10 Commandments of Real Estate Investing
So, are you considering real estate investing? Before you put an offer on an investment property, here the 10 commandments of real estate investing which are broken into 3 phases.
Real Estate Investing: Setup
- Why are you investing: Having a purpose is key. There are many investment strategies and areas to consider which can be confusing. Whether you are investing to generate $5,000 per month in 10 years from now or looking to fund your children's post secondary education, it helps you narrow down the number of required properties to achieve your goal
- Build your team: Surrounding yourself with real estate investment specialists: real estate agent, mortgage broker, accountant and lawyer who work with investors and who are investors themselves can be beneficial. After all they are your board of directors who you can bounce scenarios off and keep you on track
- Investment strategy: You can invest in pre-construction condos, buy and holds, duplexes, triplexes, multiplexes, student housing, short term rentals, commercial.......and various geographic locations which can be very confusing if you don't have your why (first point) defined. Re-adjusting your investment portfolio in the future is an expensive proposition since selling incurs real estate fees, legal fees and has tax implications
- Taxes: Having an investment focused accountant can save you thousands of dollars who can advise you on capital gains vs taxable income when filing your annual T776 (statement of real estate rentals) and implications on taxes when selling the property in the future
- Cash is king: Focus on positive cash flowing properties (rental income covers mortgage payment, property and insurance). It is easier to qualify for additional properties if you cash flow. An investment property is a business, it should be profitable at the end of the day
Now that you have established your vision, investment strategy and geographic location, the focus shifts to acquiring an investment property
Real Estate Investing: Acquisition
- Downpayment / Closing Costs: For residential properties (4 units or less), the mortgage downpayment rules are as follows:
- If you live in of the units: For a duplex 5% on the first $500k of purchase price, then 10% for the portion above $500k. For a triplex or fourplex, 10% is the minimum requirement
- If you do not live in any of the units: 20% downpayment
- Closing costs: Budget 3% of purchase price in Toronto to cover legal fees, land transfer taxes and some repair / touch up work the property might need
- Rental Income: Lenders use anywhere from 50% to 100% of rental income if the rental suite is legal. If it is not a legal unit, some lenders will not use any of the rental income when qualifying for a mortgage (hint: work with an investment specialist mortgage broker)
Once you have acquired your investment property, there is more things to consider in the operation phase
Real Estate Investing: Operation
- Repairs, maintenance and vacancy: It is good practice to allocate 8-10% of the gross rental income for contingency. For example, if you are generating $4000 monthly rental income, $400 would be set aside for future needs. The property will need some type of work or repairs in the future; plumbing, painting, roof, flooring....Tenants wear and tear rental units
- Maintenance: Replacing furnace filters, checking smoke/CO detectors, inspecting property exterior and property condition on semi-annual basis is a proactive approach
- Documentation: All communication with tenants needs to be in writing and using proper forms. No he said, she said
Real estate investing can create financial freedom if done properly. If you are interested in investing or need help with your existing portfolio, we would love to help.
Real Estate Investing Resources