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The most important thing you can do as a potential investor is prepare yourself for what will likely be the largest financial decision you make in your life. Our Investors Guide takes you through the steps of the investing process.
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One of the first things you have to decide is what sort of income property you want to buy. From condos to houses, or even to multi-unit homes, there are a variety of options out there. They come in a range of sizes and prices, and it is likely price that is going to determine which type of property you decide to pursue.
It really comes down to which are the easiest to own. Condos are the simplest rental to own. Just pay the condo fees and pretty much everything is taken care of for you. You don’t have to worry about replacing the roof or fixing windows. But when you get into freehold properties, that is when you will need to be prepared to deal with maintenance issues. From furnaces to leaky basements, new roofs, appliances, flooring and more.
And when you get into houses with 3 or 4 units, you are now compounding things with multiple tenants. In a condo, you have one tenant at a time – but a multiplex means dealing with more. Everything will multiply: you’ll be finding tenants three or four times as often, and that also means that many different personalities to learn to work with. Never mind the added complexity of multiple fridges and stoves that can break down.
All of that being said, there are financial benefits to having multiple tenants. Instead of one renter paying you $1,600/month for a condo, you might be seeing $5,000, $6,000 or even more coming in every month. You just have more to do to earn that higher revenue. And your initial costs will be higher.
Once you have thought through the options above, you then need to realistically think about what your budget is. While you may love the idea of making $6,200/month with a trendy Victorian triplex off Queen West, unless you are willing to spend $1.5-2 million, that is not something you can entertain. At the end of the day, investment properties are about cash flow. You want to be able to pay your bills with the money you make from rent.
Investment buying is also a little different, in that you really need to pay attention to your down payment. Not only will many banks require a higher down payment to purchase a non-principal residence, but you might need it to get your mortgage payments down to a level where the rent covers them.
I suggest starting with the liquid cash you have available to put towards this purchase. Deduct land transfer tax and other associated costs (around 5% of the purchase price) and see what you have left to put down. Assume you are going to be required to put down a minimum of 20% and see what sort of mortgage that allows for. It is getting harder and harder these days to make the math work, especially with condo prices rising as fast as they are.
Now, with an idea of what you can afford, it is time to look for the right area(s) to buy in. Downtown is always popular, but the prices are starting to get too high to make investing profitable. I am a big fan of the east end, as I think there is a lot of future appreciation potential there. So much new development going, it is not as tapped out as the west end is these days. The east end also has the possibility of the Downtown Relief Line being built sometime in the future… okay, stop laughing. But you are going to want to be near transportation, or near where it is coming.
Along Eglinton Avenue is a smart place to look these days, with the Crosstown LRT nearing completion. Not only will prices rise in the area, but potential tenants will be more interested in looking to live somewhere with easy access to public transportation. And the areas you identify must take into consideration the rents supported there. A decent one-bedroom condo downtown can see $2,000/month in rent, while something similar in Leaside could be down to $1,200-1,400. Prices willbe better, but you still need to do your financial analysis and be sure that the monthly numbers make sense.
Tied to location will be the target renter you are looking for. If you buy close to U of T, expect to get a lot of students looking to rent your place. Liberty Village will attract people in their 20s fresh out of higher education. Are you looking for students or professionals, mature or younger? Or do you even care, as long as they pay the rent every month? Just be sure that you understand the demographics of any area so that you understand who the target renter there would be.
I cannot stress this enough, but no matter what type of property you decide to pursue, do your best to make sure it is something different. You want to stand out from your competition. Both to attract renters, and later when it comes time to sell. If your condo is the same as 10 others for rent in the same building, what is going to draw people to your unit over the others? The last thing you want to do is be forced to lower your rent to stand out. Look for view, high floor, boutique building (go for a loft if you can find one and the budget allows, you will never have trouble renting it out), etc. Make sure the floor plan is useful, the view isn’t of an alley, and so on.
Buy as big as your budget allows. These days, condos are getting nothing but smaller. People want some room, they want space. And if your unit is just that little bit bigger than others, you will be an obvious choice. Parking is less important than it has been in the past. You’d be better to spend the $40-50,000 a spot costs on a better unit. Especially downtown, where fewer and fewer people have cars these days.
Same goes when looking at houses, be they single unit or multiple. A groovy old Victorian rowhouse simply has better curb appeal than a tired old 1970s semi. And you’ll find that neat old houses will probably have funkier units, maybe with exposed brick or other interesting features. Those will simply appeal more to prospective tenants.
Something else you will need to pay a lot of attention to is the building amenities. Believe it or not, most people don’t use the condo amenities. Especially renters, who may move more often that owners, they have gym memberships that they can use no matter where they live. Those amenities add to your maintenance fees, which cuts into your bottom line. Don’t pay for things that your tenants will not use. Obviously less important when looking at freehold, but then you might be more concerned with what is in the neighbourhood. Is there a grocery store within walking distance? Where is the closest streetcar stop Remember, you are the one who pays the condo fees, do your best to keep them to a minimum.
Some people will wonder about buying a new condo as an investment property, I can’t say it is a good idea. If you buy resale, you can start renting it out tomorrow. With a new build, you have to wait until it is completed. And that whole time before you get the keys, your down payment money is just sitting in the builder account doing nothing for you. Sure, the unit will appreciate over that time, but you are losing out on all of that rental income. And three to five years of rent is a LOT of money. Never mind closing costs, construction delays, project cancellations, etc. Resale is always the way to go when looking or a rental property.
Something MUCH more important, is the HST rebate. When you buy a new condo, you agree in the contract to assign your HST rebate to the builder. This generally never comes up, it all happens behind he scenes. Unless… if the CRA finds out that you are not living in the unit for the first 12 months, that you are renting it out, then they will refuse to pay the HST rebate to the builder. Which means you are on the hook for that money, you will be forced to pay it to the builder on closing. There is a way to recoup the cost, there is the New Residential Rental Property Rebate, but it comes later. You will still have to cough up an extra $20-30,000 on closing. Not fun.
If you buy a property that needs some work, then by all means do it. But don’t go nuts. This isn’t going to be a feature on HGTV, you are just looking to make it safe and serviceable. Get the cheaper cabinets from IKEA, no one is going to judge you. The rental market in Toronto is SO tight these days, tenants just want a clean and safe space they can call their own. Sure, fancy finishes might allow you to charge a higher rent, but not enough to offset your expenses.
Take a triplex, for instance. If you were renting out a 2-bedroom unit on the main floor for $2,100/month and your tenants move out. You decide that the kitchen is pretty tired and needs renovation. You could spend $10k at IKEA on a basic kitchen with simple appliances, or you could blow $80k on something much nicer with stainless appliances and the whole thing. But your rent would go up maybe a few hundred bucks a month. Even if you can make $4-5,000/year more with the fancier kitchen, it would take you 14 years to recoup the cost difference between the two renos. Not worth it. And once that kitchen is looking like a million bucks, it might make the rest of the unit look shabby, so then you might be tempted to spend more. Keep it simple, keep it inexpensive. Go with laminate instead of hardwood. Don’t worry about granite counters. You want durable, not pretty.
You want to keep everything easy to fix, easy to replace. IKEA kitchens, for example, are modular. Replacing a cabinet is as easy as ordering up another SEKTION corner cabinet. And when you don’t spend a lot on renovations, you won’t be as upset when tenants damage them. And they will. Not necessarily on purpose, but just through the wear and tear of daily living.
On that note, be sure to check the place over when a tenant moves out. Give it a quick paint job if it needs it, have a cleaner come through. A clean and neat unit looks SO much better than one that is grubby and dinged up. Check the smoke detectors and light bulbs. For a few hundred bucks, you are keeping up on maintenance and keeping your investment looking as good as it can.
When buying, don’t try to time the market. You can’t. Many people have tried and most have failed. It is a good rule of thumb that prices are highest in the spring, so if you can avoid buying from March to June, it would be best. July and August are quiet times, with lower prices. Less inventory, but fewer buyers to compete with. Prices tend to rise again the fall, with another busy time in the market. But once we get into November through January, it is another quiet time. Don’t take those times as gospel, but do keep them in mind when buying.
Same goes for selling. If you have control over the timing, always aim to sell in the spring.
Second to this is the question of whether or not to sell with a tenant in place or not. That all depends on your tenant. If they are clean and neat and they place looks good while they live there, then sure, it won’t hurt to list it with them still there. Just beware, some tenants make it hard to sell. Some get resentful and try their best to obstruct the sale of the unit. From making it hard to get permission for showings, to leaving the place a mess. This is why you always want to have a good relationship with your tenants!
Many investors like to buy a turnkey property, one with a good tenant already living there, as they don’t have to spend the time looking for a tenant. They don’t have dead time with an empty unit and no rental income. As I say, it all depends on the tenant, when they may (or may not) be leaving and your time frame.
Lastly, it should go without saying, know the law. There have been a lot of changes in the past while, from landlord & tenant rights to lending guidelines and tax issues. Make sure to consult with all of your professionals so that you are as informed as you can be. Talk to your accountant, your lawyer, your real estate professional. There might be tax implications you are not aware of, for instance. And be sure to educate yourself thoroughly on the Residential Tenancies Act.