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Cash Flow vs Appreciation in Toronto Real Estate Market

Cash Flow versus Appreciation.

Is it true that you can only get one or the other, but not both?

With the prices in Toronto now, should you always expect a negative cash flow?

Which area in downtown Toronto gives you the best numbers?

We’re going to answer all these questions in today’s video.

In order to show you a study with real numbers, I picked out 3 of my own investment properties in 3 different areas in downtown Toronto.

The University of Toronto area.

The Eaton Centre area.

And the East Waterfront area.

These 3 properties were completed within the past 1-2 years, so when I bought them, prices were relatively high already.

And the rents are relatively low because of the pandemic.

Let’s start with the 1st property.

It’s on College street, literally a few steps from the University of Toronto campus.

I got the keys for my 3 bedroom unit 8 months ago in June 2021.

My acquisition cost, including all the developer closing costs, land transfer tax, lawyer fees, came to $948,000.

The unit was rented within 2 weeks at $4,500 per month even though U of T was still doing virtual classes.

The rental market just started recovering recently and the rent has already gone up to $5,300 for this unit.

But for the purpose of our study, we’ll use the real rent that I’m collecting, so $4,500 monthly rental income.

I got a $700,000 mortgage at a variable rate of 1.52%.

So the monthly mortgage principal payment is around $2,000.

And the mortgage interest is around $900.

Condo fee, $682.

Condo insurance, $34.

Property tax, $165.

Rental management, this is the fee that I pay my team to manage my unit for me, $120.

I put aside one month’s rent as an annual reserve fund, so that’s $4,500 divided by 12, $375 per month.

This could be used as the commission for finding a new tenant or for some repairs.

That wraps up all the monthly expenses.

And my monthly cash flow comes to $272 after deducting the mortgage principal and all the expenses from the rental income.

You see, I don’t treat mortgage principal as an expense because an expense is something that takes money out of my pocket.

But a payment towards the mortgage principal is actually building onto my assets, so it’s putting money into my pocket.

My asset is growing $2,000 per month, I would say that’s really the main dish here.

The $272 monthly cash flow is just the icing on the cake.

Of course, when I increase the rent to match up with the market rent of $5,300, I would be seeing a $1,000 monthly cash flow, plus $2,000 towards my mortgage principal.

That’s $3,000 into my pocket every month.

That’s the magic of the University of Toronto.

Let’s take a look at the appreciation.

I bought this unit at pre-construction in July 2017.

The net appreciation, with all the costs factored in, over the past 4.5 years is around $300,000.

The total amount of money I invested in the property was $236,000.

So my money invested has grown 127% in 4.5 years and I’m getting almost $2,300 into my pocket every month even with the pandemic rent.

That’s why I truly believe that any property within steps to the U of T campus is a no brainer to invest in.

The second property I want to discuss is at Church and Shuter, with a 5 minute walk to the Eaton Centre.

This is a 1+Den unit and I got the keys almost a year ago in March 2021.

Let me show you the monthly income statement.

I’m running a negative cash flow of around $250 per month.

But at the same time, $1,050 is going towards my mortgage principal.

So I see this as me putting $250 aside as savings every month.

If I put that into a savings account or even the stock market, $250 is $250.

But in this case, $250 actually becomes $1,050 towards my assets, that’s money into my pocket.

So yes, I’m having a negative cash flow, but it doesn’t mean I’m losing money, I’m just building more assets.

In terms of net appreciation over the past 5 years, it’s around $230,000.

The money I invested into this property was $144,000, so it’s grown 160% in about 5 years.

I would say we see similar appreciations in the U of T and Eaton Centre areas over the past 5 years.

But it’s just a lot harder to find properties around the U of T area and most people don’t want to sell.

In terms of rental income, U of T is unbeatable because of the rental demand, especially from rich international students.

Now, let’s move on to the third property by the Sugar Beach in the east waterfront area.

I have a very nice 2 bedroom corner unit facing directly onto the lake.

And I did pay a high view premium for that.

Is it worth it?

Let’s take a look at the monthly income statement.

A negative $560 cash flow every month with almost $1,500 going towards my mortgage principal.

So I’m not losing money, but I do need to chip in $560 every month to build this asset.

Here’s the thing.

You don’t really get more rental income because of a nice view but your unit does get rented out faster when there’s competition, so it makes some difference in your vacancy period.

In terms of appreciation, only $180,000 over the past 5 years.

The amount of money I invested was $218,000, so it has only grown 83%, significantly less than the other 2 properties.

So what’s wrong with this area?

A majority of the east waterfront area has not yet been developed.

But when the vision is materialized, it’s going to look like this.

The property values may start off with a slower growth initially, but when more things get built, they will really take off.

It’s just like investing in a startup company.

You see, when you have the knowledge about the characteristics of the different areas, you can diversify your investment portfolio to meet different goals, be it cash flow or appreciation or exceptional growth.

It is true that prices are higher now in Toronto, but at the same time rent is also going up.

Just as a reference, the rent for an average quality one bedroom unit in the New York Times Square area is now $4,500 US dollars.

And don’t forget that vacancy rate and tenant qualities are crucial factors to consider as well.

Some people might be attracted to properties in more remote areas or cities because they can potentially get a few hundred dollars of positive cash flow every month.

But you have to be very careful because if the vacancy rate is very high and you end up suffering from a couple months of vacancy every year, then your math is not going to look nice at all.

The overall risk is actually much lower if you invest in high demand areas, easy to rent, easy to sell.

And we all know the demand projection for Toronto is extremely high because of immigration.

If you like to know which area in Toronto would best fit your investment objectives, you can schedule a call with me at the link below.


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