Q: What is the best investment that you can make in real estate today?
A: Residential income property located on a major arterial road within the secondary plan of a small town in the GTA.
I work with a lot of small-cap investors, and I get asked this question regularly. I’m typically reluctant to answer the question because the answer isn’t objective. The quality and value of an investment depends heavily on an investors’ wants and needs, and therefore, there isn’t really a good way to answer it from a high-level. This is why I make it my job to build strong relationships with my investors, so I can intimately understand their needs, and then meet those needs.
That being said, I get asked the question often enough that I finally decided to shed some light on it. The answer to the question above is a pretty simple one, and it’s based on four key reasons, which I will expand on below after a planning overview:
- You can purchase this type of property at a discount by comparison to an identical dwelling in a residential subdivision.
- You can generate better residential rents by comparison to an identical dwelling in a residential subdivision.
- You’re functionally purchasing with residential mortgage terms, but taking possession of a site that will ultimately become a commercial development site.
- You’re able to create real value growth (not merely praying for capital appreciation) in the property as a result of the secondary plan zoning process.
Secondary Plans are designed by municipalities as a review or amendment to their original official plan, which is often outdated and doesn’t respond well to the changing demands that small GTA municipalities are met with. Essentially, Secondary Plans outline new land use guidelines that are often focused on newer planning principles, such as built-form planning and microurbanism. These municipal plans are often bullish on the adaptive reuse of underutilized or functionally out-of-place properties on major arterial roads. Many of these properties are still classified as residential homes by zoning and MPAC uses. The roads in the areas that most of my investors are searching are as follows:
- Aurora: Yonge St, Wellington St., Bayview, Leslie.
- East Gwillimbury: Green Lane, Mount Albert Rd., Queensville Sideroad, Leslie, Yonge, Highway 48, and Woodbine.
- Georgina: Woodbine, The Queensway (Leslie), Dalton, High Street, Black River, Pefferlaw Road, Highway 48.
- Newmarket: Davis, Leslie, Yonge
- King: King Rd, Dufferin, Keele St., Highway 27, Main St Schomberg, Highway 9 (Davis) – for context, I actually worked in Economic Development for King Township on a land review of these corridors after their Community Improvement Plan was released.
- Whitchurch-Stouffville: Stouffville Road, Highway 48, Woodbine
Understanding planning intentions
Most small-town secondary plans call for future land use that follows the principal of microurbanism, which is sustainable and welcome. In a lot of cases, this means medium-density and mixed-use infill sites are encouraged by the secondary plans. This would entail dotting the aforementioned corridors with some taller buildings, such as 4-6 storeys, to allow for greater density. Greater density supports businesses and energizes sleepy historic downtowns. Greater density in small towns also provide for walkability and proximate access to amenities, which is something that the aging population we’re seeing in Canada will demand more of in the fullness of time.
I can best represent my clients by knowing and understanding how all of these secondary plans work, and what their intentions are. In fact, my office walls are lined with them, and within the N6 areas, I can typically tell you an assets fullest potential if you just give me an address. If you’re looking to invest with the strategy I’m outlining here, I’d recommend you try to understand these secondary plans to the best of your ability. Below is a screenshot of Newmarket’s Secondary Plan, which adapts a built-form, density-focused approach to its corridors with clear guidelines:
You can find more information about this plan here: https://www.newmarket.ca/secondaryplan
Why these assets are best:
1. You can purchase them at a discount
Outside of areas that have already been bought up by speculative investors, if you do a side-by-side comparison of a residential property on a secondary plan corridor against an identical home in a subdivision, you can actually purchase the corridor property for 5-10% less. This really boils down to consumer psychology, in such that residential home owners typically don’t want to live on main roads. There is greater demand for subdivision residential product, and therefore, the prices are higher.
2. You can command higher rents
This is where things get a little interesting. While owners don’t want to be on main roads, tenants often do, especially those in multi-family residential properties. This is because tenants value things like transit, walkability, and direct access to retail and commercial service amenities by comparison to owners. Most of the properties that fit this mandate are on direct transit routes and within walking distance to commercial nodes and schools. This effect has a lot to do with the lack of automobile-dependent lifestyle many tenants adapt, and furthermore, the reality that we are seeing a growth in rental among the aging population.
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” – Buffett
3. You can purchase with a residential mortgage
If you were purchasing a commercial or multifamily asset on the same street, you’d be expected to cough up 30-35% down payment for any good lender to give it a serious look. Because this mandate specifically suggests purchasing a residential property, you can purchase property with much more favorable lending terms, especially if you are planning to use it as a principal residence for some period of time. This ultimately means a better interest rate, lower down payment requirement, and better amortization schedule. That jargon translates to your bottom line by reducing the cost of borrowing, allowing you to build more equity from rental income while you wait for the site to mature into its secondary plan highest and best use. This reality allows you to achieve a greater levered return.
4. You can see real value appreciation, rather than praying for capital appreciation
This is the big one from my perspective. Canadian real estate investors have really adapted a skewed perspective as a result of seeing endless capital appreciation for the past 10+ years. I still see a lot of investors who want to purchase a property, lose money on its income scenario, and somehow come out on top by pumping equity in to cover the rent deficit. This is essentially using the asset as a savings vehicle. Use your principal residence if that’s what you need… but even that isn’t really economically sensible.
Although we did see a dip in freehold price and volume after the foreign-ownership tax in Q2 2017, most buyers haven’t really shaken off the perspective that property will appreciate in value forever. Of course it will in the fullness of time, but if you’re looking to use the step-up model on every 5-year mortgage renewal, or purchase property repeatedly to build a portfolio, praying for capital appreciation isn’t going to get you there. Income will.
The assets I’m describing in this post have been clearly described by the municipality as places they want to see growth, and they describe that very clearly through their secondary plans. In some cases, you’ll be able to build a mixed-use 4-6 storey building on these small residential lots, because that’s what these municipalities want to see happen there. That means that if you can redeploy the income you’re earning to fulfill planning studies and gradually advance the property towards site plan approval, you can double or triple the value of the site and sell it to a builder or build it yourself. The crazy part about the latter scenario is that you can typically leverage that newfound value into a capital structure that could allow you to get the construction financing yourself and build the project to its highest and best use. In that case, you’re functionally getting a commercial development site for a fraction of its cost, with far better mortgage terms.
The only variable in left the equation is time. Buy it, and wait.
If this sounds like something you’re interested in, I have a couple of pocket listings that fit this mandate very well, so give me a call.