15 Things to Know Before You Buy Your First Rental Property
Investing in real estate is not really “investing” as much as it is buying and running a business.
“More millionaires are made through real estate than anything else”. Quotes like this make real estate investing sound easy, don’t they? The reality is much different. Investing in real estate is not really “investing” as much as it is buying and running a business. Read on for the 15 tips that inspired our HGTV.ca article.
1. Buy in a City with a Future, not a Past
You need to understand the economic fundamentals of the city that you’re investing in. Just because a city’s real estate has historically grown by 10% per year in the past, doesn’t mean it will continue to do so. Novice investors often start investing in smaller towns because it’s “cheaper” and you can get great “cashflow”, but they don’t realize the risk that they’ve now introduced due to tenant profile, smaller economies, stagnant populations, etc. Your best prospects are to buy in cities that have strong economies, strong job growth, growing populations, and low vacancy rates. Shocker: even though Toronto is more expensive, it is actually LESS risky!
2. Don’t Buy Cheap, Buy Smart
Cheap is cheap for a reason. If you don’t understand that reason, you shouldn’t be buying that property. Only buy if you understand why it’s cheap, what risk it’s introducing, and if it’s part of your business model and your operational excellence to mitigate those risks. For example, perhaps the reason that this property is $50,000 cheaper could be because its location lends itself to a lot of vacancy, or because of the amount of deferred maintenance by the previous owner, or because the tenant that you’re inheriting is a problem tenant. Due your due diligence and be smart about your purchase… and don’t be misled by the cheap price tag.
3. Don’t Expect to Live Off Your Cashflow.
The reality is, you’re not going to retire off of the $300 or $500 of cashflow from the property… not yet. Realistically speaking, cashflow generally gets recycled back into the property in order for you to hold for the long term. Holding for the long term is the key to success – time allows for the mortgage to be paid down, the asset to appreciate, and rents to increase. Game-changing cashflow is often when you have lots of equity in the property and you have a small (or no) mortgage. You can use the “Multiplier Effect” to get to massive cashflow faster (described later)!
4. It’s Not About “Timing” the Market, it’s About “Time IN” the Market.
Forget trying to buy low and sell high. That’s not where the real money is made. The real money is made by holding for the long term. Staying in the market, through the ups and downs of the real estate cycle, is hands down the biggest determinant of success in real estate investing. No one has a crystal ball, and therefore no one knows what is going to happen to the market tomorrow. You can have a reasonable level of confidence, however, that the market will be solid over the long-term. A property with good cashflow, low vacancy, and low headache tenants, is how you’re able to ride the ups and downs and stay in the market and not be forced to sell into a downturn.
5. “You Make Money on the Buy”
Novices often interpret this to mean you need a killer deal or you need to find that diamond in the rough in order to make money in real estate, and this leads to inaction because the perfect property does not exist. Once you understand the mechanisms through which wealth is built in real estate, the better way to interpret this statement is that you make money if you actually take massive action and buy a property, because the true wealth is built by holding real estate for the long term. Does it really matter if you paid $800k or $810k for a property 10 years ago, if it’s worth $1.8M today?
6. It’s Not All About The Numbers
Contrary to popular belief, numbers don’t tell the whole story. How could it? How could it account for tenant profiles, risk, local economies, etc… and all the other critical key information not included in a standard proforma? You need to look beyond the numbers to understand the full story of the property, the neighbourhood, and of the city that you’re investing in. If something is too good to be true, it very well might be. Remember: You don’t get something for nothing.
7. Multiplier Effect
You may be wondering, how do people grow their real estate portfolios to 2, 5, or 10 properties? The answer is what Volition Properties has coined the “Multiplier Effect”. After owning a property for several years, you can often take the equity out of that property via a refinance, and then you can use those funds as the downpayment for your next property. Done right, and when investing in the right market, you may be able to massively accelerate the growth of your portfolio. In Toronto, using the Multiplier Effect, Volition Properties’ clients have been able to double the size of their portfolios every 3-4 years. Pro-tip: Make sure that your existing property still cashflows after your refinance!
8. Don’t use Uncle Joe as your Realtor.
You are buying an investment property. You need an Investor Realtor, and you should rightfully have high expectations of your Investor Realtor, since they are a specialist. The worst thing you can do is use Uncle Joe to help you buy an investment property. Investor Realtors should be able to determine the best investment strategies for your particular market, run cashflow analysis for you, describe the tenant profiles for your area, and point out any areas of deferred maintenance (and ballpark costs to remediate). Volition Properties has a team of Investors Realtors who specialize in investment real estate, each of whom is an investor and owns a portfolio of investment properties themselves.
9. Top 5 Questions To Ask Your “Investor” Realtor
When interviewing your “Investor” Realtor, ask them these questions and see how confident they are in their responses. 1. How many investment properties do you personally own? 2. What is the tenant profile for this area? 3. What investment business models work in this neighbourhood? 4. What are the development opportunities to put this property to highest-and-best use? 5. Have you executed on at least 50 properties of this nature in your career? If they stare at you dumbfounded as if you have three heads, walk away… quickly.
10. Understand your Tenant Profile
Tenants are the biggest risk factor to your business. Better tenant profiles will pay their rent on time, treat the property with more respect, and be less headache. You need to have in-depth insights into whom it is that you’re targeting. At Volition Properties, we actually identify our tenant profile first, then build our investment business model around them. In Downtown Toronto, this means that our tenant profile is a young Millennial/GenZ, university-educated, 2-5 years out of school, making $60k-80k, working at a big company in downtown Toronto in professional services (health, accounting, consulting, finance, tech, etc.), who wants to live where they work and who wants to play where they live. Who’s your target tenant profile?
11. Buy Near Transit
Transit is the single most desirable feature to look for in an investment property. Your tenants will often not have vehicles, and thus will pay a premium to be within a 10 min walk of a dedicated transit station. You’ll get a 15-20% greater lift in rents / property values than the rest of the market, and you’ll also be insulated by 15-20% reduction in rents / property values during a downturn. A good long-term strategy is to look where future transit stations are being built and to buy close to them… it’s essentially an Investment Heat Map! But only invest after shovels hit the ground… plans can always change!
12. Join a Real Estate Investor Meetup Group
Your net-work is your net-worth. Surrounding yourself with like minded people is the single most valuable investment you can make in yourself. Other real estate investors can help provide you with guidance on how to navigate tricky tenant situations, or provide key contacts like Investor-focussed Mortgage Brokers, or can help advise on how to accelerate the growth of your portfolio so you can reach your goals faster. A great place to start is the Toronto Real Estate Investors Mastermind, the largest and most active Investor Meetup in Toronto with over 3,200 sophisticated investors.
13. Don’t Chase The Shiny Object
Choose a single investment city and stick to it, don’t always be chasing the shiny object. Become an EXPERT in your chosen area, spend the energy to understand it thoroughly, and build your Investment Dream Team. Once you’ve committed to a particular city, stick with it. This focus allows you to scale your efforts, build economies of scale, and to reuse the existing team that you’ve built. A quote that I think is particularly pertinent: “Success isn’t that difficult; it merely involves taking twenty steps in a singular direction. Most people take one step in twenty directions.”
14. Real Estate Investing is NOT a Passive Investment
Like it or not, you are a small business owner. You have functions such as advertising, marketing, customer relations, maintenance, accounting, tax, bookkeeping, insurance, finance, banking, accounts receivable/payable. You’ll be making strategic and tactical decisions that will lead to the success or failure of your business venture. Don’t fall into the trap of thinking that real estate is a passive investment. A passive investment is buying a share of Apple or Google, where they have executive teams running the business. In real estate investing, YOU are the one running the business. Mentally prepare yourself for this before diving in. Don’t forget: if you don’t have a Property Manager, you ARE the Property Manager.
15. Consider Owner-Occupied
If you’re going to live in it, you have an incredible advantage! An owner-occupied property that is still an investment property essentially is taking advantage of the House Hacking strategy, whereby you could live in one unit/room and rent out the units/rooms. Owner-occupied can potentially mean less downpayment (as low as 10% in certain instances), lower mortgage interest rates, being able to use up to $35,000 of your RRSPs tax free towards the downpayment via the RRSP First-Time Home Buyer Plan, Land Transfer Tax rebates (for example, in Ontario up to $4000 and in Toronto up to an additional $4475), First-Time Home Buyer’s Tax Credit worth $750, as well as other benefits. This makes a big difference for first-time investors!
Ready to take the next step? Book a complimentary Advisory session to plan the roadmap to your first investment property!