By Brian Reiser
As we all probably know, real estate in the city of Toronto is expensive, and it is getting more and more expensive as time goes on.
So, what is someone who is looking to invest in this market supposed to do if they want to get in?
With the price for a one bedroom condo in the city core now over $500 000.00 and with 20% cash deposit (the minimum amount for an investment property), it becomes difficult to make these purchases ‘cash flow’. Even with the high rents in the city, the carrying costs of the property will probably not be covered by the rent if you are only putting down 20% of the purchase price.
Let’s face it, real estate investing is a business. A business that you would like to scale up. If your investment is in negative cash flow (i.e. you have to add money to it on a monthly basis in order to cover costs), it is impossible to scale up as it would cost you more and more out of pocket.
So what’s the solution? The old adage comes to mind, “Invest where returns are best”. We live in a massive country that has many different markets in various states of affordability. Assembling a team of professionals, realtor, mortgage broker, lawyer, property management, etc, is one way to go.
Also, you could think about doing a ‘joint venture’ (JV). With a JV there are usually 2 sides to the partnership. A working partner and a financial partner. The working partner would find and secure the property, be in charge of renovations and deal with all property management issues. The financial partner would provide deposit and renovation funds and qualify for a mortgage on the property. The split could be 50/50, 60/40 or whatever amount you negotiate and feel is fair. It is crucial that you get a JV agreement from a lawyer that will outline all the details and responsibilities of each partner and provide a timeframe for the project and what happens when someone wants to get out of the deal.
Another possibility would be to buy, renovate and then rent the property. Imagine a bungalow with a separate basement entrance. Renovate the basement and put in a 2 bedroom apartment. Now you have a 3 bedroom home and a 2 bedroom apartment to rent. Two rental incomes from one property makes it much easier to make it cash flow positive. This is a technique that you can scale up and repeat over and over again, thereby building your real estate portfolio.
Another option might be investing in syndicated mortgages. These are secured against the property and can provide returns from 8%-14%. Often you can also invest in these with registered funds, RRSP or TFSA.
Finally there are land development deals. These are a longer term investment, from 3-7 years. Returns are in the 25% per annum range. They are also secured against the property (Land in this case). In principle, you and a group of investors are partnering with the developer on a project. Some of these investments are also RRSP and TFSA eligible.
At The Parker Group, we are well versed in real estate investing. Feel free to contact us to discuss your next (or first) investment. We have a team of highly qualified individuals that are available to help you attain your investing goals.