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!

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.