A recent report conducted by Ryerson University’s Centre for Urban Research and Land Development found that Toronto is the fastest-growing city in Canada and the U.S. by a huge margin. Immigrants are being attracted in droves by employment opportunities – for example, in the first half of 2019 alone, 81,600 new jobs were added and, on a year-over-year basis, employment in the GTA grew by 3.4% in June, outstripping the 2.9% annual increase during the same month last year.
At the same time, as has been frequently been reported, the supply of housing in the GTA, whether for sale or for rent, is not keeping up with the growing demand. Many ideas have been floated to increase the supply of housing, but regional and municipal governments have been slow to make changes. Prices have been increasing for homes and especially for condominium apartments; and the biggest increases have been in monthly rents for homes and apartments of all sizes.
All of this has created a crisis in rental housing in the GTA and, correspondingly, growing opportunities to invest in rental properties of all kinds. For investors new to the income property market, the main ingredients to look for are:
- Location (as always the most important factor in real estate) – ideally close to TTC and, if possible, near a subway station;
- Cap rate (net income/price) in line with other properties in the area;
- Manageable projected repair & maintenance costs;
- Fire code compliance – many income properties in the GTA are fire traps; make sure you factor in the cost of making all units ‘fire safe’.
The goal is to make the property as close to ‘income neutral’ as possible, that is, design your mortgage financing so the gross rental income less all the tax-deductible expenses, is as close to zero as possible. That way, there won’t be any taxable income. Better to have a small loss than a small gain, as mortgage interest costs a lot less than income tax at your marginal rate.
For many new investors, a condo apartment is a good place to start. While the cap rates/returns are generally less for condos than multi-unit properties, they are much easier to manage. Maintenance costs are mostly included in the condo fees, fire safety is not an issue, and a single tenant is easier to handle than 2 or 3. Also, it’s often easy to project the likely net income for a condo that you are thinking about buying, as the projected rent can be estimated from MLS rentals in the building, and the expenses (maintenance fees and taxes) are known. It’s an excellent way to learn whether you can handle the challenges of being a landlord with a smaller and lower-risk investment.
With the not inconsiderable uncertainties presently surrounding the financial markets, investing in an income property in the super-strong GTA investment market can be a great alternative!
