Cash Flow or Capital Gain: Which Is Better for Investing?

A big question on a lot of people's minds: to invest in Toronto real estate, is it better to focus on cash flow, meaning rent, or to invest so you profit from the home rising in value? Anyone bringing money into this market should know their own answer. I am Moe Asgarian, a senior real estate broker in Toronto, ranked number 47 worldwide at RE/MAX.

First, any real estate investment should aim to profit two ways: as much as possible from rent, and as much as possible from appreciation. So both matter. But everyone's situation differs.

Why new investors should start with cash flow

If you are just entering this market, cash flow should be your priority. Someone who has been in this for 20 years and someone making their first investment are in completely different positions, and for the newcomer, having more money in hand each month is more important. Cash flow lets you profit from the start, pay part of the mortgage, and cover some of the home's costs. Retirees should also prioritize cash flow. For example, if they sell a home in Iran and invest in Toronto, they should focus on a place that rents well. Note that this is all about investing. If you are buying a home to live in, that is a different matter.

But appreciation still matters

Even if you rent well for a few years, if you eventually sell at a low price or small gain, you did not really profit. The numbers show Toronto home values have risen far more over the years than Calgary. From 2005 to now, if Toronto prices rose about 4 percent a year, the average in western Canada was about 1 percent. Toronto is great for rental investing, and while I am not a Calgary specialist, in general that kind of investment works there too.

How cash flow helps you hold

When you get a property with better cash flow, one that puts money in your pocket each month or at least does not require money from your pocket to hold, it helps you keep the property longer. There is no pressure on you, and history shows the longer you hold, the more you profit in the end. Positive cash flow makes that much easier. Remember taxes differ too: you pay tax on both your gain when the home rises and on the rent you collect, and tax on rent can be higher. So going for appreciation can mean paying relatively less tax on that profit.

House or condo in Toronto

Until 2022, when rates were low, the condo market in Toronto was hot. Units sold fast and rents were high, so both capital gain and cash flow rose. After 2022 the page turned. When rates rose, condos no longer made sense for investing. That is natural: houses are bought more by end users and families, while condos, being cheaper, suit investors. So when rates rise, the investor loses more, and the condo market has been stagnant for a couple of years, with negative cash flow and no price growth, so many held on rather than sell. Looking at the data from 2005 to now, buying a house has profited more. Houses also have no fixed maintenance fee, which makes them financially more attractive.

The renovation advantage

One more option with houses is renovation. The economic value of renovating a home in the Toronto GTA is higher than the rest of Canada, because the property is worth more and appreciates more. A good play, for example, is to buy an old detached home for 800,000 dollars, spend about 150,000 to lift its value, then rent it at a good price for a solid GTA investment. My team and I work on investment projects for many clients every year. If you'd like a straight answer for your own situation, fill out the form below and book a free consultation. Stay well and take care.