Real Estate Investing Article
A lot of people look at real estate as a great way to start socking away a reliable investment and either have tenants pay their mortgages for them, or “flip” the house and turn a profit. As with any type of investment, there are advantages and drawbacks. If you are considering making the move into real estate investment, here are some tips to help you find your way.
Tips for New Real Estate Investors
1. Establish a relationship with a local experienced realtor who invests in real estate personally. While all realtors might claim to be experts on investing in real estate, those who have put their own money into the game know the good, the bad and the ugly factors on a more detailed level. Having that type of experience in your corner is a real bonus.
2. Never purchase an investment home without having a professional, licensed home inspector take a look at it first. You might be tempted to take on a property at a rock-bottom price, but in the final analysis, you can end up spending a fortune getting a property up to code or making repairs that your tenants (or buyers in a “flip”) demand. Paying a couple hundred dollars for a quality inspection can make the difference between profit and significant losses.
3. Focus on properties that will bring in a positive cash flow. When setting rent, you should get enough to pay the utilities, mortgage, property taxes, and insurance, as well as a 10 percent cushion to set aside for repairs which will come up. This is difficult to find in many metropolitan areas, but outside the major cities this is easier to come by, so be flexible with your search criteria when it comes to location.
4. Sit down with your banker or with a reputable mortgage broker and take a look at your finances, including your current budget. Get a reasoned perspective on the amount that you can reasonably afford to take on through a mortgage to fund your investment.
5. Even if you’re going in with your best friend from high school to buy an investment property, complete a formal agreement to cement your partnership or joint venture. Sometimes friendships are ruined when these sorts of ventures do not end up like either partner had planned. Include specific provisions for cases like the death of one partner, the decision by one partner to sell even though the other partner does not want to, or if one partner fails to pay his proper share of the expenses. Having those items in writing keeps the relationship professional and does not threaten your personal connection.
6. Remember that, while time is often money, do not sign on the dotted line on an investment that does not end up making sense. There’s no reason to stick with a deal if you don’t think it works for you any more. Don’t let the fact that you spent hours on it force you to execute a transaction that you know will be a loser.
7. Unless you are a professional handyman, hire a firm with property management expertise if you plan on investing as a landlord. Let this company screen your potential tenants and handle repairs, maintenance and any other issues that the tenants might bring up. This way, if a pipe bursts in the middle of the night, you won’t be the one getting that angry telephone call. Plan to spend about $100 per property each month for this level of service.
8. Remember that when you buy and sell real estate quickly, the Canada Revenue Agency views your profits as business business income, which means that those profits will be taxed. If you have the “flip” deal of a lifetime lined up, that’s fine, but remember that purchasing properties for the long haul is preferable, as long as they are properties that you can reasonably rent out as the tenants end up funding your mortgage, allowing you to develop equity. If you sell a house that you have owned for several years at a profit, you’ll have an easier time classifying the profit income as capital gains, which has half the tax rate as business income.
9. Finally, keep accurate records of all expenses and income for the investment property. Keep this separate from your personal financial statements and bank account, as this will muddy the waters when it is time to file taxes at the end of the year.