Already bought your first home and feeling comfortable enough to purchase your first rental property?
Alike your experience of buying your primary residence, buying an investment property involves a whole new experience as factors determining your decision can be quite different. Here are some tips on how to evaluate and make an informed decision which can be beneficial for you in the long-term.
- Make sure being a landlord is the right task for you since it may involve some work you may not be prepared for both physically and financially. First time investors may need to do repairs on their own or count on friends and family members to save some money. However, as portfolio increases, owners have more leverage and usually investors put together a team of contractors for the jobs.
- Make sure to pay debt first. While savvy investors may carry some level of debt as part of their investment portfolio, it’s always a good idea to avoid debt if you are an average “Joe”. Paying off any credit card debts, student loans, medical bills or saving for your children’s college funds should be a priority. However, if the return from real estate is greater than the cost of debt, why not? But never put yourself in a position where you lack the cash to make payments on your debt and always keep a safe margin.
- Make sure you have the required down payment since investment properties usually require a larger down payment than owner-occupied properties. Tighter requirements for financing approval apply. Also, beware of higher interest rates since interest rate on an investment property might be higher than traditional mortgage rates.
- Make sure to calculate your margins of return and estimate maintenance costs, as well as insurance, strata fees and property taxes. If buying on a resort area, make sure to include in your calculations any resort fee applicable. Operating expenses can be anywhere between 35% and 80% of your gross operating income.
- Make sure to find a good but low-cost home to start your investment experience.
- Make sure to find the right location when choosing a profitable rental property. Consider elements such as low property taxes, a decent solid neighbourhood with low crime, growing job market, and surrounded by amenities.
After making all considerations above, does investing in real estate make sense for you?
Some of your rewards can be a good passive income, increase in real estate value over time, interest paid on an investment property loan is tax deductible, real estate values are more stable than stock market and you are investing in an actual physical asset.