It must be. Otherwise, we wouldn’t be incessantly reminded just how real estate-obsessed Toronto has become, and we certainly wouldn’t be reading about comments from the Prime Minister suggesting that “investors are to blame” for high real estate prices.
That comment alone, while inflammatory and perhaps misguided, would almost confirm the fact that real estate is, always has been, and always will be a good investment.
Thinking about buying an investment property? Download our Buyer’s Guide right here.
But why is real estate a good investment? And how is it a good investment when compared to other investment vehicles, such as the stock market, Bitcoin, or your grandmother’s Royal Daulton collection?
Like any investment, there are pros and cons to real estate. So let’s start with the cons, just to set the table.
Cons of Real Estate Investing
First and foremost, real estate is expensive. An entry-level condo in Toronto might run $500,000 and an investor needs a minimum 20% down payment to satisfy CMHC guidelines, so that’s $100,000. This prices many, if not most of investors out, right away. Any Tom or Jane can purchase 10 shares of TD Bank or even purchase 100 shares of a real estate investment trust which is traded online. But of course, the higher buy-in that prices out most investors ends up being one of the reasons why real estate ends up being a great investment.
There is far less liquidity in real estate, that’s for sure. You can own 10 shares of TD Bank and sell them with the simple click of a button at the market rate, any time from 9:30am to 4:00pm, Monday through Friday. You can do so through any number of online brokerage accounts. With real estate, selling takes time, and it costs money! Sale commissions are typically 4-5% depending on the service level and quality of agent and brokerage.
Lastly, there is management involved in real estate investing. Whether you are buying a 500 square foot, 1-bedroom condo for which you plan to secure tenants and manage on your own, or whether you’re buying a 20-unit multi-plex and hiring a property manager, you are going to be heavily involved.
There are other cons to real estate investing, I’m sure. But these are the big three.
As for the pros, well, collectively they will likely outweigh the cons.
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Pros of Real Estate Investing
The first one that comes to mind is simply supply and demand. Over the past twenty years, there hasn’t been any prolonged period (say longer than 4-6 months) where supply exceeded demand. Overall, we live in a city where there are never enough houses and condos for sale, and that isn’t going to change. The CMHC estimates that we need 3.5 million new housing units in Canada by the year 2030 to achieve affordability, and that isn’t going to happen.
The second reason why investors flock to real estate is quite basic: the track record. The average home price in Toronto has quadrupled in the past twenty years. It’s doubled since 2015! People might suggest, “What goes up, must come down,” and we’ve heard calls for the real estate “crash” for the past two decades, but save for periods of 10-15% declines which have come after periods of similar appreciation levels, this “crash” has simply never happened. The twenty-year chart of the average Toronto home price is essentially a 45-degree angle from left-to-right.
Real estate is also a leveraged investment, in that you’re not paying the full price. If you purchase a $1,000,000 duplex to rent out to two families, you can make a $200,000 down payment. That’s leverage at work. So even if the property were to “only” appreciate at, say, a modest 3% per year, that’s not your return. Your return is leveraged, in this case – five times. So your return on your $200,000 investment is actually 15%.
Lastly, there is a “forced savings” element to real estate investing through your monthly mortgage payment. Let’s say that you purchased a $500,000 condo to rent out for $2,300 per month. With a 20% down payment, assuming a 4.99% interest rate on a 30-year amortization, your monthly payment is $2,132.38. However, of that $2,132.38 monthly payment, almost $500 is the paydown of principal, meaning you’re basically taking it from your left pocket and putting it into your right pocket. And when interest rates were ultra-low, say 1.79% in the example above, the monthly payment was only $1,435.52, of which a whopping $848 per month was principal paydown, against only $588 per month of money spent on interest.
Planning a move this year? Check out these resources on our blog next:
- How to Price Your Home to Sell
- Is it Smart to Buy a Home when Interest Rates are High?
- Client Success Story: The TRG Difference
At the End of the Day
There’s an old saying in real estate investing:
Q: “When is the best time to sell real estate?”
A: “Never.”
On a long-enough time horizon, real estate always goes up. There are exceptions to the rule, such as a dilapidated 55-year-old time share in a sleepy retirement village in Florida. But if you’re talking about houses and condos in Greater Toronto Area, there’s simply no way that a long-term, buy-and-hold ends up In the red.
Between the appreciation in the market, the demand for rentals and non-existent vacancy rates, forced savings in the form of principal paydown, and the incredible power of leverage, real estate has proven to be nothing but an exceptional investment over the last half-century in Toronto.
If you have questions about investing in real estate, we’re happy to help. Give us a call today at 416.642.2660 or email us directly at admin@torontorealtygroup.com.
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