Investing in real estate and being a landlord should be treated like any other business. The goal is to end up with a profit at the end of the day. After collecting rent and paying all the expenses, you must have money left over to be profitable. As a bonus, slowly and steadily your mortgage will be paid down and you’ll end up with a tidy nest egg. Remember that like any other business it takes effort, time and skill to be successful.
Following these tips and it will be financially rewarding for you.
1. RESEARCH: Take the necessary time to inform yourself about property values in the locations you’re considering purchasing. Think about obtaining a market analysis from a real estate agent or appraiser for a property in which you are interested. Research if the location is in decline or moving upwards? A good indication is if large chains like Wal-Mart, Tim Hortons, Home Depot or Star Bucks are moving into the neighbourhood. Such companies do a lot of market research on demographics and income before deciding where to locate. If a large chain finds a neighbourhood appealing, it’s a good indication the neighbourhood in moving upwards. You may find that you have to view many properties and submit many offers before you find the investment property that is the right fit for you
- SURROUND YOURSELF WITH EXPERIENCE: Retain a real estate agent who has firsthand experience; who is also a local investor; and who has owned and managed investment properties. Many agents purport to be experts in investment properties, but have never owned or managed one. Retaining a real estate agent with experience is invaluable. Additionally, utilize the services of other experienced professionals, such as property managers, insurance advisers, mortgage brokers, home inspectors, accountants and lawyers. A knowledgeable professional team working with you will make the process smoother and save you time and money in the long run.
- EFFECTIVE PROPERTY MANAGEMENT: A critical member of your professional team is an experienced and reliable property manager. If you are not experienced in dealing with tenant concerns, evictions, and other property issues, you will want a property manager. Depending mainly on the number of units being managed, (although there are many other factors), the management fee will range from between 3 and 10 percent of the monthly or yearly rental income. Good property management will pay for itself in the long run. When looking for a property management company, be sure you do your research ask for references.
- BE AWARE OF ILLEGAL UNITS: Before you make the purchase, research the zoning of the subject property. There is a good possibility that you may come across illegal units, mostly in duplexes and triplexes (usually a basement apartment). You could also find them in larger apartment buildings and students housing units. These apartments are illegal in that they contravene the zoning by-law. Although these units provide additional income, be aware that they may not be fire code compliant, and that you may be forced to convert them back to the legal use of lesser units. Be aware that your lender will probably not include the income from those units in determining the principal amount you will qualify for under your mortgage.
- BUY WITH THE GOAL TO HOLD LONG TERM: If you’re looking for a quick flip and a quick profit, you might as well put your money on the roulette wheel. Historically, real estate has always increased over the long term. The probability of you making money is greater in the long term then the chance of you making short term gains. Plan to hold the investment for the long haul, and wait for the changes in the market conditions that could make it prime time for selling.Remember that by keeping your investment for an extended period, you will trigger capital gains on the sale as opposed to a business gain.
6. PARTNERSHIP AGREEMENT: If you’re investing with other persons, it’s recommended that you have an agreement in place, (i.e. partnership agreement, joint venture agreement, shareholders’ agreement) to address various matters. Those agreements should address issues such as; 1) failure for a partner to put in their share of cash calls when called upon, 2) selling their interest of the property, 3) sudden death or illness of a partner and a myriad of other situations. With an agreement in place, you have a mechanism already in place to deal with the many issues that may arise, rather than having to deal with them later when it could create problems and or opposition. It’s better to pay for the agreement before the purchase, then pay much more later on.
7. BE CAUTIOUS WITH HIGH LEVERAGE: While there are some investments that require minimal dollar investment, most real estate transactions require a significant down payment and financing that is personally guaranteed. Don’t fall prey to the “no money down” schemes. The people making the most money on the “no money down schemes” are the ones putting on the seminars. Chances are you will be paying a premium for the property because there is no money down; the property is a money drain and that’s why the seller is willing to sell with no money down so the losses can be passed onto you. Get a second opinion from a professional. Never be hurried by a real estate agent or a seller to act quickly to get in on the deal as there are many other, probably better, deals outs there.
- PROPERTY INSPECTION: A thorough property inspection by a qualified inspector is a necessity. Avoid using a contractor friend or a handymen’s opinion. Use a certified home inspector, who will provide a complete report with pictures and recommendations. Avoiding this step could lead to major unexpected costs or overpaying for the property.
9. EDUCATE YOURSELF: It is extremely important to educate and familiarize yourself with investment strategies, the terminology, and the current tax laws. You should also be familiar with all the regulations that govern investment properties such as fire, health and safety, landlord and tenant laws. Take your time and only proceed when you are ready. Know the business before you make the plunge.
- DON’T OVERPAY FOR A PROPERTY: As a wise investor, you should always remember that when investing in real estate you make money when you buy the property; by buying it right. Determine in advance how much you are safely prepared to invest without overextending yourself, and be cautious not to over pay for a property. Also make sure you have enough funds reserved for the unexpected capital expense.
Follow these tips and you will be assured to make money, and become a successful real estate investor.