Investing in Real Estate

Investing real estate doesn’t have to be intimidating. Below are some articles that you might find useful in the home buying process. Please feel free to click on one of the links below to read more.

Getting Started

  1. Purchase one property
  2. When the value increases, after a few years, have the house appraised and the bank will loan you 80% of its value.  Your existing mortgage amount will come out of that 80% & the remaining dollars left over can be used as a down payment for your next property.  Most lenders have some form of a Home Equity Line of Credit (HELOC) that you can use to make a downpayment on an investment property.  Having the flexibility of a HELOC also means that you have access to funds should any unexpected repairs occur.  Don’t get carried away of course as you don’t want to be caught in a bad position should the market go down however this is the strategy that works for most real estate investors.  Beware the interest rates need to be a reasonable level for this to work.  Your property needs to cashflow after the refinancing is complete.

Investment Tips

1. Get a Team – As you consider real estate investing for yourself, make sure you have a great team of people around you: a lawyer, accountant, real estate agent, banker or mortgage broker, home inspector, handyman.  Only use a real estate agent who invests in properties themselves. Would you purchase meat from a butcher who was a vegetarian?

2. Do you your homework on a prospective property.  Run the numbers first to make sure that it cashflows positive before you even go to see the property. Investing is about the numbers and not about the emotion.  Unfortunately many investors seem to disregard this investing fundamental of cashflow.  Many pre-construction condominium purchases are fueled by investors willing to purchase a condominium that doesn’t cashflow.  As they say, cash is king.

3. Treat your tenants as your clients.  Once you have tenants in your properties think of them as your clients.  They are paying off your mortgage afterall. At Christmas time, I give them gifts.  So I choose to treat my tenants with respect and hope that it pays off in return.  There will always be naysayers who have that bad tenant story.  There are some bad apples out there so always do a credit check, call their employer and former landlord for references.  Make sure you are investing in a neighborhood that will give you access to quality tenants.

4. Invest in what you know – From an investment perspective, it’s nice to invest in something that you can see everyday and know how it works as opposed to the stock market where you rarely have the time to delve into the balance sheets of every stock in your RRSP.

5. Variable rate mortgage makes sense – It’s always best to mitigate risks.  And on that front when you are getting a mortgage, always get the variable and not the fixed.  Why? The fixed-rate allows your lender to get richer.

 (Semi-monthly) Mortgage PaymentPrincipal Paid (after first payment)Interest Paid (after first payment)Total Interest Paid at Amortization
Fixed Rate$896.36$294.96$601.40$237,635.95
Variable Rate$710.87$365.90$344.97$126,465.90
Variable Rate + top-up$896.36$551.39$344.97$88,770.06 (amortization period has shrunk to 18 years)

Let’s say for example you are looking at a $300,000 mortgage amortized over 25 years. For the purposes of this example, the fixed rate is 5.29% locked-in for a 5-year term and the variable rate is 3% for a 5-year closed mortgage. In the last scenario, top-up your variable rate mortgage payment to the same amount that you would pay if you had a fixed rate mortgage.  In this scenario, you have paid off your mortgage 7 years sooner and saved yourself $148,865.89 over the life of your mortgage.  If you were paying the Fixed rate mortgage, your lender would be happily pocketing those dollars.  They say, “pay yourself first” for a reason.  Always keep this in mind when getting a mortgage, variable-rate mortgages make good financial sense.

6. Start At A Young Age – If you are young and considering a condo purchase.  Consider buying a home with at least 1 or 2 other units.  You’ll be living in the same space as a condo but most likely living rent free.  If you are looking for your first investment property, I also recommend a multi-unit building like a semi or detached home with 3 units.  Why so many units? It is simple if there is 1 vacancy, chances are your mortgage will still be covered.  If you purchase a rental property with only 1 unit, and if for some reason there is a month without a tenant, you will be paying the mortgage.

7. Reduce Your Tax Bill – One of the biggest bills you face is your tax bill.  Yet most of us ignore this reality when we are drawing up our budgets.  One of the ways that you can give yourself an additional write off is to have a home with an income suite.  Most people don’t want to have someone else living with them.  The reality is having a basement apartment in your home allows you to write off approximately one third of your home expenses.  For example you can write off a portion of your utility bills and all of the renovations that you have done to make the apartment rentable.  Receiving an additional $800- $1,000 per month can certainly help you with your bills each month.  This money can be used to pay down your mortgage faster or as back up income should you or your spouse lose your job or take parental leave.

You really need to ask yourself how much living space do you really need?   What do you keep in your basement? Is it storage of things you don’t use? Old clothes that can be thrown out or given away? Items you haven’t seen or used in at least one year.  My rule of thumb is if I haven’t used it in one year, it is time to trash it.

Couldn’t you use an additional $8,400 – $12,000/year?

4 Ways to Profit from Real Estate Investing

  1. Cashflow – Each month after the mortgage, taxes and other expenses are covered, you have additional dollars which can be used to pay down your home’s mortgage or cover additional personal expenses
  2. Appreciation – Over time your property will increase in value.  It is best to hold an investment property for 20+ years.
  3. Mortgage Paydown – Each month a tenant is paying down your mortgage for you.  When you tap into the equity of your property or sell it many years later that is money that you now have access to.
  4. Tax Benefits – Each year your accountant will allow you to write off depreciation, repairs to the property, interest on your mortgage and other items.  This will  most likely result in a tax refund or reduced taxes.

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