There are so many great benefits of owning an investment property. Real estate is an excellent avenue to invest your money, receive a passive income, take advantage of income property tax reductions, and so much more. If you’re considering buying an investment property, now is a great time to do so. However, there is a lot you should know about investment properties and mortgages before you buy. While there are many benefits involved, there are also many risks and potential pitfalls you should be aware of. If this is your first time buying an investment property, this is a quick list for you as to what you should keep in mind before you take the leap.
1. Put logic before your personal feelings
When buying your own house, people tend to make decisions about how they feel about the property. This is completely normal if it is your own property because you will be spending years living in this space and you want to be sure you love it. Investment properties are different. You may have a specific taste in what you would look for in a house. But, if you plan on renting this space out, it’s important to think about what would attract good tenants. You also need to think about what property is going to be the best investment for you and what your return on that property will be ahead of purchasing it.
2. Start small
Speaking of knowing what kind of property would the best investment, it’s smart to start small. The most ideal situation is to pick a house in an up-and-coming neighbourhood that has strong potential to grow in value and is located in a neighbourhood that is appealing to renters. It doesn’t need to be the most valuable house on the block, but you need to look at the property’s big-picture. Even if you’re ready to buy a million-dollar home that has multiple units you can rent, starting small helps you learn the ropes. If there are any hiccups, it’s likely, that your loss won’t be as bad with a property with one tenant as opposed to a multi-unit property that has 10 tenants. As you become more knowledgeable about investment properties and gain experience as a landlord then you can begin to buy more valuable properties and branch out.
TIP: Keep an open mind and work with a professional real estate agent who knows the area well, and who is knowledgeable about current rental rates and comparables. They can lead you towards excellent investment opportunities and usually have a business mindset to help ensure your venture will be profitable.
3. Do your research
Your research will be the most important step you take when purchasing an investment property. Consider the different neighbourhoods and what type of renters you will attract if you purchase a property there. Get an idea of past real estate trends in the area. Is the area growing quickly? Again, set aside your personal feelings and logically consider the financial benefits of the property you are looking at with a business owner mindset. It’s in your best interest to check out a few properties and ensure you’re purchasing the right property to turn a profit. The price, the location, the number of units, the fair market rent…these all need to be looked at before you buy.
4. Have your down payment prepared
Unlike buying a house you plan to live in yourself where you need to have a 5-10% down payment to secure a mortgage, you need to have a 20% down payment ready when purchasing an investment property. In most cases as well, when buying an investment property, there may be some necessary renovations you need to make to get it ready to rent. Or, that you might want to make for current tenants which have been neglected by the current owner. So keep this in mind when setting aside your down payment and planning out your expenses accordingly with a bit of extra cushion as a safety net.
5. Pay off your debts
If you have a lot of outstanding debt, now may not be the best time for you to purchase an investment property. If you are able to, try to pay off those debts before you decide to buy or apply for a mortgage. Along with your down payment, debt plays a big role in the mortgage approval process, even more so with an investment property. However, if the property already has renters or is turn-key to rent, the mortgage lender will take that additional income stream into consideration when reviewing your mortgage application.
6. Think about expenses and profits
When choosing the right property to buy, you need to weigh out the expenses and the profits. How much renovating needs to go into the house before you can rent it? How much will you be able to rent the space for? Is the space already tenanted? If so, how much rent is the current tenant paying? This is important because you likely can not increase that amount. Will you be prepared to foot the bill in the event of a large emergency expense or repair? These are all things you need to evaluate before you can move forward with buying an investment property.
When doing your research, it’s good to look at local rent listings in your area to see how much people are leasing their houses for. This will give you a better idea of how much you can intend to lease your property for and what your yearly income for the property will be.
7. Be aware of the risks
As I mentioned earlier, there are so many amazing benefits to owning an investment property. But there are also many risks. As a landlord, you will need to be prepared for the worst. What will happen if there are vacancies? What will happen if your tenants have stopped making their payments on time? What will you do in the event of a fire or flood?
Not only do you need to be aware of the risks involved with renting a property out to tenants, but you need to be aware of the investment risk too. What will you do if the property decreases in value? An investment property can provide you with a steady source of income, but you need to be aware of all the risks involved and make sound decisions that will benefit you long term.
Are you ready to take the leap and purchase an investment property? I can help!
Real estate investments are full of opportunity. If you would like to learn more about what it takes to own an investment property or get approved for a mortgage for an investment property, I can help! With my experience as a financial advisor and a mortgage broker, I can show you what you need to do to own an investment property and to make sure it’s profitable as well. I can also help further explain the pros and cons you should be aware of before you buy, and will help you get approved for a mortgage you need. I’ve worked with many clients in the past and have helped them accomplish their goals of purchasing investment properties and look forward to helping you do the same. To get started, you can book a virtual consultation online with me today. Or feel free to give me a call at (705) 315-0516. Let’s get your foot in the door of the property investment world so you can kick your income streams up a notch.