A Brief Overview of Rental Investment Properties

Some things to consider!

By: Michelle Makos., Realtor

 

 

 Investment Properties

 

 

Many of my clients have come to me, asking about Investment, or Income Properties.  After talking with other agents, contractors, financial professionals, and investors, I’ve learned that there are certain key elements to consider and I want to pass this knowledge onto others.  By no means is this article all there is to know about investment properties, but it’s a good start in making the decision a little easier and the options a little clearer! 

 Sources of Funds and Financing:

 -         If you own a home with a good amount of equity in it, then you can  consider leveraging some of that equity to purchase an investment property

 

 

-         Essentially, what you can do is charge up your existing mortgage to free up funds for the downpayment on a second property.  The advantage of this, is that the interest charged on the funds that were “borrowed” from your principle residence is tax deductible (essentially, you have taken out a “loan” for a business investment) – it’s a good idea to talk to your accountant and/or mortgage rep regarding the specifics – not all circumstances are alike.  

 -         Yes, the payments for your existing principle residence mortgage will increase, but now you are able to acquire an additional property and rent it out.  Most likely, the amount of rent will cover the carrying costs of your investment property with some left over afterwards.  If you like, you can use this surplus to lessen the burden of the increased principle residence mortgage payments.  In addition to all of this, you now have a property that is increasing in value, paying itself off, and in most cases, providing a positive cash flow.

 What good is the equity in your home doing you, if you are doing nothing with it?

 What sort of Property to Acquire:

 Freehold vs. Condo

 When considering the type of property to acquire as an investment, you must first consider two things:

1.      Amount of management you are willing to undertake

 

2.      Amount of return you want

For example – a relatively new condominium apartment will have little to no management requirements on your part – no lawn to mow, no roof to fix, etc.  It is essentially a “turn key” operation for you as a landlord.  The downside of this is that the return yielded is relatively low.  A great amount of the profit you might have been making is allocated to reducing the amount of management involvement by you (i.e. – condo fees).  If you are not interested in doing a lot of handyman/fix up/management tasks, then perhaps this is the type of investment for you.

 A freehold house with a basement apartment, however, is relatively high management.  Any number of physical things could go wrong with it (plumbing, furnace, roof, driveway, etc.) and you must be prepared to handle these things.  If you are relatively well versed in simple home improvement and “handyman” tasks, and don’t mind the extra time and energy needed in the upkeep of this type of property, then this may be a good choice for you. 

 As a note – hiring skilled trades people is expensive; if you are planning on hiring someone every time you need to change a washer or a lock on the door, you should consider the extent to which this expense will affect your profits.

Bungalow vs. 2-Story

Let’s use a 1200sqft dwelling as an example – assuming both have a basement apartment (any investment property should have a basement apartment – why not maximize your return?) If your dwelling is a 2-story, then the square footage of the basement will likely be 600sqft (the same as each level above it).  If your dwelling is a bungalow, however, your basement apartment would then be 1200sqft (roughly).  What does this mean?  You can charge more rent for the basement apartment of a bungalow, than you can for a 2-story! So…if you are considering a freehold as your investment property, go with a bungalow – you will pay less for the property, and it will yield more return. 

 Detached vs. Semi-Detached 

Essentially, this all comes down to pricing.  If you are looking at this from a Return on Investment basis, then consider purchasing a Semi-Detached or Link.  Generally, they are less costly than their detached counterparts, but with comparable square footage, maintenance and income potential. 

 How much should I spend?

Moderation is the key.  You want a property that is in a good enough area and in good enough repair that you will attract a quality and reliable tenant.  At the same time, you want to make sure that the amount of rent you are charging is enough to carry the property, and ideally, leave you with a surplus.  Chargeable or fair market rent is not always directly attributable to house value.  In the end, there will be a cap on what a tenant is willing to pay to rent your unit, regardless of how much you paid for it.  This means that a $350,000 home may command just about the same rent as a $250,000 home.  If a tenant can afford to pay you $2500/mth rent, it is likely that they won’t be your tenants for long!  It is important to consider fair market rent as well as purchase value when making the decision to buy.  

 Where should I buy?

While it is true that you can buy an investment unit for a lesser price in a “dodgy” area of town or on a busy street and still rent it out for a good return, that’s not all that you should consider.  All investment or rental properties should be purchased with the idea that they will eventually be sold as owner-occupied residences.  Therefore, look for a property in a good area, where someone would likely want to buy and occupy themselves.  This protects you, should your circumstances change and you need to sell the property.  It is a lot easier to sell a single-family unit to an end-user than it is to sell an income property to an investor (there are many more end-user buyers out there than investors!).   

 Timeline of Return 

Investment properties shouldn’t be viewed as a get-rich-quick scheme.  They will not get you rich quick.  But, if proper consideration and research is done prior to your purchase, they will ensure that your money is making you money steadily over many years. 

Most commonly, in the first few years into a mortgage, the lion’s share of your payment goes towards paying down the interest.  If you are planning on keeping your property for only a couple of months or a year – forget about it.  You will not have given your investment enough time to really do it’s job.  Essentially, when looking at a timeline for an investment property, think at least in the 5 year range.  By that time, a greater portion of your payments (which, let’s not forget, is the rent that your tenants are so kindly providing) will be allocated towards paying off the principle of the mortgage – end result – a greater build-up of equity for you.  Once you have a good portion of equity built up in your investment property, you can decide to either sell it, or refinance once again (as you did with your original principal residence) and use the equity to buy yet another investment property. 

 If you do hold on to your properties, eventually they will pay for themselves, leaving you with tremendous and predictable wealth.  You have your money invested not only in slow-and-steadily increasing property value, but that property is now creating positive, passive cash flow for you!  

 Is it for me?

This is a big decision, and it shouldn’t be taken lightly.  Consider what you feel comfortable with.  What sort of return you want, and how quickly you want it?  How much equity can you leverage?  How much management involvement you are comfortable with?  Are you willing to let your investment mature and grow steadily – do you have the patience?  Are you prepared to do your homework and research and work with a Realtor who will educate you?  

If, after considering all of these variables, this seems like a good choice for you, then give me a call and let’s start looking for your new property!