Toronto: To Sell or to Hold ?

Question

I have a 100 year old duplex in east side of Toronto. I believe we will be going through either a flat or most likely a down market that could last upto a decade. Should I:

a) SELL and realize gain, or

b) HOLD and try to ride through the next 10-15 years.

If I decide to Sell, I will have to pay Cap Gain taxes and then wait on the sidelines to re-enter the market or find a new one.

If I Hold, I have tenants locked in for the last 6-7 years, so the rents are on the lower side.  But these are quality tenants. There might be no net cash flow and I am hoping no massive capital expenditure in the coming years.

I am interested to know the opinions of actual Investors and leverage collective wisdom. Real Estate pundits and real estate professionals are usually very Bullish and their views conflict with mine. Am I being too shortsighted (3-8 years) or my assessment of market is more probable?

Send me your views and please restraint from using foul language :)

Luc Boiron · Answer

If I were in your shoes, I would sell the Toronto property and buy cash flowing properties outside of Toronto. We just sold a Toronto century home and bought 3 duplex conversion projects in Ottawa and a single family in Brockville.
If you choices are keep the Toronto home or sell and wait on the sidelines, then keep the home.
Eventually, tenants move out and you can raise rents. I also think over the next years there will be significant appreciation. I don't mean 20% like in the past but long term enough I expect values to be higher. There is too much immigration and migration to Toronto and the GTA. On top of that, the older homes in Toronto are usually in areas were there isn't the ability to build more an people want to live closer to the city

Roy Cleeves · Answer

@Lalit R.

@Luc Boiron

I second Luc's suggestion.  Gain more cashflow in markets that still have very high rents in comparison to purchase price.

Either way - as long as you hold Real Estate one way or the other - you are in the game!

David Nakkila · Answer

Hello Lalit.

I am a Real Estate Agent and Investor here in the GTA. I can say that with the current levels of newcomers to the GTA in the last two years being at over 200,000 and housing starts hovering around the 70,000 level. You can see that there is a big divide in the amount of new homes being created vs. that amount of new people that need to be housed. Currently we are under supplied and I do not see us being over supplied unless there is a major shift in the economy. If that happens then you for sure do not want to hold a property over 100 years old as those properties will always drop in value the quickest and most suspectable to needing major repairs unless every single major thing is taken care of already. My suggestion for you is, Either hold onto it and collect rent(only if you are making good cash flow). If you are close to breaking even now I would suggest selling it and either putting the money into another investment or what I would suggest is buying one or two entry level properties under 5 years of age. Those will hold their value and be highly desirable for both investors and first time home buyers.

Another option is to move your money out of Toronto and move it into communities like Halton Hills or Guelph where the Go Train Expansion will benefit housing prices and are currently at lower price points then the rest of the GTA. Message me privately if you want to discuss some more. I want you to make the best decision for you. Thank you for posting about this issue in the forums for more outside input so you can decide correctly.

Regards,

David Nakkila

Lalit R. · Answer

Definitely. Challenge is with the rent so low for an apt with high end features and a deck, its not likely that the tenants will move anytime soon.

Theresa Harris · Answer

When the current tenants move out, raise the rent to market value.  It is hard when you can only raise it a certain amount and that doesn't keep up with market value.

Lalit R. · Answer

Roy Cleeves , Theresa Harris, Hai Loc, Huong Luu -- Thanks for your comments.

I have been raising my rents as per allowable levels every year but its usually between 1-2% a year. So currently i am lagging the market by almost 30-40 %.

As for taking additional equity out, since the revenue is discounted by almost 30-40%, there is very little room to service additional debt. Further, since its a older property, there are maintenance calls almost every other month and hence we need capital allocation for that as well.

2 of my biggest challenges in selling now are :

1. Capital erosion due to Cap Gain taxes

2. Finding alternate investment opportunity that can provide either high cash flow or high Cap Gain potential. Given the market cycle, either of these are challenging.

Let me know what some of you have done to counter these challenges.

On the flip side, holding the properties for the next 10 years doesnt ensure anything. I dont to end up in a RE recession cycle like those in Japan and India where there hasnt been price appreciation for more than 2 decades in Japan and 1 decade in India. My best bet seems to be able to turnover my tenants to get to market rents. This is very difficult in Ontario as every landlord knows. PM me if you have any suggestions.

Lalit R. · Answer

@Daniel Massicotte -- Thanks for you comments. I completely agree with you on how most of us are over-exposed in RE. Biggest benefit of RE is that its usually a leveraged position while the returns are on a nominal basis. This benefit is not so easily replicated in Stocks/ETFs. I do have exposure in Energy Stocks ( Enbridge directly and others indirectly) but the returns are more or less around 4% Dividend yield and a very volatile cap gain. If you have a specific strategy in Energy that can yield better, let us know and I would be happy to explore that as well.

Daniel Massicotte · Answer

Why don't you sell it, and educate yourself in energy stocks. RE is at the top; meanwhile energy is at the bottom. Everyone on this forum seems hell bent on taking RE money and putting it back into RE. You could buy dividend aristocrats and fund the rest of your life with dividends not having to lift a finger.

I think most RE pundits on here are long RE and nothing more.

Where's the "Investing with Your Profits" sub-forum?

Huong Luu · Answer

I am in the same position you are. What I decided to do is keep all the properties and leverage them (ie HELOC) and started buying properties outside of GTA and started money lending. From the sounds of it, you have already seen gains in your property. Are you leveraging that so if the market does go down you have already recouped your investment and making additional income from it? You can also position the property financially so that if the value goes down, you are able to still see a positive cash flow.

In addition, I am using the IFA (Immediate Funding Account) strategy to help pay for the capital gains. If you have kids or want to leave the properties to a charity, this might be something to think about.

Hai Loc · Answer

Look at your options

#1  you sell an old property, get dinged with capital gains but have an opportunity to buy a newer better maintained property

#2   you can refinance take out enough equity to maintenance home and get new tenants and possibly purchase another rental

#3   you do nothing and hoping a 100 year old home doesn't collapse..

predicting market conditions may not be wise. You are thinking too long term take it year by year

Toronto: To Sell or to Hold ?

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