Condominiums are the most attractively priced properties in Toronto and the GTA for people looking to take their first steps into the rental property market. But there are special considerations and pitfalls that you need to keep in mind when purchasing a condo as an income-generating property.
Before you buy: Check that you are allowed to rent to tenants
Each condominium property has a condominium board that sets specific rules and regulations for the property. Some may not allow long-term rental of the property, and almost all do not all short-term rentals (e.g. AirBnB) on the property. If there is any doubt about anything you are reading, contact a member of your condo board to clarify, ideally before purchasing the property.
Can you make your tenant adhere to condo rules?
While you are going over the document, ensure that the rules are reasonable enough that you can ask your tenant to follow them without violating their rights under the Residential Tenancies Act. Most rules aren’t egregious, but it is the owner and not the tenant that is responsible for ensuring that the rules are adhered to.
Do a price check on condo fees and historical increases
Setting your rental rate is one of the most important steps to ensure that your income property is actually generating income. Check how much condo fees go up each year and make sure they are built into your rental rate, in addition to any projected fee increases in the future. You can guess at this reasonably by looking at historical increases for the past few years, and some condominium agreements have fee increases built in to the agreement.
Get condominium and rental property insurance
While your insurance broker or agent is the best guide for this, you will need both condominium and rental insurance for your property. Condo insurance has additional items built in for damage to common areas, and rental insurance covers your use of the property as a rental property. On the plus side, condo insurance is typically less expensive than traditional home insurance.
Watch out for clashes between condo rules and the RTA
A common example of where you can run into problems is a tenant who decides to purchase a pet after they move into the unit. Many condos have strict no-pets policies. However, under the Residential Tenancies Act (RTA), you cannot evict the tenant for having a pet. The condo board is well within its rights in this situation to bring action against you, the property owner, and not the tenant. This is why you have to step up tenant screening for a condo property, and preferably have it done by a professional Toronto property management company such as Highgate. It is possible to find the right tenant that won’t bust condo rules on a whim, but you have to know what to look out for; most first-time rental property owners don’t.
Set an emergency fund aside for non-payment of rent
If your tenant isn’t paying rent, the condo board is still going to want its fees to be paid, and can register a lien against your property if they aren’t paid. To avoid this, make sure you set aside an emergency fund to cover things like condo fees, minor repairs in the unit, and so on. Again, a professional property management company can help you find the right tenants that will pay rent reliably and on time.
If you want to sell or rent a property, you have to make it look good. While cleaning between tenants is a no-brainer, there are additional considerations to take into account when staging a property for viewing. (more…)
The Toronto Real Estate Board’s June Market Watch outlined a number of key trends in Toronto and surrounding area real estate. An increased supply of listings has led to less price growth than we have been used to seeing in the market, but the price growth is still healthy at 6.3% year-over-year.
The Ontario government recently introduced the Fair Housing Plan, which includes sweeping legislation for the real estate market – most of which will have an impact on landlords in Ontario. One of the measures was the Non-Resident Speculation Tax (NRST) of 15%, which is meant to curb speculation by foreign investors in southern Ontario.
The brass tax of the NRST
The NRST has been in force since April 21, 2017. It imposes a 15% tax on real estate purchases of any property that would be considered a single-family residence that is purchased by a foreign national, entity or corporation. The full text of the NRST is available here.
Refugees and immigrants are not subject to the NRST. Additionally, a rebate program is available for foreign nationals who obtain Canadian citizenship – they can receive a rebate of the tax if they become a citizen within four years. Students enrolled in a Canadian institution for at least two years are also exempt from the NRST. A foreign national student would only receive the rebate after two years of full-time attendance at a Canadian university or college.
The NRST’s geographic scope expands well beyond Toronto and the GTA. It includes the following municipalities:
Vancouver foreign buyer’s tax sparks GTA’s NRST
After a foreign buyer’s tax of 15% was levied to cool housing prices in Vancouver, there was evidence that firms marketing Canadian real estate shifted their focus to Toronto. However, the Toronto Real Estate Board surveyed Toronto area Realtors and found that only around 5% of real estate transactions conducted in 2016 were from foreign buyers.
Around a quarter of those purchases were rental investments, with the rest being purchases of homes for the individual or a family member. The percentage of foreign buyers was much higher in Vancouver – it was just above 15% before the B.C. government introduced its foreign buyer’s tax in 2016. It subsequently dropped to about 4% as of December 2016 – only a percentage point below the TREB’s estimated percentage of foreign buyers in Toronto and the GTA.
The Ontario government first showed a distaste for introducing a similar tax in 2016, preferring to let market forces prevail. However, winds changed as the public became increasingly concerned with skyrocketing housing and rental costs in Toronto and the GTA and the Fair Housing Plan was introduced in April 2016 with the NRST as a prominent plank in the Plan.
Various Reactions to the NRST
The Toronto Real Estate Board didn’t have anything specific to say about the NRST in its statement reacting to the Fair Housing Plan, but did say that more empirical data is required before policy decisions are made. We didn’t really know the numbers of foreign nationals that were buying into the Toronto and GTA markets prior to the enactment of the Fair Housing Act; that data will be available to the government once the Plan has been in force for a few months.
Tim Hudak, CEO of the Ontario Real Estate Association, had this to say about the NRST. “The main culprit behind rapidly rising house prices is the GTA’s unbalanced market – housing supply cannot meet demand – not foreign buyers.”
TD Economist Beata Caranci argues in favour of the tax, stating that it has worked well in international jurisdictions such as Hong Kong, Singapore and Melbourne to cool housing markets but not to slow them down. However, she added in a joint statement with other TD economists that “Ultimately, it is unknown what degree of home sales are related to this speculative behavior.”
Will the NRST cool a hot housing market?
Tim Hudak’s argument for supply not meeting demand seems sound, but it remains to be seen how much of that demand was generated by foreign investors. Parsing it out further, how much of that demand is being generated by foreign investors speculating on the market? If 25% of homes purchased by foreign nationals in 2016 were rental property investments, that’s an income-generating venture which allows for more rental supply for tenants, not speculation.
Until the data comes in, we won’t have any numbers – and that is the TREB’s point. The B.C. government did it right by gathering data prior to enacting its legislation, and found that a high percentage of property purchases were coming from foreign buyers. The Ontario government has put the cart before the horse, and will no doubt reap the tax rewards of such a move, but it isn’t evidence-based policy decision making.
One thing is certain – the NRST is an effective tool to curb speculation for those who were looking to speculate in the Vancouver market and shifted gears to Toronto. However, the number of transactions which occurred because of that shift is unknown – we’ll know soon enough. In the meantime, bidding wars will continue in Toronto and the GTA, and the only change is that foreign buyers may not be parties to those wars.
An economist at BMO Capital Markets recently said that the real estate market in Toronto and surrounding areas is a bubble market. And while rising prices and dwindling supply have been a fact of life in the Toronto real estate market for the past couple of years, it has to be argued that we’re not in striking distance of where it is possible for the bubble to “pop”.
With the new mortgage rules which effectively knock down the price of entry to the real estate market for first home buyers or home buyers on a limited budget, it isn’t surprising that condominiums saw the highest growth rates of any property type in October.
The Toronto Real Estate Board’s October Market Watch was full of more of the same, with 11.5% growth in year-over-year number of transactions across Toronto and the GTA. The only difference was that this growth was mostly fueled by condo sales.
Condo sales in GTA are exploding
The number of condominium sales in the Greater Toronto Area increased by 28.3% year over year, while Toronto condos clocked in at a 19.8% increase. This can be explained in a very simple way – if you are priced out of the detached or semi-detached home market, you are likely going to purchase a condominium in Toronto if you can afford it, and in the GTA if you can’t. The average price for a Toronto condo is $100,000 more than the average price of a condo in the GTA – a significant and palpable difference to a first-time or tight budget buyer. At an average price of around $359,000, a GTA condo is the last bastion of affordability in the area market for a buyer with a single income.
Rates of price growth skyrocketing due to lack of supply
Despite the explosion of condo sales, if we go by the rate of price growth, detached homes are still the most desirable commodity in the local real estate market. Condos only went up by 12.5% in October, while detached homes went up by 25.8%.
Jason Mercer, Director of Market Analysis for TREB, explained the phenomenon. “Until we experience sustained relief in the supply of listings, the potential for strong annual rates of price growth will persist, especially in the low-rise market segments.”
Detached homes are bound to face a continued lack of supply because it is more profitable for a builder to build a condominium building than a detached or semi-detached home in the current hot market, especially where land is at a premium in Toronto.
Is the foreign buyer tax in Vancouver driving sales in Toronto?
Although the TREB had promised a review of this to come later in 2016, we haven’t seen it yet. It will be up to the TREB to determine if correlation is the same as causation in the matter of Vancouver home prices plunging while Toronto home prices increased in October, although it’s hard to imagine that the Vancouver foreign buyer tax is having no impact at all given the sharp contrasts between the increases and decreases – Vancouver’s overall home sales slid by 38.8% in October. This could also be a result of the new mortgage rules making new properties in Vancouver officially unaffordable to those with an average middle-class income, especially since prices in Vancouver are higher across all property types.
How the new mortgage rules factor in
Realistically, the new mortgage rules only affect first time homebuyers or buyers on a limited budget, as stated above. While they were touted as a means to cool the hot housing market – which they may have done in Vancouver – in Toronto they seem to be driving these buyers into condominiums. Those at the upper end of the market who can afford a detached or semi-detached home in the area will be largely unaffected by these mortgage rules, and this could be why home prices continue to appreciate in the detached and semi-detached categories at a high rate.
New rules on mortgages were just introduced by the federal government October 17th to make sure that new homebuyers are not taking on more debt than they can afford with a potential rise in interest rates. (more…)
September’s Toronto and GTA real estate market continued upward trends both in price and number of sales, with double-digit gains happening on price and sales in nearly every category.
Also on-trend were the categories where significant gains were not realized. Detached and semi-detached home sales in Toronto posted a 4.7% increase and a -3.5% decrease respectively. The Toronto Real Estate Board said that this was due to a lack of inventory in these areas.
TREB President Larry Cerqua said “We continued to see strong demand for ownership housing up against a short supply of listings in the Greater Toronto Area in September. The sustained lack of inventory in many neighbourhoods across the GTA continued to underpin high rates of price growth for all home types.”
Keeping an eye on new mortgage rules, but inventory is the issue
Average selling price across the board was up by 20.4% year over year – the average price of any type of property is now $755,755. Recently announced rules for mortgages were announced go into effect October 2016, and while the TREB is keeping a watchful eye, it maintains that a lack of inventory is the key driver in the upward pressure on home prices.
The new mortgage rules impose a “stress test”, which measures a mortgage applicant’s financial qualifications not against current market rates, but against a higher five-year rate. While these rules were already in place with applicants with a smaller down payment, the federal Government imposed these rules on all new applicants in an attempt to cool the red-hot housing market and insulate the market – and homebuyers – against potential interest rate hikes.
Where new mortgage rules may impact
The new rules may not reduce the demand for pricier detached and semi-detached homes in properties in the 416 area code due to the need for a significant salary and down payment to gain entry to one of these properties. However, it is hard to believe that the new rules won’t put pressure on the lower end of the market, specifically any townhomes and condo properties across the region, and some semi-detached homes in the 905. Younger families may have to start out in a condo or townhouse rather than starting off in a family-sized home. Young professionals may have to rent a little longer, or draw on the bank of Mom & Dad to either purchase a property or live at home for longer than usual.
While it is true that these new rules were introduced to safeguard the future financial wellbeing of those on the lower rungs of the property ladder, it will mean that some may not even be able to climb up on the first rung – which is frustrating both for potential first-time homebuyers and the real estate market. It may force downward pressure on prices at the lower end of the market so sellers can meet the needs of the demographic they were hoping to sell to, but only time will tell.
Real estate in the Greater Toronto Area and Toronto continued to appreciate in terms of price and number of units sold in August 2016, according to the Toronto Real Estate Board (TREB). The amount of properties sold increased year-over-year by 13%, while the average home price increased to $710,410, a huge 17.7% increase. This is on-trend for the year, with consistently increasing prices and a dwindling supply of properties. The average price of a detached home in Toronto is now well over a million, at $1,206,637.
“Population in the GTA continues to grow. The resulting growth in households coupled with favourable economic conditions and low borrowing costs means that we remain on track for another record year for home sales. Against this backdrop, TREB will also be releasing new third-party research, and consumer and REALTOR® survey results throughout the fall and winter, with discussions focusing on foreign buying activity and issues affecting the supply of ownership housing,” said Jason Mercer, TREB’s Director of Market Analysis.
There are three sure factors that are combining to create this perfect storm of increases – increased population, low borrowing costs and a limited supply of new properties on the market.
Mercer also mentioned a forthcoming analysis of another potential factor, which is demand from buyers who would have purchased properties in British Columbia, but are now being hit by the punitive foreign ownership tax for doing so. The assumption is that these buyers are now looking seriously at purchasing instead in Toronto, but that theory remains to be proved in the TREB’s upcoming report due in the last quarter of 2016.
What does the GTA look like?
Unsurprisingly, housing costs rising into the stratosphere in Toronto are driving buyers into the suburbs. Condos, townhomes and detached homes in the 905 have gone up in sales numbers between 24% and 26.8%. Condominiums in the GTA have only seen a modest price increase of 9.2%, making them much more attractive to first-time buyers and people with middle-class incomes.
The TREB has been beating the refrain that increased supply of properties on the market are a partial solution to the problem of rising housing costs – but realistically it will take some time for new units to be built. Additionally, many homeowners may be hanging on to homes as the price increases year-over-year have made any investment in real estate in the last five years attractive; they are not incented to sell when it doesn’t look like prices are going down any time soon, which further restricts inventories.
Be prepared for housing costs and sales to continue their upwards trend for the rest of 2016 – the only thing that could realistically stop this is a sudden increase in interest rates, which the Bank of Canada is not signalling as a possibility before the end of 2016.
According to The Huffington Post, “buying any type of residential property in Greater Toronto is 11.9 percent more expensive today than it was a year ago”. A recent article in The Vancouver Sun indicates that banks are currently monitoring the real estate markets in Toronto and Vancouver with thoughts of raising interest rates in order to control rising housing costs in the GTA and other major centres.
With the housing market being especially hot right now, it seems like the perfect time to sell. You own your own home but changing life circumstances are making you consider a change. You’ve had a child and now need more space, you’re considering retirement and need less space or you have been transferred for work and will be relocating. Perhaps you have concerns about potentially decreasing real estate values should the market cool significantly.
There are many reasons to consider selling but renting your property instead of selling is often a profitable and simple option.
Selling Vs Renting
Owning two or more properties requires an investment of money and time which is not ideal for everyone. Selling allows you to relocate without worrying about carrying costs and additional mortgage payments. And it can provide you with immediate income if you need it.
Renting your home can be a viable and profitable alternative to selling. Depending on your local rental market, it may be possible to rent out your property while your tenants pay your mortgage and even the additional expenses such as insurance and taxes. Since properties appreciate in value over time and price fluctuations in the real estate market tend to be short-term (in spite of what the media says), having the mortgage paid for by tenants can make rental properties an especially attractive investment.
Renting also offers the security of allowing you to keep that residence should you need to move back into it for any reason later on.
Before Becoming a Landlord
When considering renting your property, check your local rental market to see what similar properties in your area are renting for. Ensure that you will have enough income from the rent to cover all expenses you might incur beyond the mortgage such as property taxes, insurance, repairs and utilities. This will help you determine if renting is a feasible option.
Consider whether you can carry the mortgage if your tenant is late with the rent or skips out entirely. Factor in potential tenant damage to your property and major repairs like the heating system or shingling the roof.
Consider the Tax Benefits
One of the benefits of being a landlord is that you can claim tax deductions against your rental property. The Canada Revenue Agency has a list of the expenses you can claim which includes things like advertising, insurance and repairs.
A qualified bookkeeper can help you at tax time but remember that the more expenses you claim, the more you can reduce your taxes payable since you are required to claim your rental income. Maintain great records of all income and expenses and keep all of your receipts.
When in Doubt, Refer to a Professional
If you’ve decided to rent your property but have concerns about the time commitment, you can always hire a property manager to take care of it all for you.
A good property manager will vet potential tenants, collect rent and ensure maintenance is done on a regular basis. This can help maintain the value of your home in the long term. For many landlords this is a great solution since it frees them from those day to day concerns.
View Renting as an Investment
The real estate market can be risky and volatile. Done properly, renting your property can help manage those risks and provide you with an additional long term investment to add to your portfolio.