As a real agent in GTA for over 10 years, I witnessed the up and down time of Toronto Market. I saw many people gained financial freedom through property investment, and also some people end up living in the stressful situation. Below is some experience I learnt from my own and others mistakes. Hope those will benefit you during your property investment journey.
Cash Flow , Cash Flow, Cash Flow
You might have heard that number one rule for property investment is “Location, Location and Location“. However, I would like to change that to be “Cash flow, Cash flow, Cash flow”.
The location is important. But at Greater Toronto Areas(GTA), the property in a more centralized location is just costing too much, and the rent is nowhere near to the point to cover all the cost. In this situation, I would suggest to compromise the location for the cash flow. Here are two examples to explain why. In York Region, a 3 beds freehold townhouse costs about $850k. With 20% down payment ($170k), the mortgage is about $3000/month plus property tax , $400/month, the fixed cost each month is $3400/month. With average rent about $2500/month, each month you will need to pay $800 to support this property. Initial investment is $170K plus $800 each month. In stead, if you buy a similar property at Hamilton or Oshawa, which costs $550k. With 20% down, $110K, each month the mortgage payment is about $2000 plus HST property tax $400, average rent is $2100, the initial investment is $110k plus $300 per month. The above examples showed clearly why go for cash flow. Buying something expensive in the good location, the only bet is the appreciation. With all the initial investment and extra money to put in each month, it is hard to sustain especially in the market downturn. The worst is it will bring down the life quality of ours. The property investment is supposed to make our lives better not worse, isn’t it? If you think the profit will be better with good location. From my experience, when market goes up, everywhere goes up. Percentage wise, the suburb or remote location might even make more appreciation due to the low cost.
Don’t Buy Something You Can’t Afford
This one might sound like common sense. But when the market is on the upturn, people are easily to go beyond what they can afford. GTA housing price got rocket high during year of 2015 to 2017. Some people made really good money within a short time. I have friends who bought a preconstruction house in 2014, paid $80k deposit, then sold it in two years and made $400k. It is indeed easy money to make, isn’t it? So they want to go further and go all in. They bought other two preconstruction houses, $1.9 M/house, and planned to sell it in two years. If the market continues going up, they will be able to make $800k. But it is just “IF”. In 2017, April, Ontario implemented the 15% Foreigner tax , which is the last straw of GTA housing market. Furthermore, two times of interest increase brought the maker to be ice cold. At the time of closing, my friends didn’t want to sell for loss, so they decided to close it and borrowed the high interest loan to carry on. Now they rarely go out for dinner. Their life qualify is significantly impacted. That is why I put this common sense as the golden rules number 2 for property investment. Sometimes the basics are easy to be missed. Before you acquire any property for investment, please make sure you can get the mortgage and pay for the cost if it is not rented out.
Go Small and Go Cheap
When talking about property investment, some people ilke to go big and expensive ones. They feel there is more gain with bigger property. I think otherwise. From the historical stats, bigger house seems have more appreciation by looking at the absolute value. However, percentage wise, small house is actually gained more, because all the cost is lower. For example, pre construction condo, I always suggest my clients go with something small in the same type of properties. When purchasing the pre construction condo, the price is determined by the size. Bigger size, the more expensive. However, in term of renting or selling, it will be based on the function, e.g. one bed, two beds, one bath or two bath. Profit wise, it will be similar. So when buying an investment property, go small and cheap.
Don’t put all the eggs in one basket
Anyone who is doing well in the stock or mutual funds investment knows diversifying is important to lower risk. This applied to property investment as well. Often, I told my clients not to put all the eggs in the same basket.
The diversity could be location, type, resale or pre construction. Diversifying the property investment will help you to minimizing the risk and maximize the profit in the long run. For example, if you have $200k down payment, and you have purchased an resale property which costs $500k. You have another $100k lest. Then you could buy a pre construction house then you won’t have to handle all the closing and renting at the same time. This will lower the stress and balance out all the cost. The resale property will make sure that rent starts paying for the mortgage soon and the pre construciton one will gain better appreciation by leveraging the time.
Another example of diversity would be location. If you got something in the east Durham region, then when you saved up enough money, go for something in more west region, for example, Brantford. By spreading out the investment in different locations the appreciation will be balanced out and risk will be minimized.
Leave the Primary Residence Alone
Primary residence is not investment property. Yes, it is a big portion of the asset regular family owns. But it is not investment. Some people likes to play with primary house to make appreciation. I don’t recommend. It is something your family live, love and spend big time in. It serves the purpose of shelter for people. So sell it when you need to upsize or downsize. Don’t sell it when market goes up or goes down. I have seen people who are doing it but more of people end up regretting. I know a couple who sold their detached house in 2010 for $700k. They think the market is going to crash. Yes the market was down a bit during the year of 2008 to 2011. The couple rented for five years and hope to re enter the market when it touches the bottom. It didn’t go as planned. They finally tired of renting. They bought a townhouse at similar location for $610k. Two years later, they bought in the detached house in the same location for $1.03 M and finally feel relieved. So primary residence is for living, not for investing. It only becomes investment at time you are ready to downsize, when it has served its purpose.
Don’t borrow money for down payment
Investment is when you have extra savings and you would like to use those money to grow your assets. When it comes to the property investment, we want to leverage the mortgage to grow our assets, and use the rent to pay off our mortgage. But the precondition is you should save up enough down payment. If you don’t have enough down payment, invest it somewhere else or save more.
I don’t recommend to borrow the money for property investment. It adds too much stress to the family and it is hard to survive through hard times, for example mortgage interest goes up. After all, investment is to make our lives better not to stress ourselves out.
Above is some suggestions for property investment. Hope it will help you to reach your financial freedom.