HOUSE PRICES ARE DROPPING AND REAL ESTATE INVESTING IS LOOKING MORE ATTRACTIVE

HERE'S HOW TO DO IT RIGHT AND MAKE MONEY LONG TERM

Brayden Hooper has ambitious plans for growing his real estate investments over the next five years.

The Toronto mortgage broker bought his first investment property, a three-bed, three-bath condo in Cambridge, Ont., in October 2021 for $489,900, with a 20 per cent down payment. Renting it for $3,000 a month, Hooper is able to make a $300 monthly profit in what is called a cash-flow positive transaction — meaning, the investor isn't bleeding money.

He hopes to buy four more long-term and short-term rentals, including delving into Airbnb's and a mixed-used commercial property (a shop on the first floor and an apartment on the second).

Now, the biggest question for Hooper remains: When is it the best time to buy his second investment property?

"We're still waiting for the spring of 2023 for prices to fall

down even further," Hooper said.

Economists predict home prices could drop by 30 per cent from the February 2022 peak to spring 2023.

But if a good deal presents itself, Hooper is open to buying a property earlier. Being a mortgage broker, he is constantly looking for deals, which is his biggest tip to clients.

"Whether we're in a busy or slow market, if you're not constantly scanning for deals you could miss something," he said. "That's general good practice if you want to be a good investor."

It's investing adage that the time to invest is typically when the market is down because it's easier to enter the market when the asset is cheaper to buy. Since the February 2022 peak, home prices have dropped by more than 15 per cent in Toronto. However, mortgage rates have also tripled at the same time, meaning higher rates are offsetting lower home prices.

But higher rates aren't sticking around forever, said Ralph Fox, broker of record (a manager of a brokerage) and founder of Fox Marin Associates.

"We have higher interest rates to help offset soaring inflation and we know that will cause an economic slowdown," Fox said. "When that happens interest rates will also come down because it's not sustainable."

It's unknown when mortgage rates will come down, but when they do it will be a good time to invest, real estate experts say. Or, if home prices drop by another 10 to 15 per cent by spring, the costs could be low enough to mitigate the impact of higher rates.

What makes the market appealing now, according to Fox, is that buyers are facing less competition, with sales activity having dropped by a whopping 49 per cent in October 2022 compared to October 2021. It's becoming less of a seller's market and becoming a more balanced market for buyers, as there is currently less demand, Fox said.

"Buyers aren't having to compete nearly as much as the January and February 2022 market frenzy," he said, adding buyers can put more conditions on their offer such as a home inspection, and can have more time to negotiate with the seller.

An investment property should be bought with the intent to rent it out, not flip it, said Tom Storey, sales representative and team lead with Royal LePage Signature Realty in Toronto.

When prices are declining, it's not wise to flip a property as it could make less money on the resale. But if it's a rental, and is seen as a long-term investment — that means owning the property for at least five years, but ideally 10 years — then it will be a profitable investment, Storey said.

Currently, the average rent in Toronto is $3,360 for a two-bedroom apartment. And it doesn't look like rent is going down any time soon, experts say. Skyrocketing rent can help investors cover the higher mortgage payments, Storey added.

However, while rent is drastically up in Toronto it still won't be enough to make an investor cashflow positive — at best they can be cash-flow neutral, meaning they're not making any profit from the property at the end of each month, he said. That's because higher mortgage rates make it difficult to charge rent that will cover the monthly mortgage cost in addition to making a profit — the rent would be too high and above market value.

If the rent is too high, prospective renters will scout for landlords who are charging less and are likely taking a financial hit.

Ron Butler, mortgage broker of Butler Mortgages, warns that even being cash-flow neutral is dangerous. Investors must conduct a meticulous review of the economics of the rental before buying.

That includes: the monthly mortgage payment; the property tax and the annual rate of increase the municipality imposes on the tax; around one per cent of the property's value should be set aside for repairs; and 30 days of vacancy should be set aside in case the tenant leaves, Butler said.

Buyers also need to evaluate their cap rate, which is the cash yield you get from the property after accounting for all expenses but before mortgage payments. It's calculated as the ratio between the annual rental income to its current market value. The rate needs to be higher than the interest paid on the mortgage otherwise money won't be made.

Around 10 years ago the goal cap rate would have been six to seven per cent, Butler said. But now, southern Ontario has deviated so much from cap rates that it's about three per cent, he added. In the pandemic, when interest rates were as low as 1.5 per cent, it was possible to make a profit. But now, with interest rates close to six per cent, it's difficult to get a cap rate higher than the interest rate in urban centres.

To be cash-flow positive, Hooper said buying property outside of Toronto is a safe bet. That's why he bought a property in Cambridge, and is looking in places such as Ajax or Oshawa where property prices are cheaper.

It's a trade off, as homes farther from Toronto don't appreciate as much, but it means you can make a monthly profit, he said.

"I really encourage investors to look elsewhere, because places like Cambridge have lower land transfer tax and 'cheaper' prices," Hooper said. "You can have better cash flow and sell it down the road for a higher price than what you bought it for."