How Can I Invest in the Canadian Real Estate Market?
Before deciding that you are going to invest in real estate it is vital to do your research, particularly when it comes to funding and mortgages. Taking out additional mortgages as a way to buy investment properties can be tricky – especially when so many people today are having trouble getting a first. Talk with your mortgage broker, you will have a better idea as to how it works, and what is required of you. Once you have sorted that out, it is time to seriously look at the various ways in which you can invest in the real estate market
There are numerous investment strategies that someone who is looking to invest in the Canadian real estate market can use. Prior to sinking funds into any kind of real estate investment, it is important that you take into account the macro-economics of whatever province you are looking at. The best locations to purchase investment properties will be those with a growing GDP, high population growth, high rental rates, and those with large projects and developments underway. Try to aim for areas that have high home purchase rates and low rental vacancy rates. If after researching these factors, you think you have found a profitable location then the following information will help you to reach all of your real estate investing goals.
Flip the Property; One of the most popular investment strategies is to flip a property that you have purchased. This simply means purchasing a property for what is considered below the market rate for the area and then renovating it to bring it’s market value up and then selling it for a higher profit.
Another option is to purchase the property, renovate it, and then hold on to it for a while until the market improves. This is called the hybrid approach. One potential benefit to this approach is to refinance once the renovations are complete. Doing this might allow you to pull out whatever capital you initially put into the investment, therefore reducing the amount of your money that is invested in the property. This can be a great way to build a real estate investment portfolio quickly. However, before pulling out capital out of the investment property, you should consult with a mortgage broker to ensure your gross debt service ratio will not be maxed out.
Rent to Own
As mentioned above, getting a mortgage can be tough. However, it doesn’t mean that you cannot be a real estate investor. The reality of investing in real estate is that any credit issues or an inability to come up with the necessary minimum deposit can make getting approval for conventional financing challenging. However, when this happens, many people turn to a different kind of real estate investing – rent to own (RTO).
With rent to own, an investor can buy a property. They will then set a rental lease up with someone who intends to pay rent the house in the short term and buy the house in the long term. In addition to the traditional rental lease, there is also an RTO agreement in place, outlining all the particular details of the rent to own process between the investor and the RTO tenant-buyer. Rent to own generally works like this: The person who is planning on eventually buying the property (tenant/buyer) generally pays a deposit to the investor, as with most rental agreements this is due prior to move in. A portion of monthly rent payment gets applied to the tenant/buyers down payment for the property, and the other portion towards the rent. The portion being applied for the rent must be at the fair market rental value, (it is a good idea to obtain a letter from an appraiser to confirm the economic rent for a specific neigbourhood) and must be in writing. The term of the contract is pre-determined, as is the price of the downpayment. Generally, rent to own terms is about 3 years. We really recommend that you contact a mortgage broker or a lawyer to make sure the purchaser’s interest is also protected. And secondly, will the initial deposit be returned to the client in the event the client does not buy the property after 3 years? Everything must be in writing and must follow CMHC’s guideline, such as a caveat must be registered on title by the purchaser to protect his interest before moving into the property.
Buying and Holding the Property
Another way that people can invest in the real estate market is to do what is often referred to as a “buy and hold”. This means that the investor buys the property and rents it out for enough to cover the mortgage, expenses and generate positive cash flow. This is a great option as it allows for someone else to pay down the mortgage and leaves the investor with paid for the house in the long run.
Investing in real estate can be a lucrative and fun career, however, it does come with a great deal of risk. As with any investment, it is crucial that you do your research and have some money set aside for when problems inevitably do arise. Ie; repairs, appliance replacement. Some Financial institution will provide insurance against items such as Furnace, hot water tank, Kitchen appliances. Contact your mortgage broker to find out which financial institution offers such insurance coverage.
Remember, you might begin thinking about investing one way, and end up investing in another. There are several avenues to real estate investing, none of which is better than the other. Good luck!
If you have any questions please do not hesitate to contact us.
William Harries, Principal Mortgage Broker
The Mortgage Centre – Sky Financial Corporation