Have you been thinking lately that a residential rental property could be a good boost to your investment portfolio? This can be a very lucrative opportunity, but a first-time investor might miss some land mines that could obliterate your returns. Here are some important things to consider when shopping for an investment property.
Do Your Homework
Start your search by speaking with a financial advisor. A financial advisor will be able to go over the types of investments available to you based on your budget and lifestyle. For example, different types of rentals will have different carrying costs based on their location or size. Once you’ve done that, the next step would be to turn to a reputable real estate agent. A reputable real estate agent is key here as you want someone with excellent knowledge in the investment property field to guide you in a purchase. They should be able to provide critical information such as capitalization rates (also known as cap rates). Cap rates are the ratio of Net Operating Income (NOI) to property asset value. For example, if you are looking at an investment property that is valued at $1,000,000 and it had an NOI of $100,000, the cap rate would then be $100,000 / $1,000,000 or 10%.
The Ins and Outs on Location
You will notice that the location of your investment property will be dictated by how involved you want to be in the investment property. If you intend to actively manage the property, you will want to live close to your investment property. If you want to be a bit more removed, you can hire someone to manage the property for you and you can live further away. However, hiring someone to manage the property will be an additional cost.
It is important to also take note of the type of tenant you can expect based on the location of the property. Purchasing an investment property near a university will likely yield students as your tenants. Students will likely live with friends and so one unit can be rented out to multiple people. A property in close proximity to a school will more than likely be of interest to people with young families. The value of your investment property will be directly related to how close it is to a good school.
Factor in how much property taxes are to your financial plan. Some neighbourhoods will have higher property taxes than others - however this is not a bad thing! Some neighbourhoods will attract long-term tenants and therefore can combat the higher property tax. You can speak either with your real estate agent or an assessment office to get a taste of what current property taxes are like as well as what increases will look like in the near future.
A property is only as good as its amenities. This does not necessarily relate to condos, whose amenities are in the same building as the unit. It is important to tour the surrounding neighbourhood and see how close your property is to parks, restaurants, gyms, movie theatres, public transportation links and other perks that could attract renters.
There are many things to consider when looking to purchase an investment property: future development, number of listings and vacancies in the neighbourhood, average rents, job market and crime rates on top of what we have already discussed. If you would like to learn more about things to consider when looking to purchase an investment property, please reach out to me here. I’d love to help you find an investment property that suits you and your lifestyle best while generating passive income!