All About Real Estate Investing in Canada
Even for those who disagree with the statement that ‘buying your own home is an probably the best investment you can make’, will likely be hard pressed to admit that having someone else pay for you to own a property, is a bad idea.
For centuries, real estate investing is a time tested and proven way to grow investment assets. People will always need a place to live, and real estate Investing is an excellent way to diversify a portfolio. Make no mistake though – real estate investing is as much a business operation as it is an investment. So if managed poorly, can become an investment disaster.
This step by step guide will show you how real estate investing in Canada can be done the right way, for the best profitability, while avoiding the costly mistakes and un-needed stress that plague many unhappy landlords across Canada.
- Understand the business. Don’t just run into it. Talk to a couple of other landlords. Read some more articles. Know what you’re getting into. Real estate investing has several strategies to pick from including investing in a condo, a stand-alone house, a multi-family house and property development. Also don’t limit yourself to one geography. Investors in Toronto may want to look at Kitchener opportunities, and investors in London may want to look at Windsor opportunities. These investment decisions are within your control, and will affect your returns. Get a feel for which strategy is best for you and then start working out the numbers.
- Get pre-approved for an investment property mortgage. This step shouldn’t come too far behind step 1. With a rapidly evolving Canadian mortgage industry, you’ll want to know what you can afford and what the different investment property mortgage financing options are. 20% is the minimum down payment on a rental property, and many Banks and lenders will require more for their more flexible approvals or best rates. Importantly, you’ll want to know what your monthly mortgage cost is so that you can work in to you budget.
- Start creating financial scenarios. Once you have been out and seen a few potential properties, work out what the expenses are, including: Monthly mortgage cost, property taxes, fire insurance, maintenance costs and any utilities not covered by the tenant. Then determine (using comparisons to other similar rental properties on Kijiji.ca) what a conservative monthly rental cash flow might be. You will then be in a good position to determine your budget by subtracting the expenses from the income, to see what your monthly cash flow will be.
Having some excess cash at the end of the month will be an important part for protecting yourself in case mortgage rates increase, more serious repairs are needed, or if a tenant misses a rent payment or two. If you have more free cash flow available from your regular employment source, a low or even negative ash flow may be OK. But projected budgets should at least be known beforehand.
- Work with experienced partners to select the property. Knowledgeable Realtor and Mortgage Brokers that are highly experienced in real estate investing will likely be a good choice to help select the best investment property. Make an offer on the property that you believe offers the best investment potential, and go firm on the sale once you are satisfied with your mortgage financing arrangement and any potential property inspection.
- Select great tenants. Having a good tenant that pays their rent on time is far more important that maxing out your rent rate. More than important, picking a stable tenant is VITAL to your success as a lend lord. The following checks should be performed on EVERY prospective tenant that applies to rent your property:
- The credit check. Is the single most important indicator for if a tenant will pay their rent on time. If a prospective tenant has poor credit (a lower credit score than 600), then you are at high risk. This tenant should have a strong co applicant to fall back on in case the tenant misses payments and you need to come after the lost rent. For a nice, well-kept unit, the tenant should have a credit score of 650 or higher with little to no credit mishaps.
- Income and Employment verification. The income available to the tenant should match the rents charged. If an individual earning $30,000 per year applies for a unit that costs $2000 per month – this is bad news in the making. Try to ensure that the yearly cost of the rent and all projected utility costs is AT LEAST less than half of the prospects gross employment earnings. Employment can usually be verified with a quick call or online search.
- Reference. Preferably from a past land lord, but could also be from an employer or other source acceptable to you. If you discover anything that seems odd about the reference, then this could be a red flag. This said, if the credit score and employment verification check out well – you should find yourself on good footing.
Tenants can be found cheaply and easily by marketing your property on Kijiji and other free online resources.
- Taking care of tenants. A happy tenant will make your life happy, and will also keep your property in good shape. Respond quickly to requests and make needed repairs. Allowing a rental property to sink into a state of disarray will be much more costly in the long run.
- Property management. Along with an experienced and trustworthy real estate and mortgage broker team, build a network of ongoing maintenance professionals around you. A trusted plumber, electrician, craftsman locksmith ect… will provide you with peace of mind as you manage your property over time. Ask around, and find a good balance for price and quality of work. You will definitely find that there are some better than others. Even if you are a handy person yourself, you may not be available at all times to handle tenant requests.
- Financial management. Without good financial management and diligent expense recording, it becomes exceedingly difficult to track and improve on your profitability. Beyond this, you’ll want to deduct as many expenses as possible for income tax purposes. Everything from mortgage interest (but not principle), to property taxes, fire insurance, management and maintenance is legally deductible. Knowing a good accountant who is familiar with rental property tax rules can easily pay for itself. But be careful not to not to depreciate your property each year (unless that is part of a bigger strategy), or you will be stuck paying an extremely hefty capital gains tax bill on the eventual sale of the property.
Following this guide provides some of the top tips and direction for purchasing and profiting from a real estate investment. But there are a lot of blanks to be filled in. For an expended version of this guide , check out the other article here. Also, the decision to purchase an investment property should be integrated into an overall financial plan, as it will be helping to achieve your goals. But ultimately the experience itself and ‘getting your hands dirty’ will give you the real education. That part for many is also half the fun.