Like many people, you may be thinking it’s time to consider investing in real estate as a way to build your portfolio and have tenants help you grow your wealth. There are pros and cons to investing in real estate, but if you do, here are 10 things to know.
1. CASH FLOW IS KING
Nothing else matters before this. If it doesn’t cash flow on day one that you own it, (or the first day after you’ve done your repairs if it’s a fixer-upper) don’t buy it. There’s no way around this. If you’re planning on buying it hoping to cash in on future appreciation and are willing to take a small loss each month thinking this is a good idea…it isn’t. It’s not worth the gamble, and I’ve seen too many people get into trouble chasing this dream. Be conservative on your projected rents, and make sure it makes money. This is a business. Treat it as such.
2. Visit with a mortgage broker or your bank to determine how much money you can afford to borrow responsibly for your investment. Make sure you’re honest with yourself and understand what you can afford, and more importantly, what you can afford if you have vacancies and repairs at the same time. Don’t get left shelling out of pocket money that you don’t have in the first place.
3. Look for properties that generate a positive cash flow. What this means is that the rent that you receive from tenants should be enough to pay your mortgage payment, property taxes, utilities and insurance bills. Budget an additional ten percent on your overall payments to pay for minor repairs that will invariably arise. These are not always easy to find but they are out there if you look. Do not be afraid to expand your search to be able to find more properties that match your search criteria.
4.Use an experienced local real estate agent who also invests in real estate themselves. Investors learn about the pitfalls only through first-hand experience, both good and bad, and you want that experience working for you as well.
5.Have any property inspected by a professional home inspector. In addition, find a contractor who you can trust to give you the right advice for any minor repairs or renovations that may be required, especially for older properties, in order to add the most value to your investment.
6.Keep proper records of income and expenses for your investment property. Do not mingle these with your personal bank account as it will become difficult to properly trace this when you have to file a tax return at the end of the year, regardless whether you own the investment in your personal name or in a company name.
7.If you are buying with a partner, make sure you have a proper partnership or joint venture agreement to protect both of you should things not work out as planned. In particular, provisions should be made if one of the partners wants to sell and the other one doesn’t, one partner is not paying their share of expenses or what happens if one of the partners dies.
8.Hire an experienced property manager to assist you in finding suitable tenants and dealing with any ongoing maintenance, repairs or other complaints by tenants. You do not wish to be woken up in the middle of the night to handle emergency repairs. Budget an additional $100 per month for this service.
9.Be careful not to buy and sell properties quickly. The Canada Revenue Agency may view this activity as business income. This means that you will have to pay tax on any profit you make on your investment. It is preferable to buy properties for the long term, rent them out and use your positive cash flow to reduce the amount of your mortgage owing, building equity in your property. If you then sell years later for a profit, it will likely be classified as a capital gain and thus one half of your gain will be tax free.
10.Don’t be afraid to walk away if the deal does not work for you, no matter how much time you may have invested in the property.
Have more questions? Call me at 613.291.8033
I would love to help you grow your wealth through real estate...the blueprint is there, and you can do it too!