the government when you make a profit by selling something for more than you originally paid.  This applies to all sorts of assets, including stocks, bonds and of particular interest to us, real estate investments.

How is the capital gain calculated?

The good news is that determining your capital gain on an income property is pretty straight forward.  You just take the sale price of the property, and you subtract your adjusted cost base (ACB) and you have your capital gain.  This of course leads to the next question, what’s an “adjusted cost base”?

Here’s what goes into your adjusted cost base.

You can think of your “adjusted cost base cost” (ACB) as what you paid for the property when you bought it, plus the costs of any improvements you made to the property, plus whatever it costs to sell the property.  You can’t add in all your costs (such as a property manager, property taxes and other ongoing costs), but anything you did to improve the property should be recorded separately so you can add it into your ACB.

While using a professional realtor to sell the home helps you get the most amount of money on the sale, the commissions paid on the sale can be significant.  The good news is that those sale transaction costs (also including legal fees, bank fees and so forth) are added to your adjusted cost base.

Here’s an example of how it all works.

Let’s go through an example of figuring out your capital gain on an income property.

Here’s the key aspects:

• In July, 2011, you inherited some money and decided to invest in real estate in Toronto. You bought a semi-detached house for just about the average price for one back then, $502,000.
• You had to pay both the Ontario and Toronto land transfer tax (introduced in 2008) and that cost you about $10,000 at that time.
• Over the years, you spent some significant money on some renovations to keep the house in good shape. You redid the roof, you bought a new furnace, updated the bathrooms, had it painted top to bottom a few times and you eventually had the carpet replaced with some hard wood flooring.  All in, you spent $82,000 on the home over the ten years you owned it.
• In 2021 you decide to take a year off work, and in July, 2021, you decided the time was right to sell the property. You hired a good agent and managed to get a bit above the average for a semi-detached in Toronto, selling for $1,220,000.
• You paid $61,000 in real estate commissions (5% of the sale price), $1,500 in legal fees and your lender charged a $500 fee for discharging the mortgage.

Take all of this into account and here’s what we see.

When all is said and done, you’re adjusted cost base for the property is $657,000.  When we take our sale price of $1,220,000 and subtract your ACB, your capital gain on the property is $536,000.

OK, got it.  Now I know my capital gain.  So..I have to pay that?

Nope.  You only pay tax on 50% of the capital gain you realize on your income property. This means that half of the profit you earned is taxed, but the other half is tax-free.  Here’s what that looks like if we continue the above example.

In this case, your taxable profit on the sale is $281,500, which would be added to your income and taxed by the CRA based on your personal circumstances.   Given you decided to sell in a year when you had no other income (as you were taking a year off work), your overall tax will be lower than if you did this during a year where you also had other income.

Make no mistake, selling an income property where it has appreciated significantly can result in pretty high taxes.  Take comfort in the fact that the other half of your capital gain on the property was tax-free.

Whether it is a long-term rental property or a short-term flip, the bigger the difference in your adjusted cost base and sale price, the more tax you pay.  The timing of the sale can have a huge impact on the overall profit you realize and you need to work with agents who understand income properties.  If that sounds appealing, don’t hesitate to get in touch!

One of the most common questions we get asked on the team is “Where should I buy an investment property?” so let’s take the time today to answer that question.

The question of where to buy an investment property is a complex one and your particular situation is of course very relevant.  Your financing options, budget, level of desired management, comfort with vacancies, tenant interactions – all of these play a big part in what makes the right investment property for you.

We can, however, talk in a general sense about where there are opportunities to buy an investment property in which the numbers work.

Let’s start with one core concept.

Multi-unit properties beat single-unit properties

This is true every day of the week, 52 weeks a year.

I have met many investors who proudly talk about their investment portfolio of X number of “units” they own, valued at X millions of dollars.  While any income property is something to be proud of, not all are created equal.

Whenever you have a single-unit property, such as a single family house or condo, you run into three limiting factors.

1. Vulnerability to vacancy
2. Repetitive repair costs
3. No additional income

Let’s go over these three factors quickly before we get to where to buy an investment property.

Vulnerability to vacancy

With a single-unit property, you are reliant, by definition, on a single tenant.  Tenants lose jobs, break up, over-extend themselves and generally have the financial and life issues we all do.  When there is only one tenant paying for your property, you can lose 100% of your income that pays the mortgage, utilities, maintenance fees and so forth.  You are very vulnerable to any vacancy, as you are either fully tenanted (one tenant) or totally vacant (no tenant).  With a multi-unit property, you are rarely in a situation where all of your tenants can’t pay their rent or need to leave their lease.

Repetitive repair costs

The second factor that makes single-unit properties less desirable is that your upkeep responsibilities (and therefore repair costs) are virtually the same as a multi-unit property with less income.  If you own three single-unit properties, you can be on the hook for three roof repairs, three lawn mowing services, three foundation cracks, three AC units, three washing machines and so on.  If you own a triplex with three tenants in it, you only have one roof, one lawn, one foundation, one AC unit and so forth.

No additional income

The final factor is of course the income levels.  When you have a single-unit property, the level of rent you can charge is based on what your tenant can afford.  With multi-unit properties you charge rent based on what multiple tenants can afford.  Any house with a basement apartment is proof of this principle.  A house with a separate basement apartment is worth more to many buyers because they can charge X amount for the basement and Y amount for the main/upper levels.  The rent you can charge for X + Y is almost always more than you can charge for Z, which is the rent for the whole house.  After all, how much is the basement worth to a tenant who is also living in the main/upper levels?  It’s worth something for sure, but not as much as to a tenant for whom that basement is the entire housing option.  With multi-unit properties, you have additional income at relatively low incremental costs.  This additional income often means the difference between a good investment and a poor investment.

Our recommendation for the vast majority of cases is that investors consider a multi-unit property.

The question then becomes, where can one buy an affordable multi-unit property that is a good investment?

The options as of today

As of July 7, 2017, there are 117 multi-unit properties for sale in the GTA.

The prices range from $399,900 up to $8.6 million.  Let’s see what you get at the low end and the high end.

Currently listed at $399,900, we have a duplex located in Oshawa at 272 Haig Street.  It’s a legal detached duplex, bungalow style, with two separate units.

The rental income for the property is $1,915 per month according to the listing.  With a purchase price of $399,900, operating expenses of just over $300 (monthly property taxes and insurance) the capitalization rate for the property is 4.84%.

From a financing perspective, the $399,900 purchase price means that with 20% down ($80K), you have a mortgage of $320K.  At about $450 per month for every $100K of mortgage (for a principal and interest payment, amortized over 25 years), you are looking at a mortgage payment of about $1450 per month.  With interest rates as low as they are, from your first payment you are paying more than 50% of that payment towards principal repayment.

So for $80K down, with about $6K more for closing costs (legals, land transfer tax), you own a property that is bringing in $1,915 per month and costs about $1,750 per month.  Roughly speaking, you clear about $165 per month.  Don’t forget that each month, your tenants are allowing you to pay down about $725 in principal on your mortgage.  Add in some property appreciation over the years and you have a decent investment property.

Now let’s look at the high budget option.

Currently listed at $8.6M, we have 336-340 Jarvis Street.  There are three buildings located in Toronto near Jarvis and Carlton Street, with 13 units total.  No virtual tour for this one.

The rental income for the property is $37,750 per month according to the listing.  With a purchase price of $8.6M, operating expenses of just about $3,600 per month, the cap rate for the property is 4.77%.

Financing for three buildings with 13 units is quite different than a two unit duplex, but in order to compare apples-to-apples, let’s assume the same approach as our lower end property.  To be clear, the financing for this unit would likely be considerably higher as once you get over 4 units in a building (or buildings in this case), fewer lenders are interested and rates generally rise.

The $8.6M purchase price means that with 20% down ($1.72M), you have a mortgage of $6.88M.  Using the same rate and terms as the duplex in Oshawa, we have a monthly principal and interest mortgage of about $32K.  Again, we’re using the same interest rates, which means about half of that is principal repayment.

So with $1.72M down and about $340K in closing costs (land transfer for both Toronto and Ontario in this case), you own three buildings in Toronto that are bringing in $37,750 per month and costs about $35,600 ($32,000 mortgage payment, plus $3,600 in operating expenses) per month.  That means you clear about $1,150 per month, plus the principal repayment your tenants pay for on the mortgage. These numbers are optimistic given the likely higher cost of financing.

With three buildings, this multi-unit complex still faces the same issue with three roofs, three HVAC systems and so forth.  I would be much happier with the numbers on this 13 unit investment property if it was in one building rather than three.

From a cap rate perspective (which is independent of the cost of financing, basically as if you bought it outright), the properties are almost identical.  You have a cap rate of 4.84% for the bungalow in Oshawa and a cap rate of 4.77% for the three building complex in Toronto.

Both properties cashflow positively on paper, but with the Oshawa bungalow costing about 1/20^th the price of the three buildings in Toronto, the cashflows for the Toronto property should be much higher. Again, given the financing is likely more expensive than our apples-to-apples comparison, the cashflow numbers will get worse for the Toronto property.

We find that when we work with investors we see variations of this scenario happen quite often.  The high price of properties in Toronto means that properties outside of the city are often better investments.  Rents may be lower, but the significantly lower purchase prices often means the cashflows are still better.

This is shown by looking at the stats for the 117 multi-unit properties for sale today in the GTA.  If we look at the properties that in Toronto proper (61 of them), the average list price is 1,934,511.  Compare that with the 56 properties outside of Toronto, where the average list price is $912,259.  That’s less than half the price on average.  Are rents less outside of Toronto?  Sure.  Are they less than half the rent of Toronto?  Nope.

While every investment property needs to be examined to consider how the purchase price, operating costs and rental income shake out, the lower the purchase price, the lower rent you need in order to have positive cashflow, the more vacancies you can tolerate and less of an investment you actually need to make.

With that in mind, our top three locations for multi-unit investment properties in the GTA are Oshawa, Whitby and Brampton.  The combination of lower prices, reasonable operating costs and decent rental income means these locations offer investors the chance to get a good return on their investment.

If you or someone you like is considering buying an investment property, you need to work with a Realtor that is an investor themselves and understands what goes into making a great investment property.  If that’s the case, please get in touch with us.