To continue with our “Firsts” theme here’s one for the rookie property investor.
So you think you’re ready to invest some of your hard earned cash in an income property. This may come as a surprise to you but most entry level investment properties aren’t actually cash flow positive. In fact, most single unit investments (condos) basically break even. But with anything less than 20-30% down expect to be taking an annual loss (some investors consider a $100-300/yr out of pocket to be acceptable). The break-even point is becoming even harder to achieve as condo prices have outpaced rental rates in recent years. But due to the lack of residential rental development, newly developed condo units are supplying much needed rental inventory. With well over 140 buildings under construction and dozens ready for occupancy each year, the demand is still outpacing supply with most types of units. Since the demand for rentals has exceeded supply , we’re seeing multiple offers from tenants on most downtown units thus bringing some units back to a neutral position. We wrote a piece a month ago outlining some rental figures.
Just in case you’re buying an investment property as your very first real estate purchase, have a look at the Worlds’ Greatest First Time Buyers’ Guide. It will provide you with loads of knowledge before getting started. Very important to remember that purchasing a property beyond your principal residence requires you to have a minimum of 20% as a cash down payment, plus closing costs to qualify for funding. If you don’t own your principal residence (or any other property for that matter) then you can qualify for as little as 5% down but then you’ll have problems covering your monthly costs with the rental income earned.
How much money do you need? Well that depends on the location and investment goal. Are you happy with someone paying down your mortgage and not earning positive cash flow? Or do you have a larger budget and can get into a duplex, triplex, or quad type of investment? These are the questions you need to ask yourself. The very first step is to see your mortgage broker and get a bank approval for your purchase. This is a show me the money moment, if you don’t have the cash you aint buying, plain and simple.
Most people don’t even consider the tax implications of owning/managing/selling investment properties and they fail to consult their accountant. Our man, Grant the CGA has all of the info you could ever need about the tax implications of rental properties and he’d be happy to discuss them with you. All experienced investors (the smart ones do anyway) have a great tax consultant. This quick step can save you thousands of dollars and the headaches of dealing with the CRA. No surprises = stress free investing.
Again, this all depends on your budget and cash position. We will not get to this point in the discussion until you’ve spoken with your mortgage professional and obtained an approval and we strongly urge you have a discussion with your CGA. As Real Estate Sales Representatives and Brokers we do have the general knowledge to guide you but we cannot replace the specific skills and knowledge of a tax professional.
- Most likely a condo/loft/townhouse: This is usually the safest investment and ideal for first time investors. The price barrier is low, maintenance is low, and the demand for centrally located condo units is high. You have the option of going with a pre-construction unit or consider resale. We’re leaning more towards resale in this market as the advantages to buying pre-con have essentially disappeared. The days of buying off plan and seeing a sharp spike in price on occupancy day are over. There are still some smart pre con opportunities but they are few and far between. Most pre con developers require a minimum of 15% down within the 1st year and a further 5% on occupancy. This cash is held in trust for years and really doesn’t earn any interest (well it does but it’s not that much). You could put that same amount of money down on an existing, resale unit today and have it earning rental income the following month. With the price of resale essentially the same as pre construction in most neighbourhoods it’s the logical choice for the local investor. Pre con as an investment could make sense for foreign investors needing to park money etc… not ideal for the local, small time investor. Location is important here for two reasons: First, to attract a ton of potential tenants, Second; for resale value. With the condo market as tough as it has been over the past few months you need to protect yourself. Try and find a unit in less “condo heavy” communities (less competition when selling). Focus more on tight neighbourhoods: Leslieville, Riverside, Riverdale, Leaside, Highpark, Roncesvalles, Danforth area are prime examples of great communities with fewer condos but high demand for rentals. Keep in mind, we don’t recommend you hold a condo beyond its 7th yr in business. Maintenance fees tend to creep up, demand from buyers decline as they focus on newer, shinier options.
- A property with more than 2 apartments (or 2 min) have the greatest potential for positive cash flow each month but they do have a higher barrier to entry as they tend to cost more and require much more maintenance than a single unit condo investment. If you’re a first timer we’d hope you at least have people in your life that are experienced landlords and can help you when things get tough. Buying near, or on main streets make the best income properties. Main street properties tend to cost 10-20% less than those on quieter residential streets but achieve similar rents. Ensure the property isn’t too far from transit. Subway is ideal but communities with easy access to downtown via streetcar are also fantastic options. Certain ethnic communities are also fantastic options for income properties as families arrive in Canada they begin their journey as renters and some remain in the same property for a number of years.
- This option isn’t usually for your rookie. Finance companies do not treat commercial loans as they do residential. They require much higher down payments (whether you’re a first timer or not. The financing process in general is quite a bit more intense. Could take up to 30 days to even confirm financing as more detailed appraisals are required. If you are newer to real estate investing but are confident and cash heavy, a small building with main floor office or retail with upper level residential would be an ideal option. Always good to be able to diversify and in this case you’ve got a nice mix of res/comm in one investment. Gerrard St East is a great place for this right now as we’re in the early to mid stages of gentrification. Parkdale area is another good location with great growth potential.
Once we’ve zoned in on the right property type, have our financing approvals in place, and have discussed your tax consequences with your tax professional, we’re ready to get out there and start looking for money makers. One important thing to remember is that you’re not buying this place for yourself so try to put yourself in the shoes of a renter and not someone who may have different requirements as an experienced homeowner for a number of years.
Analyzing the Numbers
How to find a Tenant
You’d expect a Real Estate brokerage to insert the cookie cutter “Always us a Realtor to find a good quality tenant” line but we’ll spare you the BS. If you’re dedicated to your investment properties and have made property ownership your career than you’re more than capable of using tools like Craigslist, Kajiji, Facebook, and Twitter to find a great tenant.
For those that have other full time commitments, or are new to the rental game, cannot spend the time to create the ads, efficiently reply to prospective tenants, and would like the added benefit of MLS exposure then we’ve got your solution. At Spring Realty we have dedicated rental agents that can handle 100% of the tenant finding and vetting (which we’ll get to next). The fee for a rental agent at Spring Realty is the equivalent of one month’s rent plus HST. If we rent your space for $1200/mth our fee would be $1200. This can be paid from the initial tenant’s deposit of $2400 (1st and last) and the remainder is returned to you, the landlord.
To discuss your rental property purchase or if you’d like us to help you rent out your existing rental units, please get in touch to discuss. We’ve created an efficient system that includes a full social media campaign, high quality photos, and of course MLS exposure. If we can’t find you a tenant: it’s you, not us.
How to pick the right Tenant?
This is a great problem to have and a common one in Toronto these days. Having a lack of rental inventory has created quite the demand for rentals and it’s quite common to have 2-10 applications within a week on a single property. Here’s what we look for:
- Credit report from www.equifax.ca including credit score
- Employment Letter to confirm annual salary and length of employment. If self employed we ask and review their NOA’s for the last couple of years.
- The Spring Realty rental application which asks for references and other vital information
Once you’ve gone through all three of the above documents. You’ve likely settled on the top tenant. If you only have one application, don’t feel as though you need to take the 1st app that comes your way. Sometimes it’s better to listen to that feeling in your gut and walk away. The Residential tenancies act is set up so that it’s quite difficult to evict a bad tenant even if they’re not paying rent so let’s make sure we wait for the good one, even if that means you will have the place vacant for a few more weeks.
Once you’ve found that dream tenant it’s time to “get them to sign on the line that is dotted” (<– can you guess which movie that line is from?). Our lawyers have created an air tight Lease Agreement specifically for our clients which we’re happy to pass on to our clients.
Apologies for another insanely long post but it’s important to have all of the info you need in one place. If any of this confuses your or if you would like to chat about your options, get in touch and we’ll get started. If you have an invetsment property to sell, check out our post about Dealing with Tenants. Make your you’re connected with us on Facebook and Twitter too.