House prices are falling, making real estate investing more attractive — here’s how to do it right and make money in the long run

According to real estate experts, buyers are facing less competition and skyrocketing rent is giving investors a leg up.

Braydan Hooper plans to expand his real estate holdings over the next five years.

The Toronto mortgage broker paid $489,900 for his first investment property, a three-bedroom, three-bath condo in Cambridge, Ont., in October 2021, with a 20% down payment. Renting it for $3,000 per month, Hooper makes a $300 monthly profit in what is known as a cash-flow positive transaction, which means the investor is not losing money.

He plans to purchase four more long-term and short-term rentals, including an Airbnb and a mixed-use commercial property (a shop on the first floor and an apartment on the second).

When is the best time to purchase an investment property?

Now, the most pressing question for Hooper is when is the best time to purchase his second investment property?

According to Hooper, we’ll have to wait until the spring of 2023 for prices to drop even further. “Another Bank of Canada rate hike is planned for December, which will keep downward pressure on home prices” (Economists predict home prices could drop by 30 percent from the February 2022 peak to spring 2023.)

However, Hooper is willing to buy a home sooner if a good deal comes along.

As a mortgage broker, he is constantly on the lookout for good deals, which is his best advice to clients.

“Whether we’re in a slow or busy market, if you’re not constantly scanning for deals, you may miss something,” he explained. “That’s generally good practice if you want to be a good investor.”

It is an investing adage that the best time to invest is when the market is down because it is easier to enter the market when the asset is less expensive to purchase. In Toronto, home prices have dropped by more than 15% since their peak in February 2022. Mortgage rates, on the other hand, have tripled at the same time, implying that higher rates are offsetting lower home prices.

However, higher rates aren’t here to stay, according to Ralph Fox, broker of record and founder of Fox Marin Associates.

“We have raised interest rates to help offset soaring inflation, which we know will cause an economic slowdown,” Fox explained. “When that occurs, interest rates will fall as well because it is not sustainable.”

It’s unclear when mortgage rates will fall, but when they do, real estate experts say it’ll be a good time to invest. Alternatively, if home prices fall another 10% to 15% by spring, the costs may be low enough to offset the impact of higher rates.

What makes the market appealing now?

According to Fox, what makes the market appealing now is that buyers face less competition, with sales activity dropping by a whopping 49% in October 2022 compared to October 2021. As there is currently less demand, it is becoming less of a seller’s market — when there is high demand and insufficient supply — and more of a buyer’s market, Fox said.

“Buyers don’t have to compete for nearly as much as they did in the January and February 2022 market frenzy,” he said, adding that buyers can include more conditions on their offer, such as a home inspection, and have more time to negotiate with the seller.

According to Tom Storey, sales representative and team lead with Royal LePage Signature Realty in Toronto, an investment property should be purchased to rent it out rather than flip it.

When prices are falling, it is not a good idea to flip a property because you may make less money on the resale. However, if it is rental and viewed as a long-term investment — that is, owning the property for at least five years, but ideally ten years — it will be a profitable investment, according to Storey.

The average rent in Toronto is currently $3,360 for a two-bedroom apartment, a 27.7 percent increase year over year. Experts predict that rent will not be reduced anytime soon. Storey added that rising rents can help investors cover higher mortgage payments.

However, even if rents in Toronto are significantly higher, it will not be enough to make an investor cash-flow positive — at best, they will be cash-flow neutral, meaning they will make no profit from the property at the end of each month, he said. This is because higher mortgage rates make it difficult to charge rent that covers the monthly mortgage cost while also profiting — the rent would be too high and above market value.

If the rent is too high, prospective tenants will look for landlords who charge less and are likely to suffer financial losses.

“In Toronto, the property will appreciate more over time, which is why it should be a long-term investment,” Storey explained. “You typically lose money each month, but your long-term goal is to build substantial equity.”

Butler Mortgages’ Ron Butler warns that even being cash-flow neutral is dangerous. Before purchasing, investors should conduct a thorough examination of the rental’s economics.

This includes the monthly mortgage payment; the property tax and the annual rate of increase imposed by the municipality on the tax; one percent of the property’s value set aside for repairs (if the house is worth $1 million, set aside at least $10,000 for repairs); and 30 days of vacancy set aside in case the tenant leaves, according to Butler.

Buyers must also consider their cap rate, which is the cash yield obtained from the property after deducting all expenses but before mortgage payments. It is calculated by dividing the annual rental income by the current market value. The interest rate must be higher than the mortgage interest rate or no money will be made.

Butler estimates that the goal cap rate would have been around 6% to 7% ten years ago. However, southern Ontario has deviated so far from cap rates that it is now around 3%, he added.

It was possible to make a profit during the pandemic when interest rates were as low as 1.5 percent. However, with interest rates close to 6%, it is difficult to obtain a cap rate higher than the interest rate in urban areas.

To be cash-flow positive, Hooper recommends purchasing property outside of Toronto. That’s why he bought a house in Cambridge and is now looking in places like Ajax and Oshawa, where property prices are lower.

It’s a trade-off because homes outside of Toronto don’t appreciate as much, but it means you can make a monthly profit, he says.

“You should run the numbers to see if you’re cash-flow positive.” If the answer is no, you must consider whether you can afford to lose that money. ” Hooper explained.

That’s why Hooper emphasized the importance of being willing to buy outside of Toronto and looking into growing communities with the potential to appreciate value over time.

“I strongly advise investors to look elsewhere,” Hooper said, “because places like Cambridge have lower land transfer tax and ‘cheaper’ prices.” “You can have better cash flow and sell it later for a higher price than you paid for it.”