For many Canadians, investing in real estate has become a more attractive prospect than ever, although getting started can often be daunting. When looking into investment opportunities in the Canadian housing market, one of the biggest decisions will be determining whether to invest in a house or a condo. While each option offers unique opportunities, they are each also accompanied by a set of risk factors. In this guide, we aim to explore several facets of the real estate investment process, and provide you with the information that you might find helpful when trying to make the best decision for you and your investment future.
Before diving into the unique risks associated with either houses or condominiums, it is important to understand the general risks of a real estate investment. Typically, these risks will fall into one of three categories: market risk, credit risk, or operational risk.
Market risk refers to the uncertainty of the Canadian housing market . Property prices can fluctuate from year to year, and unexpected migration trends, along with government policies, and unforeseeable events can greatly impact municipal rent rates. For instance, movements in and out of urban cities, which impact market rent, may be based on factors such as unemployment, cost of living, or the continued prevalence of hybrid work models. One advantage of condos in this regard is that they are less likely to be rent-controlled than homes, allowing investors to take advantage of favourable market conditions without incurring many losses in poorer conditions.
In Ontario, for example, residential dwellings such as condos, rental apartments, and even basement units that were initially occupied after November 15, 2018 are not mandated to adhere to rent controls. This means that as a landlord of one of these properties, you might be able to raise rents as much as you’d like year over year. Various similar rules exist in some other provinces too.
Credit risk refers to the financial risk you are taking on through your mortgage loan. Many real estate investors aim to generate rental income that can pay off or partially offset their monthly mortgage obligations, but doing so is not always as easy as it sounds. When dealing with tenants, you must be prepared for the possibility of missed or late payments on your tenant’s behalf. With condos, the risk of non-payment is statistically higher than with houses, as suburban homes tend to attract longer-term tenants such as families. On the other hand, it is much easier to find short-term tenants for a condominium than it is to find long-term tenants for a rental house. The tradeoff of risk versus reliability must be carefully considered when making your decision. Also beware of professional rental scammers. Given the changes to Ontario’s Landlord and Tenant Act that came into effect over the last few years, landlords have very limited power and ability to kickout replace tenants who stopped paying their rent. The process can be long and very costly to a landlord with a mortgage on their property.
Operational risk refers to the realities of maintaining and monitoring a rental property. One advantage of condos in this regard is that they typically require less upkeep than suburban homes. This is because many maintenance tasks are taken care of by the condo associations, somewhat reducing operational risks. However, it is important to note that condo owners do instead have to pay annual and monthly association fees. Another advantage of condos in this regard is that they are often found in major urban centres and are easily accessible by public transit. This can make checking on your property more convenient, especially if you do not have consistent access to a vehicle.
Applying for an investment property mortgage can be daunting, but it does not have to be. By understanding the pros and cons of each investment type, you are better positioned to make a smart and well-informed choice, and the best choice for you.
A house will have a more straight-forward mortgage application. Typically, these properties are seen as lower-risk and more marketable than condos, so you may qualify for more favourable interest rates and terms. In order to be approved for a mortgage, your lender will examine your income, your credit score, and your debt repayment history, but there are also additional considerations. For more information, check out our guide on how to obtain a mortgage for a rental property.
While a house can be perceived as more risk-free than a condo for a mortgage lender, they are often a less accessible investment type. Compared to condos, houses typically have a much higher asking price, and therefore will require a much larger down payment. With the exception of some private mortgage lenders, in Canada, typically homes over $1 million CAD are required to be purchased with a minimum down payment of 20%, which means you will need at least $200,000 in savings to even begin thinking about purchasing a home in most parts of the GTA. In this sense, a condo can be a great first investment that you can then upgrade to a more expensive yet stable property once you have begun to build your wealth.
If you want to invest in a rental property, but are not sure if you can afford it, speaking to a Clover Mortgage broker about your financing options may help. For instance, homeowners with existing equity in their first home may be able to leverage it by refinancing your mortgage, applying for second mortgages , or applying for a home equity line of credit to help them qualify for, and finance, an investment property.
The potential for resale value will also play an important role in shaping your real estate investment approach. Factors such as the property's location, current state, and wider economic positioning amongst market trends must be carefully considered when deciding between a condo or a house.
Historically, houses have been favoured as investment options, primarily due to the value appreciation linked with the land they occupy. This, coupled with the freedom to implement home improvements and renovations , usually results in a higher resale value. On the other hand, condos have been progressively making their mark in the investment scene of urban centres. The ongoing trend of urbanization, coupled with the allure of a stress-free, low-maintenance lifestyle and access to shared amenities, have continued to fuel demand for condos.
Investing in either a condo or a house will come with its own set of pros and cons. Condos often appeal to urban dwellers due to their lower price-points and minimal maintenance requirements. Conversely, houses provide more control, potential for higher rental income, and usually higher resale value due to land appreciation. Ultimately, the decision to invest will be up to you, but you don’t have to face it alone. Here at Clover Mortgage, our team of brokers has decades of experience connecting aspiring property owners to the best mortgages, terms, and rates available. Contact Clover Mortgage today to schedule a free consultation.
In Canada, there are several tax benefits and deductions available for investment properties. Here are a few:
Mortgage Interest Deduction: Unlike the mortgage interest deduction for primary residences in the United States, Canada does allow for the deduction of mortgage interest on loans taken for the purpose of earning rental income. You may be able to deduct the interest paid on the mortgage or loan used to acquire or improve the rental property. It's important to keep accurate records of the interest paid for proper documentation. Your accountant will be best suited to help you with any tax planning around your investment properties.
Capital Cost Allowance (CCA): The CCA is a tax deduction that might allow you to recover the cost of depreciable property, such as buildings or furniture, used in your rental business. The CCA deduction is claimed over a number of years and is based on the class of property and its depreciation rate. The CCA deduction helps to offset the costs of wear and tear, obsolescence, or decline in value of the property. Again, a certified accountant should be consulted.
Property Taxes: Property taxes paid on investment properties may be deductible against rental income. You can claim the full amount of property taxes paid during the tax year as an expense.
Repairs and Maintenance: Expenses incurred for repairs and maintenance of the investment property might be deducted against rental income. This includes costs for routine repairs, such as fixing plumbing issues or repainting walls, to keep the property in good condition.
Utilities and Operating Expenses: You may be able to deduct expenses related to utilities (e.g., electricity, water, heating) and operating expenses (e.g., insurance, property management fees, advertising costs) associated with the rental property.
Travel Expenses: If you incur travel expenses for the purpose of managing your rental property, such as visiting the property, meeting with tenants, or meeting with property managers, you may be able to deduct these expenses. However, it's important to keep accurate records and ensure that the travel expenses are directly related to your rental activities.
Professional Fees: Fees paid to professionals, such as accountants or lawyers, for rental property-related services might be deductible against rental income.
With regards to any of the above points, it is important to consult with a professional accountant or tax expert to help you plan and understand your tax saving options and potential tax implications.
Here are a few common requirements for each property type: