UPDATE: many things have changed in Toronto’s short term rental market since this blog was first written–click here for the latest update from the front lines!
Short-term rentals in Toronto? Really?
Most investors aim to cover their monthly costs with rental income, hoping to profit from the appreciation in value of the property. Even with 20% down, many investors only break even on a monthly basis. Longer-term, of course, the Toronto real estate market has produced consistently strong returns on capital.
The short-term vacation rental market is the same, but different. Like the traditional investment rental market, the hope and plan is to make a substantial return when the property is sold. But in addition the short-term market allows investors to earn a monthly income.
So what exactly is the Short-term Rental Market?
The short-term rental market is generally made up of people looking for accommodations ranging from 1 week to 6 months. It’s basically made up of 4 main groups:
- Vacationers who don’t want to spend $200+ a night to enjoy the city
- Businesspeople on shorter-term work assignments
- Newcomers to the city (who don’t yet have a more permanent residence)
- Home owners in between homes, usually the result of construction delays
Location, Location, Location
Everyone knows the 3 Rules of Buying Real Estate: location, location, location. Well it’s even more important in the short-term rental world, and how you judge location is different than it would be if you were buying somewhere to live yourself. (BREL tip: the Financial District, Queen’s Quay, St Lawrence Market and Queen West are top picks)
Financing and Costs
The key to any investment is getting the return that you want. Doing the short-term rental math is a bit different than running the usual investment numbers. Condo fees, property management costs, furnishings, professional cleaning and vacancy rates all need to factor into your math.
And when it comes to financing, you’ll need to consider interest rates, amortization periods and of course the size of your down payment. These are key decisions that will impact your Return on Investment (ROI).
Marketing and Property Management
Managing a short-term investment property takes time. Some of the activities you’ll need to plan for:
- Marketing–there are lots of great websites that will help you advertise the property. Great photos and a convincing sales pitch will maximize your rentals, and thus your investment
- Managing bookings and rental contracts
- Managing deposits and payments
- Check-ins and check-outs
- Coordinating cleaning schedules and inspecting the property post check-out
Of course it’s possible to outsource the property management functions; this will generally cost about 10-12% of the gross monthly income.
The money you collect from rentals is taxed as income but you will get to deduct the cost of the interest on your mortgage, condo fees and operating expenses.
When you sell the property in the future, it will likely be subject to capital gains taxes. Your accountant can you fill you on how that might affect your personal tax situation.
Like every profitable investment opportunity, the short term rental market is not without risks. Issues such as condo board restrictions that prevent short-term rentals to damage and theft and unexpected vacancy rates could all affect your return on investment. If you’re thinking of entering the short-term rental, make sure to educate yourself, balance the risk and partner with a real estate agent who understands the unique aspects of this marketplace. (BREL tip: work with us!)