The Basics of Investing
Financing
Getting a mortgage for an investment property isn’t as easy as borrowing for your primary residence – you’ll need at least 20% of the purchase price for a down payment, and only a portion of the income you get from rent will be considered in qualifying you for a mortgage (usually 80%). For commercial property investments, you’ll likely need a down payment of 50%.
Taxation
In Canada, any money collected from rent is considered income, and thus subject to income tax. Increases in the value of your investment property (from the time it becomes an investment property to the time you sell it) will be subject to capital gains taxes. If you’re thinking of buying an investment property, make sure to talk to your accountant to fully understand the tax implications.
Timing
Most real estate investments should have longer-term objectives. Because of the unpredictability of the real estate market, expecting to profit in a short period of time is risky.
Goals
What are your investment goals? There are three ways to make (or lose) money by investing in Calgary real estate:
1.Cash flow (cash return) – Cash flow is the difference between what you collect in rent and the expenses you pay out. In Calgary, cash flow positive properties (purchased with 20% downpayment) are hard to come by, though it’s fairly common for investors to break-even on a monthly basis (meaning that the rent they collect is equal to the expenses they pay). Cash flow is affected by factors outside of the real estate market, for example, it depends on your downpayment and mortgage terms.
2. Appreciation – When you sell your investment property for more than you paid, that’s called appreciation. For example, you buy a triplex for $1,300,000 and later sell it for $1,600,000, that $300,000 difference is the appreciation in the value of your investment. Calgary properties have historically appreciated favourably for investors.
3.Equity (mortgage paydown) – When a tenant pays down your mortgage, you’re building equity. For example, you buy a property for $600,000 with a $120,000 downpayment and you apply the rent to the mortgage and rent it for 25 years. Eventually, you will have a mortgage-free property. When you then sell that property for $800,000, you’ll have built up $680,000 in equity (and you’ll get your original investment of $120,000 back).
Return on Investment (ROI)
Tools
Real estate investors use different calculations and tools to calculate the returns on their property investments:
1.Cash flow is the net amount of cash moving in and out of an investment
Calulation: Operating Income/Purchase Price
**There are many tools out there to help you predict the ROI of investment properties. **
Real Estate Investments Option 1: Investment Condos
Ever wonder who’s buying all the condos you see changing Calgary’s landscape? Investors. In fact, a study found that 40% of Calgary’s condos are owned by investors. Here’s why:
THE PROS
A good investment condo will break even (or be cash positive) with a 20% down payment (which you require for a mortgage anyway).Opportunity for both cash flow and appreciation in value over timeThe rental market is at an all-time low for vacancies, so finding a good tenant should be easyGenerally less maintenance/repair work than being the landlord of a houseUnique condos in good locations have historically appreciated more than the stock market
The CONS
Lots of obligations and little flexibility due to the Residential Tenancies Act. **Works best as a long-term strategy
Investment Option 2: Income Properties
The ProsHaving a basement apartment that you can rent out just might make the difference between affording the home of your dreams and not. At current interest rates, $1,000 in rent can cover over $200,000 in mortgage!Historically, houses have appreciated faster than condos, so if you’re looking to make money when you sell, then an income property may be a safer bet.With a 20% down payment on a multi-residential house, you should be able to break even (or ideally be cash positive)The ConsIf you’re living in the other upstairs (or downstairs) apartment yourself, you’ll need to cope with the noises and smells of your tenantLandlord headaches: repairs, renovations, tenants that don’t pay their rent Having tenants in leases may make it harder to sell your home when the time comesComplexities with the legalities of suites
Real Estate Investments Option 3: Flipping
While it isn’t as popular as it was a few years ago, flipping houses (in other words, buying a rundown house and renovating it for profit in under a year) happens every day in Calgary. It isn’t for the faint of heart – but it can be hugely profitable.The ProsA proper quality flip in a good neighbourhood will be in high demand (many of today’s buyers want the fully done-up house)Cash! There are certainly lots of examples of houses bought for $775,000, renovated and sold for $1,235,000+.The ConsRenovations always take longer and cost more than you expected. With a flip, every dollar spent and every month where you have to pay a mortgage counts.No matter what HGTV tries to tell us, flipping for profit isn’t easy – it takes a lot of time and can be a risky venture for someone who isn’t a contractor or tradesperson. If you’re considering buying a home to flip it, make sure you’re working with a REALTOR, who knows the game and can make sure you buy the right property, put the right amount of money into it for the neighbourhood and sell it at the right time.
Managing Your Investment Property
There’s a lot to know about being a landlord or if you’d rather outsource the management of your property, there are plenty of options in Calgary. In Calgary, you can expect to pay about 6% of the monthly rent in property management fees for a condo, and 10% for a house.
Want more info? Contact us today!
