“Interestingly, if a buyer back in 1996 had been given the choice between buying a condo in the downtown and a suburban detached house in Scarborough, the condo would have been the better investment.” – Macleans, August 7 2014

Often at CONNECT Asset Management we get questions about historical prices and our predictions for the Toronto housing market. The truth is, trying to predict the housing market is tricky. Instead, we prefer to look at historical data to help us inform our current decisions.

This is exactly what we are going to do today.

I got the question from a curious friend the other day, “Matt, what if I had bought a rental property 20 years ago, what kind of returns would I be looking at today?”

This is a fantastic question, so let’s go back in time to 1996 when the Macarena and pagers were cool.

I did some quick calculations with my friend, making a few assumptions along the way, but here is how our project unfolded.

What If I Bought A Rental Property 20 Years Ago? The Math!

The five-year fixed average mortgage interest rate among lenders in 1996 was 8%. In 2006, that number dropped to 5.6%, and is an average now in 2016 of 4.6%. For ease of analysis, we will assume that your rate throughout your 20 mortgage amortization was 6%.

According to our numbers, the average condo sale price for 1996 was $135,908. This is average between all bedroom types — studio, 1, 2, and 3 — but let’s assume you purchased a 2-bedroom condo.

With a 20 per cent down payment ($27,181), your mortgage payments at 6% over 20 years would have been $778 a month.

With historical condo fees, insurance, and property tax, it’s difficult to average out over a 20-year period. But, I would suggest that a good investor, such as yourself, would at the very least break even. No cash flow, no income deficit, for 20 years until the mortgage is paid off. This is a conservative assumption, as the investors we advise work with positive cash flow.

Fast-forward to 2016, where the Macarena is only played ironically and two-thirds of the human race now use smartphones.

In 2016 Q1, the average condo selling price in Toronto was $393,589 according to The Toronto Real Estate Board (TREB).

Ok, now we are almost there, just a little bit more math to figure out our current costs:

• – According to Condos.ca, the average monthly condo fees for a 2-bedroom unit in Toronto is $588.
• – Based on a $393,589 current value and the City of Toronto’s property tax calculator, your monthly tax expense is $231.
• – For insurance, on average Canadians pay $840 annually. It is difficult to come across averages for rental properties specifically to Toronto, but let’s assume a $75 monthly expense.

Because your tenants pay utilities, your all-in costs are $894. The average rent for a 2-bedroom condo in Toronto for Q1 2016 is $2,375.

With average condo fees, property tax, and insurance at $894 a month, you are looking at a monthly cash flow of $1,481 because 20 years have passed and you are now mortgage free. Plus, you are sitting on an appreciating asset with a current value of almost $400,000.

And that is just one property!

Now, we are 2016, and we continue to see strong growth prospects for Toronto area real estate — condos in particular. In 2036, you don’t want to be reading CONNECT’s updated virtual reality blog (copyright pending), learning about a similar missed opportunity. Let’s start planning ahead for your future!

Our motto here at CONNECT is: plan, invest, retire. Let us help you now with the first two.