We love to work with Calgary real estate investors and our main focus is to help advise them to make solid and profitable decisions. Whether you’re just considering buying your first investment property or you’re a seasoned investor, here are some important points from our experience to consider before making an investment in real estate.
1. If you’re buying an investment, it’s all about the math – don’t let emotions get in the way. I know, granite counters and meticulous hardwood floors are great, but how much do they add to the potential monthly rent? Real estate investing is all about the numbers, and it’s not just the purchase price that matters. How much are the condo fees? How much are the property taxes? What kind of maintenance should you expect in both the near and long term future? What kind of rent can you expect based on other rental properties in the area? An realtor experienced in investments will be able to guide you to the most profitable properties and encourage you to run from the ones that look great but don’t give the best returns.
2. You’ll likely need a minimum 20% – 30% down payment. Speak to your mortgage broker for qualification details.
3. Make sure your rent covers your mortgage payment, property taxes, if applicable condo fees, ALL of your costs. What does that mean? Your rent should cover your mortgage payment (at 70-80% financed), your taxes and your condo fees. If you can’t break even or become cash flow positive with your down payment – keep looking.
4. As an investor if you can qualify for a longer amortization on your mortgage, take it. This will keep your mortgage payments low (and don’t forget, you can write off the interest on your mortgage against your rental income come tax time). Example: If you have a $300,000 mortgage at a 3% interest rate amortized over 25 years, your mortgage payment is $1,362 per month. Increase the amortization to 30 years, and your payment decreases to $1,211 per month. That an extra $151 in cold hard cash flow a month!
5. Good investment properties provide 4 ways to make money: (not all have to happen all at once)
Monthly cash flow – During the time you have a mortgage, your monthly cash flow from the property (cash flow = rent minus expenses) is likely to be minimal. It is not uncommon to see properties that are $50 or $100 cash flow positive each month, and there are also a lot of investors who bring in less rent than their expenses (cash flow negative). Negative cash flow investors are betting on the benefits of appreciation, equity build-up and/or improvements.
Appreciation – Appreciation in an investment property is the amount it increases in value during the time you own it. Remember that investing in real estate – like investing in the stock market – is best viewed through a long-term lens.
Equity Build-up— Every month, a portion of your mortgage is getting paid by your tenant, and you’re building up equity in the property. That $300,000 mortgage at 3% interest will have shrunk to $265,000 by the 5th year, to $216,000 by the 10th year, $160,000 by the 15th year, and so on. The difference between what it’s worth and what you owe is the equity.
Improvements – Depending on the type of property you buy and how long you keep it, there may be an opportunity to renovate and increase its value. Many property investors renovate and improve right away (for example, they may make a 2-unit house into three units, or they may upgrade the finishes to justify higher rents). Other investors will choose to rent the property first and then renovate it right before selling. Just be cautious: a $50,000 renovation may not pay back $50,000 so talk to your REALTOR before renovating before selling.
6. Usually the best cash flow properties are the ones that are appreciating more slowly than average. When choosing your investment property, you’ll need to give some serious consideration to your goals. What’s more important to you: monthly cash flow now or long-term value?
7. There are three kinds of taxes you’ll need to consider when buying an investment property:
- Income Tax on the rental income – Rental income is considered taxable, and the net profit you make will be added to your personal income and taxed. The good news is you can write off a lot of expenses to decrease your profit (mortgage interest, property management fees, condo fees, utilities, etc.)
- Capital Gains taxes – When you sell your investment property, you’ll be subject to capital gains taxes. At the time of writing, capital gains taxes are 50% of profit, meaning that 50% of the profit you make (after selling expenses) will be added to your income and taxed at your regular income tax rate.
Initial purchase price: $400,000
Sold price: $500,000
Costs to sell: $25,000
Gain in value = $500,000 – $400,000 – $25,000 = $75,000
Under current capital gains rules, an investor would pay taxes on 50% of the $75,000 profit.
*There are many intricacies when it comes to taxes and each property investment situation can have an entirely different tax implication. Make sure to talk to your accountant to determine your individual tax scenario.
Have questions? We have answers or at the very least can help guide you where to find them! Please contact us anytime. We are hear and happy to help you on your real estate investment journey.