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I make money through real estate by helping my clients buy and sell properties and through personally investing in it. In the past six years that I’ve been working full time in real estate, I’ve come to experience numerous situations, good and bad, and I’ve learned dearly from them. Here are my top five tips for purchasing an investment property.
Know what you’re getting
The first step is to figure out what you want to purchase. Many investors and buyers have a vague idea about what they want to do but nothing beats writing it down and formulating a plan. Buy and hold, reno and flip, buy, reno and hold? Once you have the strategy narrowed down, figure out which area you would like to invest in and become the expert in that area. A couple of questions that I would be looking to answers for:
- What type of houses are coming for sale? Commercial or residential?
- What they are selling for?
- What are the rental values in the area? Rising or falling? What are the vacancies?
- Is the population on the rise or decline in the neighborhood? Employment rates?
- Any upcoming construction projects such as condos?
Create a team of professionals
It’s a good idea to partner with a local REALTOR at this time to help you with gathering the information above, if not readily available to you. The REALTOR should be able to provide you with current inventory, market statistics for properties, rental vacancies and current rental inventory. You can leverage the REALTOR’s network to find competent Mortgage Brokers, Inspectors, Engineers, contractors, Lawyers, architects and designers to help you through your purchase and wealth creation. A strong team will support you in areas where you are weak and guide you to your ultimate goal faster than trying to learn it all for yourself!
Go see places!
Nothing beats experiencing the property for your self! I love this activity and go out almost everyday with a handful of properties to preview. This form of gorilla marketing serves two purposes.
- It gives me a first hand view of the property and current inventory available. I can answer any questions that my clients would have intelligently. It’s not possible to see all the properties being listed so choose your properties wisely.
- It lets me see if there are any hidden potentials that aren’t apparent from the listing. The hidden benefit of this activity is also what NOT to do when selling your property. Be a keen learner!
Almost every property has potential to make money and a keen eye for finding that potential could net you money in the short or long term.
Do the math of cash
Before you make an offer, find out how much it will cost you to make the purchase. One of the common mistake made by buyers purchasing investment properties is lack of knowledge on closing costs. This is why my analysis takes into account closing costs such as land transfer tax, Toronto land transfer tax, HST accruals, closing costs from lawyers, lending fees for a mortgage, mortgage broker fees, building inspection reports, environmental report, and building engineering report etc. Commercial property purchases cost more than residential properties so make sure you do the math. Mortgage rules are important to note as well and it can make or break a deal. Minimum requirement for a residential investment property is 20% versus 25% for a commercial or mixed use commercial residential property and this can translate into thousand of dollars invested or saved to be used into the renovation of the property. If you’re planning on renovating, make sure you have a comprehensive plan in place about how much it would cost to do the work and a buffer for overages.
Nothing beats a detailed financial analysis to ensure the property will be able to cash flow once acquired and/or renovated. As a rule of thumb, any property purchased, when fully occupied, has to at least carry it self. As landlords, we have to deal with vacancies and broken toilets and if a property is already taking money from your pocket, it’s not a good investment or nest egg. The rental income should pay for the property and generate a return for you which can beat the bank.
Do a sanity check and run it like a business
Always double check your numbers to make sure you’re assumptions are correct. When in doubt, have your team review your numbers with you to make sure you can achieve the results you’re projecting. As soon as you purchase your property, you’re a business owner so run it like one. Do detailed due diligence on any prospective tenants to ensure they can pay the rent. Keep on top of any outstanding rent and making sure you have funds available for expenses. Cash flow is very important in this business so make sure you have a contingency plan in place in case you have vacancies or a late payment on rent.
Hope these tips serve you as well as they have served me. If you’d like more information about investing in real estate or would like to join me on my daily tours, feel free to subscribe to our blog at www.TorontonianOnline.com and connect with me.
Happy investing!
i wanted to giet your opinion on a recent investment property purchased, the closest major intersection is laughton/davenport area and located directly on davenport. The home is a triplex with 3 complete separate entrances from the outside, and the property is full tenanted with 2/3 tenants residing for more than 4 years each. the home total living square feet is 1800 sq feet, and it has 3 tandem car parking, and all units are completely updated and roof replaced in 2005, what i mean by updated is mechanical, electrical, plumbing, flooring, are updated, its currently rented below market value due to the long term tenants, and rented for $2,575/month all inclusive (it should be going for about $100.month more but quality tenants is hard to find so it balances out), the backyard has a large interlocking brick patio with a large tree making it a desirable place to relax, and the main thing is this home actually has 4 separate entrances (the main floor has 2 entrances, one from backyard and other from front of home, and the front entrance can be made a bachelor unit of approx 250 sq. ft leaving the remaining main floor unit to be another bachelor of 350 sq ft. – right now its a 1 bedroom apartment, and all units right now are 1 bedroom apartments with their own kitchen and bathroom), this home was purchased for $450k about 1 month ago and a 20% downpayment, the onyl thing is the home doesn not have a laundry but about 1 minute away is a laundromat very close to the house (since its directly on davenport rd)
my question is what is your feedback on this property, based on current valie, rental value, and future value
im sure you know of the new police station built in the area, and very close proximity to high park and junction area, and the new stockyards mall being built closeby and with very accessible transit with parks and residential living
i thought i would provide some additional info:
property tax – 200/month
home insurance – $60/month
Utilities – $440/month