09 November 2020
Melanie Wright

Buying an investment property can be scary and exciting at the same time. It takes work to manage tenants, repairs, remodelling, taxes and bookkeeping. It can be a big time commitment and a significant investment. It can also be a fantastic way to generate income and build equity over time, but getting started can be intimidating.

Read our top tips on buying your first investment property:

Determine your motivation

Start by asking yourself the hard questions. These are things not to be taken lightly.

  • Are you looking for a project?
  • Does the idea of becoming a landlord thrill and excite you?
  • Is this a long term plan for your kids to move into or for income for your retirement?
  • Do you want to manage this property yourself or will you be hiring a property manager?

It is really important to determine your end game in the first inning so you will bring home a win. Once you have decided on your goals you will have an easier time achieving them.

It’s not just money in the bank

Visit your bank or mortgage broker before you go out tire kicking. Financing is the first step, unless you are a cash buyer. Decide if you will be leveraging the equity in your home, drawing from investments or using your savings. Your mortgage specialist will explain the special financing rules for investment properties and look at your entire financial picture to see where you fit in. 

How much time do you have?

From the time you begin your search, patience is a virtue and time is an asset. The process of finding the property to fit your needs can be time consuming. There is no pressure to buy, so be detached in the process. You will want to be thorough and do your research. If you are assuming tenants, invest in getting to know them and their rental history and backgrounds.

Once you have found the right home, consider the time commitment involved in looking after an investment property. Even if you buy a turnkey fully occupied property, there will come a time that you have a vacancy. Then there are the weekly, monthly and annual commitments: cleaning gutters, windows, lawn and garden maintenance, trash out to the curb, clearing the snow etc. There is also a huge time commitment in keeping your financial records current and up to date.

Choose a winning team

You will want to make sure that you have the professionals in place before you purchase. Speak to your accountant. Do they have the knowledge to advise you on the ins and outs of an investment property and how it will affect your net worth?

If you have decided on using a property manager, you may need their services day one so it’s a good idea to establish a relationship and understand fees and responsibilities before you make an offer on a property. Even if you have a property manager you will likely need a handy person and preferably one who is readily available and reliable. 

Your home inspector will help you determine what is required to bring the property up to standard and the City will advise you the legal requirements.

You will need a realtor who is well-versed in investment properties, perhaps one who actually owns a few and truly has the voice of experience. This way they will be able to share tried and trusted contractors and other professionals with you.

Location, location, location and don’t forget property type

Now is the time to finesse your goals and make the decision on the type of investment you want. Are you thinking of buying a single family home, a single family to convert to two units, a condo or a multi-family property?

Generally speaking, you will have better cashflow with a multi-unit property and less maintenance with a condo, however, single family homes tend to grow a little quicker in equity. If you need to stay within the residential financing requirements, you will likely have to stay under five units or it will become a commercial property and the financing is very different in that realm.

Geographic location is important, although your focus when buying an investment property is different than when you are buying personally. You want to make sure that there is good public transportation, laundry facilities close by if you don’t offer them, a vibrant main street within walking distance is a good draw. Perhaps you will look  close to your home so you can attend the property quickly if needed.

Cash flow and calculations

Cashflow is an important concept to understand when you become a landlord. You will want to become very proficient calculating them, and make sure you review with your accountant. Ask your realtor about the cap rates (Capitalization rate)** on the properties you are interested in. 

Calculating cashflow is a little more complicated than simply subtracting the expense from the rent. Remember you will have several months of vacancies and several unexpected maintenance and repair costs. Generally people consider fifteen to twenty per cent to be a good amount.

**Cap rate is the ratio of Net Operating Income (NOI) to the property value. Here is an easy example; if the value of the property was $1,000,000 and the net income (NOI) after expenses were $100,000, the CAP rate would be 10%.

Real estate can deliver incredible benefits for investors.

Considering all of the benefits, buying an investment property still comes with downsides and risks. You need a large capital investment to purchase an investment property and a substantial amount for closing costs. Investment properties don’t always sell quickly so your cash investment will not be as liquid as it may have been if you had invested elsewhere. You need to put in hard work, as well as having the skill to invest.

However, your underlying asset isn’t eroded or diminished because you don’t have to sell the asset to receive the income. Instead, your investment matures and appreciates over time while providing the investor with an ongoing source of passive income. This is why investing in real estate is so appealing to those of us without a pension. Real estate investments can be an excellent source of retirement income. The investments you make in your property can be tax deductible, from maintenance costs to management fees.