A few days after Liberal Finance Minister Bill Morneau moved to douse the sizzling real estate markets in Vancouver and Toronto with tough new mortgage eligibility rules, realtor and custom home builder Sahil Jaggi was strolling through his latest project – a spacious luxury house located on a North York corner lot formerly occupied by a postwar side-split.
“I don’t just want to build cookie-cutter homes,” he said, pointing to the energy efficiency systems and a stark, modernist exterior with Bauhaus inflections. As a contractor finishes up, the 31-year-old owner of Mink Homes points to a crawl space beneath the basement steps that appears to have inadvertently been left with no access point – something no one noticed until the property showed. Such one-off projects, he added, involve a lot of attention to fine detail. “It was a tough journey.”
And one that’s been getting that much tougher with the double-digit escalation in residential real estate prices in Toronto in the past two years.
Until recently, Toronto custom builders and small developers interested in in-fill projects had mastered the art of buying deteriorating homes in up-and-coming areas, rebuilding them, and the flipping the end result for a healthy return.
In the case of Mr. Jaggi’s North York project, the math worked especially well: He purchased the original home four years ago for $700,000, and sold the new one earlier this month for $2.6-million – about a million dollars more than the unimproved house would have fetched in the current market.
But some observers say the buy-and-flip market has become far too frothy for this kind of transaction. “My general opinion on flippers is that a lot of people who were doing well a few years ago are out,” said Trevor Bond, an agent with Bosley Real Estate, adding that most flippers he met were targeting the $750,000 to $1-million space. Now, “they can’t afford to get in.”
Other agents said that as prices have skyrocketed in the central core, and as more buyers were demanding houses with the sort of high ceilings and ample parking amenities that even extensively renovated older homes don’t have, the downtown new build market began to dry up.
What’s more, Mr. Bond added, the financial rewards of simply reselling the unimproved property may surpass the return on an extensive renovation or new build, especially when the cost and hassle of obtaining permits and dealing with contractors is factored in.
He cited the example of a client who purchased a very run-down Leslieville home and a vacant adjacent lot, with plans to combine the two properties and build a small townhouse rental project on the site for an income investor.
But after the city’s planning staff flagged parking requirements that would have made the venture uneconomical, Mr. Bond urged his client to “test the market” without making any improvements at all. “They made a lot of money just for reselling the lot. If you can buy, hold and sell, you’ve made 20 per cent per year.”
Indeed, Mr. Jaggi, who says he has amassed a $9-million portfolio of nine investment homes across Toronto since 2012, knows that story from the inside. His investments include another North York home, bought for $515,000 and sold for $1.5 million. “I didn’t touch it.”
However, he doesn’t share Mr. Bond’s skepticism about the viability of flipping properties in Toronto, even with prices where they are at the moment. After working in banking and corporate sales, Mr. Jaggi, and a small network of investors, began buying older homes in emerging areas about four years ago.
His formula: locations that are within 15 minutes of a highway, close to transit, the core and, increasingly, the lake. Mr. Jaggi looks for areas where he can find other contemporary or modernist designs, and has been focusing increasingly on southern Etobicoke neighbourhoods such as Alderwood and Long Branch. He aims for detached properties in the $600,000 to $800,000 range, and keeps his company’s debt levels relatively modest by renting them out until the area’s prices start to increase sharply.
“I am still buying,” he said. “This year alone, I bought four houses in Toronto.”
“The trick is not to get into a saturated market,” added Simon West, an Etobicoke residential architect who designed the North York home Mr. Jaggi just completed. He added that low interest rates and a desire on the part of many buyers for newly built homes have continued to draw investors into the tear down sector in suburban areas, despite high prices. “People are not taking a massive risk.”
But the buyers of such properties, Mr. Jaggi noted, want luxury amenities, which is why he spent more money building that new North York home than he did on purchasing the property four years ago. “You want to be 20- to 30-per cent above the market,” he said of the target value. “If prices drop, you’re still ahead of the game.”
Indeed, the question is whether, or how, Mr. Morneau’s moves, which target mid-range earners and homes under $1-million, will affect flippers and the people who look for such properties.
“I think it’s going to put a damper on a lot of activities and that’s going to be one of them,” Mr. Bond said, adding that a quarter of his clients from the past year, including those looking to buy and flip, would not have been able to source mortgages under the new restrictions.
Mr. Jaggi, and the investors behind his fledgling company, remain more bullish. He’s planning to start work on two new-builds in Etobicoke within the next year. “It’s all about doing your homework before you buy.”