But smart investing involves more than shelling out a down payment on a house or a condominium. It requires industry know-how, investing prowess, patience and initial capital. When you are beginning, it can be an overwhelming experience.
Don’t know where to start? Here are eight essential tips for new real estate investors:
#1. Ask Yourself These Questions
Real estate investing requires a heavy commitment. It is not something you can decide overnight. From upfront capital costs to taxes to various expenses associated with owning a property, real estate investors are forced to take on a lot of responsibility.
Therefore, before you initiate the process of investing in the housing market, ask yourself these questions:
- How much money are you planning to invest in real estate?
- Do you have good credit?
- What is your personal financial situation like?
- What funds will you use for a down payment (retirement, savings, investments)?
- How much debt do you plan to take on (if any) in order to finance your investment?
- Do you have any experience in real estate investing?
Real estate investing is not easy, and it will occupy some time. Make sure you’ve thought through the hard questions before you begin, to ensure that you’re starting your journey with enough foresight and the necessary resources at hand.
#2. Know How You’ll Be Generating Your Income
When you are investing in real estate, there are several different ways of generating an income. Here are the four primary methods:
- Appreciation: A property increases in value amid changing real estate conditions.
- Ancillary: This is when you have a mini business within a larger real estate investment, such as a vending machine in a laundry room in the apartment building.
- Cash Flow: You collect a stream of cash from a tenant.
- Commission Income: Real estate specialists earn a commission on properties they helped a client buy or sell.
When selecting a market to purchase in, or a property to buy, consider the amount of income that you’ll potentially receive through each of these streams. Is it worth the initial investment?
#3 Order Home Inspections Before Buying
Home inspections are a critical component of buying a property. In a red-hot real estate market, a growing number of potential homebuyers are foregoing this essential step so they can and the home almost immediately. This could be bad news.
Home inspections are crucial because they raise any red flags, such as repairs and renovations, that could cost you a lot of money once you receive the deed to the property.
How devastating would it be if you learned that the foundation needs to be fixed? This would set you back as much as $10,000, which is nothing to sneeze at – especially when you’re a beginner investor.
#4 Get an Appraisal
Property appraisals are just as important as home inspections because they inform you what the home is worth, using analysis from past, current and predicted future valuations. Moreover, if you are renting out the property, an appraisal can provide you with a ballpark figure of how much to charge per month.
#5 Focus on One Property
In the world of investing, it is recommended that diversification is the key to success. But while this is sound advice, it does not apply to real estate investors when they are starting out.
When you are beginning your real estate investment journey, it might be prudent to concentrate on one property at a time. Allocating your time and energy to more than one house or unit may prove challenging when you’re just starting out, and increases the risk of making costly mistakes.
#6 Consider Exit Strategies
Like shares in a stock or units in a mutual fund, you need to have an exit point. Once an investment reaches a certain point, you can hit the ‘sell’ button and enjoy the profits.
What is your exit strategy with your real estate investment? This is a pertinent question to put forward when you are just starting out, because you do not want to risk losing when you are on top. From a market crash to a new tax, there are many different ways someone can lose their investment, even when it seems like you’re set to experience a big win.
Most savvy real estate investors will advise you to define your exist strategy before you’ve even purchased the property. Some of the most common real estate investment exist strategies include:
- Fix & Flip
- Buy & Hold
- Seller Financing
- Rent to Own
Learn about your options and based on your timeline and resources, consider which strategy will bring you close to your financial goal.
#7 Know Your Tax Laws
Taxes on real estate investing are complicated. Hiring a tax attorney, real estate lawyer, or accountant for your property is an investment that will pay dividends in the future.
Should you choose to go solo, it would be prudent to have a fundamental understanding of the tax laws in place regarding real estate investments.
Here are some basic elements of real estate tax law in Canada. This should not be taken as legal advice, and it is always recommended that investors consult a lawyer, but this list should give you some things to think about:
- When you purchase a property, you pay a provincial transfer tax, which varies from province to province.
- New home acquisitions are subject to the GST.
- The Canadian Income Tax Act slaps a 25 per cent penalty of the gross property rental income per year.
- Investors can usually deduct two kinds of incurred expenses: capital expenses and operating expenses.
- Non-residents selling a Canadian property are mandated to give the federal government 50 per cent of the sale.
#8 Have Six Months of Money Reserves
One of the best pieces of advice anyone will ever give you when it comes to real estate investing is to have a minimum of six months of money reserves per property.
Even if the housing market is soaring or your investment has been reliable for the last 18 months, it is always fiscally responsible to have reserves at hand. The market could slump at any time, it could take time to find a tenant, or an emergency repair may crop up. With an adequate reserve fund, you’ll have enough cash to ride it out through any of these scenarios.
This cash, which could also be placed in a yield-bearing account, will prevent you from accessing credit markets, too.
Real estate investing has become a popular method of making money in a zero-interest-rate economy. Because the cost of borrowing is so cheap and the Canadian real estate market is booming, there is a great deal of interest in buying and selling properties, from semi-detached houses to one-bedroom condominiums. It can be a challenging experience when you are starting, but it can also be highly rewarding and profitable.