Investing in real estate has been a time-proven strategy for accumulating wealth. When thinking about real estate investments, many investors think of condos or townhomes, but real estate investing is a very broad term. Some investors purchase income-producing properties, while others are looking for equity growth. Some investors buy and sell contracts, while others buy and sell land. The type of real estate you invest in has a lot to do with your timeline, equity, downpayment, and tolerance for risk.

 

We’re here to give you a crash course in investing in real estate in the GTA. While we have a very holistic approach to investments, many investors pick one type of real estate investment and stick to it. We find the most successful investors are those who find their niche and become experts. But, finding your niche can take some deep thinking. You’ll find we are very critical of real estate investment properties. Real estate investments can provide extraordinary returns, but they can also lose a lot of money.

 

The basics of real estate investing: 

Investments are all measured differently depending on your goal. The most basic measurements are Cash Flow, Equity Growth, Capitalization Rate (CAP), Return On Investment (ROI), and Gross Rent Multiplier (GRM). These can be a bit complicated for a first-time investor, so let’s discuss examples of each investment.

If you’re familiar with investing in stocks, some of these will be familiar. When it comes to buying real estate, some investors are looking for high cash flow (similar to a high-dividend stock), while others are looking for undervalued real estate, which has a high chance for appreciation. 

 

Cash Flow: The most basic form of real estate investment is to find a cashflow-positive property that puts money in your pocket each month after expenses. However, many investors will accept a cashflow-neutral property if there is athe prospect of equity growth.

Equity Growth: This one speaks for itself. As we experience a housing shortage, competition continues to push up home values. Hand-in-hand, we’re also experiencing record rental rates in the city. Most real estate in the GTA is poised for price growth, but some home types and neighborhoods will appreciate better than others. We can offer some guidance on where we see future growth, because not all home types and areas will appreciate the same.

Capitalization Rate (CAP) rate: Capitalization rate is a measure used to determine the rate of return on an investment. It’s calculated by taking income after taxes, maintenance, and utilities, and dividing it by the value of the home. An example is, if the yearly profit is $100,000 and the home is worth $1,000,000, then the CAP rate is 10%. In the GTA, CAP rates have been falling steadily for years. Investors used to look for Cap rates of 10%, but today they are settling for 5%. (100,000/1,000,000 = 10%).

Return On Investment (ROI): While CAP rate looks at the value of the asset, ROI looks at the amount of money invested (so the downpayment and closing costs). ROI is calculated by taking the net profit (or loss) and dividing it by the amount of money invested. For Example, if you put down $200,000 to purchase a property and that property brings in $40,000 NET annually, the ROI is 20%. (40,000/200,000=20%). When calculating net profit for ROI, it’s common to exclude mortgage fees.

Gross Rent Multiplier (GRM): Gross rent multiplier is a quick and easy tool used to evaluate properties at a glance. It’s used more often in commercial real estate, but it’s a great tool to measure residential real estate as well. To calculate GRM, investors take the purchase price and divide it by the annual gross rental income. Here’s an example, $400,000 purchase price / $40,000 annual rental income = 10 GRM. It’ll take 10 years to earn back the purchase price in rent. GRM does not include property maintenance, taxes, insurance, vacancy, or mortgage, so it should only be used as a quick overview tool.

 

There are many different ways to invest in real estate, but they all narrow down to one set of questions. 

One of the biggest misconceptions in the GTA is that all properties always go up. Even in the strongest seller’s market, we find sellers who are losing significant sums because they made a bad purchase. It’s important to find a property that makes sense on paper. Before committing to an investment, ask yourself:

• Is the property in good condition, when was it built?
• If the property needs renovations, will the renovations add more value than the cost of the renovations?
• Does the property bring in enough rental income to cover all the carrying costs (mortgage, taxes, maintenance, utilities, insurance, vacancy, management)?
• Is the property likely to appreciate as well, if not better, than the average home in the GTA?
• Is there strong employment in the area?
• Is there strong immigration/migration into the area?
• Is there a lack of supply in the area?
• What are the costs to buy and resell the property?
• What type of taxes are due on your profits?
• And, this one is often overlooked, does the average income in the area amount to enough for tenants to comfortably afford the rent?

 

Does your investment need to meet all of the above criteria? Absolutely not, no property in the GTA will meet all of the above criteria. But, asking these questions will give you an idea of the most profitable “exit plan” for that property. 

 

Below are some examples of real estate investment strategies:

 

Flipping Real Estate 

HGTV makes flipping real estate look fun and easy. However, in real life, flipping real estate takes significant effort on all fronts. Not only do you need renovation experience, but you also need to see strong grasp on home values before and after renovations.

Renovations often cost more than the value they add to a home. For example, a new kitchen might cost $40,000, but only add $20,000 to a home. To make money flipping real estate, you need to find a home that is in bad cosmetic condition and is severely underpriced. To break a profit, the price between the purchase and resale of the home needs to cover the following costs:

• Purchase costs (land transfer taxes, lawyer’s fees, real estate adjustments, utility set-up fees, miscellaneous costs)
• Carrying Costs (mortgage, taxes, utilities)
• Renovation costs (clean up, landscaping, hardscaping, permits, inspections, engineering drawings, demolition, painting, roof, windows, doors, kitchens, bathrooms, flooring, HVAC, electric, plumbing, and more).
• Resale fees (realtor fees, lawyer fees)
• And, properties sold as flips are subject to income tax and HST on the profits.

The best flips are homes that meet the following criteria:

• Does the neighborhood sales support a higher sale price?
• Is the home priced low enough to make a profit after expenses?
• Is the home in solid condition?
• Is there potential to keep the windows, roof, front door, etc?
• Is there a potential to add valuable additional bedrooms and washrooms to this floorplan?

 

Preconstruction Condo Investments 

Preconstruction condos are very common real estate investments. This is partly because they are very hands-off investments for both buyers and the agents that sell them. The major benefit to preconstruction properties is the staggered deposit system, and the long, drawn-out closing. The fact you can invest in real estate, and skip the mortgage, taxes, maintenance, and insurance for 4-6 years, is a major benefit. The downside is the cost of preconstruction properties right now. A decade ago, preconstruction homes were priced below market value, but today, preconstruction homes are often priced 15-30% above current market conditions.

 

Assignment Sales 

Assignment sales are a very useful tool where buyers and sellers trade real estate contracts. While any real estate contract can be assigned, the most common assignments are those of preconstruction condos and homes. With long timelines and frequent delays, the original buyers of preconstruction condos often assign their contracts. Often, the original buyers never intended to live in the home, and the purchase was purely a speculative investment. But sometimes families buy homes and then their family plans change, leaving them on the hook for a home that no longer suits their needs.

You can read more about assignment sales here. 

Some investors purchase preconstruction condos in bulk and resell them for profits at a later date. This is extremely risky and irresponsible. Never buy a property that you cannot close on in the worst-case scenario. In 2023, thousands of buyers who purchased preconstruction homes they could not afford are facing bankruptcy because they used fake mortgage preapproval letters, and bank loans, to purchase preconstruction homes with the intent to assign them for profit before final closing. (This is the same as borrowing money to invest in the stock market).

 

Land Banking

Consider land as a bundle of rights. Some property comes with the right to build a home, install a well, set up a cabin, etc. Some properties have more rights than average and some have fewer. The most valuable properties are those with unique rights, like the right to lake access. And the least valuable properties are those with only surface rights, where you cannot build anything on the property.

Land banking in its most simple form is buying land and holding it for a long term while it appreciates.

The best case scenario in land banking is purchasing a lot on the outskirts of a community, where in a few decades a developer might come and buy it with the intent to redevelop it into a subdivision.

Another way to engage in land banking is finding properties with limited rights and uses, and having them rezoned into more valuable uses. This is risky and takes a lot of time. Often the municipal plan for a community and the rights of some properties do not align perfectly; in basic terms, some lots are in areas where the city wants to encourage development, but the lot is zoned wrong. Cunning investors can find these underpriced lots, snap them up, and rezone them for their best and most profitable use.

 

Taxes On Investment Properties:

There are a lot of different taxes when buying and selling real estate. Even if you brought and sold investment properties before, tax rules have changed since 2023. If your real estate investment is functioning like a business, you could be taxed as if it is business income. The Canadian Tax Act is not a black-and-white document, and it requires an expert accountant to help guide you on which taxes you might be required to pay.

 

There are significant opportunities in the GTA to make a meaningful real estate investment, but they require a careful approach. Whether you’re a first-time investor or a seasoned professional, we always advise working with a trusted real estate agent to help navigate the process.