Hundreds of thousands of people across North America are happily living off money made from investment properties. If you do it correctly you can join them. But it’s much more complicated than just buying a building. There’s a lot you need to know and do before you take the plunge. You also need to understand a bit about the dark side of residential property management – but we’ll point out a great way to handle that!
Don’t rush into it. You need to go into property investment with your eyes open – knowing what the potential gains and risks are. That means doing research, as well as getting advice and help from professional property experts. Do your research in person as well as on the internet. Talk to anyone you know who owns investment property. Sit down with them to get a first-hand look at what it really entails, the good, the bad, and the ugly. As for those property experts, they should include an independent mortgage broker, and a real estate agent with investment experience.
You’re not buying a property, you’re buying a business. And this isn’t always the easiest paradigm shift to handle. It’s not simply a case of sitting back and watching the money roll in. You have responsibilities to shoulder and legal aspects to understand. You need to factor in municipal rates, interest rates, and operating costs like property insurance and taxes. A good way to handle this is to draw up a business plan with all the details you should consider, and set realistic goals. Are you willing to handle the day to day details of an investment property? If not, hire a good residential property management company. It’ll save you money - and headaches - in the long run.
Look for an ‘income stream’ instead of capital growth. Before you buy, you need to work out – and understand – the ‘yield’ of a property. Yield is the actual income you expect to receive – the rental income relative to the property’s value. To figure out the yield: total up all property costs (include closing fees, renovation fees, etc.). Take the estimated annual rent amount and divide it by the cost of the property. Multiply this by one hundred for a percentage – and this is your net rental yield. Balance this annual ‘yield’ against the price your property could be sold for in the next five to 10 years. Now you can see if the property is worth investing in.
Buy Where Renters Want to Live. You may get a great deal for a property in a small town, or in what appears to be a good area – but if it turns out no-one wants to live there, you’re in trouble. When scouting around for a rental property, look for areas of a city that show signs of growth and economic sustainability. Find out which areas have jobs available and people moving there for those jobs. Is there a school nearby, is transit handy? If you’re not familiar enough with all the different parts of your city, hire a real estate agent who’s experienced with investment needs.
Understand Your Monthly Costs. There are more than you may have realized when you first decided to buy an investment property. Those costs include: mortgage payments, interest and property taxes, maintenance costs, possibly garbage pick-up, water usage, or strata fees. You should also have an emergency fund to take care of unexpected repairs or vacancies. Those monthly costs may also include a property manager to handle the business end of things.
A Property Manager is Your Best Friend. Good property managers are worth their weight in gold! They’ll deal with the many day-to-day details of running your property and handle the dark side of rentals - like the call in the wee hours of the morning when a water pipe breaks, and dealing with the ‘tenant from hell’ who just doesn’t get it! – all for a small monthly fee. They’re proven to generate higher rent incomes, have connections in enough industries to handle any situation, and understand the applicable legalities. Shop around when it comes to choosing your real estate property management. And ask around. People are more than happy to recommend a good property manager.
If you’re considering buying an investment property, and hadn’t really looked into it too much, your head might be spinning right now! But if you are serious about this, you can now move forward in the right way, with the right people, to make this dream a successful reality.
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