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INCOME PROPERTIES.  TAKE THE ROAD MOST TRAVELED.

INCOME PROPERTIES. TAKE THE ROAD MOST TRAVELED.

So you’re staring at your “nest egg”, ready to put it to good use before your financial planner gets wind of your intentions and tries to reel you back in.  Your friends are filling your head with all their success stories of Flips, Renovations, and Long-term rental conversions, and some of their ideas are starting to appeal to you.  You have a real estate agent sending you new “for sale” listings, optimistic local market reports, and newspaper clippings prognosticating a tight rental market.

You are ready to get into investment properties.  Now what?

There are proven key steps investors can make that will save you a lot of money and help avoid disastrous consequences.  When starting out, try to avoid the road less traveled.

IT’S NOT A TV SHOW

Television episodes are for entertainment.  Segments are edited to make even the protracted, tedious renovations and sale process appealing.  We forget how some of the homeowners got on the shows in the first place.  How many properties they lost money on?  How long it took to find the one property that may make them a profit?  How long they had to rent out a property instead of flipping it before they recovered their initial investment.  We are told about, but never observe, the great screw-ups with a contractor, or lack of a quality inspection that landed them on the show in the first place.

Surround yourself with experienced professionals knowledgeable in the area and type of home you are considering investing in, before you start shopping.  Allow for longer time periods at each stage of acquisition, planning, permitting and completion.  Budget at least 15% for overages.  Get your financing options locked in.

COMPARATIVELY SPEAKING

Investors use ratios like “CAP RATES” to compare and contrast one investment opportunity with another.  CAP rates are an attempt to compare similar and dissimilar properties based on their income potential versus purchase price.  On occasion it is an attempt to compare apples to oranges.  BEWARE:  Comparing a condominium with a six-plex may yield similar CAP RATES, but capital investment and management efforts are very different.  One should still try to use these calculations on similar types of properties.

CAP rates will vary greatly from one city and region to another.  Owners are willing to pay more for a similar property in a larger metropolitan area where prices are stable and security of the investment is more assured.

If your investment is easily comparable to others sold in the same area, then a straight price – to – price comparison may be very useful.  In a large, very developed pocket compare builders, home styles, size of lot and home,  and types of finishes.

COOLER HEADS PREVAIL

Before purchasing any investment property, get it professionally appraised.  If you are planning to resell within a year or so, get the appraiser to estimate the resale value, taking into consideration the improvements you are planning to make.  Even if you believe that your property will sell for higher than the appraised value, ask yourselves if the appraised value is enough to make a profit.  If you can’t make money with the appraiser’s evaluation, rethink the improvements, or the purchase all together.

WHERE THE BIG BOYS PLAY

Which would you prefer?  To be the nicest biggest house on the block?  Or a nice but “Typical” sized home in the community?  As an investor, you rarely want to be the one to try to buck the trend in a community.  The adjective ‘TYPICAL” should be your most trusted term.  If major developers are putting up new 3000 square foot homes in this pocket, look for the “typical” underachiever, do a “typical” renovation or upgrade for the area until now and expect typical rents.

Benefits of this effort is that you will not be waiting for the market you enter to catch up to the big boys.  However, in contrast to the bigger players, your home will appear as a good deal to the next buyer and they may pay a premium for it at a later date.  Tenants may pay a premium for a unit that is in an up and coming neighborhood.

 BE A SCROOGE.  EVEN ON CHRISTMAS

Investment properties – come down to realistic numbers.  The more costs you shave off the acquisition, renovation and maintenance of the property, the more profit.  In a Flip (a quick resale after acquisition) study your potential re-sale price very carefully.  The word “Typical” comes up again.  Expect a typical sale price but hope for a higher one.  If you can profit from Typical, you will live long enough to do this again.

SHUT UP AND DRIVE

Investment properties should be within easy driving distance from you.  Few individuals can afford an investment property that generates so much income that they can hire a management company to maintain that investment for them.  But even if a manager is involved, be prepared to make the midnight dash to your property – or at least have a trusted handyman on speed dial – in case a bathroom floods, or a washing machine stops working in mid-cycle.

ABSENTEE LANDOWNER

If you spend all your time in Canada but your investment condos are in Arizona, or Florida, you must have faith in a management company to handle your properties at least as carefully and cost-effectively as you would.  BEWARE: Guaranteed returns, maintenance costs, sale prices.  If your property is abroad, the laws of that land may not protect you from local suppliers guaranteeing or promising you certain things they cannot deliver.  If I had a dime for every story of a vacant condo in Turks and Caicos or Jamaica where certain promises from now bankrupt developers left investors with overpriced vacation homes…

HOME OF THE BRAVE:

Tenants are a breed unlike any other.  Most landlords I know are just happy to get some tenants out after months of non-payment of rents and hundreds of dollars in damage never to be recovered.  You can spend days checking the background of a potential tenants, only to face a very different beast once they take possession. Be Brave.  Still do your homework, but set aside a reserve for unexpected loss or rents or renovations.  For long-term investments you must factor in larger upgrade expenditures and set up a larger reserve.

Office: P. 416.441.2888; F. 416.441.9926; 2145 Avenue Road, Toronto, Ontario M5M 4B2
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