Last Updated on January 24, 2024 by CREW Editorial
Although the median home price is on the rise, many Canadians are seeking out ways to grow their assets and seek financial freedom. This has given birth to the idea of the “side hustle,” a way to make money besides one’s usual employment. Some real estate professionals are choosing to expand their role in the real estate business by purchasing investment properties and acting as landlords. Real estate investing provides a much-needed boost in income without the need for job growth.
According to Statistics Canada, approximately 15% of residential property owners in British Columbia and Ontario owned two or more properties in 2018. 22% of homeowners in Nova Scotia owned two or more properties as well. It seems that more people are purchasing investment properties, whether they are used as rental units or vacation homes.
This article will discuss what housing markets are the best to invest in, what investors should consider, rental income, and more to help you determine where you should invest your money.
The real estate market: what is going on and what you need to know
Since the COVID-19 pandemic first started in 2020, the Canadian real estate market has exploded. Many people are staying at home rather than going out or taking a vacation, causing many to reconsider their living space. Some people are finding that they have more disposable income due to shopping malls being closed and being unable to take vacations. The combination of these factors – alongside low-interest rates – has caused many people to flood the housing market for a new home.
As housing prices skyrocket in response to the increased demand and low supply of homes, it can be more difficult to buy rental property. According to CBC, the median home price is $716,000 in Canada. Despite the high median home value, incomes have not increased. In 2019, the national median household income was $62,900 in 2019. These national averages exemplify. There is a stark difference between what people earn and the average price of a home in the real estate market.
The rising national average of home prices and plateaued income has delayed when people buy their first home. The median age of first-time homebuyers is now in Canada. This means that more people are either living with their parents or renting longer.
A hot housing market for your investment: short-term rentals
While you may want to invest in a city with a growing population, regional vacation markets are growing
Canadian real estate markets can be difficult to enter because of the high average home prices. If an investor is having difficulty investing in long-term rentals like single-family homes, they should consider investing in-short term rentals.
Rather than choosing the most populated city to invest in, Avery Carl, the CEO and founder of a real estate company, Short Term Shop in Tennessee, suggests investing in regional vacation markets. Regional vacation markets are vacation places that are close to home, allowing visitors to drive there rather than fly. Some examples of regional vacation markets in Canada are Muskoka, Niagara-on-the-Lake, Cape Breton, and Banff. While some of these places may not be experiencing population growth or job growth like most cities, they attract many short-term tenants for out-of-town vacations.
Regional vacation markets are also more recession-proof than other markets. As we have seen this past year, many people still want to take a vacation – even if there has been a decline in jobs and job growth. Local vacations are more affordable rather than faraway destinations, spurring more people to travel locally. As a result, local vacation areas typically experience seasonal population growth and competitive median rent prices.
In Merged Media‘s podcast, Carl mentioned that short-term rentals are “little income turbochargers” that will allow you to build your wealth more quickly. Typically, the average home price in these areas is lower than the national average but has similar property values. This means that these properties can be just as profitable as commercial real estate due to their high median rent.
You don’t need to find an investment property in the largest city to invest in real estate. You can easily purchase a short-term rental for lower than the median home price.
What all real estate investors need to know
Anyone who is considering investing in a rental property – whether short-term or long-term – may think that their investment will be straightforward and automatically lead to increased cash flow. Sadly, this is just a myth. Real estate investing can be a difficult task for even the most prepared individual. Take the time to consider these various factors, regulations, and financial investments you may have not considered yet – it could open your eyes to the reality of real estate investment.
Determine the median rent and value of your property
One of the most important things in real estate investing is to ensure that you make sufficient rental income from your property. This will ensure the success of your investment and grow your assets over time.
In April 2021, the average rent price in Canada was $1,675 per month. While this is the median price for a rental unit, the cost can greatly differ depending on your location, amenities, and local economy. To determine what rent you should charge, evaluate the median rent in your area. If your unit has a great location, many amenities, and is in an area experiencing population growth, you could charge above the median rent price for your property.
Most investors may not be fortunate enough to start renting their properties at high prices. Just remember that if you bought a place at a lower property price, home values will typically increase over time. This could spur you to raise your rent prices and, over time, increase your rental yield.
You may have to renovate your rental properties
Investors may need to consider a cheaper property because of the required 20% down payment when buying a second property. This could mean that you may need to buy a fixer-upper for your investment. Don’t discount buying a property that is in less than ideal shape, the affordable prices of a fixer-upper may help you afford to invest in the most populous city in your region.
Consider the local economy
It is important to choose a rental property in an area with a thriving economy. A city’s unemployment rate will provide some much-needed information to understanding how the economy is faring in the city. This will allow you to plan not only for the present but predict how the local market will change.
If there is a significant opportunity for job growth in the area then there could be an increase in rental demand. For example, Sarnia, Ontario is in the process of completing a $2.5 billion expansion on one of their chemical plants. This expansion has created 900 new jobs, causing an influx in job growth and local home prices. Choosing an area with expected or ongoing job growth is a good way to determine whether you will be able to fill your rental estate with tenants – and for the long-term.
Alongside job growth, population growth is a similar influencing factor. Many major cities like Toronto, Vancouver, and Calgary are experiencing population growth as more people flock to the city for jobs, school, and a more urban lifestyle. The constant growth in these urban areas has led to increased house prices and a strong rental market. Consider the population growth for your city and the surrounding area to determine whether your rental housing will be in high demand.
Another thing investors should consider is their local vacancy rate. A healthy vacancy rate in a local rental market is 3%. If you notice that there is a higher vacancy rate in the area you are thinking of owning rental property, search other housing markets for a more secure investment.
Invest in real estate close to a college or university
If you choose to purchase a long-term rental, consider owning rental property in a city that has a college or university. While rental real estate could be a gamble in some cities with changing economies, real estate investments in college or university towns are more likely to thrive because of the consistent enrollment in higher education.
In an article by the Globe and Mail, a real estate investor noted that he had bought six rental units in Waterloo, Ontario in 2013. His units, which are several blocks away from both Wilfrid Laurier University and the University of Waterloo, were quickly filled by students. In 2019, he had seven rental units that were bringing in a revenue of approximately $17,000 in monthly rent.
The consistent growth in student populations has made university towns some of the best real estate markets for investors. Students will always need housing and rental real estate is the best option for many students who live in the city on a short-term basis. The steady growth of university towns like Kingston, Waterloo and Guelph (fondly known as the Royal City) has been beneficial for many real estate investors.
“Still, location is key – whether it’s a five-minute walk from campus or close to good transit – when investing in student housing,” said the real estate investor in the 2019 Globe and Mail article. While you may have chosen to buy rental property in a university town, you should consider how appealing your property will be to students searching for a place to rent.
Property taxes
If you are looking to buy a rental property in a growing city with a high average cost of living, it is likely that most homes or condominiums you view will have a significant property tax. While you are looking for an investment property, consider whether the property tax is worthwhile for your investment. There may be significant demand for locations in up-and-coming neighbourhoods, attracting long-term tenants and a greater rental income.
To learn more about property taxes that you can expect from your investment property, speak to the neighbours or visit the municipal assessment office. They will have information on the unit’s property tax on file and may mention if they expect a rise in your property tax any time soon.
Consider the help of a property management company
A property management company may be a great idea for people who live far away from their investment property or those who may not have the time to deal with the responsibilities of being a landlord.
Property management services will help with landlord-tenant laws, collecting rent, unit maintenance, acquiring tenants, financial services, and more. The comprehensive services take the stress out of being a landlord and allow you to run yourself.
The best place for rental investment is up to you
Overall, there is no best place to invest – where you buy a rental property is up to you. Take the time to ask yourselves these questions to figure out where you should invest in a rental property:
- What is your budget?
- What locations do you feel comfortable renting? What are their local economies like?
- Do you want a short-term or long-term rental?
- Do you feel comfortable renting to students?
- And more!
