Recently, many friends have been asking me whether they should sell their rental properties now that their tenants are moving out, given the uncertain Toronto real estate market, or continue renting them out. They wonder if selling now is like falling into a pit. Today, let's discuss what to do when you have a vacant property and explore the underlying trends in the Toronto real estate market.
First, let's address a common argument: The market is bad, and many real estate agents are painting a bleak picture, urging everyone to sell quickly before prices plummet further! But remember, don't just listen to what people say; look at what they do. Many agents who are predicting a crash haven't sold a single property themselves. So, an agent's rhetoric and a genuine market downturn are two different things.
Personally, I have several investment properties in Toronto, mostly condos and a few low-rise houses. I haven't sold any of them during this market downturn! The reason is simple: I am a long-term believer in the Toronto real estate market.
Long-Term Optimism: Three Reasons!
- Declining Interest Rates: Although current interest rates are high, they are already on a downward trajectory. There's a high probability of two to three rate cuts this year, which will definitely improve affordability for homebuyers.
- Acceptable Cash Flow: My condos generate decent cash flow, generally breaking even, and some even have a slight surplus.
- Population and Immigration Demand: Toronto's population and immigration numbers continue to grow, which is a long-term driver of housing prices.
Of course, in the short term, the Toronto real estate market is indeed relatively weak. According to the latest market data, sales are down year-over-year, inventory is up, sales velocity is slowing, and prices have also declined slightly.
| Indicator | May This Year | Same Period Last Year | Change |
|---|---|---|---|
| Sales (Units) | 6244 | 7206 | -13.3% |
| Inventory (Units) | 30964 | No Data | +41.5% |
Home prices have fallen from $1,168,000 to $1,121,000, a relatively modest decrease.
So, what's causing this short-term market weakness? The main reason is the large number of condo pre-construction closings. Toronto's population grows steadily, adding about 100,000 people each year. In 2024, an estimated 30,000 condo units will be completed. This number, combined with low-rise houses and existing inventory, is certainly enough to house the new population, even with some surplus. Therefore, the real estate market is indeed experiencing oversupply in the short term.
However, in 2024, only 4,600 new homes were sold across the Greater Toronto Area and Hamilton. In 2025, another 30,000 condo units are expected to be completed. Based on the sales pace in the first quarter of this year, only 2,000 to 3,000 new homes may be sold throughout the year.
This situation of 30,000 completions and only 3,000 sales is certainly unsustainable. Eventually, the homes sold in 2024 and 2025 will also be completed. And there will eventually be a year when only 3,000 to 5,000 condo units are completed. At that point, condo prices should theoretically start to rebound. I estimate that the average market rebound will occur significantly earlier than this point, perhaps in the second half of 2025, the market will be better than the first half.
Since I am a long-term believer in the Toronto real estate market, does that mean we should hold onto all our properties forever? Of course not! In the following four situations, even in a less-than-ideal market, you should consider selling:
Four Situations: Consider Selling!
- You Don't Want the Hassle of Managing Tenants, Especially in Older Properties!
The difference between new and old properties is crucial. Properties built after November 15, 2018, are not subject to rent control. This means you can increase the rent an unlimited number of times every 12 months. Going from $2,000 to $20,000 is perfectly legal!
Although new rental rates are unlikely to be significantly higher than market rates initially, the situation changes after tenants move in.
Old landlords have virtually no bargaining power when dealing with bad tenants and cannot drastically increase the rent. They can only increase rent by about 2% each year, according to rent control regulations. If tenants refuse to leave, go to the Landlord and Tenant Board (LTB), the judge may even reduce the amount owed or give the tenant a second chance. If you want to get rid of a tenant paying a very low rent, you basically have to offer "cash for keys." Some tenants paying $1,000 below market rates may even demand $50,000 or $100,000 to move out!
New tenants are much easier to manage and don't require cash payments. Rent can be increased an unlimited number of times every 12 months. If the tenant is good, you can increase the rent to 95% to 98% of the market rate; if the tenant is bad, you can drastically increase the rent to $20,000, and the tenant will naturally leave. Even if you encounter a tenant who refuses to pay rent, you can obtain more compensation from the LTB by drastically increasing the rent.
The proportion of problem tenants is significantly higher in older properties than in new properties. Due to rent control, older properties should never be rented out at significantly reduced rates, as it will be difficult to increase the rent later.
Therefore, my suggestion is that older properties are best for owner-occupation and not suitable for renting out. If vacant, sell them as soon as possible. Selling an older property and replacing it with a new one is a good option.
- Excessive Debt Pressure, Can't Breathe!
There are two types of debt pressure:
* Optimize your debt-to-asset ratio and reduce total debt.
* Optimize cash flow and reduce monthly repayment pressure.
If debt pressure and cash flow pressure have become so severe that you can barely breathe, selling property to recover funds and reduce debt is indeed the right choice. Selling sooner is better than selling later.
Excessive cash flow pressure usually means that your annual income, after deducting living expenses, leaves you with little to nothing, and you may even need to rely on your parents or spend your savings to make ends meet.
In Toronto, most properties purchased with high down payments will have some negative cash flow. However, if you have a stable job, no retirement plans within five years, and can manage the negative cash flow on your property each year while still having funds left over at the end of the year, then you don't have excessive debt pressure. In this situation, the anxiety is more psychological, and it's not advisable to sell at a low price.
- Preparing to Leave Toronto Permanently!
Many of the properties sold by my team this year fall into this category. The landlords have made up their minds not to return to Canada, so they have decided to sell both their primary residences and investment properties. In this case, you should sell!
If you are preparing to develop your career in the United States or return to your home country to see what’s going on, and are unsure whether you will return to Canada, you can consider renting it out. Even if the vacant property is your old primary residence, you can ask your family members to move back to live there and use the N12 form to evict the tenant. Of course, you will need to pay the tenant one month's rent.
- Trading Up from a Smaller Home to a Larger Home!
Which has fallen more since the 2022 peak, condos or detached houses? Which has fallen less?
| Housing Type | February 2022 (Peak) | April 2025 | Decline |
|---|---|---|---|
| Detached House | 1797203 | 1431495 | -20.35% |
| Condo | 799666 | 678048 | -15.24% |
During the real estate market downturn of the past three years, condos have fallen less than detached houses. Therefore, if you want to trade up from a smaller home to a larger home in the current market, the value proposition will be fantastic! Even if the percentage decline is the same, the total loss on a smaller house is less than on a larger house.
Case Study: This Property Should Not Be Sold!
Let me give you an example. Unless you are in dire straits, you really shouldn't sell this property. The list price for this property is $798,000, with land transfer tax of approximately $26,000 and legal fees of $2,500. The rent is approximately $4,000 (I have also rented out similar units at this price).
Assume an 80% loan with a 4% interest rate (some banks may offer even lower rates). The monthly principal payment is $935, and the interest payment is $2,100. Insurance is $35, maintenance fees are $631, repairs are $50 (I think $600 a year is excessive), and property taxes are $325.
In this case, the total rental income is $48,000, and the total operating costs are $37,000. Assuming you bought this property with cash, the annual net rental yield is 4.45%! This is almost on par with some multi-family properties!
The annual net rental income is more than $10,000. Although there is a slight negative cash flow, less than $100 per month, the annual rental income is still positive because a portion of the principal is being paid down each month.
Assuming the property price increases by 3% each year, after five years, you will earn $50,000 in total rental income and approximately $120,000 in appreciation, resulting in a very good return! If interest rates drop to 3.5% this year, with an 80% loan, the cash flow will also turn positive.
Therefore, I think it's a shame to sell this property at this price. Unless the landlord is genuinely facing financial problems or has loan issues and has no choice but to sell. Otherwise, it's better to keep it!
Conclusion:
2025 is the bottom for the real estate market, especially for low-rise properties. If not necessary, don't sell! Unless the vacant property meets one of the four conditions I mentioned above for selling. If you are still unsure whether to rent or sell, feel free to send me the address, and I'll help you crunch the numbers!