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Toronto Real Estate As An Investment
For those wanting a steady return on their money, houses can be a sure bet. When the baby boomers started madly buying houses in the 1980s, suddenly real estate seemed like the path to instant wealth. The real estate markets fluctuate constantly. There have been times when house prices have gone down. However if you look at the overall price of homes in your area over the last 10 years, in most cases, (depending on your region) prices have risen.
Where is the housing market headed? Nobody can accurately predict. But even if house prices don't rise phenomenally, a home has two strong things going for it as an investment. First, any capital gains on your principal residence are tax-free. If your house appreciates by 6 per cent, you get to keep every cent of your gains.
Now 6 per cent may not sound like much, but in terms of how much you end up with, you'd have to earn as much as 12 per cent on a fixed-income investment such as a GIC to match that return, after tax.
Second, you don't have to come up with the full purchase price, meaning you're able to harness leverage. Conventional mortgages require a down payment of 25 per cent of a house's appraised value, whereas a high ratio mortgage requires only 5% down.
For example, if you buy a $200,000 home, you need to come up with around $50,000 for a conventional mortgage. If the home's value rises to $220,000, that's an increase of 10 per cent. But what's really happened is you've put up $50,000, and made $20,000. Your real gross return on your invested funds is around 40 per cent. But notice the word "gross" - your real return will be less.
Recent gains in average price are attracting a growing number of investors to major markets across the country, says a new report by Re/Max. It says one in six Canadians plans to buy an investment property in the next 12 to 24 months.
Based on on-line interviews conducted in December 2005 with 1,200 homeowners across Canada, the report highlights developing interest in residential real estate as an investment.
Close to 30 per cent of respondents already owned one or more investment properties and approximately 18 per cent indicated that real estate represented more than 51 per cent of their total investment portfolio, says Re/Max in a release.
"We believe purchasers view residential real estate as a simple, sound and safe investment - something that is very familiar to them," says Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada. "The risk factor is greatly reduced compared to other financial vehicles."
The Re/Max report also found that investors were younger than anticipated. Forty-three per cent of those who intended to invest in the next two years were under the age of 40. Once tagged "Generation X," these individuals supposedly rejected more traditional values like owning a home.
"Certainly, the promise of continued upward trending in housing values is a major factor influencing these investors, particularly in British Columbia and Alberta," says Elton Ash, regional vice-president, Re/Max of Western Canada, in the release. "Over the past five years, residential prices have appreciated close to 10 per cent on average, nationally. That's a fairly impressive return on investment."
In recognition of residential real estate's potential for long-term growth, 50 per cent of investors indicated they plan to hold their properties for 10 or more years. However, if an investor were to realize a tidy profit in the interim, he or she may be inclined to move on to the next income property, says Ash.
Females represented 16 per cent of those who say they intend to purchase an investment property in the next two years. Singles are also playing a greater role in investment, with 10 per cent planning to buy an income property in 2006 and 2007.
"Real estate speaks to a broad range of purchasers," says Polzler. "You don't have to be a millionaire to invest in housing. According to reported household income levels, today's investors are solidly within the middle class, with one in five earning $50,000-$60,000 a year and one in three earning $75,000-$100,000."
The report found spending intentions almost equally split between those planning to spend less than $200,000 and those considering properties in the $200,000-$500,000 range, suggesting that investment interest is spread throughout the marketplace, with respect to property, category and geography. For example, 41 per cent of investors say they intend to purchase a home, 35 per cent a multiple unit building, 24 per cent a condominium, and 13 per cent a townhome.
The report says corporate executives and entrepreneurs are expected to be the most active investors, representing 25 per cent and 19 per cent of respondents respectively. Investors were generally well-educated, with most possessing some post-secondary education. Fourteen per cent had gone on to a master's or professional degree.