Oliver Foote

How to Get Started in Real Estate Investing or Flipping

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

People have been buying run down and dilapidated things, then fixing them up and reselling them for a profit for as long as there have been things that break. It has now taken on a style of it’s own when it comes to real estate. Some people might argue that flippers are just investors who take away supply from other potential buyers. But I can tell you from experience, that the majority of people who are in a position to buy a home they plan to live in prefer to have the home at least 90% complete and up to their standards before they move into it. The people who are ok with a home that requires a ton of work, or has been used as a hoarder home, or is a century home that’s half falling apart, are almost exclusively investors who are then competing with other investors. I think that investors and home flippers are doing a service by purchasing homes that no one else is willing to go near, then turning them into something that is liveable and will appeal to the mass market. If they make some money along the way, more power to them. Capitalism at work. Obviously, it has become clear that relying solely on the private market to manage the housing of an entire country is not the most ideal strategy, there are flaws in every system. That’s a discussion for another day.

For todays discussion I’ll focus on how flipping homes works and some things to consider if this sounds interesting to you. Firstly, you need to have a reasonable level of confidence in your abilities or your contractors abilities if you go the route of purchasing a run down home. With home prices where they are now in Toronto and the surrounding area, even a very poorly maintained home can fetch an absurd price because of the land value and other factors. If the move-in ready home is “only” 100,000 more, most people find it a very reasonable trade-off to pay a tad bit more and avoid the hassle of renovations. That leaves a select few people who are willing to pay the high price and take on the risk of doing renovations with the hope of possibly making some money on the sale. Over time as more and more people have learned about home flipping and the real estate market becomes more efficient, the “gaps” in the market become smaller and smaller which makes it more difficult to make a profit as an investor. You pile on a serious supply demand imbalance due to population and other factors and you find yourself in a bizarre situation where people will pay a premium just to simply get ANY home, regardless of condition. This is not an ideal market dynamic in my opinion for investors or end users.

When is a good time to flip homes?

People say that you can’t time the market, while there is some truth to this, I believe that you can absolutely make educated guesses about where the market will likely be headed. Let’s take a look at some recent examples. If you were considering flipping homes from 2020 to 2022 it would have been a good time to do so because the Bank of Canada cut interest rates at the fastest pace in recent history to prop up a potentially failing economy, and alongside the fed they effectively saved the stock market form complete collapse. This led to significant appreciation one year later. Real estate generally lags behind the stock market, and prices take a bit more time to move. But seeing the unprecedentedly low interest rates at which you could borrow money, locking in a 5-year fixed mortgage was a no brainer at the time. Even if your renovation took 1-2 years, with money being so unbelievably cheap, and so few people willing to put their homes on the market, it doesn’t take a rocket scientist to see how that equation would lead to increasing prices. After the development of a vaccine it provided people with the confidence they needed to be around others again and provided a visible pathway to the end of the pandemic. Around this time in late 2020 early 2021 all the stars were really aligning and they were pointing at the fact that the real estate market was going to get a little bit crazy.

Not every shockwave of the pandemic lockdowns could have been predicted. For example, tradespeople became very challenging to find, and this made home renovation projects more expensive and extended their timelines quite a lot. This is where having some backup plans for any risky investment is always a good idea. In the case of the covid real estate market, being willing to do some of the work yourself would have been a very useful backup plan if you were a home flipper as well as planning ahead and being flexible with the materials you used, since it was nearly impossible to find certain items in stores. A good majority of home renovations can be done DIY with YouTube and a small time investment you can learn how to do pretty much anything nowadays. I would only recommend the DIY strategy if you are willing to put a significant time investment into the home, and have some amount of prior experience, because even though it might be quick to learn it can take a lot of time to complete. It’s also important to factor in the carrying costs into your profitability equation and to budget at least 1.5x the amount of time you think it will take you to finish a project, and even then expect it might take longer than that. Hofstadter’s law states that a project always takes longer than expected, even when the law is taken into account. The best way to ensure that you come out ahead is to use a very conservative equation to manage your costs while also baking in some profit as a buffer.

Purchasing in a depreciating market on the other hand can lead to losing money on the renovation, which is why I like to recommend investors have multiple workable strategies for each investment. You can actually come out ahead by making an educated guess during a falling market as to where you think the bottom or near bottom might be. If you take this approach you need to have multiple strategies and be willing to weather a storm if it turns out you were wrong. If you were banking on the appreciating to get you out of a flip profitability and it doesn’t happen there are a few other options. For example you could turn the property into a long-term or short-term rental, you could get creative with the renovation by including a basement suite to turn the property into two units instead of one, which generally increases your potential rent and final sale price. If you do use the rental method as a backup, it’s important to understand that you will likely be leaving equity in the property which might prevent you from doing another deal in the short term and you also have to be ok with the risks and responsibilities of being a landlord. Making sure that a property has multiple workable strategies is very important to prevent you from completely losing your shirt, especially if it’s your first investment and if you’re unsure what the market will do in the short to medium term. It is also important to actively try and avoid risk. With the amount of information out there today it doesn’t take a genius to figure out that eventually the gravy train of appreciation in 2021 was going to come to an end. The actual end date was up for discussion at the time and I think many people assumed the fed and BoC would increase rates sooner than they actually did. This is where being cautious comes into play. It can be hard to think clearly when you get swept up in the FOMO of real estate news stories talking about people making crazy amounts of money. Getting swept up in the hype and not understanding your own risk tolerance (i.e. how you’ll feel deep down if you happen to lose the majority or all of your investment) is often what leads people to making mistakes and losing money. Ensuring that you are thinking clearly, understanding your own tolerance for risk (there’s nothing wrong with the slow and steady approach), and making sure than an investment will work on multiple levels are all great ways to hedge your bets as an investor.

What does the flipping market look like today?

In our current market there are still opportunities to renovate homes and be profitable, you just have to be more certain about your purchase + improvements price than maybe you needed to be in 2020. I’d consider our current market stable with respect to prices and appreciation. The next move from the Bank of Canada is largely anticipated to be an interest rate cut. So if you buy today I would say there is a reasonable probability that interest rates are lower a year from now which means that prices at the very least are likely to stay stable and more likely to appreciate a small amount from today. Don’t expect anything crazy, but if you buy at a great price there is still room out there to make money as an investor. I would say the biggest difference in this market is that carrying costs have increase significantly thanks to the increased mortgage rates. This means that if your project goes over time, it can cause a significant dent in your profitability. So I would highly recommend being even more conservative with timelines or baking in a higher percentage of profitability to make sure that you still come out ahead.

Many professional investors use various marketing strategies to find off-market properties to purchase (i.e. properties that are not listed on the MLS). A common one is sending out mail to houses in a particular area and offering a quick closing to a distressed home owner. There are companies out there who “wholesale” homes. Basically signing a contract with someone with the option to assign the contract to another person, or even with the option to list their home on the MLS. Sometimes these companies will act unethically and a homeowner will sign something without understanding that there is an option to assign in the contract or that this person will be listing their home and doing showings. Without saying too much on this topic, I want to make it clear that I find this approach to business deplorable. Honesty is extremely important with whoever you are doing business with even if that is the only time you will do business with that person. Your reputation is everything, so if you promise a potential homeowner something the expectation is that you follow through with the promise. There are people who wholesale homes and run their business in a very honest and upfront fashion, I have absolutely no problem with that if the homeowner knows all the facts and decides that is their best option. As a homeowner it is important that you read the contract you are signing, and ask around your network for a trusted lawyer to look at the contract if you are doing an off market transaction. To be blunt a big reason people end up working with Realtors is because it is their full-time job to make sure they have your back, and if they mess up you have someone to blame (and sue). But if you’re doing everything yourself you don’t have the level of regulation, expertise, or insurance that Realtors have in order to protect consumers when dealing with what is usually their largest asset. Of course you can just as well come across an unethical Realtor who is only looking out for themselves and does a poor job looking out for you. But at the very least you have some amount of recourse and consumer protections when working with them.

That was a bit of a tangent so let me wrap up here by discussing how to increase the chances of an investment working out. As I mentioned above, trying to find off market deals can be a serious win when it comes to purchasing a property at a great price. There are a myriad of strategies to find people who are willing to sell, whether that’s flyers, door hangers, door knocking and pitching your proposition to them, online marketing methods, networking with friends, family and co-workers. You do have to be somewhat cautious if/when you do find someone willing to sell and I would recommend asking the homeowners if they would be opposed to a home inspection or at the very least doing an inspection yourself. Sometimes the homeowner might be willing to sell you the home, but doesn’t want to have strangers coming through their home. This does make it a bit more challenging from the investors perspective and if you choose to go through with a purchase you have to be ready for pretty much any problem on the books since you couldn’t get an inspector in to see the property. Depending on how many properties you’ve invested in before or how much experience you have with home building or home inspection you may have enough personal expertise or a friend whom you really trust that can give you a reasonable idea of the condition of the home and if it’s worth offering something to the homeowner.

This is again where risk tolerance comes in, making sure your profitability equation bakes in some of these risks, and preparing multiple viable strategies for the end use of the home (e.g. flip, rent, wholesale). You can find potential homes on the MLS to purchase as well, many investors are quite successful through simply purchasing homes that are on the market and negotiating a strategy that works for them. If you are looking for a deal on a publicly listed home here are some tips. First, look for homes that have been on the market for a long time or have been badly mispriced. Beyond 30-60 days is when sellers tend to realize they may have mispriced their home and this can open them up to negotiations.

Second, find out what the sellers situation is. This is where I would recommend getting a Realtor you trust and are willing to work with to call up the listing agent and try to get as much information as they can about the sellers reason for selling, urgency, and what types of things would make the seller more likely to accept an offer or what kinds of offers they might consider. For example, maybe they have to close by a certain date due to starting a new job. Maybe they will only sell if there is a firm cash offer and are just “testing the market” (these types are generally very hard to negotiate with, since they have no urgency and only care about getting their price). Maybe they are willing to consider a Seller-Financing mortgage at a lower rate than the banks can give you. This can serve as an annuity for the seller (e.g. monthly income) and allows you to give them the final higher price they are looking for since the financing could be cheaper than the banks offerings. You would have to coordinate with your agent and have them work with the listing agent to call up a lawyer and write up a contract for the seller to become a lender. The seller would likely be well advised to do some due diligence on your ability to pay the loan, as well as including the usual provisions in a mortgage such as the right to repossess the home if you default. This can be a challenge to pull off, but working with the right partners can make it a possibility. The seller might be ok with an extended closing which gives you time to find more funds or research development or rezoning opportunities that add more value to the property than a simple renovation thereby making the deal possible.

Lastly, the seller might even be willing to come in as a joint venture partner (if you have a proven track record) and allow you to renovate the home while retaining most of the equity and provide a 50/50 split on any profits made on the renovation and sale of the home beyond a certain price after factoring in costs. As you can see there are almost limitless ways to structure an investment that works for both the buyer and the seller, much of it depends on your risk tolerance, skill set, and your team. Which brings me to my final point, regardless of the approach you take it’s important to assemble a team of people that you trust in order to be successful in your investing endeavours, that includes people such as a real estate agent, mortgage broker, lawyer, home inspector, city planner, and various tradespeople that you trust. Having a strong team of advisors can make or break an investment, especially when dealing with one that has so many moving parts. I would highly recommend if you are thinking of getting into real estate as an investment and are considering any of the more complicated strategies that you find an investor who has done what you are thinking about doing and see if they are willing to spend some time talking with you about their experience. Research online, listen to investing podcasts, and most importantly just get started. You can easily overwhelm yourself with information and prepare until your eyes bleed out but nothing beats real world experience. Be prepared that it may not go completely as planned, start small with something just outside your comfort zone then build on your experiences and improve each time.

Hope that you found this information useful or interesting, feel free to leave a comment with your thoughts on this topic. I’ll see you back here in two weeks with another post.

All the best,

Oliver Foote

Newsletter #10: Realtor Lawsuit, House Flipping and Investing, Bank of Canada Holds Rates

Another week another newsletter. This week some interesting news came out about the ongoing lawsuit in the US, it could have an impact here in Canada, only time will tell. It will be interesting to see what kind of impact this will have on the US real estate market and if there will actually be a noticeable change. I wrote a blog post about flipping homes but it sort of turned into a how to invest, when is a good time to buy, and how to avoid risk to make sure you come out alive. Enjoy!

This Weeks Blog Post:

How To Get Started in Real Estate Investing or Flipping:

My take on how to become a real estate investor with a focus on flipping
Understanding the risks, being risk adverse, and different investing strategies
Building a team of professionals to stay safe, and do it well

Read the full blog post here: https://oliverfoote.ca/2024/03/17/how-to-get-started-in-real-estate-investing-or-flipping/

Housing News:

Real estate fees could fall after settlement with US agents: https://www.bbc.com/news/world-us-canada-68582949
- Big settlement just came down where the NAR in the US has stated they will make it easier for buyers to negotiate their fees.
- A similar lawsuit is in the courts in Canada.
House flipping surges in Calgary’s hot real estate market: https://www.cbc.ca/news/canada/calgary/calgary-metropolitan-area-house-flipping-data-1.7143857
Experts are expecting more buying activity this Spring as first time buyers return to the market which could lead to an increase in prices. Helped by the somewhat lower lending rates banks continue to provide.
Bank of Canada Rate held rates on Wednesday March 6, 2024. Citing continued concern for the persistency of underlying (core) Inflation. Housing inflation continues to be elevated and is the largest contributor to inflation. They expect inflation to stay close to 3% during the first half of the year before gradually declining. Real GDP grew 1% in Q4 2023. Employment remains stable. This likely puts a potential rate cut into late Q3 or Q4 of this year, if at all.

Market Performance as of close Friday March 15, 2024:

S&P 500: 5,117.09 (+7.89% YTD)
NASDAQ: 15,973.17 (+8.18% YTD)
S&P/TSX Composite 21,849.15: (+4.68% YTD)

Canada CPI Inflation Jan 2024: 2.9% (0.5% Decrease from Dec 2023)
Current BoC Benchmark Interest Rate: 5% NC (Next Meeting: April 10, 2024)
Unemployment Rate Feb 2024: 5.8% (0.1% Increase from Jan 2023)
Hope you have an amazing week! Chat soon!

-Oliver Foote

Why Owners are 28x Wealthier Than Renters

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

I wanted to talk about the ever popular debate on renting vs. owning with a focus on how the finances pencil out at this moment in time, and which option makes more sense from a Return on Investment (ROI) perspective. Toronto is a notoriously expensive housing market, especially when to comes to ownership, and renting often times appears more affordable at a glance. For the same space in Toronto it is often much cheaper to rent than it is to own (although this gap has narrowed with increasing rents and a temporarily stable housing market), and this is true across many major cities in Canada. On the face of it most people would think, “I’m getting better bang for my buck renting! Why would I ever bother purchasing?” This is somewhat shortsighted in my view and I think many people do not run the numbers on why homeownership over the long term is a more beneficial route financially (plus having the freedom to do with the property as you wish and not having a landlord). There are many very important factors that people forget to include in their renting equation which I am going to be calling the 4 horsemen of real estate ownership.

There are a few reasons why people might be biased towards viewing renting as the better option in the short term. Firstly, it can be difficult to predict prices and appreciation in the short term. For example, if you purchased a home in 1990, it would have taken about 10 years for your home price to recover from the housing market lull. If you purchased a home in early 2022, the value of your home in the current market (February 2024) is likely below what it was in 2022 and may be for another 2-3 years until those prices come back. This is partly why if you look up renting vs. owning you will often notice that ownership becomes more beneficial the more long-term you plan to hold onto the real estate. Often times if you plan to stay somewhere short-term it may actually be more beneficial to rent. I always lean towards the side of ownership when possible because there are ways to own and manage property even if you are out of province or out of country. In many cities you also have various options whether that is renting your property short-term or long-term. If you can afford to stomach a month or two of rental vacancies, you will almost always come out ahead in a high demand real estate market.

I would encourage any young person to try to enter the property ladder as soon as possible, and I’m not just saying this because I have my real estate license. I have held this belief well before I had my license. Allow me explain why I think home ownership is so benificial with some data you may find interesting. According to Statistics Canada, in 2019 the average renter had a net worth of $24,000. You might be saying, “well that makes sense, it could be a demographics thing where younger people tend to rent and some people just can’t afford to save for a home.” According to the same study, the average homeowner, on the other hand, had a net worth of $685,400, or 28 times higher. There may be some truth to the demographics of younger renters and older owners, but I believe it’s more of an education and discipline problem. So allow me to explain why this gap is so massive.

The first reason deals somewhat with human nature, most people are not savers by habit, and our 6% national savings rate proves this, in the US it’s even worse at 3.7%. For people who are not the pro-active and disciplined type, “spending” money on a mortgage can actually turn into “investing” money into real estate. Paying down a mortgage becomes a “forced savings plan” for the average person. Furthermore, many people will lack the discipline it takes to budget and save 20% or more over a number of years for a down payment. It takes a different kind of mentality and work ethic compared to simply paying rent and neglecting to find ways to save some extra money. You might have to find a place that is not as nice and therefore cheaper, you might need a second job to squirrel away all the extra cash, and you may have to skip out on a few vacations. Many people are not willing to sacrifice in order to save a down payment or they make poor financial decisions taking on debt they should not have before they even think about saving.

Luckily, not everyone is a financial mess. For people who are savers they may just prefer renting for one reason or another, or have never been shown the numbers in order to pull the trigger on home ownership. So for these people let me begin by stating that the returns on real estate (can) surpass the stock market due to a combination of reasons. Being a home owner has almost a quadruple benefit compared to renting or simply investing the equivalent which I will explain next.

Firstly, as a homeowner you get to feel the joy (or pain) of paying your own mortgage rather than paying your landlords mortgage. From a selfish point of view, it’s nice to know you’re paying into something you own rather than something someone else owns. Down the line maybe you get a tenant of your own and have them help out with your mortgage, that is known in the business as Cash Flow. Often times even if a home is “negatively cash flowing” (i.e. costs you money every month to “operate”), the other three benefits can hugely outweigh this.

Secondly, every month a portion of your mortgage payment goes to interest and a portion goes to principal (i.e. the original loan amount). The part of each payment which goes towards principal is known as principal pay down, which becomes “equity” in your home. For example, if you purchased a $1 million home with a 20% down payment, immediately out of the gate you have approximately $200,000 of home equity and the other 80% is a loan. Lets say your mortgage rate in present day (February 2024) is 5.29% fixed for 5 years, with a 25-year amortization. By 2029, or the end of the first 5 year term, you will have paid down approximately $88,755 in principal and $198,392 in interest. In this case you now have approximately $288,775 in home equity, before factoring in appreciation. You might look at this and say, “hey! I just paid $200,000 in interest! That’s crazy, what a waste of money!” This is often where people forget that homes tend to appreciate in value over the long term. The value of your $1,000,000 asset likely increased to beyond $1,000,000. Therefore the equity in the home has increased, but the loan value DECREASES at the same time thanks to your principal pay down. Over a long time horizon these two lines diverge and what’s left in the middle is (often significant) home equity.

Thirdly, the GTA over the last 40 years has appreciated at approximately 6.7% per year (in the 10 years prior to 2020 it was closer to 10% appreciation due to continually decreasing interest rates, we likely won’t see that same type of growth again). Factoring this 6.7% appreciation into the equation, in 5 years the $1,000,000 home might now be worth $1,383,000. That’s an ADDITIONAL $383,000 of home equity. Combining the original $200,000 down, the $88,775 principal pay-down, AND the $383,000 appreciation, you now have $671,775 in home equity! If we take the TOTAL return on investment between principal pay down and appreciation, in just 5 years the initial $200,000 has grown by 235%! Even if you subtract the interest you paid over the loan term you are still sitting at a new net value of around $471,000, which is still over 100% ROI in 5 years. If you took that initial $200,000 and put it in the stock market at an average 8% return every year you would have $293,865 in 5 years. Which is not even 50% of the total home equity (i.e. $671,775).

Finally, you also have the ability to create “forced appreciation” by doing some simple improvements to the property, or dividing a property into 2 or more rental units to add value from an income generation perspective. There are a few well known improvements that can significantly increase the value of your property on the open market, and if you DIY it on the cheap you can add a ton of value while saving a good portion of the labour cost. That being said PLEASE hire someone if you’re not construction savvy, a hack job could actually cost you money in materials and hurt the value of your property. If done right, by not overspending or doing a poor job, this fourth horseman of real estate ownership can help send your return on investment even higher than I outlined above.

All of the reasons listed here prove why real estate ownership can be so powerful as a wealth building tool and why the average home owner has a net worth more than 28 times higher than a renter. Many people do not take the time to do the math on real estate ownership, or might not be aware of all the ways that owning real estate provides an amazing return on their investment. Naysayers might argue that the return is not guaranteed, well, neither is the stock market or pretty much anything else you invest in. However, real estate has the benefit of being a hard tangible asset compared to an intangible piece of paper (stock certificate). There is risk to any investment, your home could theoretically blow away or burn down. But you can mitigate this with insurance. Overall, you can make a good amount of money in real estate when you purchase at the right price. If you take the example about further you might also be able to see how owning multiple real estate investments can compound your wealth even faster, and it explains why many people who are well-off have a significant stake in real estate. Even if your home appreciates at a much slower rate than the one I present here, you are likely to come out ahead of the average stock market investor and well ahead of the average renter. I hope that after reading this you think about breaking into the real estate market sooner than later and begin to benefit from the 4 horsemen of real estate ownership.

All the best,

Oliver

P.S. When you sell a primary residence your capital gains are tax free, in Canada. Also, you can deduct mortgage interest from your taxes on an investment property and you can benefit from depreciation around 4% per year. I’ll cover these tips and more in later articles. The benefits to real estate as a tool for investment and tax deferral and wealth building is bar none in my opinion.

Newsletter #8: Why Owners are 28x Wealthier Than Renters, Real Estate News

This Weeks Blog Post:

Why Owners are 28x Wealthier Than Renters:

In this blog I show the numbers behind why home ownership can be so beneficial to growing wealth
I talk about the 4 different ways that real estate assets grow.
ROI of 235% over 5 years

Read the full blog post here: https://oliverfoote.ca/2024/02/18/why-owners-are-28x-wealthier-than-renters/

Housing News:

5-yr bond rate is ticking up slowly hitting 3.67%, some banks are continuing to offer declining mortgage rates.
TRREB market stats for January 2024 showed a decline in inventory across the GTA and a small uptick in prices from December. This is expected as December is seasonally the slowest month due to holidays. But there is indication activity will continue to pick up into the spring, especially if the Bank of Canada cuts interest rates.

Market Performance as of close Friday Feb 16, 2024:

S&P 500: 5,005.57 (+5.54% YTD)
NASDAQ: 15,775.65 (+6.84% YTD)
S&P/TSX Composite 21,255.61: (+1.84% YTD)

Canada CPI Inflation Dec 2023: 3.4% (0.3% Increase from Nov 2023)
Current BoC Benchmark Interest Rate: 5% NC
Current Prime Lending Rate: 7.2% NC
Unemployment Rate Dec 2023: 5.8% NC

Hope you have an amazing week! Chat soon!

Best regards, Oliver Foote

Canada’s Supply Crisis Will Get Worse Before it Gets Better

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post:

Factors Impacting Housing Prices:

It doesn’t take an evil genius to realize that the main thing driving housing costs so high in Canada around major economic centres is a lack of supply compared to the crazy demand we have. Last year we welcomed over 1,000,000 people to the country from immigration, international students, and most recently war refugees. Similar numbers are expected for 2023. The housing crunch will only continue to get worse because our pace of construction is not currently and likely cannot keep up with the demand anytime soon. There are a lot of things that caused these problems and continue to make it challenging to solve them, today I’ll discuss a few of them.

A study back in 2020 between Urbanation and the Federation of Rental Housing in Ontario was anticipating a rental unit shortfall of 200,000 units in the coming decade a new report published just 3 years later quotes the shortage at 300,000 units. The pandemic economy is one big factor that likely made these problems worse. The momentum of building new housing slowed temporarily and construction costs exploded as inflation took hold. Followed shortly thereafter by the rapid increase in interest rates. This meant that simultaneously while costs were still high, the cost of money was also high. Causing many rental and condo projects to be outright cancelled or delayed. This means that around 3-5 years from now when construction was supposed to be completed on all these new pre-construction projects that didn’t sell this year, as well as rental housing projects that were stopped due to cost overruns. We will experience even tighter supply on the market due to the high interest rate environment we are currently experiencing.

Secondly, we stopped building rental housing through the 80’s and 90’s for a variety of reasons. Similar to today the 80’s were a period of very high inflation, construction costs exploded, and government policies were put into place which tried to transfer the construction of purpose built rental housing onto the private market. In 1968 the first condominium project was sold in Toronto. They were seen as a way for people to own the apartment they lived in rather than rent it. This aligned with the Canadian dream of “own your home” and made it easier for governments to justify slowing their investment in housing. As we’ve learned from decades of underinvestment and very exclusionary zoning bylaws. In a rapidly growing economy like ours turns out that solely relying on the private market to supply all the housing was not a great idea.

According to this report by the FRPO, Urbanation, BILD, and Finnegan Marshall published February 9, 2023. They state that purpose built rentals made up 9% of new rental housing supply in the GTA over the last 10 years and 90% of purpose built rentals were constructed between 1960-1979 (approx. 223,954 units). There is an interesting line in this report that bears quoting, “looking forward, more challenging investment economics should lead to a reduced share of condo investors who buy-and-hold and a lower level of new condo launches, placing more emphasis on the development of purpose-built rentals.” As is stands today around 59% of all condos in the GTA are purchased by investors. However, the report is essentially saying that as construction costs continue to climb, buying condos as investments will become a more and more challenging proposition as the number of units that cash flow positively on closing continues to decline. Construction costs quite sticky and often outpace inflation so it’s unlikely that there will be any relief to make condominiums affordable again.

One shocking and problematic statistic is that we are only on track to add 135,000 new rental units between condos and purpose built rentals, but we will still be short by 177,000 units. One of the biggest barriers to getting projects completed is the development timeline taking on average 100 months, which is about as long as it will take my to pay off my student loans. It will take a focused effort to shorten this timeline as a majority of the delays stem from paperwork, not actual construction. If a lot of red tape does get removed, I think there will be some very good opportunities for developers and people who understand how to re-develop properties into multi-units. They will be contributing to the rental housing supply, and it will likely become easier from a zoning standpoint to push these projects through.

Another interesting dynamic at play here is immigration. Canada was built on immigration, and we have an amazing culture and country that welcomes people from every part of the world to try and build a better life. Canada is a place where everyone should feel safe no matter where you’re from and everyone is connected by the fact that we are all Canadians despite our diverse and different cultures. From an economic standpoint without immigration we would have a declining population, which would mean fewer workers, and with baby boomers retiring the Canada Pension Plan would be somewhat screwed without new workers to replace the ones who are retiring and living longer than ever. So from a purely economic standpoint we need immigration. But one thing is clear, we’ve done a terrible job planning for it.

To be fair, some of it was unplanned, like the war in Ukraine. But even within the immigration which we control, we don’t seem to be managing it very well. There seems to be a consensus brewing that if we plan to welcome so many people, we have to have housing for them to live in. I’ve personally come across some crazy situations in my real estate work, one such situation being students who are living 7 people to a 1 bedroom apartment in Mississauga to keep their costs down while studying in Canada. I can hardly fault them for wanting to save money, but this is not what I would consider healthy living conditions and it is concerning that we are allowing people to live in those kinds of conditions.

There is no easy solution to this problem, but it is heartening to see all this data that is now coming out identifying real numbers on what needs to be done in order to correct course. It is also good to see many new government policies that are addressing difficult zoning restrictions and allowing up to 3 units on almost any pre-existing single family zoned lot, as well as easier application processes for “laneway suites”. We are also starting to see an emphasis on getting people to work in the trades, because even if we approve all these new construction projects, we need people to build them and surprise surprise, we don’t have enough. I could go on for hours about our trades problem as well as zoning bylaws. But for now I’ll leave the discussion here and you want to learn more about how these topics fit into this housing puzzle subscribe to my newsletter because that’s what I’ll be discussing in two weeks! Subscribe to newsletter here.

(Link to next post coming Dec 24, 2023…).

Thank you for reading and we’ll chat soon,

Oliver Foote

Newsletter #3 – November Stats, Housing Supply Crisis, New TRESA Legislation in Effect!

As the year is winding down this is going to be the second last newsletter of the year. Looking forward to continuing it into the New Year and wishing everyone an amazing holiday season, hope you have an opportunity to get out and meet with family and friends and that you have a great 2024. I hope that all your wishes come true!

Now has never been a better time to be a buyer. There is so much supply to choose from and historically low levels of competition. This has been reflected in the stats from last month.

Here are some main points of interest:

GTA sees 3.96 months of supply (i.e. 1 in 4 homes are selling)
Listings are up 40% from last year, purchases are down 6% from last year.
Average price: $1,082,179, about the same as this time last year
Oakville saw some very highly priced condo’s sell last month skewing the Oakville average
Mississauga’s average price fell below $1 million for the first time in 3 years.

Some other bits of news worth sharing:

New TRESA legislation came into effect on December 1, 2023:

Open biding is now allowed
Designated agency: more clearly identifying which Realtor you are working with
RECO information guide to help consumers understand Realtor services
Self-Represented Parties are more clearly outlined (i.e. people who don’t work with a Realtor)

BoC Maintained it’s Policy rate at 5%
Canada’s GDP declined 1.1% in Q3
5 year government bonds have dropped almost 1% from their recent peak in October making fixed rate money comparably cheap to the past 4-6 months. Inventory remains historically high, setting up a potential pop in activity come the new year once more buyers realize they can afford to purchase again.

The Blog – December 14, 2023:

Canada’s Supply Crisis Will Get Worse Before it Gets Better: (Dec 14, 2023 Blog)
Canada is on track to have a shortage of 300,000 rental units in the next decade
We stopped investing in rental housing in the 80’s due to similar factors that we’re experiencing today
Consensus on the poor job we’ve done planning for immigration over many decades

Read the full blog post here: https://oliverfoote.ca/2023/12/14/canadas-supply-crisis-will-get-worse-before-it-gets-better/

As always thanks for reading, feel free to reach out to me at any time.

Best wishes in the coming weeks, Oliver Foote