TOP 10 TIPS WHEN BUYING YOUR FIRST INVESTMENT PROPERTY

When entering into the Canadian Real estate market for investment properties one must have complete understanding of the various elements involved. This is especially true for the Investors who buy properties to boost their income. Unlike purchasing stock, which may cost a dollar or two per share, you could easily pour six figures into your first investment property.

·         IT SHOULD BE FOR YOU: Property owners who have one or two homes often do their own repairs to save money. If you’re not a “get your hands dirty” type and you don't have lots of spare cash, being a landlord may not be right for you. Your first property will take a lot of your time as you learn the ins and outs of being a landlord. Think of it as another part-time job. Do you have the time?

·         LOCAL VACANCY RATES IN THE AREA: As a real estate investor, one of the most challenging roadblocks to success is property vacancy. Understanding the local vacancy rate will help investors to know how much money they will need to set aside for each unit that’s vacant within their property. The higher the vacancy rates, the more difficulty the investor will have in raising rents.

·         CHOOSING THE RIGHT PROPERTY AT THE RIGHT PRICE: Investing in real estate is usually all about capital growth, so choosing a property that is more likely to increase in value is the most important decision you will make, so buying at the right price is absolutely critical. The key for you is to do your research, work out what everything is selling for in and around the area and then you’ll discover that soon you’ll become very good at working out what a property is worth – you’ll know a bargain when you see it. Ensuring that you have a steady rental income stream is also vital because this cash flow will make the holding of the asset more affordable and provide income. It is also important that your property suits the demographics of renters in the area. For example, if it is near a university more bedrooms will be in greater demand than a big backyard for kids to run around. A family home that is close to schools and parks on a quiet street will be more desirable than a property on a busy road.

·         PAY DOWN DEBT FIRST: Savvy investors might carry debt as part of their investment portfolio, but the average person probably shouldn’t. If you have student loans, unpaid medical bills or your triplets will soon attend college, purchasing a rental property may not be the right move.

·        SORT OUT A COMPLETE LIST OF EXPENSES: Many new investors underestimate the amount of expenses involved in running an investment property. This can be a costly mistake and lead to a path of debt for the uninitiated. Expenses such as water/sewer costs, utilities, account services and scheduled maintenance are well known. But what about the costs of legal fees, evictions, office supply products and capital improvements to the property? These hidden expenditures can limit profit for even the most prudent of investor.

·         BEWARE OF HIGHER INTEREST RATES: The cost of borrowing money might be cheap right now, but the interest rate on an investment property will be higher. Remember, you need a mortgage payment that’s low enough so that it won’t eat too heavily into your monthly profits.

·         HIRE A PROFESSIONAL REAL ESTATE AGENT: A licensed real estate agent that is a professional in their field, their job is to keep things in order for you and your tenant. They can help you with ongoing advice and help you manage your tenants and get you get the best possible value from your property, a good agent will let you know when you should review rents and when you shouldn’t. The agent should be able to give you advice on property law, your rights and responsibilities as a landlord – as well as those of the tenant. The agent will also help you find the right tenant, conduct reference checks and make sure they pay their rent on time. The good news is that the cost you pay to your managing agent is usually a percentage of the rent paid, is deducted from the rent and is tax deductible

·         RIGHT MORTGAGE: There are many options when it comes to financing your investment property, so get sound advice in this area as it can make a big difference to your financial well-being. Interest on an investment property loan is generally tax deductible, but some borrowing costs are not immediately deductible and knowing the difference can count. Structuring your loan correctly is critical and this should be done with the help of a trusted financial advisor. Whether you choose a fixed rate loan or a variable rate loan will depend on your circumstances, but consider both options carefully before you decide. Over time variable rates have proven to be cheaper, but selecting a fixed rate loan at the right time can really pay off. Remember that rate usually rise in line with property prices, so increasing interest rates are not always bad news for property investors as they have more than likely had a win on the capital gains front. Most investment loans should be set up as Interest Only (rather than Principal and Interest) as this increases the tax effectiveness of your investment, particularly if you have a home loan, but make sure you try and factor in flexibility The reason Interest Only loans work well for investment properties, is that with a Principal and Interest loan, your negative gearing benefit reduces as you pay down the amount of your loan. You may also want to seriously consider an investment loan that gives you the opportunity of paying interest in advance or has an Offset Account.

·         KEEP A LONG TERM VIEW: Remember that property is a long-term investment and you should not rely on property prices rising straight away. The longer you can afford to commit to a property the better and as you build up equity then you can consider purchasing a second investment property – try not to get too greedy and find the right balance between financial stability and still being able to enjoy life. Financial security is very important but life is not just about mathematics.

Keep your expectations realistic. Like any investment, a rental property isn’t going to produce a large monthly paycheck for a while and picking the wrong property could be a catastrophic mistake. Consider working with an experienced partner on your first property or rent out your own home to get your feet wet.

Looking to purchase your First Investment Property, Call Jeevan Punni 416-371-3737.

Editor: Neha Charan