Ask Me Anything - Investing in Toronto AMA!

18 Replies

Hi Folks!

Biggerpockets has always been a great resource for me, so I wanted to give back a bit to the community.

I understand that investing in Toronto makes me a bit unique amongst investors, so I wanted to open up the floor and answer any questions about investing in Toronto. A bit about myself. I started investing in student rental properties in 2001 in Waterloo and reached 21 doors at one point there. I also started investing in Toronto at the same time and in the last 7-8 years have almost entirely migrated my portfolio to Toronto. I did this because of a number of reasons: better tenant profiles, better returns, scalability, ability to execute more complicated renovations, local expertise, etc. Between and my business partners, we've invested in lots of areas, Hamilton, Waterloo, Sudbury and Edmonton - we've all ended back in Toronto. Of course, you can make money anywhere if you know what you're doing. This is just my personal journey.

I'll answer the number one question I get about investing in Toronto - Is it possible to get cash flowing properties in Toronto? - Yes! You can't expect to buy a single family property here in Toronto and rent it out and cash flow - it takes a bit more. We use a various strategies, but the most popular one we use is densification where we take single family homes and turn them into legal triplexes to get cash flow. It's not cheap or easy. Closing costs are around $300k and renovations can be upwards of $500k with holding costs. From closing to tenants moving in takes about 1 year. But we take a property from $1.2M and exit around $1.9-2.0M by the end of this process. If we hold after refi, we're getting about $500-600 in cash flow. 

Okay - let me know what other questions you have! I'm happy to answer!

Cheers,

Ming

Hey Ming! I heard you say in your podcast with Erwin that all units in a legal triplex must have forced air HVAC systems according to the building code. Do you have the exact reference for that in the code? I'm about to undertake a triplex conversion in Windsor and would like to reference it. Thanks! PS for some reason I can't tag people in these comments, so hopefully you see this. 

@Philip Robbins - Hi Philip! Perhaps I misspoke on the podcast, but the requirement isn't that triplexes must have forced air HVAC, it's just the easiest way for us to achieve the required fire separation and meet the heat recovery ventilation requirements. It also allows each unit to have complete control over the heating and cooling, vs a shared zoned HVAC which is similar to a condo.

Fire should not be able to propagate through the HVAC, so if it's a shared HVAC, it'll need some sort of fire suppression system. Or something like a boiler with rads which by the nature of the system, wouldn't allow for fire propagation. The challenge is meeting the HRV requirements with a boiler / rad system, which means installing ductless AC, and now I'm back to a complicated multi-system solution.

Hope that helps!

Thanks Ming, that's good news because installing a forced air system in the third unit would be a major pain. Currently it's a duplex with furnace in the attic for upper unit and a furnace in the basement that supplies first floor and an unfinished basement. However, we are about to apply to make the basement a separate unit with furnace supplying just the basement and using a heat pump system for the first floor apartment. Really appreciate the clarification! Phil 

@Ming Lim I’m interested in becoming a first time real estate investor this year. I have built quite a bit of equity in my downtown condo (purchased 2016). I’m doing this solo, so I can’t qualify for too much - which forces me outside of Toronto core. I also don’t think taking on a big project would be smart as I lack the experience. Do you have any recommendations on types of properties or locations around the gta? I am looking at Kitchener in particular, and perhaps condo or sfh. Thanks in advance!

@Shauna Sara - My personal opinion for beginning investors, is not to chase "the best area" or "the best kind of property" to invest in, because it's not as important as you might think it is. Here are a few things I would focus on.

Be an expert on your target demographic - We're really specific on the kind of people we're looking for to rent too. We like young professional Millennials, 2-5 years out of university, earning about $60-80k, working in areas like, tech, law, finance, healthcare, etc. Why do we like this demographic? Because in our eyes, they're the perfect tenants - because me and my friends were just like this when we were in our twenties. We would rather eat Kraft Dinner than be late on a rent payment and we took great care of the places we lived in. Plus, people in their twenties are transient and naturally move every few years. This may seem counterintuitive at first, but having tenant turnover is the easiest way to bring rents back up to market. We don't believe in renovictions, or other underhanded strategies, to raise rents. So, we focused on buying in areas that this demographic wants to live, which leads me to my next point.

Be an expert in your area - Where ever you invest, be it Kitchener or Hamilton or Waterloo or Toronto, it doesn't really matter. You can make good money in any of those places as long as you are an expert in the areas you're buying in. You should know on a street-by-street level differences in the homes, prices, and demographic. I always jokingly say, if you don't know the difference between Moss Park and High Park, and you think they're just nice parks, don't invest in Toronto.

Look at the total return of your investment - This was one of the biggest lessons for me was to look at the overall return of my investment. Not just the cash flow, but look at the cash-on-cash + cash-on-appreciation, and cash-on-equity. You'll notice that purchase price is not a consideration in my calculations. Not because that isn't important, but purchase price is not a function of returns. So give yourself a range that you'd be comfortable investing, and look for properties within that entire range.

It's not all about the money - As my portfolio grew, I came to realize that getting an extra $200 or cash flow meant absolutely nothing to my daily life. It's not like I was going to retire with an extra $200 a month. Heck, in Toronto, that's one fancy dinner. Instead, once I got okay cash flow, I cared about other things. Is it difficult to manage? Can I scale easily? Do I have a team to execute in that area on my strategy - contractors, property management, etc.? Questions like that became much more important.

Anyway, sorry for the long reply, but "where should I invest" is kind of the wrong question in my eyes. I believe anyone that tells you XXXXX place is the best place to invest, doesn't know a thing about your knowledge, your goals, and your comfort level.

If you want to do student rentals, for example, you should know everything about the university you're investing near. What are their growth plans? What has the city allowed for in terms of student rentals? What do students want to live in? Where do student want to live? It should be clear where you should invest if you know all the answers to my points above - and the answers for that will be different for everyone.

Hope that helps!

Cheers,

Ming

Thank you @Ming Lim for offering your experience! I live in Toronto and I’m looking at starting with a student rental for my first investment. I’ve considered either Oshawa or Hamilton, hoping to find a cash positive opportunity. I wonder if you think this is a good way to start out? I have about $400K equity in my home and want to use 80% towards a down payment for the rental. I have the income to support it. My other thought is to invest close to home in an area I know. I live in the west end of Toronto and there’s 3 new condos going up all within 5 minutes from my place (west st clair w, near the stockyards). 

What would you do with my financial situation? Am I on the right track with student rentals or a condo in the west end of the city or is there something else you would suggest that’s more favourable?

Thanks in advance and really looking forward to hearing your thoughts!

@Renee McGrady - Goodness - I forgot to reply to you! We've always approached investing by fundamentals. What does this mean to me?

  1. 1) Major centers of employment and population - esp in a post COVID world. We won't be working from home forever and offices, malls, places of entertainment will all return one day. With that in mind, I would want to invest in an area where the local economy is as diverse as possible as there's a greater chance of buffered impacts to employment. 
  2. 2) Transportation - the trend is away from people not owning their own cars. So public transit is key. Even for those that choose not to use public transit, you'll need a place well support by uber and the other drive sharing programs. 
  3. 3) Tenant profiles - This is super key. Wherever you're buying you want to ensure you're getting GREAT tenant profiles. Responsible, young professionals are who we go after. I can write pages on why, but in general, we want tenants who'd rather eat Kraft Dinner and still make rent if they're short on money. We stay far, far away from what my business partner loves to call, the "beer and weed" tenant profile - people who will spend their money on beer and weed, and pay rent with whatever is left over.

Hope that helps!!



Cheers,

Ming

Originally posted by @Ming Lim :

@Renee McGrady - Goodness - I forgot to reply to you! We've always approached investing by fundamentals. What does this mean to me?

  1. 1) Major centers of employment and population - esp in a post COVID world. We won't be working from home forever and offices, malls, places of entertainment will all return one day. With that in mind, I would want to invest in an area where the local economy is as diverse as possible as there's a greater chance of buffered impacts to employment. 
  2. 2) Transportation - the trend is away from people not owning their own cars. So public transit is key. Even for those that choose not to use public transit, you'll need a place well support by uber and the other drive sharing programs. 
  3. 3) Tenant profiles - This is super key. Wherever you're buying you want to ensure you're getting GREAT tenant profiles. Responsible, young professionals are who we go after. I can write pages on why, but in general, we want tenants who'd rather eat Kraft Dinner and still make rent if they're short on money. We stay far, far away from what my business partner loves to call, the "beer and weed" tenant profile - people who will spend their money on beer and weed, and pay rent with whatever is left over.

Hope that helps!!

Cheers,

Ming

 Hi Ming! How can you decide if an area has good tenant profile or not?

Originally posted by @Amber C. :
Hi Ming! How can you decide if an area has good tenant profile or not?


Hi Amber,

Much like a standard business, you want to approach your investing with your customer (tenant) in mind. Who are the best tenants? Well for us, they're young professionals, responsible, mid to late 20s into their mid 30s. They're earning 60-80k a year. About 5 years out of school. University educated. They work in tech, finance, consulting, engineering, etc. Most of them work in the downtown core, or these days at a home office as their knowledge workers. They like to live / work / play all within the same neighbourhoods. They don't drive or own cars. They take public transit and uber. 

With all this information, we work backwards - where do these people want to live?  We've done our research and most of these folks want to live in the downtown core. Pre-covid, about 75% wanted to live right in the core, about 15 mins max from work. 25% wanted to live a bit further as they wanted more space and are okay with a 35min max commute to work. It's this 25% of folks that we target specifically. 

The question is for you, what tenant profile are you after - more specifically what is a "good" tenant profile to you? Students can be "good" if they fit your business model for example. But students are "bad" for our business model. Why are you after that tenant profile? And lastly, where to do those folks want to live?

The question isn't "does my area have good tenants", rather it's the other way around. Where do "good" tenants want to live?

Hope that helps!



Cheers,

Ming

@Jon D. The time horizon is 12+ months from closing to tenants moving in, with additional consideration given to the longer lead times for permits and other construction-related activities during the pandemic, plus an additional 1-2 months for refinancing.

We will be discussing these case studies and other ways to make Toronto cash flow in our Jan. 30 Masterclass on the fundamentals of Toronto real estate investing - event details are posted in BP events and we would love to see BP investors at our event! https://www.biggerpockets.com/...

Hi Ming, appreciate you coming on here to answer questions and share insights. I have a few questions on refi. What are general requirements for refi, and do they differ across lenders? Are there steadfast rules that banks/lenders follow when refinancing a reno? For example, I read somewhere that going from a single to a duplex won't qualify for any refi. Appreciate any insights here. Lastly, does it matter the loan is under personal/residential or commercial in terms of refi?

@Seb Ko - Hey Seb! I'm happy to give back. If you find my stuff useful just upvote the post to help others too.

Refi requirements are pretty much the same as qualification for a new mortgage - in that it's going to be a deep financial exam. T1's, T4's, leases, bank statements, etc, etc, etc. I go through refi's and mortgage qualification so often that I just keep a Google Drive folder with all my key details in it. Every time I get a financial slip, I just put a copy in that Google Drive link and my mortgage broker has access to it at all times. Requirements will differ across lenders and will be different if you already have existing financing with that same lender. For example, you could have a collateral mortgage already set up as part of your first position mortgage making is easier to get lending from the same lender (or harder to get a 2nd mortgage from a different lender). 

Generally, improving a property, as long as your lender lends against these types of properties, you should be able to refi. What is more key is that your improvements aren't beyond the norm of the area, as there won't be comps to support your ARV.

Commercial vs personal qualification is an entirely different kettle of fish. In broad terms, it's generally harder to qualify for any financing as a corp.

The best thing to do is to reach out to an investor focused mortgage broker like @Jacob Perez to go through your personal situation.

Hope that helps!

Cheers,

Ming

Hi all, first off very insightful information on this post. Thank you all so much!! My names Zach. I am a contractor/carpenter in the gta looking to get into real estate investing as well. I’ve been educating myself for the past couple months and I am definitely ready to take the next step. My networking game has been terrible to say the least prior to this year but I’ve really been concentrating on connecting with more people. I am looking for jv’s, investors, business partners and also to create great relationships with every single person I talk to. thank you Ming for your insight and thanks to all who contribute on a regular basis. If anyone wants to chat, please feel free to message me. Have a great day everybody!!

Zach