Speculation has become a rather negative term when used in reference to buying real estate these days, but in truth investing in real estate with an aim to creating profit for yourself down the line has been going on for hundreds of years. It certainly require as level of acumen, wisdom, and the ability to act judiciously however. While it’s true that most investment buyers have these traits and often will be very experienced with buying investment properties, a decidedly fewer number of them will be leaning on the expertise of their realtor to advise them in the best manner possible.
Our online real estate lead generation system here at Real Estate Leads is an excellent way for new realtors to acquire greater numbers of clients through their prospecting efforts, and while the majority of them will likely be buying for a place of primary residence some of them may want to be investment buyers. Let’s look today at some good tips you can share with them regarding buying real estate as an investment.
Be Certain Real Estate Investing is for You
Being an incapable handyman is perfectly normal, but if you buy a home that needs work and you need to bring in tradespeople it will eat into your profits. It’s common for property owners who have one or two homes often to do their own repairs to save money. If you’re not inclined or capable of getting your hands dirty and / or don’t have unlimited finances, being a landlord may not be right for you.
Then there’s also the time required for the work. Do you have it to spare?
Start by Paying Down Debt
Some well-enabled investors might carry debt as part of their investment portfolio, but it’s very inadvisable for the average person. If your financial solidity is already spread quite thin, purchasing a rental property may not be a smart move for you, at least at this time.
Can you Afford the Down Payment?
Real estate investment properties in major urban centres in Canada usually require a larger down payment than elsewhere and non-owner occupied homes can have more stringent approval requirements. How much you’ll need exactly will be yet to be determined, but be prepared for it to be much more than perhaps you had originally expected. Deeper pockets are often required.
Be Wary of Bigger Interest Rates
The cost of borrowing money is always fluctuating, but the interest rate on Real Estate Investment properties will almost always be higher and again often more so than you imagine. Keep in mind that your clients as investors will need a mortgage payment that’s low enough to not eat too heavily into their monthly profits.
Profit Margins Must be Calculated
Individuals should set a profit margin goal that’s pretty inflexible around 10%, while estimating maintenance costs at 1% of the property value annually. There’s also insurance, HOA fees (if applicable), property taxes and a whole host of monthly expenses that you won’t be expecting to encounter. Count on it.
Avoid the ‘Fixer-Uppers’
Many buyers like the idea of a house that you can get at a bargain and flip it into a rental, but if this is your first property, that’s likely far from the best idea. Unless you have a contractor who does quality work affordably or you’re like Mike Holmes or Brian Baeumler when it comes to home improvement, then you’re likely going to pay too much to renovate. Purchasing a home that is priced below the market that needs mostly minor repairs is likely a much better choice.
Calculate Operating Expenses
You can advise clients to expect that operating expenses on their new property will be between 35% and 80% of their gross operating income. Charge $1,500 for rent and their expenses come in at $600 per month, they’re then at 40%. An even simpler calculation is the 50% rule. If the rent charged is $3,000 per month, they should expect to pay $1,500 in total expenses.
‘Cash on Cash’
Clients should ask themselves what is their return on every dollar? Stocks may offer a 7.5% cash-on-cash return while bonds may offer 4.5% back. If a buyer can get 6% in their first year as a landlord, that should be agreeable since that number will likely rise over the long term.
Low-Cost Home is Preferable
The more expensive the home, the higher their ongoing expenses will be. Some real estate experts suggest starting with a $150,000 home. Consider location when looking at lower-priced properties as that is what will go farthest in making them good rentals.
Going further with the focus on location, it’s advisable to look for areas with low property taxes, a decent school district, a quality neighbourhood with low crime rates, an area with a growing job market and plenty of amenities like parks, malls, restaurants and movie theatres.
Sign up for Real Estate Leads here and receive a monthly quota of qualified, online-generated buyer and / or seller leads delivered to you exclusively for your protected region of any city or town in Canada. It’s a great way to supercharge your client prospecting efforts and really start to build up a client base for your real estate business. Join the many like-minded realtors who want to be successful who’ve already claimed their territory and are receiving leads each month.