Friday, 3 July 2015

Investment Properties, Just The Basics

Have you ever thought about exploring the exciting world of real estate investing? With opportunities available at every turn, now might be the time to make your move.

Fortunately for many, Kamloops is a growing city with low vacancy rates and fairly attractive real estate purchase prices. The central location of TRU and other amenities make it a great location for students, working families, and even retirees looking to downsize. Depending on your investment objectives, any of these groups could be a demographic from which you could earn a significant amount of rental income.

According to CMHC statistics, the average rent in Kamloops for a 2-Bedroom apartment is currently just under $900/month(with townhomes renting for much more!). Compare that with a mortgage of just $550/month(based on $150,000 mortgage @ 2.69%), and you can see that there is potential for good cash flow if you can keep your monthly operating costs low.

Sounds pretty good, right?

And it can be, if you do your research and understand the risks involved. Investors of all types gravitate towards the flexibility and the opportunity that owning a rental can allow. Like any investment, the best opportunities are had by those who start early and plan ahead. A long time horizon will allow you to ride out some of the fluctuations of the real estate market and to watch the value of your property increase over time. It can also be an excellent way to plan for retirement, having rental income available later in your life to offset any decrease in your employment earnings.

A rental investment portfolio is a great option for people who like the tangible, secure potential of property but who are ready to accept that this can come at a cost.

Ok, so what's the catch?

If you're still reading at this point, you must be wondering what the price of all this security and wealth is? Well, like any investment there are always risks such as:

What if you are unable to find tenants? Will you be able to afford your monthly payments without the rental income? And if so, for how long? It is important to think that there may be a time where you are required to carry the mortgage, insurance, and other monthly obligations in order to keep your property.

As a landlord, it is now your job to ensure things go as planned for your tenants. Depending on your experience and your comfort level with performing tasks, these costs can add up quickly. Remember to budget for things like leaky faucets, plugged toilets, and other repairs that can and will come up over time.
Major Repairs/Problems

Problems like plumbing and minor maintenance pale in comparison to the major problems with a home that can occur. Large, unexpected costs such as foundation problems, electrical issues, roofing, or water/mold problems can creep up and cost thousands of dollars at a time. If you are earning an income each month from your rental, it would be wise to save some of that money as an emergency buffer for when things like this come up.

Bad Tenants
There is no amount of value you can place on the headache and hassle of having bad tenants. This can be as bad as police visits to the property and you on the hook for months of missed rent and/or property damage. It is extremely important to understand who you are renting to and to realize the potential damage and cost of bad tenants!

Not scared off yet?

Great! Then you might be exactly the type of person to invest in a rental property. Now that we've worked that out, let's get to the meat and potatoes.

How do I choose an investment property?

The answer here lies in seeking out multiple options and comparing to decide what you are comfortable investing in. There are a myriad of property types to choose from including single family homes, duplexes, condos & apartments, or even a principal residence(where you live) with an income-producing suite.

When considering the options, think about how much maintenance a property will require, how much it will cost to operate and insure each month, and any other costs in terms of both time and money in order to run the property as effectively as possible.

  • Stratas/Condos may cost less in maintenance, but will come with the added expense of monthly fees. There may also be rental restrictions in some strata/condo complexes, be sure to read the rules thoroughly when considering this type of purchase,
  • Single family homes and duplexes on the other hand, may not have monthly fees but can cost significantly more to maintain and operate each month. Costs ranging from insurance to property taxes will all usually increase, but you may be able to charge more rent.
  • Income-producing suites are a popular option to balance costs and income. Many first-time buyers and young families consider this "Mortgage Helper" option to keep their living costs low, but allow for a larger living space later if needed. Simply converting a suite back into part of the home allows your home to grow alongside your family when you are ready.
 Once you've determined the monthly costs, compare that with the amount of rent you expect to receive each month to determine your potential income.

Comparing market rents for the property should begin with a thorough comparison of similar available properties(Kijiji and Craigslist can be good resources), and it may also include a visit from a property appraiser. He or she will take factors such as size, location, and amenities into account to determine an estimate of how much the property will rent for each month in your market. 

And Now for The Nitty-Gritty(Financing, Taxes, and Legal...)

Your best mortgage advice will come from a local mortgage broker who can compare the different options available for your particular situation. There are literally dozens of lenders, insurers, and different programs to consider in order to make sure you get a competitive rate and good terms. A 20% down payment is usually required when financing rentals, but there are also some alternative options available for highly qualified borrowers, again see your mortgage pro for advice. There is also plenty of competition in the private lending market for properties or portfolios that may not fit into the typical lender profile.

Rental properties come with a unique set of challenges and benefits come tax time and it will also be important to have a trusted tax professional on your side. Things like your interest paid, maintenance costs, depreciation, and even strata fees could all contribute to reducing or even eliminating any taxes owing on rental income you receive each year. There are plenty of opportunities here, but you should discuss this at length to determine how this will fit into your personal situation.

Finally, you must always seek legal counsel when considering a large investment such as real estate. This may be one of the largest purchases you ever make and it is important to have a lawyer review everything and consider any and all potential implication before completing your purchase.

The Final Word

Investing in real estate is not for everyone. It can be very rewarding to watch an investment like this grow and turn into valuable income and long-term wealth, but it won't come without hard work and intelligent decisions. Consider whether you can afford to maintain a property like this when it is vacant or needs repairs. If you can build up some savings(hopefully with all that income you're earning!) to prepare for things to go wrong, then you will be in a position to maintain your investment in the long run. This is how smart investors maintain and eventually grow their portfolios.

Need some personal advice on whether an investment property might be in your future? Visit my website for some free calculators to get you started, and then contact me so we can discuss the details and get started planning!

Follow Us


Post a Comment