2025 Real Estate Preview – what’s hot and what’s not and why ‘equity’ is key.

January 12th, 2025

Well it is interesting start to the year.  Trump tariffs on Canadian exports, a crashing Canadian dollar, and a new federal government in Ottawa. What is an investor to make of it all?

Welcome to my yearly real estate predictions on trends, where I think markets are heading, and most significantly, what I am doing in my own portfolio and that of my investors. I’m going to briefly discuss what the emerging trends are, and areas to avoid in 2025.

2025 will be the year of the ‘equity’ investor, meaning that equity will be the name of the game this year and beyond. Carefully managed leverage with healthy reserve funds will ensure your success whether you are a new investor or have been in the market for a long time. So, lets first look at what is NOT hot these days.

I would classify these as the fads that have run out of steam. Most notable being cryptocurrency, the CMHC multifamily MLI Select (5% down) program, as well as pre-construction condos. Leverage was the mantra of 2023/2024 where 5% down was not only allowed, but it was also encouraged. ‘Experts’ were teaching strategies on how to overleverage, including many investor focused realtors with very little experience. If you are on social media, you likely saw a flurry of these MLI SELECT 5% down HIGH CASHFLOW deals pop up.   Rookie investors dove in headfirst, but now I’m already seeing distressed, over leverage projects, with many more to come this year.  Those who got in early on MLI Select will do fine, however with construction costs, combined with changing rules to CMHC (notably having in place tenants prior to funding) has dramatically increased the risk. Select could become the Canadian equivalent of ‘sub prime’ lending that tanked real estate in the US back in 2008.

How do I know MLI Select is a fad? Because none of the smart money is using it. Nearly all my more experienced colleagues refuse to touch this program with a 10-foot pole, and instead are utilizing modest leverage to grow and manage their holdings. The reality about sound multifamily investing is that it’s all about the cash – the equity you bring to the deal which historically runs from 15% (CMHC) to 25% to 30% of the purchase with conventional lenders. I have in fact seen MANY large projects heavily discounted due to the ‘affordable’ financing that is placed on them, which handcuffs any potential buyer from fully renting up the project. Anything you will gain on leverage will be lost by not being able to fully raise your rents to market.

The reality is that 5% down in multifamily does not exist, as there are always closing costs and at least 5% of the asset value in reserve fees. Hence, if you think your going to buy an 8 plex for $2M with $100K down you may be in for a surprise.  Add on at least $30K of closing costs, and another $100K reserve fee and it’s now 10% down or higher. On a standard CMHC deal 15% down becomes 22%, and a 25% down conventional deal becomes 32%… you get the idea. Equity in any real estate deal is your best friend.

Bitcoin is at the end of the 3-year crypto cycle driven by the introduction of EFTs in America and Donald Trump’s pro crypto comments. Once in office, the strength of the USD will ‘Trump’ all other priorities, at the expense of crypto and most likely the Canadian dollar as well. Watch for a large crypto correction in early to mid 2025 which will present buying opportunities for those who are into bitcoin.  Don’t be fooled by the hysteria today, as many gurus pumping bitcoin are silently selling their holdings at the same time, and plan to buy the dips when the value drops. Patience will persevere here, in an extremely volatile asset that can drop 10% in value or more in a single day. There is simply too much ‘dumb’ money chasing rainbows with no work on their part.

Speaking of bad investments. Toronto condos, and the small condo market in general appears to be in serious trouble as more short-term rentals seem to be under attack by regulation, leading to listings piling up on condo’s that are too small to live in for families, let alone a single person. I have always found condo’s to be a bad real estate investment due to their price/rent ratios as well as most of the time not delivering positive cash flow.  Folks made good money on pre-sale condo’s if they timed the market right and experienced a lift from the time of down payment to possession, and often flipped for a quick buck.  In BC in particular, this strategy is very risky due to stagnant prices and new anti flipping taxation being introduced in 2025. This is likely the largest area I would avoid in real estate.

So where are the opportunities today? Well, if I were starting today, it would be single family suited homes or townhouses outside of Ontario and BC in areas with growing populations and strong economic fundamentals.  Multifamily value add (BRRRR) projects are once again viable since variable rates are going down, and expenses are stabilizing. This is offset by large renovation costs and very high price per door for multifamily assets Canada wide. Even on the prairies it is now very rare to find a project priced at 100K a door or less, and vendors expectations are high hence these deals are very hard to find, but they are out there.

The safe play would be 5 year buy and hold with conventional CMHC, or conventional financing with at least 25% equity. If you need MLI Select to make your project’s numbers work, then the deal is not strong and move on to something else. Even better plan for a 10 year hold with modest leverage and a healthy reserve fund and you will almost certainly succeed!

Watch Canadian energy stocks take off again, as well as REITS, especially office. So, for new investors avoid condos, except for townhouses, and for senior investors the play will be townhouse complexes and value add multifamily, which will thrive in virtually every market.

Interest Rates.  I predict that fixed rates will be largely unchanged, as the market adjusts to inflation vs. recession. GOC and CMB bonds have been virtually stagnant for 3 years meaning that fixed rates will likely be around 4% at the end of 2025, with variable (Residential) slightly lower. Bridge loans for BRRRR projects will become marginally cheaper as it is widely expected that the Bank of Canada will drop rates around 100 bps (1%) this year, but these predictions change quickly as you know.

Rental Vacancy Rates. Across Canada the rental vacancy rate has been rising for several months in a row, with downward pressure on rents. The fall CMHC multifamily report in fall suggests vacancy increased to 2.2% from 1.5% in 2023, so it seems it is rising but still below the 10 year historical average of 2.7%. Rent growth slowed to 5.4%, down from 8% in 2023. Much of this is seasonal, with December and January being historically slow months with rental activity picking up in the spring.  A lot of new product has come on the market, however demand still remains high so I expect a more balanced market in 2025 with strong rental operators doing fine, and tenants having more choices of where to rent in most cities.

So what am I am doing? First, I will continue to work for my current investors by selling several multifamily assets that were purchased in past 10 years. We have now reached our exit point after we were able to create a large amount of equity from rental increases in strong markets. These assets have plenty of upside, both in terms of improvements and rent increases in years to come and it’s time for new owners to take over.  I’m currently recruiting capital partners for a larger multifamily acquisition that I have been working on for some time that will involve a limited partnership on a 10-year hold strategy likely with a value-add component.

In closing, are you an investor from Ontario, or perhaps BC and are interested in getting into prairie markets such as Edmonton, Saskatoon, or Regina, but you don’t have the time or local contacts to confidently move forward?  If this is the case, I would like to hear from you and how I can help.

P.S. What are your thoughts and predictions?  What do you think will be hot/not in 2025?

Happy Investing!

Cory Sperle