It’s no secret that investing in real estate can benefit you financially by allowing you to generate passive income. This is done through positive cash flow either by purchasing properties to “flip”, or by purchasing properties to rent out to others. Before you get started though, I’ve got a list of do’s and don’ts when it comes to buying investment properties.
What is an Investment Property?
First things first, what is an investment property? According to Investopedia, “an investment property is a real estate property purchased with the intention of earning a return on the investment either through rental income, the future resale of the property, or both.”
Investment properties can be long-term or short-term investments.
Buying a “flip” is purchasing a property in order to update/ remodel it, and ideally sell it for a profit; this is considered to be a short-term investment.
Buying a property to rent out to tenants is considered to be a long-term investment. Yes it will take a 20% down payment, but after that, the tenants are paying down your mortgage over time. Once the mortgage is paid down after a few years, you can even refinance to get money back in order to buy more investment properties.
Thinking about buying an investment property? Here are some do’s and don’ts to consider first.
Do: Consider the Real Estate Market
It is easy to get so over-excited about the prospect of taking on an investment property that you forget to consider important external factors. Before you make any concrete decisions, it is important to consider the real estate market.
When shopping for an investment property, you need to consider if there is a high demand for houses or if there is a surplus of houses available. High demand could mean that you have to act very fast and pay a bit more for a flip, but the returns when it is renovated could be worth it.
Conversely, if there is a surplus, consider why that surplus exists. Is it due to economic fluctuations, shifting rules surrounding mortgage approval, or is it due to the current interest rates? A surplus is not a bad thing as it can actually mean that you can buy a property for cheaper. However, be careful as it is a fine line between a good price and a salable flipping property.
You should consider these same elements if you are looking to buy a property to rent out. Is there a surplus of rental properties, or are they in high demand? Is the area where you are considering purchasing in also high demand for renters? If there is high demand, you may be paying more for a property, BUT this could mean that the cash flow is also higher.
Don’t: Immediately Seek out a foreclosure
It may be tempting to check out foreclosures when considering investment properties as they are thought to be priced lower. However, banks and judicial foreclosures come with some hidden costs that aren’t immediately apparent.
As I’ve previously discussed, there are a few things you need to know before purchasing a foreclosure. Foreclosure properties can come with hidden costs in the form of buying the property “as is, where” upon possession. Yes, you can sometimes have a property inspection done before buying, but not always. Finding more issues than expected, major problems, or a property needing significant repairs can eat away at the renovation budget or mean a significant additional investment into the property during the flip or before renting it.
Additional costs can also occur if you need to sanitize the property if mold is found, abate asbestos, or if you need to clear out garbage and debris left behind. When you buy a foreclosure, what you see is what you get, which can include anything that’s been left behind.
Do: Consider the Cost of Materials
If you are thinking of purchasing a foreclosure property, it is important to look into the cost of the materials and resources you will need to complete that renovation. Depending on the economy and the demand for specific goods, those materials could cost more than you were expecting (like lumber currently), so it is important to consider if the budget you have set aside for renovations will cover all that you need it too with the cost of materials and labour.
Don’t: Forget to Consider the Area You are Buying In
Sometimes properties come onto the market that seems like a steal of a deal for what you would be getting. Sometimes that can be contributed to the area they are in. Some areas are not good for rentals as they are isolated, far away from amenities, and require a vehicle to get into due to limited transit options. Or for flips, these properties are simply in an area that is considered old or undesirable by first-time buyers and seasoned homeowners. Some areas may have reasonably priced housing, but costly property taxes.
Therefore, it is very important to consider which area of Edmonton you are buying your investment property in, and what aspects of these neighbourhoods potential buyers may be attracted to or repelled by.
Do: Know the Different Types of Properties
Don’t marry yourself to a particular property type before you even begin looking for your investment property. Take the time to research all of the different options, such as condos, townhouses, single-family homes, and multi-family homes.
Additionally, consider what types of properties are in demand and which better fit your property needs. Condos can be great rental properties, especially if they are located in desirable areas such as in the downtown core or close to the Universities. Single and multi-family houses can make better investment properties for remodels or “flips”, especially if they are located close to desirable amenities such as parks, schools, or recreation centers.
Don’t: Forget to Plan
It is no secret that the real estate market is steady right now. For many Edmontonians, this is the perfect time to buy a home or sell their current home. It is important not to be tempted to buy a property just because the market is appealing. You must have a solid plan as to what you would like to do with the property and if you have the time necessary to execute any plans you do have.
In terms of buying a property to remodel and sell, it is important to take advantage of the market while it is beneficial for you and you can make a significant return on your investment. That means you need to have a strategic plan of action for purchasing and remodeling the property promptly while also ensuring the quality of the renovations.
Purchasing a property before you have a plan can lead to your cash flowing investment property into becoming a money pit.
Are you ready to purchase your first investment property? Make sure you are working with a real estate agent you can trust.
As one of Edmonton’s top REALTORS, I have the experience and the knowledge to help you find the perfect investment property, and to help you sell it! Contact Jeneen by phone: (780) 904-4240 or by email: firstname.lastname@example.org.
Hi, I’m Jeneen Marchant!
I’m here to help you find you during your next Real Estate transaction. Home ownership is a beautiful thing and I love seeing my buyers happily opening the door to their new home on possession day. I also get great satisfaction from helping my sellers get the best price possible for their home when it is time to move on to another property.