The federal budget has earmarked $11.2 billion for affordable housing. TD Economics predicts a 25% increase in price. Chit chat about a real estate bubble has long been heard. Rumours of foreign buyer tax continue to spill over in the news.
But today let’s talk about investing… rather… speculating in Toronto real estate.
Let’s throw the basics of investing out the window
The average price of Toronto homes continue to defy logic. Double digit price growths. Homes doubling in less than five years.
Could this really keep going forever?
Investing is based on sound principles and proven models. Sure, there’s risk associated with it. But it’s calculated risk.
When it comes to real estate, invest in something that will appreciate over time and generate positive cash flow. If you put 20% as a downpayment, your real estate investment should, at the very least, break even or generate a decent positive cash flow. Earn your rental income. Subtract the carrying costs (mortgage, property tax, maintenance, insurance). And pocket a bit of cash every month.
And let’s also consider principal pay down. Every month, your renters are paying your mortgage and the amount you owe goes down over time.
Appreciation? Definitely. Whether your property appreciation is in line with inflation, or follows the average price growth (which is about 7% per year in Toronto real estate), the value of your property could only go up, right?
How does speculating in Toronto real estate look like?
Let’s take ‘investing’ to a whole new level.
How about this. Let’s buy a property, hold onto it, and hope it goes up 22% next year. Or wait, why not wait five years so it doubles?
And forget about earning a positive cash flow. Who needs money every month anyway?
Why don’t we put our money in, let’s say 20%, and forget about whether or not the monthly rent covers our carrying costs.
Sure, you might have to plunk $500, $1,000… or more every month because rental income isn’t enough to pay for mortgage, property tax, maintenance of your property, and property insurance.
But who cares, right? The property you just bought will jump up 25% in a year anyway.
Hopes and dreams
Since the Toronto real estate market is on a roll, is it fair to assume it’ll be like this forever?
Speculators sure think so. Instead of using sound investment practices, they’re trading in positive cash flow with hopes of continued price appreciation.
The problem with this aspiration is nobody knows when it’ll stop.
The government has been talking about a foreign buyer tax after what has happened in Vancouver.
And the solution to reigning in the wild forces affecting housing affordability have slowly shifted to slapping a tax on speculators instead of foreign buyers.
So let’s define what this tax would look like.
If you buy property and sell it within a certain period of time, then you’re speculating in Toronto real estate. And you’re going to get hammered with a speculation tax.
The government doesn’t want you to drive prices up because of careless speculation.
They want to be fair to legit buyers who want to live and thrive in Toronto.
So if you’re just betting on prices going up, and you’re holding onto your property just to flip it to the next person paying a higher price than you, it’s going to cost you.
Does it still make sense to invest?
Maybe if you’re looking outside of the Greater Toronto Area.
A recent report by Realosophy shows that about 90% of homes bought as investment properties in 2016 are NOT generating profit.
If you’re investing in property in hopes that prices will keep going up (knowing that real estate is cyclical), I don’t want to burst your bubble. But there’s a great chance you could lose money if and when prices cool off.
You can’t directly control supply and demand. Those are market forces.
You certainly can’t tell what the government to do.
Mortgage interest rates will go up at some point in the future.
What you have power over is what you do with your money.
If you really want to invest in real estate, use sound investment practices. Don’t just gamble.
Make sure you buy at the right price. Earn a decent positive cash flow. And look at investing as a long term practice. Not just a roll of the dice.