10 things to consider when Buying an Investment Property

Buying a residential investment property is a big decision and should not be done without first doing your homework. Here are 10 important things to consider before you purchase.

1. What Type of Property Do You Want

There are many types of properties to invest in including condo apartment units, condo townhouse units, freehold townhouse units, semi-detached homes, single family detached homes as well as multi-family homes such as duplexes and triplexes. A condo apartment unit is probably the least amount of work for the landlord because most maintenance items are taken care of by the condo corporation, however, the monthly condo fee can really eat into your bottom line.

2. Potential Rent

The rent is what is going to pay your expenses so this should be a prime consideration. Ask your REALTOR© for the average rental rates for properties that you are considering and factor that into your decision making.

3. The Rental Inventory

Find out from your REALTOR how long properties in the area take to rent. Are there lots of properties on the market that you will have to compete with?

4. Future Development

Will planned developments in the area positively or negatively impact the value of your investment property? Are there new rental units being built that will affect the inventory? Is the area improving or declining? 

5. Distance from Where You Live

If you are paying someone to look after the property for you (a property manager), then this is not a big issue. However, if you are responsible for collecting rent and taking care of maintenance issues, I would recommend buying within a one hour drive of your residence.

6. Proximity to Amenities

Being within walking distance to restaurants and clubs can be an important factor for young singles or couples. On the other hand, being within walking distance to schools is more important if you are targeting young families as potential tenants.  Good shopping nearby is desirable to most every potential tenant. Proximity to public transportation in a city like Toronto is key, but in smaller centres where people tend to drive more, proximity to major traffic arteries and highways is more important.

7. The Local Economy

The local economy and employment levels in the area will affect how quickly you rent your property, the amount of rent you receive and the outlook for potential value increases to your property. Check with Stats Canada as well as with local news-sources for information. For example, personally I would shy away from investing in Oshawa given the precarious state of the General Motors plant there.

8. Property Taxes

In Ontario our property taxes are based on market value. Municipalities multiply the value of a property by the mill rate to calculate the property taxes. The mill rate is set by the individual municipalities and in the GTA, Hamilton has one of the highest mill rates so a house with an accessed value of $350,000 will have a higher property tax bill in Hamilton then in Milton or other municipalities. Property taxes are an expense that comes right off your bottom line so it is definitely something to consider.

9. Other Expenses

As a landlord you will have to deal with other expenses such as maintenance and repairs on an ongoing basis. While you can’t always predict these expenses you can use some common sense. For example, maintenance and repairs will typically be less in a newer and smaller property than in an older and larger property. A large portion of the maintenance costs for a condo may be covered by the monthly condo fee – if you are purchasing a condo, make sure you know what expenses are covered by the condo fee.

10. What Can You Afford

While this point may seem obvious, many times it isn’t. I’ve seen many people over the years searching for investment properties when they couldn’t afford one, or looking for types of properties they couldn’t afford. You will need at least a 20% down payment and may have to cover the mortgage payment for a period before you get the unit rented out, and as mentioned above, there are ongoing expenses you will have to cover. Buying an investment property typically involves a leap of faith, but you will be more successful if you are financially prepared for it going in.

Conclusion

Once you know the area and type of property you want (and can afford), rate the properties based on their appreciation potential and projected cash flow (rent minus expenses). Now have your REALTOR write up an offer and negotiate the best deal for you. Make sure you work with a REALTOR who is experienced with investment properties who can help you navigate your way through this complex but rewarding investment opportunity.