In this article, we discuss the myth behind a COVID-19 recession resulting in the 2008-level real estate prices. We also provide some reason why now continues to be a good time to invest in real estate. Lastly, this article reflects on somethings to keep in mind for purchasing your first (or second or third) investment property. 

The Myth that Any Recession can Burst the Real Estate Bubble 

It’s often conventional wisdom that housing prices will decline during a recession, but this isn’t the always case. The 2008 financial crisis originated from subprime mortgages and the U.S. property market, among other factors, caused the decline in housing prices and subsequently the greater financial disaster. 

Subprime mortgages are not the reason for the possible recession that Canada could face. Now, the cause is the COVID-19, so it’s not likely that real estate prices will be affected as much as they were in 2008. Many experts across Canada believe that real estate prices may decline 5-10% at most due to COVID-19. Even though, until now, this hasn’t affected the market: monthly numbers from real estate boards across the country have continued to show a steady average price of the homes sold. 

COVID-19 is leaving many unemployed, reducing immigration to Canada, and providing us with economic uncertainty. However, the pressure exerted on the housing market by these factors is limited. Other COVID-19-related events, such as the slowdown of new housing constructions, are exerting upward pressure on real estate prices due to reduced supply. Further, if Canada can reopen its economy successfully and safely, the recession could have a smaller impact. 

Why You Should Consider Investing in Real Estate Anyways

The stock market’s prices have been jumping up and down due to on-going news about the Coronavirus. If you’re looking for a bit more stability in these unprecedented times, then residential real estate may be a good bet. 

As an income stream, real estate is relatively secure during a recession. Tenants will generally continue paying rent as they still have a legal obligation to do it. In contrast, a company whose stock you purchased may cut their dividends or the stock may see a sharp decline in value. 

Interest rates in Canada are still low, as the Bank of Canada attempts to stimulate the economy. This may reduce your cost of borrowing to purchase a home. If you can lock in a good mortgage rate for an investment property at this time, it’ll result in a better return on investment and cash flow down the road. 

A Few Best Practices for First-Time Real Estate Investors 

Just because now is a good time to invest, doesn’t mean you should jump right into any property you can get your hands on. If you purchase an overpriced property when you aren’t doing well financially, it could hurt you more than it could help you. 

Calculate your Cash Flow

In the world of real estate investing, cash flow is king. Cash flow is what you’re spending (cost of monthly mortgage payments and repaying other debts associated with the investment property) versus what you’re taking in (usually rental income). If you have a positive cash flow, you’re on a good track. Before buying an investment property, it’s important to run the numbers…. And, then, run them again to make sure you didn’t miss anything. When calculating your cash flow, make sure to ask yourself these questions:

● How much will your monthly mortgage payments be? 

● How much will renovations cost? 

● How much can you rent out the property for? 

● What happens if you can’t find a tenant to pay the price you’re looking for? 

Assess your Financial Position

It would be best if you also looked at your financial circumstance. Just because you have a good job today, doesn’t mean you’ll have one tomorrow. Especially not in the era of COVID-19. Would this investment still make sense if you were laid off or furloughed? Similarly, if you’re a business owner, could you manage the investment property’s mortgage if we face a second lockdown? Although residential real estate tends to be a safe investment, it’s essential to judge your financial position before committing to a purchase. 

High-Quality Properties in a High-Quality City

Finding the property with the lowest per-square-foot cost is usually not the best way to go. To find an investment property that will provide consistency in economic uncertainty requires buying in a high-demand area, even if it’s more expensive. This can better guarantee renter demand. 

Further, fixer-uppers are often of great value. You can renovate the property and get an even larger return on investment, however, there are some fixer-uppers you want to avoid. Properties with water damage or structural problems are often ones to avoid, especially as a first-time real estate investor. Even some veteran real estate investors stay away from these properties. 

We’re unsure if COVID-19 will bring a full-blown recession that’s as devastating as the one in 2008. However, it’s highly unlikely we’ll see the same kind of decline in home prices. Nevertheless, it may still be a good time to invest in residential property. Investment properties can provide a consistent income in times of uncertainty. But if you are a first-time investor, make sure you figure out your cash flow, assess your financial situation, and choose a high-quality property before making such a financial commitment.  

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In this article, we explain both why and how to invest in Canada’s flourishing real estate markets. We look at the appreciating values and rising rental incomes of Canadian properties and also what to look out for when making your investment. 

Why Canadian real estate? 

There are pros and cons of investing in Canada, of course, and then there are also pros and cons of investing in particular provinces and cities. But generally, Canadian real estate has continually appreciated in property value and rental earnings over the past years. According to the MLS® Home Price Index (HPI), home prices across Canada appreciated 38.34% over the past five years. Additionally, hotter cities grew even more in average price, with Toronto rising 56.60% and Vancouver rising 54.18% over the past five years.  Markets such as Montreal and Halifax have also been popular more recently.

While appreciation is great, rental income is also an important part of your real estate investment. According to rentals.ca, the national average rent has gone up over the past year, despite having various ups and downs. The average Canadian rent in October 2018 was $1,839 while the average rent in August 2019 was $1,914. What’s more, rent prices are expected to rise throughout 2019 and likely into the following year due to higher interest rates, more immigration, more renters as opposed to homeowners, among other reasons. 

However, there are a few downsides in investing in Canada. In many provinces, landlord-tenant laws favour the tenant. In Ontario, for example, there is a standard lease agreement that all landlords and tenants must use. Among other conditions, the lease agreement prevents landlords from evicting tenants unless they use the unit themselves.  Of course, having some provisions are necessary to balance the playing field for both landlords and tenants. 

How to make money investing in Canadian real estate 

With residential real estate, the increase in property value and rental income are the two main ways to produce a profit. As mentioned before, Canadian real estate excels in both categories. But there are also other costs to worry about aside from the price of the property. Interest payments, transaction fees, taxes, and more can eat into how much you make. 

Property value

Canadian properties have gone up a lot over the past few years and will most likely continue to appreciate in the long term. But it’s a mistake to assume that property values will consistently go up. The real estate market experiences highs and lows, and investors who can’t stomach volatility or who may need to sell quickly in a down market may end up losing money. Looking at the HPI® index, prices in the Metro Vancouver Area peaked in May 2017 and haven’t returned to such a level since. Thus, speak with a real estate profession to see whether it’s a good time to buy or if you should wait for the market to go down. Although a realtor isn’t some sort of oracle, they can provide some insight about whether prices may go higher or lower in your area. If you get into an investment when the market is low, it’ll be easier to make money. 

Rental income 

In many Canadian real estate markets, you can expect at least $1,000 of rental income a month for just an apartment. When you look into Toronto and Vancouver, this easily reaches over $2,000 a month. Although vacancy rates are low in many cities, there are a few things to keep in mind to make sure that your rental is the top choice among tenants. Aside from a low price, tenants value a property with a good location and a reputable builder. 

As the saying goes, location, location, location. A property at the centre of the Toronto financial district will ultimately fetch more rental applications and a higher rental price than a spot in the suburbs—of course, it’ll be more expensive to purchase too. But also keep in mind locations that may be noisier, such as those close to a railroad, or areas that have higher crime rates. This can turn off tenants and make your property less desirable.

The builder of your property is especially important if you’re renting out a condominium. Finding a condo from a reputable builder is important. As real estate development has become so profitable in many Canadian cities, new real estate developers with little experience have continually built massive condo complexes. Because new developers lack a reputation in the market, it could be a risk to purchase a unit from them. The building could end up poorly constructed or have poor management, which will deter tenants. A realtor can guide you on how a builder’s past projects have gone.

Keep down fees

There are a lot of fees associated with real estate investing that you can’t forget about. If you do, they’ll eat into your profits. A major one is the closing costs associated with purchasing the property (and later selling the property). This includes realtor commissions, lawyer fees, cost for inspections, and more. These closing fees can total a few thousand dollars.

Then there are taxes. You’re taxed on both the appreciation of your property and any rental income you earn. When you decide to sell your property, you’ll be charged a capital gains tax on the difference between your purchase and the selling price. You’ll also be charged property tax which varies city to city. Expenses, such as interest payments on your mortgage or other monies borrowed, can reduce these taxes. 

Canada has many great real estate markets to invest in—from the Metro Vancouver area across to Halifax. The appreciation of property value combined with rental income can make you a healthy profit. But make sure to watch out for all the fees. 

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