Getting into the world of real estate investment can be highly lucrative. Real estate has produced many of the world’s wealthiest people. If you are just starting out in your career as real estate tycoon, there are some things you need to consider.
First and foremost, it is important to consider if real estate investment is right for you. Are you well suited to being a landlord? Are you handy? Do you have spare cash available to cover unexpected expenses and repairs? How can you be sure you will make money?
The Right Property
When you begin your search for an investment property, it is important to consider many things. As is always the case in real estate, location is key. The investment property should be located in a good neighbourhood, close to schools, transit and amenities. A low-crime area is also important.
Then there’s the building. If you are looking at condos or townhouses, it is important to consider the cost of monthly strata fees. Many properties have high monthly carrying costs that need to be factored in.
And what about the home itself? If this is your first investment property, it is crucial that you keep your expectations realistic. Starting with a low-cost home is a very good idea, but the biggest mistake most new real estate investors make is to buy a “fixer upper” that requires a lot of capital to make habitable. Unless you are knowledgeable about home repairs, it is always safest to buy a property that is in decent condition and “turn-key ready” if possible.
Do I Want to Be a Landlord?
Ask yourself if being a landlord is right for you. Are you willing to spend the time sourcing a good tenant? Do you have a contingency fund available to cover unexpected costs or cover the mortgage for months that the property could sit empty?
Being a landlord can be time-consuming. You may end up dealing with difficult tenants, non-payment of rent and destruction of property. Taking the time to choose your tenants wisely is critical and can involve a lot of screening and viewings.
If you are uncomfortable with the idea of being a landlord, you can hire a property management company to maintain the property for you, collect rents and oversee your investment – and even find the tenant for you in the first place. You can expect this to cost you approximately 10% of your monthly rental income, and an additional cost for tenant placement and screening.
Can I Really Afford It?
Investment properties generally require a larger down payment so right off the bat, getting into your first investment property will require a nest egg of funds to get things rolling.
Then, to determine how much you can afford to pay for your investment property, start by using a mortgage calculator. This will give you an idea of what your monthly payment will look like once you factor in current interest rates and terms.
The next step would be to contact your mortgage broker and request a pre-approval to see how much money you qualify to borrow. It is important that you let your mortgage broker know that you plan to buy an investment property because there are different lending rules for investment properties as opposed to a primary residence.
One of the biggest mistakes homebuyers of any kind make is to begin the hunt for a property before they have secured financing, By getting pre-approved you put yourself in the position to be able to jump on the right property as soon as it becomes available. Failure to do this can, and likely will, result in disappointment as you may lose out on a property while you wait for your financing to be approved.
The Potential Returns
If you have the disposition – and funds – needed to become a real estate investor, it can be highly lucrative. In 2016, the average gross yield for rental investors was 9.4%. In comparison, the average annual return on the Dow Jones over the past 10 years has been 4.8%.
You will always have more influence over your real estate investment than you would the stock market. With an investment property, small improvements such as updating kitchens, bathrooms, paint or flooring can improve the likelihood of finding quality tenants and increasing the monthly rental income for that property. It will also result in increasing the overall value of the property itself. In contrast, you will never influence the stock market by purchasing a can of Coke or an Apple computer.
Real estate investing is an amazing source of passive income over time. In our local market we have seen prices skyrocket over the past few years and the 20-year trend has been on a steady incline. If you take your time and make your decision based on the factors above, buying your first investment property will be a decision you will be unlikely to regret.