Over 90% of millionaires have made their money through investing in real estate. Learn how to get started!
Investing in real estate can be far more lucrative and rewarding than other forms of investments, but before you jump in with both feet, let’s look at what is involved in being a real estate investor.
Determining if this is for you:
Owning rental properties involves time and effort so before beginning, it is helpful to ask yourself the following questions:
Am I prepared to make a long-term commitment?
Depending on market conditions, it takes an average of 3 years to begin to see gains in your investment.
Do I have the capital or funding to purchase this property?
You will need cash to make a down payment and enough income to qualify for a mortgage. You will also need extra money to meet the purchasing expenses such as lawyer’s fees and adjustment costs. If you are not able to gather enough money for the purchase, but this is something you truly want to do, you may be able to find a family member or money partner to help you. This is what’s known as a joint venture.
Will I manage the property?
If you are able to, I highly recommend it, at least for the first while. If you choose to hire a property manager later one, having the management experience will help you immensely when dealing with your property manager. And yes, you will need to stay on top of your property manager because no one cares for your property like you do.
Am I willing to educate myself and do all the necessary research?
Rental properties are not a learn-as-you-go thing. Maybe some start out like this, but it can be costly to make mistakes. Firstly you’ll want to understand the entire purchase process and have a plan for when you take possession. Are you inheriting a tenant with the sale, or will you need to find a new tenant? For the latter, you will want to have a strong screening process in place (read 9 Sure Fire Ways To Avoid Bad Tenants). You will need a solid rental agreement with additional terms such as number of occupants permitted, pet and smoking rules, and much more. And it is very important that you become knowledgeable on the Residential Tenancy Act before entering into a tenancy.
Will I still be able to sleep at night? Am I going to worry over every detail?
Being a real estate investor is not all rainbows and lollipops. Imagine you inherit a tenant with your purchase; one that seemed nice enough when you viewed the property. But soon you realize they have having large parties, the neighbours are calling the police, and now you’re worried about your new place getting damaged. Either you will need to have or learn the skills to stay calm while going through something like this, or rental properties may not be your gig.
How to begin:
The most common type of real estate investment involves the purchase of rental housing (as opposed to doing flips, buying pre-builds and so on). Condos, townhouses, duplexes, single family homes and all the way up to multi-family buildings can all bring you a positive cash flow and increase the equity in your portfolio.
Before running wild and contacting your realtor about every possible rental property on the MLS, save yourself some time and energy by performing a simple calculation to determine if the property is one to skip over or one that you should give more attention to.
Analyze what the current rents are for a particular type of property, and calculate the yearly rent. Divide this number by the purchase price of the house. If the result if higher than 8%, this property may be worth looking at further.
Here is an example: You are looking for a two bedroom condo as a starter investment rental property. Say the average rent for a two bedroom condo in this neighborhood is $1,000, the yearly rent will be $12,000. Now say you think you can buy the condo for 150,000. Divide yearly rent ($12,000) by purchase price ($150,000) and you will get an answer of .08, or 8.0%. Because this property is right at 8%, this property may be worth looking at further.
Remember, lower than 8.0% is probably not that profitable so you can skip over most of these. The higher, the more profitable. Make sure to be conservative with the average rental amount you use in this calculation. You don’t want to calculate using $1,000 as your monthly rent only to find out no one will pay more than $800/month in that building.
After viewing a property that meets the 8% rule and you are interested, it’s time to take a look at all the monthly expenses such as:
- Mortgage payment. Use an online calculator or ask your mortgage broker.
- Insurance. Get a free quote using Square One Insurance
- Property Taxes. Ask your Realtor.
- Utilities (unless you will require your tenant to pay them)
- Improvements and/or repairs needed at the start
- Maintenance (usually 5 – 10% of monthly rent)
- Vacancy allowance (usually 10% of monthly rent)
- Strata fees, if applicable
- Property management fees, if applicable
Keep in mind that some expenses are paid yearly such as insurance and taxes so you will need to divide these by 12.
After comparing the total expenses against the monthly income, you will be able to see if you can put any money in your pocket each month. Generally speaking, savvy investors do not purchase a property unless it has positive cash flow.
Gather your team
If you have decided that you’d like to go ahead with the purchase of this investment, and you think you may want to eventually purchase a number of properties, it is beneficial to have a team of professionals to assist and advise you. You will need a Realtor, a mortgage broker, a lawyer or notary public, an account, an insurance broker, a home inspector, and possibly an appraiser.
Organize your dates
I highly recommend reading the book called 97 Tips For Canadian Real Estate Investors by Don R. Campbell. This is one of the best investment books on the market and includes great tips such as using possession dates strategically to maximize your cash flow.
For example, if the property you are buying is vacant, chose the last Thursday of the month as your possession date, and have your possession date at least 4 weeks after your subject removal date. Then add this clause into your purchase contract: “The seller to allow access to the buyer upon subject removal and 24 hours’ notice to show prospective tenants/contractors.” So once your offer is accepted, you can start showing the place to prospective renters.
This is just one great tip of many in this highly recommended book.
Reap the rewards
The income that an investment property provides is not limited to the monthly cash flow. Consider that each time you make a mortgage payment, you are in fact paying yourself. Essentially, a mortgage is like a forced savings plan. There are income tax deductions as well. Even though you are profiting from your investment, you can deduct certain expenses such as the interest on your mortgage, strata fees and more.
If you are interested in growing your business and if you feel the value of your property has gone up, your bank may be willing to give you a line of credit against your property. This can help you to purchase another rental property.
Few other investments can be as financially rewarding as rental properties. After all, over 90% of millionaires have made their money in real estate.