Real estate investors have a lot to think about before making a purchase. The Canadian real estate market as a whole is heating up and has been much stronger than anticipated as we work through the Coronavirus Pandemic.
However, smart investing involves more than shelling out a down payment on a house or a condominium. It requires industry know-how, investing prowess, patience and initial capital.
Here are eight essential tips for real estate investors:
#1. Ask Yourself These Questions
Real estate investing requires a heavy commitment. It is not something you can decide overnight. From upfront capital costs to taxes to various expenses associated with owning a property, real estate investors are forced to take on a lot of responsibility.
Therefore, before you initiate the process of investing in the housing market, ask yourself these questions:
How much money are you planning to invest in real estate?
Do you have good credit?
What is your personal financial situation like?
What funds will you use for a down payment (retirement, savings, investments)?
How much debt do you plan to take on (if any) in order to finance your investment?
Do you have any experience in real estate investing?
Real estate investing is not easy, and it will occupy some time. Make sure you’ve thought through the hard questions before you begin, to ensure that you’re starting your journey with enough foresight and the necessary resources at hand.
#2. Know How You’ll Be Generating Your Income
When you are investing in real estate, there are several different ways of generating an income. Here are the four primary methods:
Appreciation: A property increases in value amid changing real estate conditions.
Ancillary: This is when you have a mini business within a larger real estate investment, such as a vending machine in a laundry room in the apartment building.
Cash Flow: You collect a stream of cash from a tenant.
When selecting a market to purchase in, or a property to buy, consider the amount of income that you’ll potentially receive through each of these streams. Is it worth the initial investment?
#3 Make a Home Inspection Part of Your Offer
Home inspections are a critical component of buying a property. In hot real estate markets, a growing number of potential homebuyers are foregoing this essential step so they can own the property almost immediately. This could be bad news.
Home inspections are crucial because they raise any red flags, such as repairs and renovations, that could cost you a lot of money once you receive the deed to the property.
#4 Make an Appraisal Part of Your Financing Condition
Property appraisals are just as important as home inspections because they inform you what the home is worth, using analysis from past, current and predicted future valuations. Moreover, if you are renting out the property, an appraisal can provide you with a ballpark figure of how much to charge per month.
#5 Focus on One Property
In the world of investing, it is recommended that diversification is the key to success. But while this is sound advice, it does not apply to real estate investing typically.
Allocating your time and energy to more than one house or unit may prove challenging, ensure you have each investment property is in good condition and rented, focusing on multiple properties at one time can increase the risk of making costly mistakes.
#6 Consider Exit Strategies
Like shares in a stock or units in a mutual fund, you need to have an exit point. Once an investment reaches a certain point, you can hit the ‘sell’ button and enjoy the profits.
What is your exit strategy with your real estate investment? This is a pertinent question to put forward because you do not want to risk losing when you are on top. From a market crash to a new tax, there are many different ways an investment property can be affected both positively or negatively.
Most savvy real estate investors will define their exit strategy before they purchase a property. Some of the most common real estate investment exit strategies include:
Fix & Flip
Buy & Hold
Rent to Own
Learn about your options and based on your timeline and resources, consider which strategy will bring you to your financial goal.
#7 Know Your Tax Laws
Taxes on real estate investing are complicated. Hiring a tax attorney, real estate lawyer, or accountant for your property is an investment that will pay dividends in the future.
Should you choose to go solo, it would be prudent to have a fundamental understanding of the tax laws in place regarding real estate investments.
Here are some basic elements of real estate tax law in Canada. This should not be taken as legal advice, and it is always recommended that investors consult a lawyer, but this list should give you some things to think about:
When you purchase a property, you pay a provincial transfer tax, which varies from province to province.
New home acquisitions are subject to the GST.
The Canadian Income Tax Act slaps a 25 percent penalty on the gross property rental income per year.
Investors can usually deduct two kinds of incurred expenses: capital expenses and operating expenses.
Non-residents selling a Canadian property are mandated to give the federal government 50 percent of the sale.
#8 Have Six Months of Money Reserves
One of the best pieces of advice anyone will ever give you when it comes to real estate investing is to have a minimum of six months of money reserves per property.
Even if the housing market is soaring or your investment has been reliable for the last 18 months, it is always fiscally responsible to have reserves at hand. The market could slump at any time, it could take time to find a tenant or an emergency repair may crop up. With an adequate reserve fund, you’ll have enough cash to ride it out through any of these scenarios.
This cash, which could also be placed in a yield-bearing account, will prevent you from accessing credit markets, too.
Real estate investing has become a popular method of making money in a zero-interest-rate economy.
Because the cost of borrowing is so affordable and the Canadian real estate market is strong, there is a great deal of interest in buying and selling properties. It can be a challenging experience, but it can also be highly rewarding and profitable.
For more information on real estate investing contact us today to discuss your unique situation.
Article courtesy - RE/MAX Canada