Becoming Wealthy by Purchasing Toronto Real Estate Is This Easy.

Becoming Wealthy by Purchasing Toronto Real Estate Is This Easy.

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If you have read my story in the September issue of Toronto Life which I have conveniently linked to this post for those who have not yet had the opportunity you can see that with purchasing only three properties I have gone from a $320,000 apartment to a $1,835,000 house.  Some of you may be thinking

“No, this cannot be true”

or perhaps that this could only occur under some set of extraordinary circumstances. The truth is anyone could have done this then and anyone can do this now.  Having a knowledgeable advisor to help you make the right decisions and more importantly to encourage you to work through the fear (because at first, you will be unsure) and also having the ability to save enough money for the down payment on your first property (this may be the hardest part) is all it takes. Sure, this requires sacrifice and discipline but it is the only way for most Torontonians to create wealth through owning what will eventually be their family home. I have done this myself and I can do this for anyone and that is why I am writing this story. If you already own your home and it is an investment property that you are considering the path is similar and which you will see as you read on.

The most common rebuttal I hear these days is that I was “Lucky” because I purchased my first property 14 years ago when condo prices were $300 per square foot but that does not exist anymore so people feel they have “missed the boat”. Nothing could be further from the truth. I thought that way when I purchased my first condo and I had to work through the fear that was holding me back. Wow, I said

“$300 per square foot, how much higher can this go?” 

Today we are sitting at $900 per square foot or triple the price and 15 times my original investment (I put 20% down).  When I think back to 14 years ago I remember thinking that I had “missed the boat” because my parents had purchased their first home for $28,000 and I am sure my parents felt that way as well knowing that their parents had purchased their first home for $3000. Do you see where I am going with this? To think that real estate prices in downtown Toronto have now peaked and they will never go any higher is absurd.

CityPlace before we ran out of land.

CityPlace before we ran out of land.

In fact, I believe that prices in Toronto will now go from $900 per square foot to $1500 per square foot in the next 5 to 7 years.  Think about it logically, it took 14 years for prices to increase by $600 per square foot during a period when we had large tracts of land such as CityPlace, Liberty Village and Fort York Boulevard not to mention countless parking lots scattered across the downtown core.  Today we are virtually out of parking lots, CityPlace, Liberty Village, and Fort York Boulevard are 95 percent complete, there are 12 cranes in the sky building residential buildings, not 30 and this development industry’s ability to produce large amounts of new condos is in decline. There are many other factors at work on the demand side which you can read about in my article “Why the Downtown Toronto Real Estate Market Is Not Likely to Fail Anytime Soon” as well.

More demand than ever before and the inability to add inventory like we have in the past is going to accelerate price growth moving forward. This is the most simple of economic equations.  So, if you were to put $60,000 down on a pre-construction $400,000 one bedroom, 450 square foot condo today, that condo under this model will be worth $666,000 which is $266,000 more than the purchase price in 5 to 7 years and a profit of $206,000. I am not aware of any other way you can create this kind of wealth without gambling. You can then use the equity from this property to purchase you next and larger pre-construction condo and wait until it is built while living in the first property and so on. It is important to note that as long as these properties are your principal residence, the profits are tax-free.

Purchasing an Investment Property

If you already own your home and you are looking to purchase strictly as an investment there are a few simple rules you can follow to make your investment property less risky than any other kind of investment including those funds your bank is always trying to get you into for your RRSP and the returns are far greater.

My 5 Simple Rules:

1.    Purchase only in markets where the population is increasing.

2.    Cash flow neutral at 25% down

3.    Purchase with long term goals (Invest, do not speculate)

4.    Smaller is better than larger (buy small one beds or small two beds)

5.    Purchase only where you have first access at the lowest price if buying pre-construction. (For those of you who are interested we are launching our next project called “The Bread Company “ at Baldwin and McCaul next month and you can have the first pick of the units at the lowest price by purchasing direct. This will not have an Agent or Public launch for 6 months – Please contact me for details)

Toronto is a City on the rise and for those who see the opportunity and take advantage, there is a lot to gain. Let's look at the kind of return on investment can be obtained simply by following the rules above.

Example:

Take Lamb Development's "BauHaus" on King E. as an example

Take Lamb Development's "BauHaus" on King E. as an example

Purchase a 450 square foot one bedroom pre-construction condo at $900 per square foot or approx. $400,000.

Purchase price:     $400,000

Down payment:    $100,000

Mortgage:             $300,000 ($1300 per month P and I)

Monthly carrying costs:

Mortgage ($300,000)    $1300 per month

Condo Fees                     $ 270 per month

Property Taxes                $150 per month

Total:                               $1720

Monthly Revenue:

Rent:                            $1950 per month

Monthly Cash Flow      $230

Yearly Cash Flow    :  $2760

Yearly Cash Flow    :  2.76%

Mortgage principle paid down by your tenant:

Principle pay down:  $650 per month (half of your mortgage payment is principle)

Principle paid/year:  $7800

Return on Investment:

Cash Flow:      $2760

Principle:         $7800

 Total:              $10,560 (or 10.56% return on your $100,000 investment)

I think we can all agree that a 10 percent return is great these days but keep in mind this does not include any increase in real estate prices. If the price of your property increases by a modest 5% per year that is another $20,000.  That was 5% of the total net asset value and in this case, you only have 25% cash down so at 4x leverage your return is actually a further 20% on your cash in addition to the 10 percent mentioned above for a total of 30 percent.  If you the price of your property goes down you still get the 10.56 percent return through cash flow and if you have long term goals you hang on until prices rise again.

I think the reason most people do not do this is because it sounds like so much money and it is so simple it just cannot be true.   Well, it is true and I along with thousands of other investors in this city have done it.  If you have questions about this analysis or if you are thinking of buying a home or investing but you have concerns I would like to hear from you. Contact me.

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