Real estate is not a one-size-fits-all strategy. Pierre Carapetian, a top 1 percent agent in Toronto and an avid real estate investor himself, shares what we should know about buying an investment property in Toronto. Here are his tips to profitable purchases.
1. Understand your goals
The type of product you invest in will depend on your goals as an investor. Are you investing for equity gains or are you looking for an investment that generates cash flow?
Toronto’s lucrative condo market and rising interest rates have raised carrying costs, making it more challenging to find cash-flow positive properties. There are, however, strategic ways to improve your margins, like a higher downpayment or purchasing the right product. Your Realtor will know best.
Type of property to invest in: Resale
If it’s equity gains you’re after, you’ll need to think long-term. Toronto condos are a great option as prices in the core have been stable and rising substantially. An experienced Realtor can help guide you to the right product and the right neighbourhood so that you can achieve higher equity gains.
Type of property to invest in: resale or pre-construction
2. Know your budget and closing costs
Ensure you know how much cash you will need and how much mortgage you can afford to carry. This will influence the types of properties to evaluate when investing. If this is your principal residence you are allowed to purchase with as little as 5 percent down. However, as an investor purchasing a secondary property you must have at least 20 percent down.
5 Percent vs. 20 Percent Downpayment
Different products have different downpayment structures:
Type of property to invest in with < 20 percent downpayment: resale
Type of property to invest in with 20 percent + downpayment: resale or pre-construction
Beyond your downpayment, you’ll also need to account for closing expenses. These include Land Transfer Taxes and, on pre-construction condos specifically, HST (capped at $24,000).
Use this Land Transfer Tax Calculator to find out how much you’ll owe. First-time buyers are also eligible for a partial Land Transfer Tax rebate.
When investing in a pre-construction condo, you’ll need to pay HST on the registration date (approximately four years after purchase) to a maximum of $24,000. With a one year lease in place though, this amount is fully refundable as you’re able to file for a full HST rebate.
3. Understanding price per square foot averages in the neighbourhood
Paying attention to the price per square foot is a great indicator of an investment’s profit potential. Look for properties that have a low price per square foot compared to a comparable unit trading in that same neighbourhood. This will also help you determine if the best deal is pre-construction or resale.
“If the average resale condo in King West is trading for $900 per square foot and the current pre-construction deal is selling for $1,100 per square foot, you’re likely going to generate higher returns investing in resale,” says Pierre.
4. Know how to spot a good deal
Beyond the price per square foot, there are many other factors to consider when spotting a profitable investment condo. Some of these include:
Does the builder have a good reputation?
Does the location or floorplan allow you to rent for a premium?
Is there future infrastructure development coming to the area?
We aren’t all real estate whisperers — if you don’t know how to spot a good deal, or maybe don’t have the time, hire an experienced Realtor to help you.
“I’m always scouring the market for profitable purchases that I can send along to my investor clients.”
5. Purchase investments where you can charge a premium in rent
There are key factors to look for as you search that will help guide you to a profitable investment property.
Rental prices favour condos along major transit/subway lines. You can also typically charge about the same rent for a two-bed, two-bath, 750-square-foot condo as you would a two-bed, two-bath 800-square-foot condo if they are in the same building. That 750-square-foot condo, however, will cost less to purchase, so you actually will improve your margins and lower your carrying costs.
6. Buy in gentrifying neighbourhoods
When it comes to equity gains, the biggest wins to be had are in pre-construction properties in up-and-coming neighbourhoods. If you can invest in areas when prices are low, you’ll reap the benefits in years to come as the area becomes more desirable.
Leslieville is a great example of how gentrification impacts property values. Condo prices there have increased 50 percent since 2014.* Investment opportunities in up-and-coming neighbourhoods where rental inventory is low will also allow you to charge a premium in rent.
PRO-TIP: Be on the look-out for investment opportunities on the Danforth along the subway line.
7. When purchasing, think long-term
When it comes to investing, it’s always wise to think long-term. The longer you hold your investment, the more equity you amass. As your investment’s market value goes up and your mortgage goes down, you’re able to leverage that equity into other investment condos. Learn about Pierre’s leveraging strategy and building a real estate portfolio.
PRO-TIP: Borrowing to invest can dramatically improve ROI.
8. Understand the tax implications
Knowing how your investment will affect your taxes — and the amount you owe — can make all the difference when purchasing property.
When you sell your investment property, you are required to pay Capital Gains Tax. This means that 50 percent of your net profit will become taxable income. You are entitled to deduct expenses incurred during the investment from these gains (like interest on a loan and cash-flow losses).
As we mentioned earlier, when investing in a pre-construction condo you’ll need to pay HST to a maximum of $24,000 when the building registers with the city (typically four years after your initial purchase). Your lawyer can file for a full HST rebate, refunded approximately four to six weeks later, provided you have a one year lease in place.
If you do not rent out your property for the minimum one year, you are not eligible for the HST rebate.
9. Ensure you’re playing by the rules
Ensure you play by the rules when investing. This includes understanding the rules regarding short-term rentals (eg. Airbnb) in the building to flipping condos and the financial consequences that come with it.
If you sell your investment too quickly you run the risk of being taxed as a trader rather than as an investor, which means you can be taxed on 100 percent of your profits as it’s seen as business income. It is best to get legal and property advice from your lawyer and/or accountant regarding tax implications as a flipper.
When it comes to spotting profitable investment opportunities in Toronto, just remember: it’s not about buying something, it’s about buying the right thing. Equipped with these nine investment tips, you can rest assured you’ve invested with sound advice and guidance from one of Toronto’s top real estate brokers.