Things You Should Probably Know About Investing In Real Estate - Part Two

Last week we started to dive into a few tips that I’ve learned along the way that all my  investor clients have really appreciated. Here are another four tips that my clients  regularly ask me:



5. As an investor with a downpayment of more than 20%, you’ll likely qualify for a 30- year amortization on your mortgage. 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’s an  extra $151 in cold hard cash flow a month!



6. Good investment properties provide 4 ways to make money: 

• 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.  In Southern Ontario, it's not uncommon to see properties that are $50 or $100  cash flow positive each month, and there are plenty of investors out there 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. The real estate market in Southern Ontario  during the last few years has been on fire, with 4-5% annual appreciation for  condos and 10%+ annual appreciation for houses. Don’t be naive and think  that’ll always be the case – during the time you own the property, there will likely  be years of zero growth and years where prices go down too. Be prepared for  that and 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  house 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 renovate right before selling (this is  common in the condo market). Just be careful: a $50,000 condo renovation may  not pay back $50,000, so talk to your real estate agent before renovating pre sale.



7. 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. For example, right now in Southern Ontario, there  are some condos that sell for less per square foot than the average, yet rent for nearly  the same amount of money – so you can pay $350,000 for a condo or $400,000 for a  condo and get the same amount of rent. There are lots of reasons why the $350K  condo may be cheaper (location, finishes, quality of the building, supply/demand in the  building, etc.) and that may impact the resale value of the condo. What’s more  important to you: monthly cash flow now or long-term value?



8. The short-term rental market is pretty much over in Ontario. While renting out  properties for a few days or weeks at a time was a cash cow for years, the short-term  rental market’s days are numbered in Ontario, at least for serious investors.




 

You’ll want to stick around for next week where I have my final installation to our series  on things you should know about investing in real estate! In the meantime, if you have  any questions you’d like to ask me about buying or selling investment property, please  reach out by calling me at 905-683-7800.

Thanks for reading today’s BLOG!!!

Brian Kondo
Sales Representative / Team Leader
The Brian Kondo Real Estate Team
Re/Max Hallmark First Group Realty Ltd.
905-683-7800 office
905-426-7484 direct
brian@briankondo.com
www.BrianKondo.com
www.BrianKondoTeam.com

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