Home ownership presents an idyllic dream. And your idea of home ownership may change over time, influenced by factors like life stage, family composition and position on the property ladder. But truly, doesn’t everyone at some point have a dreamy snapshot in their mind’s eye of owning a detached home with a two car garage?
Detached homes are in huge demand by potential homeowners and are in increasingly short supply in the city of Toronto. As such, prices for this housing type contine to climb rapidly and competition is fierce among buyers to secure one of these coveted properties. Even more so when it is in a AAA location.. But does this property type hold the same allure for property investors? And, to take it one step further, does a detached property give you a better return when its value is predicated on the income stream? If you're all about generating rental income, what does your “dream” investment property look like?
Here are some considerations:
Supply Against Demand: The Engine of Value
When it comes to the property investment, the model for determining value rests not only on whether it's detached or not, but on a number of different variables that effect both cost and outcome. In fact, it's a rather complex process that isn't as simple as being able to ballpark an income stream based on purchase price point either. There are many variables, including size, location and the condition of the property plus other intangibles including number of units, space plan, and how long any existing tenants you assume have been living in the property (whose rents are protected by rent controls) that can determine investment success.
Yes the value of any property automatically jumps as a function of supply and demand. And, as any house hunter in Toronto will readily tell you, the scarcity of low-rise house is diminishing (any aging obsolete detached house on a large lot is a candidate to be torn down and severed into multiple lots for new multiple housing units) which means prices continue to go up on economic principle, based on limited availability.
While the value of the property itself would grow because of the whole supply/demand mechanism, it is important to consider other costs that would effectively erode ROI. After all, while a property value might be higher, gap of profitability narrows considerably when costs are substantial.However, the growth of this value will be mitigated by the additional costs associated with being detached, like higher maintenance and repair expenses that are not commensurate with the income stream (which we will address in greater detail below).
The cost to acquire a detached house is more than a semi-detached or a row house because they're considered more desirable and less available (there are more row and semi-detached houses in the central core than detached).
The pandemic has created a fury in the real estate market. Buyers are numerous, detached properties are scarce and low, low interest rates are allowing buyers to pay more and more money for coveted housing types, often in competition. According to the most recent stats from TRREB, while all housing types saw increases in prices, the most dramatic leap happened in the detached market, where average price climbed by 26.6 per cent to hit $1,384,797. This is closely followed by the semi-detached market, where prices climbed by just over 20 per cent year-over-year to $853,001. That's what happens when you combine low supply, high demand, low interests and a jolt of consumer confidence, moving buyers to spend, spend, spend.
After the Purchase- Renting it Out
While a detached home is more to purchase, that bigger price tag doesn't automatically equate to higher rates. In fact, the market rents generated from all of these types of dwellings are pretty much the same. For example, a 2 bedroom apartment of a similar size and condition in a row house or a detached house will generate a similar rent based on market demand.
Renters won’t pay premiums to have more exterior walls. So, technically, given the higher acquisition cost to buy a detached house, this means the income stream from a detached house is less lucrative.
What property investors must be mindful of with this particular property type, that the “value” may be mostly realized when said dwelling is sold, propped up by the economic fundamentals of supply and demand. Theoretically, the value of the detached house will have increased more (possibly substantially) but investors have to wait until they sell in this scenario.
That's why the purchase of such a property should be made fully understanding the costs- but also with a strategic purchase to support growth of the overall asset over time, to realize larger gains when you take equity out selling down the road. A lot of that has to do with location, location, location. The best, tried and true strategy to supporting asset growth in real estate is being close to amenities like public transit, parks, shops, dining and entertainment, and schools. At the same time, these features will help you to attract and maintain tenants, and to charge premium rents.
Again, the income matrix is the same as buying a row or semi, but the value as a detached property should be higher at point of purchase and on resale. This factor has a bearing on your annual return on investment.
More Walls, More Money
Another point. A detached house has more surfaces exposed to the exterior elements (4 walls versus 2 or 3), which means it's more costly to repair, maintain and operate than a semi or a row house, which will translate into increased spending towards capital investment for repairs, maintenance and utility costs during your tenure of ownership.
In simple terms, what this means is that more of your rental income will have to go into fixing and operating the property than going into your pocket.
Spend Money to Make Money?
Another factor is what you plan to do with the property once you acquire it. If you buy a property that needs some improvements, you may find investing some money will generate a better return and increase the value of the property.
Reconfiguring spaces to suit different occupancies or lifestyles can set the standard to generate higher incomes over the longer term, but will admittedly require a more substantial initial investment. Part of being able to boost potential income is being able to imagine a space in its most profitable layout. How do I maximize the available space (i.e. multiple bedrooms, maximizing available space, etc.)?
Depending on the work to be done, there may be substantial upside to earning potential. For big picture thinkers, this is the cost of doing business. For investors who are gearing towards pulling income with minimal cost, this may not be as attractive a proposition.
Remember all the Costs
Also whittling down potential profit are some oft overlooked costs, especially by investors who do not intend to occupy any portion of the property.
In the downtown core, homebuyers are paying hefty closing costs, in the form of double-dip land transfer taxes, which given the price point of many detached homes in the area can be substantial.
What does your housing dream look like? Are you considering property investment, but are fixed on getting the best return on your investment, and need guidance on influencing factors and what steps to take to get you there? We at urbaneer have decades of experience, from both sides of the transaction - and as investors ourselves - that lend important perspective. Here's our Tales Of Upper Hillsborough which shares our own journey into the income property market. Specifically, you might enjoy reading Tackling The Property Tune-Up which summarized the scope of work identified by our home inspector plus our own plans, and The Black House Financial Tally where we fess up to the real costs of undertaking a dilapidated triplex.
In current market conditions, and knowing how important it is to employ a smart purchasing strategy today to ensure the best ROI in the future for your property investment, you should seek advice predicated on data and experience.
Have questions? Please know we’re here to help!
Have you been dreaming of a property investment opportunity? Check out our new listing at 152 Sorauren. !
~ Steven and the urbaneer team