Investing in Toronto real estate to buy an income property is quite different from purchasing real estate you plan to keep as your home. The rules and costs associated differ, and so do your goals. There are a number of factors that you should consider before entering the market—from financial obligations to ideal investment locations—so we’re sharing our six most important tips for successfully investing in Toronto real estate here.

1. Determine your motivations for investing

The path you take to invest in Toronto real estate will differ depending on your goals, so in order to make the most of your time and money, get specific about:

  • Why you’re investing
  • What you want to accomplish
  • Your timeline

Are your goals short-term or long-term? Do you want to earn additional income to finance a special interest like a dream vacation? Or are you looking to become a real estate investor to grow your portfolio of assets? Maybe you’re planning for retirement.

Before you look at real estate investment opportunities, make sure you’re clear on what you want to accomplish and your timeline. Being specific about your goals will help determine the best strategy for you to achieve them.

A licensed real estate agent can help you plan for your investment, create a strategy, provide expert guidance for achieving success in the competitive Toronto market, connect you to helpful industry professionals, and protect your interests.

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2. Calculating your down payment

Down payment requirements vary depending on the home you’re purchasing, but when you’re buying an income property in Toronto the down payment is usually at least 20% of the property’s purchase price.

This is important to note because with property values in the city being so high compared to other areas, the down payment usually amounts to hundreds of thousands of dollars.

For example, if you’re purchasing a $1.2M house as an income property you’ll need a down payment of at least $240,000. You’ll want to make sure you develop a strong financial plan to reach your goal in the least amount of time.

When you work with an agent who’s experienced in real estate investments, they’ll create a tailored buying plan with you and connect you to trusted financial experts to help prepare your finances.

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3. The benefit of buying a primary residence first

This may sound counter-intuitive. However, because the down payment required for buying an investment property in Toronto is relatively large compared to other cities, it’s smart to enter the real estate market by purchasing a primary residence first.

Then, you can leverage the equity or profit you gain from your primary residence to buy an investment property. Purchasing a primary residence first means:

  • You won’t have to pay capital gains tax on the profit you earn from the sale of your primary residence whether or not this is your first real estate purchase. This means you’ll have more money to put towards the down payment of your next property.
  • If this is your first real estate purchase you can qualify for the First-Time Home Buyer Incentive and the Home Buyers’ Plan, two federal government programs designed to help first-time buyers purchase real estate.
  • You can qualify for a land transfer tax rebate if you’re a first-time home buyer.

Property values in Toronto usually increase considerably year after year. When you buy a primary residence your home will continue to appreciate while you live in it and by the time you’re ready to purchase an income property, you’ll have generated enough funds from the appreciation value to comfortably make a 20% down payment on a rental—while still having some money left over.

Calculate your potential costs

Investing in real estate requires strategic planning to be successful, so while you may be eager to purchase an income property immediately, it’s a good idea to consider purchasing a primary residence first so you can benefit from your home’s appreciation and the money-saving options available to you if you’re buying your first house.

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4. Buying a cash-flow negative income property

Almost every real estate investment opportunity in Toronto is cash-flow negative, so investing in Toronto real estate requires a different approach than most markets. This means you’ll actually lose money year over year because the cost of rent won’t cover your expenses (i.e. mortgage, property tax, house insurance).

So why invest? There’s a simple reason: the capital appreciation for a Toronto property is so high that purchasing an income property that doesn’t make you money in the short-term is still a worthwhile investment to make in order to secure the future profit or equity that you’ll gain.

As the Toronto real estate market is so competitive, purchasing a cash-flow negative property is a good strategy to secure your investment before property values appreciate further and you risk getting priced out of the market.

Watch our video on buying your investment property or primary residence first!

5. Should you invest in multiple income properties?

The short answer is yes.

The long answer is that one of the keys to successful real estate investing is diversifying your assets, because with multiple types of real estate investments you’ll be able to offset your costs and also create a long-term wealth strategy. One of the ways you can achieve this is by purchasing both a cash-flow negative and a cash-flow positive income property.

Learn more about why you should diversify your assets from our founder Michael Prior

The next thing to consider is the location of the second income property you’re looking to invest in. We recommend researching communities where the rate of return (cost of rent) is greater than the expenses (cost of maintaining the property). Cities in Ontario like Windsor and London still have real estate markets where you can find cash-flow positive investment opportunities.

6. Hire the right Realtor®

Hiring a real estate agent when planning to purchase any property is always advisable because you should have a professional representing and protecting your best interests. When purchasing an income property specifically, you’ll want to hire an agent with the practical experience of not only representing real estate investors, but being one as well.

As a team with this exact experience, The Prior Group can help you identify ideal locations for real estate investment opportunities, source the right property type for your particular situation, and help you weigh your options and determine the best course of action to help you exceed your goals.

Book an appointment with our team to discuss your real estate investment options

Investing in Toronto real estate requires careful planning and involves many moving parts. Before jumping into the market, meet with a real estate agent to discuss your strategy so you can create a tailored plan that’s specific to your individual goals.