Investment Property Tips For Beginners

Buying investment properties is an exciting and rewarding venture for many looking to build a well-rounded financial portfolio. For those who are just starting out investing in real estate, or who have questions, read the Q&A below to learn more.

Am I ready to buy investment property?

There are many different ways to invest your money, and one of them is in property. While the idea of owning several other residential buildings and renting them out to tenants may initially appeal to you, it is essential to understand that real estate is simply not for everyone.

It is not a get rich quick scheme and requires careful planning and some time. You will need to decide if you are hiring a landlord or if you will manage the properties yourself. Additionally, you need to ensure that you have all of your legal areas covered and understand all of the possible ramifications that can occur should renters not pay, or if there is damage or injuries in your building. Speaking with your lawyer or financial advisor will give you a good understanding of the potential hazards and will also help you get a better grasp on whether you are ready to invest in real estate or not.

Why buy first home or investment property?

The decision to buy investment properties is definitely a difficult one, especially in today’s uncertain market. Many people may fear investing in properties simply because of the recent drops in real estate, however setting up rental properties is a surprisingly lucrative business.

Purchasing a property in a growing neighborhood or in an area near schools and city centers can easily generate hundreds of extra dollars each month in revenue. While there is an initial set up cost for buying an investment property, once you have a property that people want to rent, and a landlord capable of tending to the tenants, then you can sit back and collect a steady stream of revenue on a regular basis.

How do I buy an investment property?

If you are wondering how to buy your first investment property, then you’re not alone. Many novice buyers are overwhelmed and can often make critical mistakes. This is why it is crucial for you to take your time and understand that buying your first investment property is something that is not done overnight.

First, you need to make sure that you have enough of a down payment for the property, and that you can secure a mortgage at a feasible rate. Next, you should begin scoping out properties. Before choosing any particular property you will need to perform a myriad of checks on them. These checks include checking the age of the house, the type of insulation, having an inspector go around and look for water damage or potential pests, and also ensuring that all of the electrical, heating, and plumbing systems are up to par. Once you’ve got a property that meets all of your requirements, you can then begin bidding on the property and go from there.

Where to buy investment property?

Buying an investment property in Australia, or anywhere in the world for that matter, is a huge step in building long term wealth. After assessing your finances and determining that you can now consider buying the first investment property in your portfolio, you need to now look at where to buy an investment property.

The key features that will ensure a very successful investment property is finding it in a location that is close to public transportation, near good school systems, and is in a decent area that is sought after by residents. While you may pay a bit more to get a property in one of the “hot” locations in town, you will find that there is almost a never ending supply of tenants willing to rent your property.

What mistakes should I avoid making when buying investment properties?

Aside from learning how to buy investment property, it is crucial to learn how “not” to buy investment property. Novice investors can make mistakes that can end up costing them tens of thousands of dollars in legal fees and property losses. Here are three big mistakes that real estate investors commonly make;

1. Not enough research – this is key to ensuring that the property is in a good location, will not have any problems, and has no permit issues that can become an issue later on.

2. Not hiring others when needed – getting an investment property is hard work and requires you to hire others for additional resources. Getting experts in to help set up the property, as well as lawyers to look over contracts and papers is essential to preventing major problems down the road.

3. Poor financing – getting a good and reliable loan is essential because the amount you end up paying in interest on a more exotic loan can mean you actually are paying thousands upon thousands more!

Can I use my current equity to fund buying investment property?

If you have owned your current home for several years, then you likely have a significant amount of equity built up into it that can be tapped as a potential financial resource. Using your current equity can be a way to avoid any out of pocket expenses for the investment property and still allow you to secure a loan at a great interest rate. Contact your mortgage company to see about adding in an additional loan and you may be surprised at the great rates that can be offered!

How do I secure a good loan for my investment property?

Securing a good loan at a great rate is essential, especially for first time investors. Unfortunately, unlike with normal mortgage rates on primary homes, investment properties tend to incur rates that are slightly higher. This is why many first time investors initially start out using their current home equity as a way to help lower the rates on the investment property.

Securing a good loan will take a bit of time and research. You may find that the best rates are with your current mortgage lender, or you may find that you find better rates with a different bank. The key is to do some research, understand the qualifying standards that are set in place, and make sure that you provide ample support to show your current income, your equity, and research to help get a better rate!

What Canadians need to know about buying U.S. real estate

The financial crisis that began in 2007 with the breakdown of the U.S. residential mortgage market still persists for millions of Americans who have lost their houses, their jobs and all hope of a secure retirement.

As a result, residential real estate prices in the hardest-hit areas such as California, Arizona, Nevada and Florida are well below replacement value (i.e., the land is valued at zero), leading many analysts to conclude that prices must be near, if not already at, the bottom.

At the same time, the Canadian dollar remains very strong against the U.S. dollar. Any investment in U.S. assets is likely to provide a decent return over time based on foreign exchange gains alone.

Taken together, these facts seem to suggest that Canadians have a once-in-a-lifetime opportunity: To buy U.S. real estate in desirable locations at historically low prices using cheap U.S. dollars. Seems like a slam dunk, right? Maybe. But there are a number of factors to consider before pulling out your cheque book and booking a flight.

If you have always wanted a vacation home in the sun and are planning to buy a property that you will use yourself, then this seems like the perfect time to buy. In addition to enjoying your new home for years to come, it is more than likely that it will appreciate in value during that time.

If you are approaching the opportunity strictly as an investor, with the basic plan of buy-rent-sell, then consider the following:

1. There is no such thing as passive real estate investing

You want to buy the right property in the right neighborhood on the right street. This requires local knowledge. Additionally, since your model requires that you rent out the property while you wait for the expected increase in value, you will need professional property management to keep the property occupied and problem-free.

2. Canadians have a very hard time accessing financing in the U.S.

If your model requires any amount of leverage, it probably won’t work. Although mortgages are cheaper than ever, you may not qualify for a mortgage from an American lender. Having to come up with the full purchase price will significantly lower your long-term returns.

3. Taxes, taxes, taxes

Unless you are already a seasoned investor down south, you may be exposing yourself to various U.S. taxes by buying and renting out an income property. The cost and hassle of having to file a U.S. tax return alone is a disincentive. So, too, are the potential complications for your estate if you die while owning real estate in the U.S.

4. Lack of diversification can spell disaster

Anything can happen with a single piece of rental real estate. Deadbeat tenants can kill your yield. Uninsured damages can increase your costs. And simply buying on the wrong street can mean that your returns are lower than anticipated.

Our firm subscribes completely to the view that a great opportunity now exists to buy U.S. residential real estate and reap significant rewards with moderate risk over the mid-to-long term.

Rather than trying to execute on the opportunity directly, however, we are studying a number of Canadian-based investment funds that purport to provide the gains that U.S. real estate investing may create, while mitigating most of the problems described above.

These funds enlist professional managers to buy, rent and sell their assets, and are designed to reduce the headaches of cross-border investing from a tax perspective and reduce property-specific risk by providing investors instant diversification.

Now the challenge is to conduct due diligence to discover which plan and which managers are best suited to capitalize on the opportunity that exists. Once we do, we hope to be investing in U.S. real estate the smart way.

David Kaufman is president of Westcourt Capital Corp., an exempt market dealer specializing in the sourcing and due diligence of conservative, alternative income-generating investments