Real estate investing is not for the faint of heart. If you plan to invest in real estate, it’s very important to do your research and make sure you are comfortable with your decision. Most people consider real estate as a great investment.

Real Estate investment can take many forms, from small scale, just simply having a rental suite in your home to add a mortgage helper, a rental property or two, or to large scale where you have a portfolio of properties, or are ‘flipping’ houses or even you yourself is the lender.

As with all investments, you need to know and understand not just the potential returns, but also the risks. Here are 10 things you need to know, before you make that leap:

  1. Talk with a Mortgage Broker to discuss what you want to do, and to determine how much money you can afford to borrow.
  2. Real Estate investment needs to be all about the numbers! Understand what a property can be rented for, and know your costs. Then look for properties that generate a positive cash flow (i.e. the rent earned less all of the costs, should still be a positive number). This means that the rent received from tenants should be enough to pay the mortgage payment, the property taxes, condo fees (if applicable), utilities, insurance, property management, and be enough for a ‘repair/maintenance’ fund. You should set-up a ‘repair/maintenance’ fund as minor, and even major, repairs are inevitable.
  3. Talk with a Real Estate Agent who works with other investors and/or 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.
  4. Have any property inspected by a professional home inspector. Use the inspection report to help determine future repair costs (i.e. roof, furnace, hot water, etc). If you don’t think you can do the repair work yourself, find a contractor/handyman that you trust to give you the right advice for any minor repairs or renovations that may be required. It’s also a great idea to ‘make friends’ with the various trades people you’ll need (i.e. plumbers, electricians).
  5. Consult with your Mortgage Broker, your accountant and your lawyer as to how you want to/can structure the ownership of the property (i.e. in your name, or a company). There are pros and cons to each. The biggest con being there aren’t as many residential lenders who will accept a property purchase in a company name anymore. Some benefits though could be personal liability protection, or for tax planning purposes. For a company, you will also have to pay about $1,000 in incorporation fees and you will have to file a separate tax return each year for your company.
  6. As it’s an investment, keep proper records of income and expenses. Do not mix 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 of whether you own the investment in your personal name or in a company name, there are tax deductions you can make if you have the proper records.
  7. If you are buying with a partner, make sure you have a proper partnership or joint venture agreement in place to protect both of you should things not work out as planned. In particular, 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. It’s always a good idea to consider hiring an experienced property manager to assist you in finding suitable tenants and dealing with any ongoing maintenance, repairs or other complaints by tenants, unless you want to want to be woken up in the middle of the night to handle emergency repairs. If you do, make sure the cost is included in your cash flow calculations.
  9. Be careful not to buy and sell properties too quickly. The Canada Revenue Agency may view any gains you make as business income or business profit, rather than personal capital gains. 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, or if you have already incurred some costs, or your desire to become a real estate investor. A true real estate investor knows it’s all about the numbers, and if the numbers don’t work you walk away

If you want to discuss real estate investment further, please contact me. I am happy to discuss your real estate investment goals with you over a coffee.

Co-written with Martin Breeze, Mortgage Broker, TMG The Mortgage Group