The Toronto real estate market continues to chug along as we head into the warmer months. There was a 2% reported drop in year-on-year activity for March but without knowing the final numbers yet for April, it seems like this great five year spike in Toronto prices is still holding. Quality income properties, where the cap rates are respectable (minimum 7%), still seem to be selling very quickly if they are priced correctly. Buildings with jazzed up owner’s suites are also still moving fast in the more desirable neighbourhoods. In some cases perhaps buyers are looking to convert back to single family residences but, for the most part, great owner-occupy buildings continue to always be in demand.
I don’t want to sound like a broken record, month after month, stating that the market is great and our prices are holding while other markets are crumbling. But that’s what’s happening! Remember though that this market has been particular good if you are a seller. The high prices and lower returns really don’t do a lot of my investment clientele any favours. If the prices start to subside a little bit and the demand curve falls more in line with supply then I’ll be busier than ever. A lot of investors have been cautious in the current climate and with my blessing have stayed the last few years out. If cap rates start to approach double digits again then many more investor buyers will come out of the woodwork.
The natural question is when will we return to that state, if at all? I don’t have the answer – no one does – but I’d say look to the condo market dropping to be your first sign of trouble. When the new projects that have been traditionally selling out on preview night slow down, then that would be an indication that demand is finally starting to subside. The first time buyers have fuelled this growth and there has been unparalled development in this segment. Will it continue like this, unabated for the foreseeable future? Somehow I doubt it. But when condo sales start to calm down then I think we’ll be closer to a time where income properties will start to make more sense on the numbers.
I have quite a cross section of readers. Many of you are seasoned investors with many years of experience in the landlord business. I also do get a lot of feedback from readers who are just getting into real estate. Sometimes the topics I talk about are only really relevant to one side of my audience, so this month’s column is going to be split into two parts. First if you are looking to get into the income property market in Central Toronto I will present a series of pointers to help you out in the searching and buying process. The second part is for all you income property owners out there – I have presented a “good landlord” checklist. Most of this information I have pulled form the Plex website which I wrote some years ago. Despite market conditions, the advice is still very relevant today. This gave me the opportunity to look at the info on our website and prepare for the launch of our new site later on this summer. Stay tuned for more news on that.
FOR PEOPLE GETTING INTO THE INCOME PROPERTY MARKET:
If you are a first time buyer of a duplex, triplex or multi-unit apartment building in the GTA here are a few steps that you ought to follow to ensure your chances for success:
i. Define Your Investment Goals
Each time you review a listing or visit a property you should ask yourself would this property meet my fiscal objectives? Some of the specific factors that you should consider are: suitability of neighbourhood for renters, the current vacancy rate, economic conditions and your own propensity to stick it out with the property long-term.
ii. Identify Your Needs & Desires
Determine what you’d like to have versus what you must have. These include obvious items like location, type of investment property and whether you have a penchant for doing renovations if necessary.
iii. Know Your Financial Readiness
The financial questions that you have to ask yourself before you get started include:
• How much money can you afford to put towards a deposit on your income property?
• How much of a debt obligation you are prepared to undertake? What is the maximum that you will be able to borrow?
• What is your net monthly payment comfort level? Set a maximum dollar amount and do not exceed this threshold when searching for properties
iv. Establish a Relationship with a Lender
This is very important because there a myriad of financial products on the market today. The mortgage business has become one of Canada’s fastest growing segments. You can get no money down options, 40 year amortizations and there are specific programs for self-employed people that don’t show a lot income on their tax returns. I often say that how we finance a purchase is just as important as how much we pay for the property.
v. Develop a Purchase Strategy
There are many ways to proceed here. I obviously recommend using a realtor like myself for getting into income properties. My knowledge comes from countless hours in the field looking at rental properties, which I think is the best way to truly gain a proper understanding of the market. Once you have found a qualified agent to assist you, then it is important to develop a strong plan of attack. Start by having your agent search your local real estate board’s listings as often as possible. There are many different ways in which income properties are listed on the Multiple Listing Service (MLS) so ensure that your agent is are being thorough in conducting searches. Look for listings with multiple kitchens and bathrooms and always check both residential and commercial listings. Challenge your agent to determine an innovative campaign to find you the right income property. If you don’t find what you are looking for you may ask them to call income property owners of certain target buildings in your area – you never know when an owner may be thinking of selling. In addition, you may want to place classified ads outlining your specific investment criteria.
Once you have purchased a property and have gotten it all rented out, here a few pointers that may help your continued success with your venture.
i. State of the premises:
This may sound obvious, but under no circumstances should you let your property fall into a state of disrepair. If your tenants are paying each month, on time, then you have an obligation to keep everything in good working order. If something breaks down, fix it. Also, please try and keep up on maintenance items. Make sure the snow gets shoveled, the eaves get cleaned, the grass gets cut, etc. A tidy property is better all around for both you and your tenants.
ii. Rent Increases & the Residential Tenancies Act
You are allowed to raise your tenants rent 2.6% a year. Keep up on your allowable limit and try and stay familiar with you rights and obligations under the tenancies Act. If are unfamiliar with this, please take a look at:
iii. Fire Issues
As a landlord you are obligated to ensure that your rental property meets fire code guidelines. The best way to ensure that your building is compliant is to hire a retrofit consultant who will give you a laundry list of all the things that need to be done. I recommend Paul Schuster at www.pcfirecode.com.
iv. Eliminating Expenses
Sometimes you are limited on how much rent you can get way with, so the best way to improve your profitability is to cut on expenses. Things like separate hydro meters help but ensuring that your building isn’t wasting energy can go a long way to saving you money in the long term.
That’s it for this month. I’m sure many of you heard the government’s announcement that CMHC is now only required for purchases with less than 20% down (it used to be 25%). It’s a small victory … but we’ll take it!
Take care everybody.