Tips for investing in Real Estate!
If you’re fed up with the “paltry returns” you get on bonds, the “insulting interest” rates paid by banks, and the “roller coaster” ride of stock market, you might consider turning to rental real estate to supplement your income. Here are Tips for investing in Real Estate!
Understand how you will take ownership of the property by consulting with your accountant and lawyer. There are some benefits in taking title in the name of a limited company, in order to protect yourself against personal liability should someone get hurt on the property and for other tax planning purposes and so on. However, on the other hand, you will also have to pay approx $1,000 in incorporation fees and have to file a separate tax return each year for your company.
Keep proper records of income and expenses for your investment property.
Do not mingle these with your personal bank account as it will become difficult to properly trace this when you have to file a tax return at the end of the year, regardless whether you own the investment in your personal name or incorporation.
If you are buying with a partner, make sure you have a proper partnership or joint venture agreement to protect both of you should things not work out as planned. In particular, provisions should be made if one of the partners wants to sell and the other doesn’t, one partner is not paying their share of expenses or what happens if one of the partners dies and so on!
The sweet spot in the rental market is for single people: young singles, divorced middle-agers, and retired widows. Most of these people do not need, and will not pay for, a larger unit.
The one bedroom condo is the Toyota Corolla of the rental market. There’s nothing sexy about it, but for most people it offers the best value, and is the easiest property to manage.
It is never a good thing to be the last person to buy in an area, at the top of the market. Look at areas where there are new Starbucks and Home Depot stores. They have done their own research to make sure that the area is expanding. That is where you want to be.
When you try to take in all the information out there relating to a potential real estate investment, it feels sometimes as though there is too much information. How do you make an informed decision? Watch what experienced investors look for. Make sure you properly qualify all tenants in advance. Use a property manager so you don’t have annoying phone calls about repairs in the middle of the night.
Have a plan before you start looking for a location to invest in real estate. Look for areas where unemployment is low, with schools and public transit nearby. A good rule of thumb is not to invest anywhere that takes more than one hour to reach by car.
When you buy real estate, it should not be for an expectation of a quick flip for profit. As long as the property is cash-flow positive and you can carry the property for a few years, eventually the property will rise in value. Then you do not have to worry about short-term interest rate hikes or other external events that may affect the price of real estate in the short term. If you have a partner, make sure that there is an agreement in place that states what will happen if things do not go well down the road. For example, use a buy/sell clause to end a relationship without having to resort to lawyers or expensive court proceedings.
Have any property inspected by a professional home inspector. In addition, find a contractor who you can trust to give you the right advice for any minor repairs or renovations that may be required, especially for older properties, in order to add the most value to your investment.
It takes a lot of courage to make that first investment in real estate. It is always easier to find a reason not to. Remember that with real estate, you are borrowing about 80 per cent from a lender and your return will likely be much more than any investment in the stock market over time, primarily because you are leveraging the lender’s money. Have comfort that most people who do decide to invest in real estate, with the right research, are usually very happy later.
Hire an experienced property manager to assist you in finding suitable tenants and dealing with any ongoing maintenance, repairs or other complaints by tenants. You do not wish to be woken up in the middle of the night to handle emergency repairs. Budget an additional $100 per month for this service.
Be careful not to buy and sell properties quickly. The CRA may view this activity as business income. This means that you will have to pay tax on any profit you make on your investment. It is preferable to buy properties for the long term, rent them out and use your positive cash flow to reduce the amount of your mortgage owing, building equity in your property. If you then sell years later for a profit, it will likely be classified as a capital gain and thus one half of your gain will be tax free.
If you already own your own home, you know that at some point you’ll inevitably face an unexpected expense—the dishwasher breaks, the roof leaks, or the condo association hits you with an assessment. You need to keep a cash reserve to take care of any surprises, including the possibility that your unit might be unoccupied for a (hopefully short) period of time. You also need to build these irregular expenses into your financial equation to help you decide, in the final analysis, if the whole project is worth it.
Don’t be afraid to walk away if the deal does not work for you, no matter how much time you may have invested in the property.
That’s why they always say, “It’s not who start the game, but who finishes it!”