Hello,
I am currently renting apartment in Toronto and now I have two options:
1. Buy an investment property with 20% down far from Toronto
2. Buy a home for my family with 5% down somewhere close to Toronto

My goal in the future is to buy investment properties, but I just not sure what would be the best strategy for me, how to start.
Can you suggest what should be better? I read than I can't get HELOC for investment property, is it true?

As I mentioned in my book, buy the biggest house you can afford.

The reason: the gain is tax free, and you have to live somewhere anyway, so it might as well be in a nice house.

With limited land supply, cheap money world wide, a weak Can$ and strong in-migration of both people and cash, single family houses in big cities, especially Toronto and Vancouver will always be in demand and appreciate faster than outlying regions. Also, kids of baby boomers now buying while parents do not move to smaller towns but remain where they used to live for the last 30-50 years !

Maybe you’d better wait for a couple of years? Vancouver and Toronto property markets are significantly overvalued today. The Canada Mortgage and Housing Corporation has voiced fears that these markets are presenting signs of a bubble that will only recede if prices stabilize. According to https://tranio.com/canada/analytics/2016_outlook_residential_real_estate_market_in_canada_5105/ price growth is due to slow down to a sustainable rate in 2016. Read this article, maybe it will help you to make a proper decision.

AnnaDanishek said:

Maybe you’d better wait for a couple of years? Vancouver and Toronto property markets are significantly overvalued today ... price growth is due to slow down to a sustainable rate in 2016.

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Currently sitting in Munich discussing the very same effect in Munich (and many other quality Germany cities) with a friend with two kids in their late 20's: prices will continue to rise.

The reason: limited land supply, cheap money world wide, a weak Can$ ( or Euro) and strong in-migration of both people and cash ( from unsafe, undemocratic or undesirable places) plus kids of baby boomers now buying while parents do not move to smaller towns but remain where they used to live for the last 30-50 years ( smaller house or condo but same city or region ). So do not expect all Vancouver and Toronto baby boomers to depart to small boring cities in the middle of nowhere. Some will, but many won't !

Sounds like Calgary, AB a couple years ago

ThomasBeyer said:

Currently sitting in Munich discussing the very same effect in Munich (and many other quality Germany cities) with a friend with two kids in their late 20's: prices will continue to rise.

The reason: limited land supply, cheap money world wide, a weak Can$ ( or Euro) and strong in-migration of both people and cash ( from unsafe, undemocratic or undesirable places) plus kids of baby boomers now buying while parents do not move to smaller towns but remain where they used to live for the last 30-50 years ( smaller house or condo but same city or region ). So do not expect all Vancouver and Toronto baby boomers to depart to small boring cities in the middle of nowhere. Some will, but many won't !

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Hm... Maybe you are right

AlexShapo said:

I have two options:
1. Buy an investment property with 20% down far from Toronto
2. Buy a home for my family with 5% down somewhere close to Toronto

My goal in the future is to buy investment properties, but I just not sure what would be the best strategy for me, how to start.
Can you suggest what should be better?

Click to expand...

Hi,
Your plan to buy both is good. It doesn't really matter what property type you buy first.
Try to buy both within 1-2 years.
Thanks

With the little knowledge I have with real estate life cycles, I am sure all real estate markets (including Toronto and Vancouver) for all types of properties (including single family homes) will eventually have a correction.

Currently I do not see enough economic indicators to forecast a downtrend in Toronto & Vancouver area for single family homes. Eventually it will happen.

What we don’t know is:

1. When will the downtrend start

2. How long it would last. It could be for few months to several decades.

3. How much is the correction is going to be

If you are purchasing properties with positive cash flow from rental income, you could withstand the downtrend. The risk is if the population shrinks and you are unable to rent. With large diversified market such as Toronto, I do not forecast this for the next few years.

For now, invest in areas that you have specialized in and going up in value. When possible, remortgage or open a home equity line of credit. Educate and specialize yourself with other upcoming markets. Using the additional capital with remortgage or HELOC , pick other areas to invest. So when the initial market faces a downtrend, your portfolio could sustain and go up in value.

Before all these, identify:

1. Why do you want to invest in real estate

2. What is your target passive monthly income? What is your target asset value?

3. In what timeframe you want to achieve this

With the answers to the above questions, you could identify how many and what type of buildings you need to invest in.

If you purchase a large house in Toronto or Vancouver for you to live, you may not have any rental income coming and you could be in debt with large mortgage. You may be asset rich and cash poor. Optionally if you buy a large building in one of the top 10 cities that has good potential to appreciate, and have good positive cash flow, with the additional income, you could rent a bigger house in Toronto/Vancouver.

Even though it is your first house, if it is fully rented you may or may not qualify for tax benefits as first time buyer.

Why would there be a down trend ? What has to happen ?

A) people leave
B) interest rates go up substantially
C) banks stop lending
D) immigration stops

How likely is A - D in GTA and Vancouver area ?

I don't see any of A-D happening now or near future. But all market has the potential to face this sometime in future.

Nobody can forecast a downtrend. Everything is great until it isn't. It will just happen. And when it does, just take advantage of it.

After10-14 years of annual 2-5% upside there may indeed a down trend for 2-3 years of 1-4% per year . When though ?

Upside is not a straight line.

ThomasBeyer said:

When though ?

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Nobody knows.

No point thinking about it.

Rickson9 said:

Nobody knows.

No point thinking about it.

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A little simplistic a world view. In life you make decisions based on assumptions based on evidence, experience or research.

ThomasBeyer said:

A little simplistic a world view. In life you make decisions based on assumptions based on evidence, experience or research.

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K.I.S.S.

I have limited experience and k have made loads of mistakes over the last 8 years mainly regrets.

Based on what I regret, I recommend the following:

1. Buy a family home first. 5% is totally fine as long as you can afford to pay the mortgage and interest. If it's going to be your first property, you will get the land transfer tax deduction (forgot what it's called).
2. Build some equity in the home. In this market it won't be long for you to have a lot of equity in the home (maybe 2-3 years?) in a Toronto home. You can either use heloc money at that point or your savings to buy your investment property.

We were supposed to buy our house in 2010 but didn't have 20% so decided to live with parents to save 20%. But markets kept going up. Bought in 2012 with 20 down. Wrong move! We could have gotten less than 2% interest rate in 2010 at 5% down and could have had much better ROI.

Bought an expensive investment in 2015 but that's okay it's giving us high capital returns.

Buy with as low down payment as you can as that way your returns will be higher.

My two cents.

I agree ThomasBeyer and RELover.

I have properties in Toronto, KWC area of Ontario and Edmonton for about 7 years now. The true winners are the ones in Toronto.

The CAP rate of Toronto properties are lower, comparing to that of many Canadian cities, e.g. Kitchener and Edmonton. You don't get the same cash flow that KWC and Edmonton ones can produce. But the chance of appreciation is MUCH higher. That's the main characteristic of Toronto market. Some people call it speculation. Yes, the risk is higher. But the reward is higher too, especially you are comparing to buying a family home, where your family can enjoy many resources that the City of Toronto can provide while smaller towns or cities cannot.

helenxu said:

That's the main characteristic of Toronto market. Some people call it speculation. Yes, the risk is higher.

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Hi,
Wrong, the risk in Toronto is lower.
The cash flow is lower but that too is not a risk , it is known from the start.
Thanks

Risk in big cities is always lower. CAP rates are essentially risk indicators !

Hi Alex,

I would buy a home for your family first. Focus on paying down the mortgage and hopefully you will have nice price appreciation in the GTA over the next few years. Take out a LOC when you have some equity built up and use that for a down payment on a rental. You can also find mortgages that are linked to a LOC. You pay down your mortgage and your LOC increase automatically.

Also think about buying a home with a basement suite. Live upstairs and rent the basement.