Real estate investors looking to buy, fix and flip housing for profits in Toronto are increasingly finding it difficult to sell their upgraded properties, let alone make the kinds of margins that justify the risky ventures. Some are now turning their property portfolios into rental accommodations to help them weather the slowing market.
Of all the players in Toronto’s stubbornly slow real estate market, it seems the travails of the house flippers inspires the least amount of sympathy. In the past decade the practice attracted the negative attention of politicians, academics, housing-debt bears, the Canada Revenue Agency (which has cracked down on some of the common tax dodges associated with the practice) and scores of social media scolds who flock to accounts dedicated to uncovering real estate losses.
But according to some property investors, who wish to eschew the term “flipper,” what is finally chasing them out of the flip game is the lack of buyers, the slowdown in price growth and a rapid rise in construction costs. Mean tweets haven’t had nearly the effect on their activities as the softening market.
“It’s a tougher market, it’s been getting tougher every year,” said Eduardo Pontes, who has worked in the mortgage and banking industry for 14 years, but about seven years ago began investing in single-home redevelopments himself after helping finance some custom-home flips.
“They were asking me for financial advice for how to handle their builds. They were making about $400,000 per sale. If you build a home in a year, or even every two years, that’s a good paycheque,” Mr. Pontes said. “Over time, with rule changes, finance rates going up, the whole situation that’s going on, the spread to make margins is very low now … you’re down to about $150,000 [margin]; it’s not as desirable.”
As an example, Mr. Pontes bought a building with two semi-detached units on 116 and 118 Sorauren Ave. in 2016 for $650,000. In partnership with designer Nicholas Ancerl he tore down the units and rebuilt them as separated and more contemporary structures. He attempted to sell 116 Sorauren in 2018, with asking prices that changed over time from between $2.38-million and $2.88-million. He says he eventually sold the house for about $2.6-million, although Ontario’s land registry shows no recorded sale as yet. More recently Mr. Pontes listed 118 Sorauren, where he says Mr. Ancerl has been living, for $2.438-million.
In recent years Mr. Pontes says he has noticed some of his former flipping clients changing tactics. “It got to a point where builders weren’t building, they were buying and holding onto it; they changed their direction as to where they want to make money,” he says. Now, he too is looking for properties that can be subdivided into rentals, with upgrades to secure top dollar.
Imran and Winnie Latif have followed a similar path: as the Toronto real estate market neared the end of its decade-long hot streak they left office jobs behind – she was an accountant with KPMG and he was a financial advisor – and began investing in real estate together. In 2014, they paid $649,000 for 114 Sheridan Ave. in Toronto’s Little Portugal neighbourhood; at the time it was a rooming house with nine bedrooms. The couple learned on the job, slaving away chipping off stucco, fixing the structure, rebuilding all the rooms. They initially thought the Victorian rowhouse would make a great triplex, but ended up deciding on a showpiece single-family home.
"We’d estimated $250,000 [for] renovations; ended up being north of $400,000. We bit off a little more than we could chew,” Imran says. Still, it cemented the couple’s bond: they started the project as boyfriend-girlfriend, Imran proposed in the middle of the kitchen renovation and by the time they were finishing the house about a year and a half later they had married.
“There were times where I was terrified and scared. I had the whole wedding on credit cards and I was really uncomfortable, we owed everybody for the house,” Winnie said. “Luckily, with Chinese weddings you get a lot of cash back. … I was able to pay off everything and we refinanced the [finished] house.”
By that point the newlyweds say they decided to live in the house at 114 Sheridan as they continued to do projects for clients, friends and families (Winnie’s family had invested in rentals over the previous 20 years). But before long the market began to change.
“No one realized it was the peak. Right up to 2017, that’s when it popped around April-May. We had renovated for a client, he listed in April and that week was when everything fell down,” Imran said. “Three people showed up [for the showing], our seller didn’t get the price he was looking for so he decided to wait. It took another six months to sell and the initial offers were maybe $50,000 under what he wanted. What he finally sold for was $100,000 below [his ideal price].”
That didn’t stop the Latif’s from investing, but with construction costs rising almost 9 per cent a year, according to Imran, they have stopped pushing aggressively for the “Wow” factor and are aiming at accommodations families can afford.
“Rather than making a $1.5-million house a family can’t get a mortgage for, we’re more focused on making multiple units,” Imran said. Their current project is in Riverdale, where they intend to live in the upper floors of a detached they are renovating with plans to rent out the basement and main floor. Before they settle on living there, they will try to list the house and see if they can get a quick sale at a good price. “We think there’s a good market, a much safer market there. A lot of people now want to share a house, the newer generation they don’t mind.”
It all adds up to a more cautious approach to a business that still carries a good deal of risk. And they say they did come out ahead on the Sheridan flip in 2019, selling for $1,645,000 on Jan 31 after listing in late 2018 for $1.75-million.
“I’m more conservative, I feel like we’re sometimes underwater but it works out in the end,” Winnie says. “Imran has the big picture vision, he visualizes something and he doesn’t compromise. He needs to complete the job, even if that means borrowing more funds.”
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