Real Estate Investing in Ontario During COVID-19: What You Need to Know
According to billionaire Andrew Carnegie, 90% of millionaires made their fortunes by investing in real estate. And though we may be a little biased here at Purplebricks, we believe that investing in real estate, whether for personal use or as a rental property, is an excellent way to diversify and increase your long-term wealth.
Despite ebbs and flows in the market, housing prices go up over time. Even in times of economic slow down, the real estate market has bounced back, and often quickly. Take 2008-2009 as an example. Canada was in a recession and Toronto home sales reflected that. Year-over-year sales were down 32%, new listings down 11%, and days on market increased 50%1. Despite these dramatic changes in figures, average selling price was only down 5.4% year-over-year; the average price was $361,305. In 2020, few markets in Ontario see an average selling price of the mid-$300s, let alone in Toronto. As of February 2020, pre-pandemic, the average selling price was $910,2902, which is a 152% increase over 11 years – that is amazing price growth! And although we saw a 0.8% month-over-month average price decrease from February to March3 and another decrease of 9% from March to April4 in Toronto, the average selling price is still on par with April 2019 average selling price. What this example illustrates is that despite economic downshifts, the real estate market has historically recovered and is an important asset in many investment portfolio s.
Whether you’re new to real estate investing and are ready to purchase your first property (congratulations!) or you’re a seasoned pro looking for the next great find, there are important factors to consider, especially during the COVID-19 pandemic.
Choose the right city
Important factors to consider when choosing a rental property:
Vacancy Rates: A healthy vacancy rate is 3%, which means a rate lower than that likely indicates a shortage of rental properties. This tends to drive rent rates up as demand outpaces supply. Selecting a location with a healthy to low vacancy rate is a good strategy.
Housing Prices: The COVID-19 pandemic has resulted in housing prices remain steady in most major markets Considering that the spring market was set to be a seller’s market, housing prices are “well priced” compared to what they would have been without the pandemic. The opportunity to buy a rental property at 2019 or early 2020 prices could be advantageous for some investors.
Rental Rates: As the landlord you need to know what rental rates are going to get you the most return on your investment. Borrowing money for a mortgage is not location specific, which means you are charged the same rate whether the home is in Toronto or in a little rural town like Oro-Medonte. You will of course fetch a higher monthly rent in a large city but will pay more for the property itself. Figuring out the balance of the amount of mortgage (aka debt) you want to carry versus the rental rate is crucial for success. A rule-of-thumb followed by many real estate investing pros is the 1% rule, which means that your gross monthly rent should be equal to or greater than 1% of the property purchase price. So, if you purchased a rental property for $400,000, you would want to rent it out for at least $4,000 to satisfy the 1% rule.
Property Management: If you are going to perform all the property duties yourself, you will likely want to live near your rental. This of course limits the areas you can purchase in, but it will save you money doing it yourself rather than paying a property management company. Property management companies can charge 6-12% of rent value, with some companies offering a monthly cap rate. Do your research and determine if doing the heavy lifting yourself is worth the time commitment.
Health of the City: The current and future overall economic health of a city is also important, even if you’re not choosing to live there. Owning a rental property should be a long-term commitment that allows you to pay off the mortgage and collect a substantial paycheck from renters during your retirement or allows you to sell the property 10-20 years later while enjoying the appreciated value.
Our top 5 picks for cities to invest in Ontario are Hamilton, St. Catharines, Windsor, Guelph and Ottawa – find out why here!
Review mortgage rates
There are pros and cons to fixed and variable mortgage rates. The benefits of fixed mortgage rates are you know what you are paying every month, and the disadvantage is you don’t get to capitalize on rate cuts like you would with a variable mortgage.
Due to the COVID-19 pandemic, the Bank of Canada has reduced its overnight rate from 1.75 to just 0.255. Variable mortgage rates are based on the Bank of Canada’s overnight rate. This means that homebuyers can get a desirable interest rate on their variable rate mortgage loan. Paying less interest on your loan means more money in your pocket.
Any percentage off your interest loan rate helps you keep more of your hard-earned money. Of course, with a variable rate, you are not guaranteed to always have your rate so low, so you may need some flexibility in your budget.
For more information on variable mortgage rates, read Variable Mortgage Rates are Low, and Here's How They Work in Your Favour.
Know your financial flexibility
Whether there is a pandemic or not, under the Residential Tenancies Act, landlords cannot charge fees or penalties for late rent payments. During the outbreak, landlords and tenants are encouraged to work together to determine a payment plan that allows the tenant to remain in their home while the landlord is still financially compensated.
As a landlord, it is important you consider your financial stability before acquiring a new investment. Asking yourself what is your tolerance for vacancy or not receiving rent from tenants? In general, you want to have at least two to three months in gross rent in your property safety reserve. So, if you have a rental property that generates $2,500 gross monthly, you will want to have $5,000-$7,500 set aside.
And during the COVID-19 pandemic, it may be wise to allocate more funds to your safety reserve as an additional buffer. It is also important to consider the stability of your other investments and income. Does your income depend solely on real estate investments? Do you have a steady paycheck from your “9 to 5”? Assessing not only your tolerance for risk in your rental investments, but for your own obligations, will help you make an informed decision when selecting the right rental property for you.
Consider revised eviction rules
The typical eviction process has undergone some changes due to COVID-19. The usual process is the landlord provides a tenant an eviction notice. If the tenant does not comply to the request (usually stopping poor behaviour or paying owed rent), then an application to the is created to escalate the issue. Then a hearing takes place with the Board where the Board will make a decision about the landlord’s application; this decision is called the order. Lastly, there is enforcement of the eviction order if the tenant does not leave the unit as per the directions in the order; the enforcement would be carried out by the Court Enforcement Office, not the landlord.
How has COVID-19 impacted the eviction process? Landlords can still give eviction notices and most applications can still be filed online. However, all hearings are suspended, no new eviction orders will be issued, and enforcement of eviction orders are postponed until further notice (except for extreme circumstances).
What does this mean for landlords? Overall, evicting a tenant during the COVID-19 pandemic will likely prove to be difficult. To avoid tenant issues, existing landlords are encouraged to work with current tenants to improve behaviour or work out a payment schedule to assist the tenant. If you’re a new landlord, you could consider requesting existing tenants to move out before you take possession of the unit. This would provide you control of the interview process for new tenants. However, keep in mind that obtaining new tenants during the pandemic will likely prove more challenging than during regular times. Having existing tenants remain in the building, especially ones in good standing, would be the best financial move.
For more information about how the eviction process works, visit the Ontario Government’s article on “Renting: changes during COVID-19 (coronavirus)”.6
Ready to buy an investment property? Purplebricks can help.
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1 Market Watch February 2009 (TRREB)
2 Market Watch February 2020 (TRREB)
3 State of the Market Report: March 2020 (Purplebricks)
4 State of the Market Report: April 2020 (Purplebricks)
5 Bank of Canada lowers overnight rate target to ¼ percent (Bank of Canada)
6 Renting: changes during COVID-19 (coronavirus)