Is it smart to invest in property right now?

Real estate has often been considered a safe option for the more cautious investor. Your hard-earned money is more than likely to appreciate in property eventually — everyone needs a place to live.

According to a poll conducted by Royal LePage in 2023, a quarter of all Canadians are planning on investing in property in the next five years — and of those, over 30 per cent will be first-time buyers. Some experts believe that with interest rates rising, it’s a good time to jump into the market if you can afford to buy a property outright.

However, for the majority of buyers who would need to take out a mortgage to invest in property, there’s much more to consider. In early June, the Bank of Canada raised its policy interest rate to 4.75 per cent, the highest benchmark rate since 2001. As a result, its prime rate also increased, which Canadian banks use to calculate variable-rate mortgages. That means even if you get a deal on a piece of real estate, any of the money you saved on a purchase price will likely go straight to the interest on your mortgage, rather than the principal.

So, is investing in real estate in Canada a great idea in 2023?

Where is the Canadian housing market headed this year, and beyond?

Before you even consider investing, it’s worth understanding where the Canadian housing market stands. Housing prices are rising, more people are selling, and interest rates continue their incline. As prices rise, the market is expected to stabilize and create more inventory.

“For those people who are riding the very edge of what they can afford, the last rate hike might knock them out of the market for a while,” says Millie Gormely, a certified financial planner in Ontario.[MB4] “The more people that happens to, the less demand there will be for what’s currently on the market.”

However, Gormely notes, there are also not as many new builds, which will limit just how much the housing market can cool off.

Some buyers have looked outside of hot markets, like Toronto or Vancouver, to invest in real estate. For example, average home prices in New Brunswick and Newfoundland and Labrador remain under $300,000. Storeys, the real estate news site, even suggests investors look outside the country: places like Montenegro or Costa Rica have cheap real estate that may be attractive as vacation or rental properties.

How much can you put towards a down payment?

Your options will really depend on whether you can afford to pay cash, or if you have to get a mortgage.

At the current rate, if your initial mortgage balance is high to begin with and you have a high payment, you might be in store for a large increase in your monthly payment if you have a variable mortgage rate. At that point, making an investment in real estate may not be worth it.

However, if you can put down a sizable down payment or, even better, pay all cash, you’ll have a lot more options available to you if the market stabilizes as predicted.

And if you’re serious about buying an investment property and it’s within your reach, it’s a good idea to compare mortgage rates and talk to a broker before making your decision.

Are you going to live in the house or rent it?

Rent prices across Canada are at historic highs right now. The average cost of a one-bedroom in Toronto is $2,538. Such high competition in the rental market could present an opportunity for a smart investor to make money and pay off their mortgage.

But there’s more to it. First, being a landlord is not passive income — you are dealing with your renter’s home, and all the legal and ethical obligations that come along with that.

While in most jurisdictions, you can set whatever initial rate you want after increases are legislated, “you can’t just double somebody’s rent in a year,” says Gormely. “That’s not a good business practice.”

So, renting the property out truly only makes sense if you can cover your own costs while also charging what the rental market in that community can bear.

If you plan to live in your home, or flip it after a certain period of time, the same calculations are needed to an extent: can you afford to make those payments, while also doing renovations?

And do you trust, based on market history, that you will earn your money back? “We can’t predict the future,” notes Gormely. She advises doing your research if you do really want to buy real estate. When in doubt — purchase property at a price point you can manage.