Toronto Income Property Newsletter: February 2012

A few postings ago, I wrote about being patient if you are looking to buy an investment property in Central Toronto.  I had no idea how true this would be for the start of this New Year. Demand is still greatly outpacing the current supply, and some of the recent sale prices have defied logic.  Take a moment to check out the “Sold Income Properties” on the Plex homepage to see how the market has been performing in your neighbourhood.  If you would like to have more detailed sales info on a specific area of the city sent to you, please send me an e-mail.

I’d like to wish all of you a Happy Valentine’s Day and if you are an NFL fan, all the best for a great Super Bowl party.

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The income property market in Toronto has indeed started off this year with a bang. From everything that I have seen over the past three weeks, 2012 is looking a lot like last year – high prices, multiple offers and a lot of overall action. There’s no doubt in my mind that the market is still favouring sellers and it will take longer for most buyers to find quality plexes that make fiscal sense.  We do expect more inventory to come on-line in the next few weeks, but the lack of suitable properties for January has been very frustrating.

Interest rates continue to be at all-time lows and it doesn’t seem like they are about to go up any time soon.  When you can lock in for four years at less than 3%, that’s going to help affordability and fuel a strong demand.  I also still believe that if the market cools down as many experts figure will happen, the prices that we have seen over the past couple of years will still hold.  I do not anticipate a reduction in the prices of plexes in prime locations.

One in six Canadian homeowners and investors who responded to a recent study said they planned on investing in property in the next two years.  The study, commissioned by Re/Max, found that single-home purchases were the most popular investment, followed by multi-unit buildings, condominiums and townhouses. Of those who planned to invest in real estate, close to 30 per cent already owned a home and 43 per cent were under age 40.  Michael Polzler, executive vice-president of Re/Max Ontario – Atlantic Canada Inc., once said Canadians are by nature conservative investors and like the predictable returns real estate offers, even if they might be a better bang for their buck in equity investments. “It has an allure,” Polzler said.  “You can write off your expenses and you know what you have.”

Carl Gomez, an economist with Toronto-Dominion Bank, offers an opposite view. He states there has been a “big rush to real estate” in recent years, thanks to rising prices, low interest rates and poor returns in equity markets, but he is not convinced that trend will hold indefinitely.  “People go where the returns are,” he said.  “The tide might be turning.”  If the tide does in fact start to turn, I’m sure that we on the investment side of the Toronto market will see the signs well in advance.

One factor that continues to push sales of income properties is that we have a fantastic (read low) vacancy rate. In my opinion, this is something that is not likely going to change for some time.  Some people think that there are tons of empty apartments out there, thus making investment properties an unsure bet. This is simply not the case – at least, not in the core of the city.  You may not get a crush of renters in December or January, but once the snow clears, there are always renters out there.

The vacancy rate in the fall of 2010 was around 1.8%. The Toronto Shelter, Support and Housing Administration published that 579,010 households in Toronto are rentals. I had a client call me last month looking to rent a two bedroom and wanted to spend around $1500 a month.  I couldn’t find anything on MLS or on www.viewit.ca so I called a few clients who I knew had multi-unit buildings.  No one had any vacant units.  When I show income properties to clients we do see vacant suites.  In many cases though, the owner chooses not to rent it out, in case the buyer would like that suite. It’s also awkward to tell a new tenant that the building is for sale – it sometimes makes the renters feel nervous.

Some analysts see downward pressure on rents should the market level off.  “The volume of incentives has softened a bit and landlords are pulling some of them off the table, such as free rent, free parking, or renovations.  This is good news for real estate investors.” quotes a CMHC source.

Average rents in Toronto held steady between 2010 and 2011 and are virtually unchanged since the late 2000s, says a report by Clayton Research Associates Ltd.  Aggressive recruiting of tenants helped fill vacant units.  Even better times may be ahead for landlords, because of continuing strong immigration and a widening gap between renting and owning. “Overall vacancy rates will decline over the medium term,” the report concludes, “thereby allowing landlords to pass rent increases through more easily in the future.”  Interestingly enough, rental rates haven’t gone up that much.  A 2-bedroom apartment rents at an average of 1395.00 per month and this number has by and large been the same for a few years now.

Take a look at the following vacancy rates in this chart provided by CHMC.

Private Apartment Vacancy Rates (%)
	2007	2008	2009	2010
Barrie	3.2%	3.5%	3.8%	3.4%
Brantford	2.9	2.4	3.3	3.7
Guelph	1.9	2.3	4.1	3.4
Hamilton	3.5	3.2	4.0	3.7
Kingston	3.2	1.3	1.3	1.0
Kitchener	2.7	1.8	3.3	2.6
London	3.6	3.9	5.0	5.0
Niagara Region	4.0	4.3	4.4	4.4
Oshawa	3.7	4.2	4.2	3.0
Ottawa	2.3	1.4	1.5	1.6
Peterborough	2.8	2.4	6.0	4.1
Sudbury	0.6	0.7	2.9	3.0
Thunder Bay	3.8	2.2	2.3	2.2
Toronto	3.2	2.0	3.1	2.1
Windsor	12.8	14.6	13.0	10.9

It is interesting to see how Toronto compares to other Ontario towns.  Clearly, while some cities have seen the vacancy rate increase over several years, in Toronto that hasn’t been the case.

Toronto Income Property Newsletter - January 2012

Happy New Year everyone! I’d like to personally wish you and your family all the best.  May all your hopes and dreams come true in 2012 and may you have a truly fun and memorable year.  I look forward to seeing many of you in the upcoming months.  I will continue to be your eyes and ears for the residential income property market in the Toronto downtown core.  As always, if any of you have any landlord or income property market questions, please feel free to shoot me an e-mail at any time.

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 As is customary at this time of year, I’d like to look ahead to try get and get a fix on what we might expect over the next few months.  Many of you know that the real estate market in Central Toronto has been a very robust sellers’ market, characterized by multiple offers and prices reaching all-time high levels in top areas.  In fact, recently the Economist Magazine branded Canada one of the nine countries where “home prices are overvalued by about 25 per cent or more,” and among the four where prices are in line with those in the United States "at the peak of its bubble." This has many people concerned that real estate in Toronto is over-valued and that they should avoid the market.

Should this give those of you thinking about a real estate purchase in 2012 a real cause for concern?  I don’t really think so.  I don’t believe that we are in a traditional bubble and heading for a sudden crash.  While prices are still high, I still anticipate strong demand since interest rates are still quite low and we don’t have the same kind of subprime mortgage crisis as they do in the U.S.  Some thought that prices were starting to soften a little at the end of last year anyway, so perhaps there may be a little leveling off. I predict that the income property market in Toronto will look very similar to the past six months – the best properties will continue to be popular since they still make a lot of sense to own long term.  I still believe that if you can obtain real estate with 20% down and have your tenants completely cover all of your costs, then it makes sense to pursue if you can handle the responsibilities of being a landlord.

The duplex and triplex market will still see cap rates dip under 5% in the prime neighbourhoods, since the rental market continues to be very strong.  Being a landlord is still a very good way of acquiring passive income.  Prices will continue to be expensive in the downtown areas close to the subway stops. Overall prices dropping by 10 to 20 % seems like a real stretch to me, especially on income properties, so I just don’t see it happening. On the other hand, I don’t expect prices to go up too much more either.  Let’s see what the next six months bring.  Keep an eye on the resale condo market.  So long as that market is still moving along at top speed, then I think the income property market is safe. Keep checking back in with me and I will continue to update you with Toronto income property sales activity.

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I have found in my travels that there a good landlords and then there a great landlords.  Great landlords go that extra step to make sure that their tenants are comfortable and their live-in experience is as enjoyable as possible.

Once you have chosen a tenant and signed a lease, here are ten things that you should do as a landlord prior to renting out your suite:

1.    Make sure that the suite is clean and free of all debris. If need be, give the suite a fresh coat of paint. Ensure that all light fixtures are operational. It doesn’t hurt to leave a few extra light bulbs in the suite.

2.    Put together an inventory of all furniture and fittings, and make sure the tenant agrees and signs it before they move in.

3.    Leave instructions/manuals for all appliances that will be left at the property, including cookers, washing machines, fridges and freezers. Not only is this helpful for the tenant, it'll save you having to answer phone calls about how to turn the dishwasher on! "

4.    Make sure that everything meets fire code and that your extinguishers, carbon monoxide detectors and smoke alarms are all in good working order.

5.    Compile a list of emergency contact numbers for your tenant, including your own.  It is also wise to put together a trouble-shooting sheet so tenants know how to react in an emergency.

6.    Before a tenancy, take meter readings and transfer all utilities to the new tenant.

7.    Explain to your new tenant how to use any safety equipment, such as fire extinguishers and alarms, plus point out any fire doors or window locks and show the tenant how to work the burglar alarm, if you have one.  Also, show the tenant how to use the laundry machines (if necessary).

8.    For that added personal touch, put together a useful welcome pack for your tenant. This could include information such as how to use certain items and when the bins are collected etc. It usually gets the relationship between the landlord and tenant off to a great start and, unfortunately, not enough people do this.

9.    Establish good lines of communication with your tenants. Ensure that the tenant knows what is expected of them during the tenancy and make sure you know what they expect from you too.

1. If possible, introduce your tenants to everyone else in your building and the neighbours.  This will make everyone feel more comfortable and safer.

Toronto Income Property Newsletter - December 2011

Season’s Greetings everyone! I would like to wish you, your family and all your friends the warmest wishes for a safe and happy holiday season. I'm looking forward to taking some much needed down time over the upcoming break. For those of you who don't know, I built an audio recording studio in my basement this year, so I look forward to hanging out with some of my musician friends to make some noise. I'll be back in January with a detailed look back at the income property market in 2011 as well as predictions for what we can expect in 2012. Take care and all the best.

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As many of you who follow my postings are aware, the Toronto income property market has essentially been hot all year long. At a time when the overall economy is still suffering, unemployment in the US is at all time highs and Europe is on the brink of a financial collapse, it is quite paradoxical that our market continues to be so hot. Interest rates are low everywhere so that doesn't fully explain why the Toronto market has been so robust. I still believe that Toronto is a magnet for new immigrants and the lack of quality rental inventory has made the existing stock more desirable. I can verify first hand since I am in the field daily that there have been fewer duplexes and triplexes for sale over the past three months than I would have expected.

October existing home sales in the greater Toronto area market soared 17.5% from a year ago, the Toronto Real Estate Board says. The Toronto market numbers have been credited with boosting the national average price at a time when the Vancouver market has slowed. Jason Mercer, the Toronto Real Estate Board's senior manager of market analysis, says "seller's conditions" are in place throughout many parts of the GTA. "Thanks to low interest rates, strong price growth has not substantially changed the positive affordability picture in the city of Toronto and surrounding places," said Mr. Mercer.

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We all know about Riverdale, the Annex, Little Italy, Bloor West Village and all the other tier one rental neighbourhoods in central Toronto. But have you tried to buy a duplex or triplex in one of these areas lately? It is almost impossible to find anything decent in the $500K range. It is still even
tricky in the $600 range. If the rents in these areas don't increase proportionately to the sale prices (which they often don't) then as the prices increases the investment value decreases. It is ideal to buy something for under a half a million since these properties usually provide better bottom line returns.

So where are all the plexes for under $500K?

If you work hard and put yourself at the forefront of all buyers by staying on top of the market, you can still find properties in the $400K range, I will look at three areas that may be particularly interesting to the income property investor. I have mentioned these neighbourhoods before in past newsletters and I still believe very strongly in them. These are neighbourhoods that I have spent lots of time over the last few years getting to know better, surveying the rental market and their demographics.

These are areas to keep zero in on if you are looking to land between $350K & $500K.

i. Leslieville 

This is the area in between Carlaw and Coxwell, from the railway tracks just north of Gerrard down to Eastern Avenue. Leslieville is situated around three of the more popular east districts, namely the Beaches, the Danforth and Riverdale, which are all popular rental destinations. The Toronto Film Studios on Eastern will be transformed into retail in the future. Little India on Gerrard has become a very popular spot.  Given the proximity of Leslieville to downtown, the Gardiner & DVP and all of the amenities that the East side offers, many new owners have been renting out their properties. Leslieville is well served by the public transit system which operates buses and streetcars on Carlaw, Jones, Greenwood, Eastern as well as Gerrard and Queen Streets. Most of these bus routes link up with stations on the Bloor-Danforth subway line, which is of great benefit to renters.

ii. The Junction

The Junction Triangle located just northeast of the Annex is bounded on three sides by railway lines that enclose the entire neighbourhood in the shape of a triangle. The key boundaries are Dupont and Bloor to the north and south, and just west of Lansdowne over to Dundas Street West (which curves north by this point. The main streets are Perth, Symington, Wallace and Campbell. Like Leslieville, the Junction is ideally situated in between two very popular rental areas, namely the Annex and High Park. Most of the housing in the Junction has already been converted to two and three family dwellings - with numerous choices of inventory relative to other pockets of Toronto. I have seen new loft developments in the Junction as well as many new businesses opening up on Bloor Street West. Given that it's only ten minutes to downtown and it sits on the Bloor subway line, this has become one of the top areas for renters.

iii. Belgravia &  Dufferin/Eglinton

 This is the area just west of the Allen Expressway going north and south of Eglinton Avenue West up to Lawrence - the main artery being Marlee Avenue running north to south. The interesting characteristic of this area is that it is adjacent to some of the finest homes in Toronto to the east. The creation of the Forest Hill Lofts and adjoining condo town homes on Castlefield shows that the development has now moved over to the other side of the Allen. The proximity of the subway going up to Yorkdale and to downtown is quite attractive to renters. There are many income properties already in the area that can be purchased for lower prices than properties to the East. I have also seen custom homes starting to be built in this quadrant as well, suggesting the buyers are interested in moving further west heading towards Dufferin.  South of Eglinton, going east and west of Dufferin down to Rogers Rd. still offer relatively affordable prices.

For the real estate investor who is looking for a long-term situation and does not have an abundance of start-up capital to invest, these areas can provide quite a profitable solution. They have become more popular for renters many with new cafes and they are all fairly close to the downtown and midtown cores.       

Toronto Residential Income Property Newsletter: November 2011

What is the key to success in the real estate investment business? One word: Patience. Many of my clients have endured a rough ride this year with the lack of too many good duplexes and triplexes. The key, quite simply, is to hang in there. I strongly recommend to my purchaser clients that you don’t get frustrated with the market and the poor returns and just stay the course. Eventually, with a lot of hard work and a little bit of luck, your property will turn up. I’ve seen it happen too many times, that just when you think you will never find the right opportunity, that there it comes right around the corner. The old saying “good things come to those who wait” can be very true indeed in the income property business.

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This month I’d like to look at a segment of the Toronto real estate market that I often don’t report on too regularly. As you know, at Plex we are very active with duplexes, triplexes and multiplexes as well as “fixer-uppers” that may have profit potential. One other area that can also have good investment potential is with mixed-use buildings – retail storefronts with two or three apartments and/or offices above.

Most of these properties are on popular retail strips like Queen, Bloor, College and obviously Yonge St. There are also little strips like the Forest Hill Village, the shops on Bayview south of Eglinton or at the top of Coxwell in Leslieville. Many neighbourhoods have retail strips that offer every good and service imaginable. Some areas are more known for specialties – for instance restaurants on the Danforth, or on College in Little Italy. Most of the time these buildings fall under the I.C.I. umbrella (commercial rather than residential) even though there may be residential rental apartments above the main floor retail space.

These properties can be quite interesting for someone looking to live-in or for the absentee investor. The market for these mixed-use buildings has been similar to strictly residential properties over the past few years insofar as lower bottom-line returns and negligible cap rates. My advice is to make sure that if you buy a mixed-use building that your main floor retail tenant is on a long lease and that their business is strong, unless of course you have a business to operate out of the main floor yourself. Most of the properties derive the bulk of their income form the main floor lease and it would be difficult to immediately make up that rent if the tenant leaves before the end of their rental term. It is much easier to find a residential tenant than a commercial one. The commercial rental market has softened a little following the recession we just endured. It is not uncommon to see more and more unrented storefronts these days.

Remember too that every new tenant is going to want to build to suit, so that cost is likely going to cost you months of free rent. It is usually the tenant who pays for major modifications to the premises, but you have to be aware of how these changes may affect the value of your building if they suddenly disappear. Also, most of these properties are on busy main streets, so keep that in mind if you intend to live in a property above a store front.

My clients have asked where the mixed-use retail market is going since commercial borrowing rates continue to be very favourable. So far in 2011, the market for these buildings has been strong and the bottom line cap rates are similar to the residential plexes. In other words, they don’t really offer any more investment benefit than apartments in traditional homes.

Experts believe that REITs (real estate investment trusts) are great indicators of where the commercial market is going. A couple of years ago many thought that the overall commercial prices would start to drop, yet that didn’t really happen in Toronto’s core. This is quite interesting because there is no indication that this is happening yet on either the residential or commercial side.

So does that mean that a storefront with two units above it will be a better buy this year than a regular triplex? Quite often I will highlight duplexes or triplexes that trade for over-asking and comment on how the investment value gets thrown out the window.

I’d like to look at some of this year’s activity that may shed light on what’s happening with these kinds of properties:

Here are all the 2011 sales in C01 west of Yonge Street south of Bloor, specifically categorized as stores with apartments or offices above. These include shops on Bathurst, Ossington, Dundas West, Queen West, College St and others.

Field	Count	Mean (Average)	Median	Mode	Low	High
List Price	11	$1,117,173	$999,000	n / a	$439,000	$2,250,000
Original Price	11	$1,120,809	$999,000	n / a	$439,000	$2,250,000
Sold Price	11	$1,080,000	$975,000	n / a	$400,000	$2,130,000
% List	11	96.36	98	98	88	103
Taxes	10	$10,743	$10,156	n / a	2779.2	$22,934.97
Bedrooms	0	n / a	n / a	n / a	n / a	n / a
Washrooms	4	4	4	n / a	2	6
Days On Market	11	93	44	44	13	472

Note that there were only eleven YTD sales in this, the most popular downtown retail area. The largest sale (over $2M) causes the average price to go into the million dollar range. Most sales are in the $700K range but they tend to be further west towards Dufferin. Obviously to closer to Yonge, the more expensive the buildings become.

Here’s the same analysis for mixed-use buildings on the east side of the DVP. These would include sales on the Danforth, Broadview, Gerrard, Pape, Coxwell St. Clair East & many on Queen Street East.

Field	Count	Mean (Average)	Median	Mode	Low	High
List Price	30	$632,010	$558,500	n / a	$289,000	$1,690,000
Original Price	30	$635,177	$568,500	n / a	$289,000	$1,690,000
Sold Price	27	$585,333	$539,000	$825,000	$329,000	$1,590,000
% List	27	98.07	97	97	81	181
Taxes	28	$9,399	$8,397	n / a	$2,358.62	$29,245.12
Bedrooms	0	n / a	n / a	n / a	n / a	n / a
Washrooms	16	3.3	3	3	2	7
Days On Market	30	65	52.5	9	3	24

The average sales prices are lower than on the west side. The highest sales here are Queen St in the Beach and prime larger buildings on the Danforth. The average for a small building with one apartment above seems to around $600K.

I think that the bottom line is if a mixed-use building is throwing off better numbers than a completely residential multiplex and has good lease(s) in place, then it should be considered seriously. I prefer all residential just from a rentability point of view but remember that investment real estate is all about the returns. If cap rates start to get noticeably stronger on mixed-use buildings, I will start steering more of my clients in that direction. It hasn’t happened yet, but as I pointed out earlier, it may.