Why invest in Canadian real estate?
Canadians are increasingly realizing the value of diversifying into real estate investments. This is especially true given the volatility of stock and bond markets over the last few years. In addition to building personal wealth, investment property is often viewed as part of an individual’s pension or retirement nest egg, particularly since so many Canadians are not adequately covered by workplace retirement benefit plans.
Why the surge in popularity? Outside of general stability and the preference many of us have for owning tangible assets, an investment property can often provide ongoing income while simultaneously increasing, or maintaining, its value. For instance, rental income typically pays for most or all expenses associated with holding the property, and appreciation of the value of the property can often outpace the performance of stocks and bonds.
Is investing in real estate only for the affluent?
Emphatically, no. Investing in real estate is within the reach of many Canadians, not just for well-established business people or experienced homebuyers. It is not uncommon for first-time buyers to jump in with both feet, purchasing a duplex or triplex. They live in one unit, and then manage the additional units to pay down the mortgage. And, for the slightly more established, there is always the much desired cottage on the lake. This can initially be a rental property until you decide to retire.
The right way to invest…
The options are numerous and more and more Canadians are investing in real estate every day. However, as with any investment opportunity, there is a right and a wrong way to start. Here are the 6 steps you should take if you want to reap the benefits of investing in Canadian real estate:
#1 What’s your goal?
First, determine your goal. Most of us have heard the adage, “If you don’t know where you’re going, how will you know when you’ve arrived?” It’s very difficult to build a game plan for your real estate investments if you don’t know where you want it to take you. Be specific! Are you looking for ongoing cash flow to create retirement income or a “do-it-yourself pension”? How much per year or per month? Or, is your objective to create equity growth to yield periodic cash lump sums? Again, how much do you intend to generate? Come up with concrete numbers and time frames, and make sure that your expectations are realistic.
#2 What’s your strategy?
Second, decide which investment strategy will fulfill your objectives. The most common strategies are a) Buy and (long-term) Hold, b) Fix and Flip, and c) a combination of the two, Buy, Fix and Hold. Explore the pros and cons of each, and make sure you are comfortable with the process, time frames, and commitment required for each.
Learn more about 5 common and potentially lucrative real estate investment strategies here.
#3 How much and where from?
Figure out your financing. Many people assume that if they have equity in their home, or have great credit, they can automatically qualify for financing. This is not always the case, and lender requirements change all the time. Make sure you don’t jeopardize a potential purchase by skipping this step. You need to figure out which lender (or lenders) will lend you money, how much you will need up front, and how to structure your financing to make the most of your investment dollars.
#4 Talk to an investment real estate expert
Talk to a knowledgeable, experienced Realtor to help find potential properties. The work you did as part of steps one through three will make you a sophisticated client, coming to the table prepared, qualified, and knowing what you want. By putting the criteria for the property you’re looking for in the hands of a good Realtor, you’ll be empowering him or her to effectively find the best options, deals, and geographic locations for you in the shortest possible time.
#5 Compare before you decide!
Run the numbers on each investment option to ensure you’re comparing apples to apples. Remember; be realistic or even conservative about costs and expected returns on investment. Costs to compare should include not only mortgage and tax payments, but also all utilities not paid by your tenants, a budgeted amount for anticipated costs, an estimated vacancy allowance, and an estimated property management fee (even if you manage it yourself at first, you never know what may happen a few years into ownership). If the property requires upgrades, or minor (or major) fixes, include these numbers in your estimates. At the end of the day, it is much easier to look at a property logically and un-emotionally when you are reviewing the numbers on paper.
#6 Seize the day
Make your move. You’ve done your homework, now it’s time to invest!
A first time real estate investment doesn’t have to be complicated. By following the steps detailed above you’ll be on your way to joining the thousands of Canadians who are already reaping the benefits of this great wealth-building option.
Don’t hesitate to get in touch with me to discuss your own plans.
Photo [c] Irina Kryvasheina for vecteezy.com
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