It comes as no surprise that over the years television shows where people spend time and money renovating unpleasant properties to make a profit have grown in number. For instance, home renovation and real estate shows comprise approximately 65 percent of programming on HGTV. The main point to remember is that this is entertainment and, while it may be a profitable business for a few, the fact remains that the real estate market will not work in your favour if you want to flip houses in this manner. Instead, you will want to make sure that you adhere to traditional real estate investing principles of buy and hold. This is a preferable method of investing, since your property can appreciate over time and offer you a steady income.
According to a May 2018 report by Ryerson University’s Centre for Urban Research and Land Development (CUR) and sponsored by the Ontario Real Estate Association (OREA), the potential demand of 700,000 Millennials will look to move out and form nearly 500,000 new households over the next decade in the Greater Toronto-Hamilton Area (GTHA) all the while baby boomers are not expected to begin downsizing in a significant way until mid-2040. When we consider this with the constrained supply of ground-related housing, it is clear that “this will only put further long-term upward pressure on ground-related home prices.” The present and future demand for housing coupled with the potential for income and price appreciation lends credence to the notion that it may be the right time to invest in real estate.
Previously, we visited the pros and cons of purchasing an investment property. In order to help you make the right decision when purchasing a property for investment purposes, we look further in depth at the factors you should consider, such as location, condition, costs, and current rents.
Location! Location! Location!
Real estate is hyperlocal. A great location will remain an asset no matter how the real estate market fluctuates. It is important, not only to look at the overall city of your potential investment, but also at the specific community or neighbourhood. You can make an ugly house attractive, but you cannot make a bad location great. The quality of the location will influence type of renters attracted to your property, the price of rent that your property can command, and the overall value of your property. What attractions or amenities are nearby that will draw renters to your property? Focus on the proximity to hospitals, libraries, central business districts, retail, grocery, and schools. Moreover, make note of the accessibility to municipal infrastructure in the area. Is the location well-connected by to public transportation and road and rail networks? What type of water and sewer supply is available in the area? How readily available are telephone and internet connections? What type of recreational and social services are available in the community? A property that is strategically located close to these amenities will give you a greater return on your investment. Lastly, consider future improvement and development projects. Is it a high-growth area in terms of population, employment, and infrastructure?
Opportunities abound in taking on fix-and-flip projects, but unless you have the capabilities of doing the repairs and renovations yourself or find a trusted contractor to oversee the entire project while you are tending to your career, the ability to recoup your investment may be less than you had originally hoped. Hence, the current condition of the property is a significant consideration when purchasing an investment. After receiving a thorough inspection by a qualified professional, ask yourself how many of the repairs you can do on your own and how many would require outside contractors. Get an estimate for any major jobs that you would have to pay someone else to do. You will want to make sure that you fix all serious issues before anyone moves in and calculate how long the repairs should take. If the property must be vacant for months while renovations take place it may not be worth it. This is one of the reasons why condos serve as a good investment. They typically require less hands-on work by you because the exterior of the building, common areas, and major electrical, heating and ventilation, and plumbing are handled by property management. The risk increases when you begin to move into the freehold sector of the real estate market.
For income properties, your monthly rent is your bread and butter. Research the average rental rates of a particular housing type in a given area. Can you achieve above or below the market average? At the very least, you will want to cover your monthly expenses of mortgage, property taxes, insurance, and maintenance.
Additionally, look at available inventory in the neighbourhood or condo building you are interested. Is there a lot of inventory or next to nothing on the market? The greater the availability, the more choices potential tenants will have to negotiate on price. Where there is little or no inventory, prospective tenants will have less room to negotiate on your price.
Carrying Costs (Operating Expenses)
When purchasing real estate as an investment you will have what is known as operating expenses. These expenses can be broken down into two categories: fixed and variable.
The former is comprised of costs that are a set amount and they can occur at the time of sale and over the duration of your investment after you take possession of the property. Fixed costs to account for prior to closing the transaction include: home inspection, appraisal, and legal fees. Before closing, your lender will typically conduct an appraisal of the subject property to establish the value. Do not be surprised if your lender asks you to cover the cost of the appraisal. Separate from the appraisal, the home inspection seeks to protect you from underlying issues. It is imperative to have a qualified professional complete an inspection and make sure you set aside the time to accompany the inspector because you will learn a great deal about the structure. Once you have the report, give the owner time to correct problems tied to making the sale and determine the cost of any work that needs to be done by you in the event that the seller does not remedy the issues brought forth.
Once the sale is finalized, expenses will include: mortgage, property taxes, and insurance. You should always consider taxes when purchasing an investment property. High taxes, like high maintenance fees in a condo, will impact your bottom line. Property taxes can also be paid as part of your mortgage. As it pertains to insurance, decide what kind of coverage you want for the investment property. Do you want to pay a smaller premium each month with a high deductible in the event that you have to make a claim or vice versa? Additionally, you will want to decide whether or not you will want to make it a requirement for a tenant to obtain their own liability insurance. Lastly, principal and interest payments that comprise your mortgage will make up the majority of your operating expenses. Speak with a reputable mortgage broker in order to obtain the best terms and conditions of a loan.
The latter category of operating expenses known as variable costs encapsulates general upkeep of the property and a reserve fund. Condo corporations set aside a portion of the maintenance fee in a reserve in order to fund major repairs and replacement of big-ticket items, such as the windows, roof shingles, water heater, or furnace. It is imperative that you do the same. Doing so will also provide you the ability to cover the cost of any emergencies associated with your property.
Take advantage of the opportunities that are present today. Speak with an experienced and seasoned real estate sales representative who has a proven track record of helping investors build and grow their investment portfolio. A successful real estate sales representative will be able to help you leverage their professional network and knowledge in order to hone in on an investment property that serves your goals.