As a real estate sales representative and active investor I always get questions from clients, family and friends about what to buy or how to invest in real estate. First things first, it is not for the faint of heart and I have made my fair share of mistakes over the years. As the saying goes “sometimes you win, sometimes you learn”.
Below I have condensed, what I think, are the most important lessons I have learned over the years into my top 5 tips for investing in real estate.
Don’t take it personal: Like any investment whether it’s stocks, bonds or widgets, remember it has no feelings. Many times we become more attached to our first investment than a girlfriend or boyfriend for sentimental reasons. At the end of the day if it is not making you money let it go. I have met many clients and investors that will hold onto a property in the hopes that one day it will go up in value so they can sell for a profit or be “cash negative” for years (will discuss later) hoping to be positive later on. One thing to remember with real estate, unlike stocks or other investment vehicles, once you buy it or even pay it off you will always have to make payments in the form of property taxes, maintenance (all properties), utilities and/or condo fees. If it doesn't make sense, much like a bad relationship, let it go. Another one will come around.
Start small: I usually advise new investors to start with a small condo here in Toronto for two reasons:
1. A condo requires very little maintenance. You don’t have to worry about a furnace breaking down, leaky roof, snow removal or lawn care. Yes, it does come with a fee but it eliminates a lot of stress and frees up your time.
2. Buy the smallest unit possible! I got this advice from a developer years ago as I was fortunate enough to be an original investor in a new condo project. I wish I had received this advice when I purchased my first condo a few years prior. The smaller the unit the more likely you’re going to be “cash positive” and have it rented on a regular basis. For example if a unit cost $400K you should expect roughly $1900 to $2200 per month in rent in downtown Toronto. Even after you put down 20%, will you be “cash positive” after mortgage payments, property taxes and condo fees? I own a few condos under 500 sq ft that I paid less than $275K for. They command $1395 per month in rent - you do the math. Plus, the smaller the condo, the lower your monthly condo fees.
3. Multifamily: So you purchased your first property, hopefully you’re “cash positive” and like most real estate investors you want to get more. For a lot of people, including myself, looking at multi-unit properties was a natural progression. Why? Economies of scale. Initially when looking at a multi -unit property the numbers seem huge, $700K, $800K or, depending on the area, even more. For my first multi-unit property, I was fortunate to have a friend that was into real estate and was open to going into it together. We were able to pick up a 5-plex for $800K (not Toronto core) which felt like a lot, but once you looked at it per door it made sense. At $800K, it cost us $160K per door, much less than what it would have cost us to buy a condo (even in the ‘burbs). And the best part about it? We were cash positive from the get-go.
4. Cash Flow/Cap Rate: As a real estate investor this is the one thing you always look for. There is positive cash flow where, after all expenses are paid, you will have a steady stream of income, or a negative cash flow where you are actually taking money out of your pocket to cover expenses. I have found that in today’s market, especially when it comes to condos, more people are settling for a negative cash flow with the hope of capital appreciation later on. I am torn on this strategy. Investing in real estate traditionally has always been about cash flow but with interest rates so low, investors are now settling for any type of return including capital gains. If this is what you are banking on - or thinking of banking on - a key factor to remember is that you will not make a profit until you sell and, as we all know, getting in and out of real estate due to fees/taxes can be a very expensive process.
5. Hire a professional: I really find it strange how many people refuse to hire a professional property manager to assist them with their investment. We hire financial advisors, personal trainers and dog walkers, but yet we still have a do-it-yourself attitude when it comes to real estate. Unfortunately, most people realize the value of a property manager after they have had an unpleasant experience. Hiring a property management company makes your life much easier. For a fee of around 7 to 9 per cent of gross rent, they handle everything from collection of rent to maintenance and tenant issues. Ever had a furnace go down? I guarantee you it will never happen in the summer months but, rather, sometime in the dead of winter. Are you in the position to take time off of your job to arrange a repair or replacement? Do you know what needs to be done regarding a tenant that has not paid rent or is habitually late? Or better yet, do you have the time to go to the LTB to clear up a matter? Remember, even if the tenant has not paid rent you still have to pay your mortgage and property taxes. A property manager will make your life much easier, plus their fee is tax deductible.
