When it comes to investing, the reward, or “return on investment” is always relative to the risk associated. A quick look at traditional investing illustrates this perfectly. For example:
- If you have an RRSP invested in mutual funds or the stock market, you will likely see fluctuations in your portfolio. The overall gains may be faster and higher, but you are taking a bigger risk that something in the market could turn.
- On the other hand, an RRSP invested in something like a GIC is often seen as more “stable” the gains are slow and steady, but the risk of “losing” money is lesser.
Real estate investing works in a similar way. It’s important to note that as a real estate investor, you are still playing the market. It may not be as volatile as the stock market, but there is still some inherent risk with real estate investing.
So, is it possible to eliminate the risks of investing while maximizing your profits? Yes and no. As they say, you need the risk for the reward, but there are certainly a few things you can do to minimize risk.
First, One Key Thing to Know About Real Estate Investing
In general, real estate investing is considered a very safe and reliable investment. The year-over-year gains are not usually huge, but you likely will not suffer long-term losses. History has shown that the market is always trending upwards over time, despite a few small hiccups in the market over the past 50 years or so. Things generally always trend up.
As a result, most experts say that real estate is a “buy and hold” investment where it is better to hang onto it for a long period rather than purchase it and flip it (which is an entirely different topic.)
Even with the recent news that the Toronto market is down from its peak in February 2022, we can still see that home values are slightly up over last year.
Are you looking for the best Toronto neighbourhoods for investment properties? Read our blog outlining some of our top choices right here.
Do Some Market Research
You wouldn’t make a big purchase without doing your homework, right? The same goes for a real estate investment. Research potential neighbourhoods and property types that could make a viable investment.
It’s also a good idea to look into the things that potential renters are looking for. For example, proximity to amenities, transit, schools, and healthcare. But also things like in-unit amenities including a washer and dryer, stainless steel appliances, hardwood floors, and more.
When you have a grasp on the areas and types of properties that tenants seek, you will be more likely to make an educated investment decision.
Understand Your Cash Flow
As an investor, the goal is always to make money and grow wealth. Real estate investors generate wealth through two main channels, typically: your monthly cash flow and the equity that comes from paying the mortgage on your investment property.
However, if your investment is cash flow negative, you could run into some serious trouble. Do some research about the typical rental fees charged for the property types in your area and determine what exactly you can charge for rent.
Make note of your monthly expenses, for example, mortgage payments, insurance, utilities (if included), plus any funds leftover for emergency repairs. Ensure that the rent you plan to charge is enough to cover these expenses.
Real estate investing is a great way to diversify your portfolio and grow wealth. Read some of our other investment blogs here:
- Everything You Need to Know About Buying an Income Property
- Condo Vs. Townhouse: Which is the Better Investment?
- 4 Real Estate Investment Strategies to Consider
Find an Amazing Tenant
One thing that could make or break your real estate investment experience is your tenant. The best way to find the right tenant is through a detailed screening process. Interview potential tenants, call for references, check credit scores, and do all your due diligence before committing to a tenant.
We’ve listed everything you need to know about becoming a landlord in Ontario in this helpful blog right here.
Put Everything in Writing
Once you have found an ideal tenant, it’s time to put things in writing. Make sure your lease agreement is prepared and reviewed by a legal professional to ensure nothing is missed or forgotten.
It’s also important to note that in Ontario there are technically two types of leases. The Ontario Standard Lease is one document that must be provided to your tenant by law in addition to your Offer to Lease.
Time is Money
As a real estate investor and landlord, you may need to solve common issues like leaky pipes, broken appliances, or maintenance such as snow removal in the winter. As an investor, you need to decide if these things are better handled directly by you, or if you would prefer to engage a property management company to take care of the details.
There are pros and cons to both sides, but if you decide to hire a property management firm, you can expect all the minor details of real estate investing to be handled on your behalf for a fee. It’s up to you whether your investment model allows for an expenditure like this. Also, fees charged by a property management company are typically tax deductible as a business expense.
Make the most of your real estate investments. Read these blogs to help you maximize your ROI and become a successful Toronto investor:
- Will a Changing Real Estate Market Impact Landlords?
- Upsizing as an Investor: Why it Works
- Can You Sell More Than One Income Property to Buy a New Home?
Work With a Real Estate Agent
Before starting your investment journey, it would be helpful to consult an experienced real estate professional. Real estate agents have their fingers on the pulse of the market and can provide you with exceptional insight to help make sure you have a sound investment on your hands. Some of the things a great real estate agent can help you with include:
- Finding undervalued properties, off-market listings, or properties in neighbourhoods that are on the brink of gentrification (ie., inexpensive to buy, with a greater ROI once the neighbourhood reaches its full potential)
- Helping you negotiate the sale and connecting you to key mortgage professionals who can help secure the best possible mortgage rates.
- Advising you on the cost of renovations and ways to improve your investment for maximum rental income.
- Connecting you to industry professionals and tradespeople who can help across a variety of areas.
Are you looking for more insights and advice on getting into real estate investing? Contact Evan Christensen at 416.441.2888 ext. 766 or email [email protected] today to learn about your options.