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Things to consider when buying a property

Posted on | March 11, 2013 | Comments Off

By Betsy Fallwell

What do you get when you combine near record low interest rates and property values that are still struggling to recoup the losses of the Great Recession? The answer is the opportunity of a lifetime: to make money through property investment.

In some ways, it’s easier to buy a property for investment purposes than if you were going to call it home yourself. Why? Because it takes a lot of the emotional elements of property ownership out of the picture. After all, if you know you’ll never live in a building, you might not be as likely to make decisions based on your emotions.

So check your emotions at the door and go with your instincts. You’re about to make some serious money.

The #1 Rule of Real Estate

The top rule of residential real estate is also the key ingredient to a successful investment property: location, location, location. Just like you wouldn’t want to live in a bad neighbourhood, your prospective tenants won’t want to either.

But buying an investment property in a tony neighbourhood isn’t cheap – you’ll pay a premium for more-desirable zip codes. Instead, look for up-and-coming areas, neighbourhoods that are starting to see a renaissance without the already-inflated property values.

Look at the Bigger Picture

You may also choose to look at foreclosed properties to minimize your costs up front. While that may be a great move financially, many foreclosed homes pay the price when it comes to aesthetics. Instead of looking at the property as it looks right now, think about what it could be with a little elbow grease.

That doesn’t, however, mean you have to go overboard on repairs. Most tenants aren’t looking for high-end features in a rental property; while things like hard wood floors and granite countertops are nice, it’s most important that you provide your tenants with a clean, safe place to live. Instead of making major changes to your investment property – like changing the floor plan or remodelling entire rooms – focus on aesthetic updates you can make inexpensively, like:

  • Refinishing existing hardwood floors, or bringing in a professional grout or carpet cleaner to spruce up other surfaces
  • Paint rooms in neutral shades to appeal to a wide variety of tastes
  • Patch up any scratches, dents, or holes in walls or doors

Because tenants come and go – dragging their furniture in and out with them – going too far with luxury upgrades can backfire. Tenants often lack the pride in the property that owners feel, meaning they’re not going to take as good care of it as a permanent resident might.

Think Long Term

If you have cable TV, you’ve likely seen the panoply of series devoted to flipping homes. While these shows make flipping a house look glamorous, the reality is often anything but. When you flip a home, you have one goal: to renovate it as quickly as possible so you can sell it fast. The longer the home sits (empty) on the market, the less you stand to make.

Looking at property investment from a long term perspective is very different. Instead of making dramatic changes to the house so you can sell it for a premium, the goal here is to keep it occupied with a renter. Over time, the money generated in monthly rent fees will help you recoup the expenses of purchasing the home in the first place. On top of that, the longer you hold on to the home, the more you stand to profit. That’s because – despite what we’ve seen the past few years since the housing crisis – real estate values tend to increase from year to year, meaning that as your tenant pays most or all of your home loan month to month, you’ve acquiring equity in the property.

There’s another caveat to flipping. Any time you sell an investment property after owning it for less than a year, you may be faced with capital gains taxes.

Expect the Unexpected

If you’ve ever owned your own home, you know that emergencies do happen. Maybe it’s a busted toilet, a broken window, or a problem with the HVAC system; whatever the cause, at times like these, it’s helpful to have extra cash on hand to pay for the repairs.

This is another hidden benefit of property investment. While you’d never be able to write off these expenses on your personal residence, they are valid tax deductions for your investment property. In other words, you’ll get a tax break for fixing them!