10 tips for first time real estate investors
First time real estate investors are often very confused with the process. Here are some helpful tips to guide your buying decision.
1. Real estate investors usually do not purchase the property without a loan. First Visit with a mortgage broker or your bank to determine how much money you can afford to borrow responsibly for your investment.
2. Look for properties that generate a positive cash flow. What this means is that the rent that you receive from tenants should be enough to pay your mortgage payment, property taxes, utilities and insurance bills. Budget an additional ten percent on your overall payments to pay for minor repairs that will invariably arise. Currently this is very difficult to find in the Toronto area. Do not be afraid to expand your search to smaller communities, where you will be able to find more properties that match your search criteria.
3. Use an experienced local real estate agent who also invests in real estate themselves. Investors learn about the pitfalls only through first-hand experience, both good and bad, and you want that experience working for you as well.
4. Have any property inspected by a professional home inspector. In addition, find a contractor who you can trust to give you the right advice for any minor repairs or renovations that may be required, especially for older properties, in order to add the most value to your investment.
5. Consult with your accountant and lawyer as to how you will take ownership of the property. There are some benefits in taking title in the name of a limited company, in order to protect yourself against personal liability should someone get hurt on the property and for other tax planning purposes. However, on the other hand, you will also have to pay about $1,000 in incorporation fees and have to file a separate tax return each year for your company.
6. Keep proper records of income and expenses for your investment property. Do not mingle these with your personal bank account as it will become difficult to properly trace this when you have to file a tax return at the end of the year, regardless whether you own the investment in your personal name or in a company name.
7. If you are buying with a partner, make sure you have a proper partnership or joint venture agreement to protect both of you should things not work out as planned. As real estate investors, provisions should be made if one of the partners wants to sell and the other one doesn’t, one partner is not paying their share of expenses or what happens if one of the partners dies.
8. Hire an experienced property manager to assist you in finding suitable tenants and dealing with any ongoing maintenance, repairs or other complaints by tenants. You do not wish to be woken up in the middle of the night to handle emergency repairs. Budget an additional $100 per month for this service.
9. Be careful not to buy and sell properties quickly. The Canada Revenue Agency may view this activity as business income. This means that you will have to pay tax on any profit you make on your investment. It is preferable to buy properties for the long term, rent them out and use your positive cash flow to reduce the amount of your mortgage owing, building equity in your property. If you then sell years later for a profit, it will likely be classified as a capital gain and thus one half of your gain will be tax free.
10. Don’t be afraid to walk away if the deal does not work for you, no matter how much time you may have invested in the property.
Be prepared before buying any real estate investment.
— Credits for this article go to MARK WEISLEDER Real Estate Lawyer, Author, Speaker