What to Know Before Buying an Investment Property

Are you thinking of buying an investment property and don’t know where to start?  In this Blog, I talk about the top things you’ll need to know before purchasing.

If you’re thinking of expanding your Real Estate portfolio to purchase an investment property in Toronto, it’s helpful to understand a few of the basics.   Owning a second (or even third, fourth or fifth) property may be easier than you think!

First, it is important to understand your home equity.  What exactly does that mean?  Your home equity is the difference between your property’s market value and the balance of your mortgage.  Basically, it includes whatever money you’ve paid into your mortgage that has gone towards the principle AND any increase in market value over time.

Subject to qualification, you may be able to use the equity from your primary residence to buy an investment or second property.  Lenders typically let you tap into 80% of the appraised value of your home.  To do so, you would have to re-qualify for the loan or mortgage under the current rules and rates.

So why would you do this?  Because houses are appreciating assets.  Especially in Toronto!  By putting the money you already have invested in your home to work, you might be able to buy another property that will also appreciate, thus benefiting from the increase in a value of two or more properties at the same time. 

Why Buy an Investment Property?

So let’s define investment property and why you might want one.  Almost certainly, you’d be interested in a property with the intention of renting it out.  Your return would be a combination:

  1. the portion of the Principal that a tenant is paying off each year, and
  1. Capital Gains:  The increase in market value from the time that you purchased to the time you eventually sell.

One important thing to note when considering an investment property.  You absolutely must purchase for the long term.  And by long term, I mean at least 25 years. 

Wait, what?  That seems too long!  Here’s why this makes sense….

The average mortgage is amortized over 25 years.  With a long term plan in mind, you could conceivably own a fully owned and paid for the property by the end of the 25 years.  Through the years, your tenant(s) will have paid for the ENTIRE property through monthly rent.  And, they’ve also paid the carrying costs.  So, when it is time to sell, you will have access to 100% of the current market value, which also would have presumably grown exponentially over that 25 year period.  Especially if you’re lucky enough to get something in close proximity to Downtown Toronto. 

Another reason to plan for the long term is that you want to ride out any economic cycles that may occur.  Recessions typically last 12-18 months and are followed by several years of positive growth.  A perfect example of this was the last recession in 2009.  We are now in year 10 of the current recovery.  By holding real estate for the long term, you avoid the panic and inclination to sell when the economy turns.  And yes, I said WHEN not if.  The economy will inevitably be subject to ups and downs.  However, Toronto’s prices have been rising, and have historically only gone up in the long term.

What Type of Property Should You Buy?

So the next question is naturally, what type of property should you buy?

My advice is to find something that is low maintenance, secure, brings in high rents and that you don’t have to worry about too much.

Too good to be true?  Not really!  Condos can be a great option.  Here’s why:

Owners don’t have to worry about building maintenance and large ticket items like roof repairs, foundation work, and window replacements, etc.  This is all done for you by the condo corporation.  Through a monthly maintenance fee, condos pay into a Reserve Fund that is pooled together by all the unit owners and used to cover these huge expenses if and when they arise. 

Condos are also professionally managed by a large property management company.  This means fewer calls to YOU in the middle of the night to come and look at a broken furnace, burst pipe or leak. 

Typically, condos (especially if they have a concierge) are safe and secure.  You will worry less about a break and enter, or outside damage to the property.  You are only responsible for the interior unit and keeping your suite in good repair.

Cost.  Condo’s are typically more affordable than houses.  Especially if you live in Toronto or the GTA. 

And, they are a favorite among renters because of access to amenities.  They are usually centrally located to things like transit, restaurants, and shops— all a huge draw to someone looking to live on their own or closer to the city. 

In Toronto, condos can be a very liquid investment as there is usually a large pool of potential buyers at any given time.  So, if you ever had to sell, it would typically be easy to do so.

More Reasons to Consider a Condo

Another important thing to mention is that it is almost always ideal to buy condos in big cities.  Why?  Think about demographics.  Big cities tend to attract wealthier tenants who are less likely to default in their rents.

And, cities typically attract higher rents.  In Toronto specifically, the GTA has seen significant growth in 2018 & 2019.  There is a continuation of historically low vacancy rates leading to stronger competition between renters for available units.  This naturally means strong growth in average rents. 

So, if you’re thinking about buying a second property, you can start exploring ways to turn it into a reality.  Using the equity in your home is a great option and will allow you to get into the investment market without tapping into all of your liquid cash or investments.  Once you’ve figured out all of that, you can get to the fun part— shopping for one!

Written By Deanna Allegranza, Realtor

If you have any questions about Investment Properties or Real Estate in general, please contact me at info@deannaallegranzarealty.com

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