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6 questions to ask yourself before buying an investment property


smiling couple looking at paperwork

They make it look so simple on TV. Just find an affordable fixer-upper in a decent location, renovate it completely in about three weeks, and either rent it out or flip it for a nice profit.

But it’s rarely that easy. Finding the right house for the right price in the right neighbourhood can be a challenge. You might have to replace the furnace, plumbing and roof before you can even think about installing that stylish kitchen backsplash. And the work will probably take a lot longer than three weeks.

If you’re keen to buy an investment property, ask yourself these six questions first.

1. What do you want to do with the property?

Do you want to live in part of the property and rent out the rest? Rent it for a while and then sell? Or just fix it up and flip it? Your answer will dictate where and what you buy, and how much you spend.

2. What can you afford?

Speaking of money, how much cash can you afford to tie up in an investment property? You will likely need a mortgage. Will the rental income be enough to cover the mortgage payments, taxes, upkeep and insurance, plus make a reasonable profit? If you plan to flip, can you sell it for more than your purchase price plus renovation and closing costs? If it doesn’t sell quickly, can you afford to wait? Your advisor and accountant should be able to help you find these answers.

3. Is this the best use of your money?

Compare the potential return on investment (ROI) to what you could earn by investing your money in something other than real estate. To estimate ROI, subtract the cost of investment from the gain, then divide the result by the original cost. This will give you a percentage to compare with the expected return on a mutual fund or other investment. If your property looks like it will produce the same or less ROI than those other investments (which typically take much less time and trouble to manage), maybe you should re-think your real estate plans.

4. How much will taxes cost?

The Canada Revenue Agency will want its share when you sell your property, assuming you don’t take a loss. They will also treat the difference between your mortgage payment and the rent you receive as taxable income. You’ll need to include the tax bill in your affordability and ROI calculations. You can, however, claim certain costs as business expenses. Again, don’t try this without your accountant’s advice.

5. Are you ready to be a landlord?

If you plan to rent out part or all of your property you’ll need to get completely familiar with the applicable Landlord and Tenant Act, so you understand your rights and obligations. That includes things like when you can raise the rent and by how much, and what to do about a destructive or tardy tenant. As the landlord, you’ll also be on the hook if any renovations by you or a previous owner aren’t up to code. There are the obvious things, like making sure there are working smoke and CO2 alarms, and that any door from the garage into the house is self-closing.

But there’s more. For example: If you buy a house with a basement apartment, the basement windows have to be big enough for an adult to get out in case of fire. Typically, both units will share a furnace and water heater; they may also share a breaker panel. This can be an issue if your upstairs tenant overloads a circuit and trips a breaker in the middle of the night, and either has to bang on the basement tenant’s door or drag you out of bed to reset the breaker. And just because a house has a pre-existing basement apartment doesn’t mean it’s legal. If you buy a house with a basement apartment, it’s up to you to make sure the city allows it and it’s completely up to code.

When you’re doing any work on an income property, you may be tempted to cut corners to save money. But if you do, there’s a good chance it will come back to haunt you in the form of an unhappy tenant. A good rule is to treat your income property like you live there yourself.

6. How handy are you?

Simply put, if you own it, you fix it. If you don’t know how to replace a toilet or install a dishwasher, for instance, or you’re away on vacation when troubles arise, you’ll have to hire someone to do it for you. And that will cut into your ROI.

 

Is buying an investment property worth it?

Done properly, owning an investment property can be very rewarding. Andy Skrotzki of Dunnville, Ontario bought a triplex in Toronto in 1990. He lived in one unit and covered his mortgage payments with the rent from the other two. For him, the key to success was choosing his tenants carefully, and treating them the way he wanted to be treated. “With happy tenants, it can be a very good enterprise,” he says. “With unhappy tenants, things can get really ugly, really fast.”

Robert Bacchus of Mississauga, Ontario owns an investment property in London, Ontario with his family. He recommends finding neighbourhoods with great investment potential and targeting your real estate search there. “You’ll save time by not scrolling through every property across the province,” he says.

Before you decide to buy an investment property, get expert advice. Talk to your accountant, a lawyer, a trusted realtor, and your Meridian advisor.

 

Learn more about managing home finances

How to prioritize home renovations
Should you sell or rent your home?
Finalizing the sale of your home

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