There’s been big upswing in the number of (smart) people putting money into real estate as a viable investment opportunity, including Waterloo Region real estate. While that real estate won’t make you rich overnight, the right property, or properties, will dramatically increase your net worth in the longer run. In other words, there will be a great payoff.
Before you take your first drive around neighbourhoods or step a single foot into an open house, you will need to know how much you can afford to spend on your fledgling real estate venture, and what are the most common responsibilities that come with the purchase.
Here are some tips to consider before making any offer:
Save up the down payment.
Investment properties by nature need a significantly larger down payment than owner-occupied properties, so you need to be ready for what’s ahead. The approval process may be lengthier, and you will need more cash.
Anticipate higher interest rates.
Because of their inherent risk, interest rates on investment properties are often higher than a regular home mortgage rate. Make sure the numbers add up in your favor.
You want to keep your mortgage payment as low as you can to see a profit from the rent. Working with an experienced mortgage broker can be one great way to ensure you get the best rate possible
Calculate your return on investment.
Do the math! For every dollar you spend, determine your return. In general, stocks may offer a 7.5 return, bonds may pay 4.5 percent, but experts say a 6 percent return in your first year as a landlord is considered excellent, especially since that figure is likely to rise over time.
Remember the number one rule: find the right location.
You’re wise to look for an affordable yet profitable rental property, but that doesn’t mean buying in a bad location. There’s a long list of things to consider, but overall you want to find low crime rates, a flourishing job market; an excellent school district; plenty of cultural and outdoorsy places to visit, such as parks, restaurants, theaters, and museums. Bonus points if the location is close to a walkable downtown
Unless you’re a good handyman, don’t get in over your head. All of us look at older homes and see potential, but in truth, few of us can make that happen. The idea of flipping, too, can be enticing, but again, you need to be an expert builder to take this on. Yes, these older properties come at a lower price, but you need to figure in the materials and labor to bring it up to snuff.
A better option is to look around for a house priced at or slightly below the market value that needs only small repairs, like front steps, gutters, or landscaping.
Don’t be dazzled by fancy homes you can’t afford.
This is the opposite of buying a fixer-upper: you find a lovely house that’s flawless and move-in ready. Chances are good you won’t be the only one drooling over this opportunity.
The price will be high, and you may even fall into a bidding war if there are tons of interested buyers. Keep your eye on the bottom line. We recommend not even looking at properties outside your financial limits because it will only make them less expensive houses look drab and unappealing.
Get advice from actual experts.
Your parents, friends and other well meaning acquaintances may have a lot to say when you’re in the middle of figuring out what to buy.
Take all that with a grain of salt! All the people on this list lack one important thing: objectivity.
Instead, take the high road and make an appointment with a seasoned local real estate broker who has experience in selling local rental properties. Not only will they help keep you on budget, but they are one of the very best sources of knowledge about both the local market and the area in general.
Understand Risk Versus Reward
It isn’t as easy as, say, slipping a coin or asking a psychic. As with any financial decision, you need to carefully weigh out the risks versus the rewards to figure out if buying real estate rental property is right for you, right now.
- This is passive income at its best. Sure, there will be the initial investment plus some time commitments for repairs, but overall, you can earn good money on the side, along with your day/night/regular gig
- The interest you pay on loan for an investment property is tax-deductible. Consult an accountant to make sure you’re taking advantage of this. With time, you can expect your income to take off!
- You’ll be earning money through rental income while paying down the mortgage. In addition, as real estate values increase, your investment spirals upward in value.
- You can keep an eye on your investment. You will need to ensure your site isn’t getting trashed by tenants by visiting regularly or asking your property manager to check in bi-weekly. Always have a good lease spelling out who pays for damages, and also have a considerable security deposit on hand.
- Real estate values are more balanced and less likely to swing up and down than the stock market.
- Although rental income is passive, tenants can cause disruptions to your life when they fail to pay on time, break things, become a noise problem in the neighborhood, leave the trash out, and 100 other things they can do to give you a migraine. As an optional choice for dealing with all this, you can hire a property manager, but that will subtract from your profits.
- You may not be able to charge enough rent to cover the total mortgage payment. Similarly, if the place sits vacant for any period of time, you will see zero income.
- You will need a landlord’s insurance. Unlike stocks, you can’t instantly sell real estate if you become overwhelmed or decide to try something else to supplement your income.
- You can’t just unload part of your real estate. With stocks, you can sell a set percentage. But you can’t sell 50 percent of your rental house.
When it’s all said and done, your first venture into real estate can be thrilling, daunting and exhausting, but in the long run, it will help build your bank account in a big way.