Now that you’ve had a conversation with your lawyer, accountant and mortgage broker, (see Part 1 of Investing in Residential Real Estate 101) your next step is to determine your investment goals.
There are three ways to make money as an investor in Toronto real estate:
- Equity – You build equity when a tenant pays down your mortgage. For example, you buy a property with the intention of renting it. As you collect the rent you apply it to pay down the mortgage. Eventually, you will have a mortgage-free property! When you sell the property you will have built up significant equity and recover your original investment. This is a long-term objective so if you are looking to make a “quick buck”, try buying a lottery ticket.
- Cash Flow – The difference between what you collect in rent and the expenses you incur to maintain the investment property is your cash-flow. These days, positive cash-flow properties are hard to come by (especially in Toronto) because of the astronomical cost of real estate. However most investors are happy to break even, ie. the rent they collect is equal to the expenses they pay. Of course, the size of your down-payment and mortgage term will factor into the cash-flow equation. This is where you need to do your homework and enlist the help of an expert. To determine how much rent to charge, you will need a complete profile of the operating expenditures for the property, as well as an up-to-date market analysis.
- Appreciation – When you sell your investment property for more than the purchase price, the increased value is the property’s appreciation. In a strong housing market like Toronto’s, investment properties typically appreciate a great deal. But, finding the right investment is the hard part.
Regardless of your objections, its imperative that you get an educated and experienced real estate agent on your team. I know a good one, ask me when you’re ready!
