In the current real estate landscape of the Greater Toronto Area (GTA), interest rates have reached all-time highs, resulting in mortgage payments that are double, if not triple, what they were just two years ago. However, there are solutions and strategies that can be employed to turn these challenges into opportunities, whether you’re a homeowner or an aspiring real estate investor. In this blog post, we will explore these strategies and discuss how they can help you navigate the high-interest real estate market in the GTA effectively.
The Impact of High Interest Rates:
As of today, variable interest rates are hovering around 6%, while fixed rates are in the low 5% range. Comparatively, two years ago, variable rates were as low as 1.5%, and fixed rates were around 2% for mortgages. This substantial increase in interest rates has led to a significant surge in mortgage payments. For example, a payment that was once $2,300 is now closer to $4,000 for a property valued at $800,000. If you’re considering a million-dollar property, you can expect an additional $1,000 added to your monthly payment. Affordability has become a significant concern as incomes have limited flexibility, whereas expenses have risen considerably.
The Challenge of Low Inventory:
Compounding the issue of high interest rates is the problem of low inventory. The limited supply of available properties has prevented a decrease in prices to reflect the high interest rate environment. As a result, buyers are competing for the same properties, further driving up prices. This situation extends beyond the buying market and also affects the rental market. Rental rates have increased by approximately 30% to 40% since the pre-pandemic era due to the scarcity of rental units. This situation presents an opportunity for homeowners and investors to leverage rental income to offset their costs.
Utilizing Secondary Units for Rental Income:
One effective strategy to counter the rising mortgage costs is by adding secondary units to your property and renting them out. The high demand for rental units allows landlords and investors to charge premium rents, ranging from $1,500 to $2,500, for basement apartments or separate dwelling units. By renting out these additional units, you can cover a significant portion of your mortgage payment, effectively reducing your monthly expenses and enabling you to save substantial amounts each year. This approach is particularly beneficial for single-family homes that lack a second kitchen or the possibility of accommodating another tenant.
Advantages of Multi-Unit Properties:
Investing in properties with multiple units is another way to leverage the current market conditions. While single-family homes may no longer be financially viable due to higher mortgage payments, properties with secondary dwelling units can generate substantial rental income. For instance, in Toronto, Mississauga, Brampton, and Hamilton, properties with a second unit can be purchased within a budget of $900,000 to $1.1 million. Renting out these secondary units can cover approximately half of the mortgage payment. In Hamilton, for example, the basement unit alone can fetch around $2,000 per month, significantly offsetting your expenses.
Exploring Third Units and Garden Suites in Ontario
In recent years, a new trend has emerged in the GTA, allowing property owners to create a third unit within their properties. This is made possible by converting detached garages or meeting building code requirements to build an interior garage or an additional unit on the property. While properties with three units are not as common, this strategy can significantly reduce costs. Each unit can be rented out for an average of $1,800 to $2,200 per month, potentially covering the entire mortgage payment. Although creating a third unit requires additional funds and effort, it can be a worthwhile long-term investment that provides financial stability.
Conclusion:
While high-interest rates have posed challenges for homeowners and real estate investors in the GTA, creative strategies can help turn these difficulties into opportunities. Adding secondary units to your property or investing in properties with multiple units can generate substantial rental income, offsetting the higher mortgage costs. Exploring the possibility of creating a third unit within your property can further enhance your financial stability. By adapting to the current market conditions and implementing these strategies, you can navigate the high-interest real estate market in the GTA with confidence and make the most of the available opportunities.