As interest rates started to rise in 2022, the sentiment among real estate investors started to sour. It didn’t take a Nobel prize winning economist to see that the drastic decline in borrowing rates throughout the Covid 19 Pandemic wasn’t sustainable for much longer and the bounce back to “normal” was going to bring some pain along with it.
Over the next twelve months, from July of 2022, investment in the real estate sector fell dramatically, especially in the pre-construction segment. With increased borrowing costs, the numbers just didn’t make sense anymore for new prospectors, and there was trouble brewing for some others who had bought within the previous few years without locking in a fixed low rate.
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How Will Today’s Market Influence the Investment Landscape?
Fast forward to early 2024 when the central interest rate peaked at 5%, a 2000% increase from the lows of 2020, and investment speculation had all but ceased to exist. But by the Spring, the bank made its first quarter-point interest rate cut and overnight the conversation started to change. Carrying costs were still high, and supply was still rising, but many investors could see the turnaround coming and knew that any price depression was likely only going to be for the short term.
Today, the pre-construction segment of the market is still very quiet, but savvy investors are back on the hunt, and resale investment opportunities are popping up across the city. We are seeing some units sell at or less than they did six or seven years ago! Imagine that; a property owner in Toronto not seeing any appreciation over that long of a period… This would have been unfathomable during the boom leading up to and throughout COVID-19, and some investors are jumping on board.
With further interest rates expected over the next 12-18 months, a solid amount of good inventory still on the market, and that ever-increasing population in Toronto, it seems reasonable to expect more investors will follow them back into the market.
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Finding the Right Investment for You
But how do you find the right investment in a market flooded with overpriced listings? Well, that’s the fun part… and the best part of working in an industry where every property and transaction is unique. But if you’re thinking about making an investment anytime soon, here’s a few pointers to get you started.
First off, define your objectives:
As simple as it sounds, a lot of first-time investors struggle with this one. You need to give this some serious thought and be specific about what you are trying to do or build. Although adages like “Buy low and Sell high” may provide some mindset, this is not an objective. Questions surrounding your ideal tenant demographic and investment timeline will better dictate whether you are looking for more cash flow over longer-term capital appreciation and ultimately impact where and what you’re going to buy.
Build out your criteria:
Based on the objectives you’ve outlined above, build out a solid set of criteria you’re looking for in a property. Most people think strictly about the price point when I say this, but there are a ton of variables to consider; size, location, amenities, neighborhood, tenant demographics, future infrastructure projects, etc. that will all have an impact on getting you toward your overall objective.
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Consider the risk factors:
As bullish as I or anyone else may be for the investment comeback, nobody has a crystal ball so spend some time thinking about different scenarios. Long term, I will stake my reputation on the fact that prices will continue to rise, but there may be bumps along the road.
- The most obvious is the Market Risk; could population trends in Toronto reverse, or supply of new units come to market too quickly? It’s unlikely in my opinion, so the more pressing things to consider might be your Tenant Risk; how do you avoid getting stuck with a bad tenant, how does a month of unpaid rent affect your bottom line?
- And somewhat intuitive given my introduction here is Interest Rate Risk; do rates not fall as fast as expected, could we see the return of inflationary pressures?
Get the Professionals:
It might sound a bit shameless, but working with a good Real Estate Agent is a no-brainer. Listed properties already offer to pay your agent a cooperating commission so there’s no additional out-of-pocket expense to you and a good agent can not only find off-market opportunities but can make all the difference between a good and bad investment. Similarly, a good mortgage Broker can secure the best rate and product for your financing needs and is compensated solely by the lender, so another no-brainer. Engaging a good lawyer can also be a key part of your success to ensure you don’t run into any issues on closing, avoid any fraudulent purchases, and inherit a clear property title. Lastly, you may want to engage a Financial Advisor and or Accountant to strategize on the best Tax Structure for your investments.
Curious about working with a real estate agent? Here’s how to find the right Toronto real estate team for your next transaction.
Do the Financial Analysis:
There are many different metrics you can look at when comparing and analyzing different investment options, but there are a few key metrics you should consider as the basics.
- Capitalization rate: The Cap Rate is a measure used to assess the profitability and value of a property based on its income-generating potential. It represents the rate of return on a property’s income, assuming the property is purchased ONLY in cash. This is a useful metric to compare one investment to another, as every investor will have different debt/equity and interest rate variables.
- Return on investment: ROI measures the total return on the investment relative to the amount invested. It considers both the income generated by the property and any changes in its value.
- Return on Equity: Return on Equity measures the return on the actual equity invested in the property, accounting for financing. This helps evaluate the return on the portion of the property paid for with the investor’s own funds, after accounting for financing costs, and can provide a more accurate picture of your profit.
- Cash flow: This one is more key in the short term and can be adjusted depending on how much equity you put into an investment. Cash Flow represents the amount of money left after all operating expenses, debt service (mortgage payments), and any other costs are subtracted from the rental income.
Have More Investment Questions? We Have Answers!
If you’re thinking about diving into the world of real estate investing, we can help you find the right property in Toronto. With accurate insights and honest advice, we can help you achieve your investment goals!
Call us today at 416.642.2660 or email admin@torontorealtygroup.com. We’re always happy to chat!
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