The concept of real estate investing may sound easy, but the reality can be much different. Investing in real estate is not really “investing” as much as it is buying and running a business.
Expert real estate investors Matthew Lee and Ming Lim run Volition Properties, a Toronto-based real estate investment advisory and realty firm. They have a team of investor realtors who specialize in helping clients find the best investment properties in Toronto. Read on for their 15 tips to consider before you put in your offer for your first investment property.
Published Jul 13, 2021, Updated Feb 1, 2022
Buy in a City With a Future — Not a Past
It’s important to understand the economic fundamentals of the city that you’re investing in. Your best prospects are to buy in cities that have strong economies, strong job growth, growing populations and low vacancy rates. With this in mind, here’s a shocker: even though Toronto is more expensive, it is actually less risky.
Buy Smart — Not Cheap
Cheap is usually cheap for a reason – if you don’t understand that reason, you shouldn’t be buying that property. For example, is a potential property is $50,000 cheaper than expected, the lower price could be due to factors like a location that lends itself to a lot of vacancy, a previous owner that has fallen behind on maintenance or a problem tenant that you’d inherit. Do your due diligence and be smart about your purchase.
Don’t Expect to Live off Your Cash Flow
You’re probably not going to retire off of $300 or $500 of cash flow coming in from a rental property – not yet. Realistically speaking, cash flow generally gets recycled back into the property in order for you to hold for the long term, which is the key to success: time allows for you to pay down the mortgage so the asset can appreciate.
It’s Not About Timing the Market — It’s About Time in the Market
To really make money from an investment property, you need to hold for the long term. Even though the market is constantly fluctuating, you can have a reasonable level of confidence that it will be solid over the long term. A property with good cash flow, low vacancy and low-headache tenants is key to your ability to ride the ups and downs and stay in the market – rather than be forced to sell into a downturn.
Know What It Really Means to Make Money on the Buy
“You make money on the buy.” Novices often interpret this statement to mean that you need to find a killer deal or a diamond in the rough in order to make money in real estate, so they keep looking for that elusive perfect property and don’t take action. However, you make money if you actually take massive action and buy a property – because true wealth is built by holding real estate for the long term.
It’s Not All About the Numbers
Numbers don’t tell the whole story. Look beyond the numbers to understand the full story of the property, the neighbourhood and the city that you’re investing in – factors like tenant profiles, risk, local economies, and the like. If something seems too good to be true, it very well might be.
Know How to Use the Multiplier Effect
How do people grow their real estate portfolios to two, five or 10 properties? The answer is what the Volition Properties team calls the “multiplier effect”: after owning a property for several years, you can often take the equity out of that property via a refinance, and then use those funds as the down payment for your next property. Done right, and when investing in the right market, you may be able to massively accelerate the growth of your portfolio.
Use the Right Realtor
You need an investor realtor to help you buy an investment property – a specialist who can determine the best investment strategies for your particular market, run a cash-flow analysis for you, describe the tenant profiles for the area and point out any areas of deferred maintenance.
Know What to Ask Your Investor Realtor
When interviewing an investor realtor, be prepared to ask them specific questions. How many investment properties do you personally own? What is the tenant profile for this area? Which investment business models work in this neighbourhood? What are the development opportunities for this property? Have you executed on at least 50 properties of this nature in your career?
Understand Your Tenant Profile
Tenants are the biggest risk factor to your business. Better tenant profiles will pay their rent on time, treat the property with more respect and be less of a headache. Identify your tenant profile first – their age, level of education, income, household size, where they work, where they play – and then build your investment business model around them.
Buy Near Transit
Transit is the single most desirable feature to look for in an investment property. Your tenants often won’t have their own vehicles and will pay a premium to be within a 10-minute walk of a dedicated transit station. This means you’ll generally get a 15-to-20 per cent greater lift in rents or property values than the rest of the market, and you’ll also be insulated by a 15-to-20 per cent reduction in rents or property values during a downturn.
Join a Real Estate Investor Meetup Group
Your network is your net worth. Other real estate investors can help provide you with guidance on how to navigate tricky tenant situations, provide key contacts like investor-focused mortgage brokers, or can give advice on how to accelerate the growth of your portfolio so you can reach your goals faster. A great place to start is the Toronto Real Estate Investors Mastermind, which is the largest and most active investor meetup in Toronto with over 2,800 sophisticated investors.
Focus on One Investment City
Don’t always be chasing the shiny object. Instead, choose a single investment city and stick to it. Become an expert in your chosen area, spend the energy to understand it thoroughly and build your investment dream team. This focus allows you to scale your efforts, build economies of scale and reuse the team that you’ve built.
Remember: Real Estate Investing Is Not a Passive Investment
Don’t fall into the trap of thinking that real estate is a passive investment. You are in fact a small business owner responsible for advertising, marketing, customer relations, maintenance, accounting, tax, bookkeeping, insurance, finance, banking, accounts receivable/payable, and the like.
Consider an Owner-Occupied Property
An owner-occupied property that is still an investment property lets you use the house-hacking strategy that can help you become a homeowner before 40: you live in one unit or room and rent out the other units or rooms. This can potentially mean a smaller down payment, lower mortgage interest rates and the ability to take advantage of tax rebates and credits.