Investing in Real Estate

Financing – Getting a lender to give you a mortgage for a second property isn’t as easy as borrowing for your primary residence, you’ll need at least 20% of the purchase price for a down payment, and only a portion of the income you get from rent will be considered in qualifying you for a mortgage which is usually 80%. For commercial properties, you’ll likely need a down payment of roughly 50% to obtain a mortgage.

Taxation – In Canada, any money collected from rent would be a part of your yearly income, and you know what that means, it is subject to regular taxation. Also increases in the value of your investment property (from the time it becomes an investment property to the time you sell it) will be subject to capital gains tax. If you’re considering to buy an investment property, make sure to talk to an accountant to fully understand the tax implications.

Timing – Most real estate investments should have longer-term game plan. Because of the unpredictability of the real estate market, expecting to profit in a short period of time could end up being risky.

There are three ways to make or lose money by investing in the Real Estate market. 

  1. Cash flow (cash return) – Cash flow is the difference between what you collect in rent and the expenses you pay out. Cash flow positive properties in Toronto and the GTA are hard to come by though it is common for investors to break-even on a monthly basis which basically means that the rent they collect is equal to the expenses they pay. Cash flow is affected by factors outside of the real estate market, for example your down payment, mortgage terms, etc.
  2. Appreciation – If you’re to sell your investment property for more than what you paid, that’s called appreciation. For example, you buy a condo for $500,000 and in the future sell it for $700,000, that $200,000 is the appreciation in the value of your investment. Toronto and GTA properties have historically appreciated favourably for investors.
  3. Equity (mortgage pay down) – When a tenant pays down your mortgage, you’re building equity. For example, you buy a property for $500,000 with an $100,000 down payment and you apply the rent to the mortgage and rent it for approximately 25 years. Eventually, you will have a mortgage-free property. 

Return on Investment (ROI)
Investors use different calculations and tools to calculate the returns on their real estate investments:

Cash flow – is the net amount of cash moving in and out of an investment
Calculation: Income – operating expenses – financing costs

Capitalization Rate – is the rate of return on a real estate investment property based on the income that the property is expected to make. 

Calculation: Operating Income / Purchase Price

 

Return on Investment – a  measure used to evaluate the efficiency investments or to compare the efficiency of a number of different investments
Calculation: Adding the cash return, mortgage pay down and appreciation. 

Investment Condos

Why invest in a condo?
  • A good investment condo will break even (or be cash positive) with at least a 20% down payment which lenders will usually require from you for a mortgage anyway. To learn more about the mortgage process, click the ‘Buying’ tab above.
  • Opportunity for both cash flow and appreciation in value as time goes on
  • The rental market is at an all-time low for vacancies, so finding a good tenant should be easy
  • Generally less maintenance and repair work than being the landlord of a house
  • Unique condos in good locations have historically appreciated more than the stock market

Income Properties

Income properties are houses that have self-contained apartments that are rented out. Here are some pros and cons to income properties.

  • Having a basement apartment that you can rent out just might make the difference between affording the home of your dreams.
  • Historically, houses have appreciated faster than condos, so if you’re looking to make money when you sell, then an income property may be a safer bet.
  • With a 20% down payment on a multi-residential house, you should be able to break even or ideally be cash positive.
  • Landlord headaches: repairs, renovations, tenants that don’t pay their rent etc. 
  • Having tenants in leases may make it harder to sell your home when the time comes

Flipping Your Property

Flipping homes (in other words, buying a rundown house and renovating it in under a year) happens every day in Toronto and all over the placein the GTA. This method of investing in a property can be hugely profitable. Here are some pros and cons to flipping properties.

  • A proper quality flip in a good neighbourhood will be in high demand  as many of today’s buyers want houses that are fully renovated.
  • Cash – There are certainly lots of examples of houses bought for $600,000, renovated for $150,000 and sold for $1,000,000
  • Renovations always take longer and cost more than you expect. With a flip, every dollar spent and every month where you have to pay a mortgage counts so always consider these aspects when planning to flip a property.
  • There are just as many examples of houses bought for $600,000, renovated for $150,000 and sold for $725,000.
 If you’re considering buying a home to flip, make sure you work with a Realtor who knows the ins and outs of the flipping industry and can make sure you buy the right property, put the right amount of money into it and sell it at the right time.

    New Construction

    This used to be the number one way investors made money in the real estate market – buying condominiums or homes during the pre-construction phase and selling them when they were built.

    For more information on pre-constructions, text, email, call or contact us at anytime to get more details of how the process works and also for many pre-construction sites in areas you plan on investing in.