–<\/span><\/p>\nInvestment Property Types<\/h2>\n
Before we explain the process of buying a rental property, we\u2019re going to lay out your options. When purchasing an investment property for the purposes of renting it out and generating income, investors have two main options: residential properties and commercial properties. We explain each option below.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nResidential Rental Properties<\/b><\/h3>\n
Residential rental properties are those that renters live in, either for a short or long period of time. They can be any type of property, from a condo to a home to a cottage. Some of the most common types of residential rental properties are as follows:\u00a0<\/p>\n
\u00a0–<\/span><\/p>\n\n- <\/span>Long-term rental property: At its most basic, a long-term rental property is a property you purchase to rent out to tenants. It can be anything from a single-family home to a condo unit. Investors make money from long-term rental properties by collecting rent from tenants, as well as through appreciated property value if and when you decide to sell the property in the future. If you choose to invest in a long-term rental property, you may have the option of living on- or off-site.\u00a0<\/li>\n
- <\/span>Short-term vacation rental property: Owning a vacation rental property is fairly similar to owning a long-term rental property, except for the fact that your tenants will be short-term. When purchasing a short-term vacation rental property, you will need to make sure it is located in an area popular with tourists. In addition, you will need to budget for the additional upkeep required, as short-term means greater turnover, which means even more maintenance.\u00a0<\/li>\n
- <\/span>Accessory dwelling unit (ADU): Accessory dwelling unit or ADU, is a term used for when a homeowner rents out extra living space on their property. Most commonly, this ADU is rented out to a family member, though it can be rented to anyone. An example of an ADU is a basement or shed that is converted into a suite or small home. Managing an ADU is typically cheaper than buying an entirely separate property, making it a good option for beginner investors or those interested in a more passive form of real estate investing.<\/li>\n<\/ul>\n
–<\/span><\/p>\nCommercial Rental Properties<\/b><\/h3>\n
Commercial rental properties are non-residential properties. Some of the most common examples of commercial real estate are hotels, office buildings, warehouses, and retail stores. Managing a commercial property shares some similarities with managing a rental property. Namely, the investor is responsible for owning and renting out the space to a tenant. However, in this case, the tenant will use the space for business purposes rather than residential purposes. As with residential real estate, the tenant of the commercial space will pay rent to the investor, resulting in monthly cash flow. Therefore, the commercial real estate investor will earn money by collecting rent, as well as when they eventually sell the property, if its value has appreciated.\u00a0<\/p>\n
[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”4.18.0″ _module_preset=”default” background_color=”#edf7f3″ custom_padding=”32px||32px||true|false” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on” da_disable_devices=”off|off|off”][et_pb_row _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_text _builder_version=”4.18.0″ _module_preset=”default” header_2_text_align=”center” header_2_text_color=”#38505b” header_2_font_size=”2.63rem” header_2_line_height=”3.75rem” max_width=”800px” module_alignment=”center” header_2_font_size_tablet=”32px” header_2_font_size_phone=”27px” header_2_font_size_last_edited=”on|phone” header_2_line_height_tablet=”3.75rem” header_2_line_height_phone=”32px” header_2_line_height_last_edited=”on|phone” global_colors_info=”{}”]<\/p>\n
\u201cWhen purchasing an investment property for the purposes of renting it out and generating income, investors have two main options: residential properties and commercial properties.\u201d<\/h2>\n
[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”4.18.0″ _module_preset=”default” custom_padding=”||24px||false|false” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on” da_disable_devices=”off|off|off”][et_pb_row _builder_version=”4.18.0″ _module_preset=”default” custom_padding=”||43px|||” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.18.0″ _module_preset=”default” global_colors_info=”{}”][et_pb_text _builder_version=”4.18.0″ _module_preset=”default” text_font_size=”21px” text_line_height=”1.6em” header_2_font=”||||||||” header_2_font_size=”36px” header_2_line_height=”1.3em” header_3_font_size=”1.25rem” header_3_line_height=”1.88rem” header_4_font=”|700|||||||” header_4_font_size=”1.25rem” header_4_line_height=”1.88rem” global_colors_info=”{}”]<\/p>\n
Why Buy an Investment Property<\/h2>\n
Looking for a reason to buy an investment property? We\u2019ll give you several. We outline the pros and cons of purchasing an investment property below.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\nThe Pros<\/b><\/h3>\n
–<\/span><\/p>\n\n- <\/span>Potential for appreciation: One of the main advantages of purchasing any piece of real estate is the potential for appreciation. To earn as much profit as possible, aim to buy low and sell high.\u00a0<\/li>\n
- <\/span>Rental income: Another major perk of owning a rental property is having a steady flow of cash. Whether you rent out a condo or a retail space, you get to charge your tenants rent, which results in more money in your pocket every month.\u00a0<\/li>\n
- <\/span>Tax deductions: Buying rental property means gaining access to tax benefits you wouldn\u2019t otherwise have. For example, in Canada, real estate investors can deduct certain rental property expenses from their income, such as insurance, utility bills, property taxes, and mortgage interest. In turn, this reduces how much tax they owe.\u00a0<\/li>\n<\/ul>\n
–<\/span><\/p>\nThe Cons<\/b><\/h3>\n
–<\/span><\/p>\n\n- <\/span>Landlord role: One drawback to buying a rental property is that you become the landlord. This role comes with several obligations and responsibilities, many of which can be time-consuming. For example, you might have to deal with unpleasant tenants or handle emergency repairs. Of course, you will also need to take care of property maintenance and the process of finding and vetting prospective tenants. That said, if it\u2019s feasible, you can hire a property management company to tackle these responsibilities on your behalf.\u00a0<\/li>\n
- <\/span>Upfront costs: Buying a rental property is expensive \u2014 often far more expensive than purchasing a stock or bond. This makes real estate investing a little more difficult than other types of investing. If you don\u2019t have the capital to buy a property on your own, you will need to apply for financing.\u00a0<\/li>\n
- <\/span>Difficulty obtaining financing: As mentioned above, buying a rental property doesn\u2019t come cheap, which means many investors will need to rely on financing. Unfortunately, it can be difficult to obtain financing for a rental property, especially since the down payments are high (typically no less than 20%).\u00a0<\/li>\n
- <\/span>No guarantee of property appreciation: All investments come with risk, and that includes rental properties. Any time you buy a piece of real estate, there is no guarantee that it will appreciate in value. Depending on the market, it could actually do the opposite. That\u2019s why understanding the risks before investing in real estate is so important.\u00a0<\/li>\n
- <\/span>Lack of liquidity: Let\u2019s face it \u2014 real estate is not a liquid asset. Even in a hot real estate market, it can still take several months to sell a home. Investors need to come to terms with their money being tied up for years when they invest in real estate.\u00a0<\/li>\n
- <\/span>Changes to the tax code: One last con of owning a rental property is that the tax code could change in a way that is unfavourable to real estate investors. For example, right now, owners of rental properties can deduct all kinds of expenses from their taxes, lowering how much they pay each year. But if the tax code were to change, some or all of these benefits could be eliminated, which could significantly increase the cost of owning a rental property.\u00a0<\/li>\n<\/ul>\n
–<\/span><\/p>\nHow to Buy Your First Rental Property: A Step-by-Step Guide<\/h2>\n
Now that you understand the types of rental properties available to you and the pros and cons of buying a rental property, let\u2019s dive into how to buy one. Follow the step-by-step guide below to learn all about purchasing a rental property in Canada.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\n1. Clear outstanding debt<\/b><\/h3>\n
The first step to buying a rental property is to clear any outstanding debt. Buying a piece of real estate isn\u2019t cheap. Don\u2019t overstretch yourself by attempting to buy a second property without paying off your debts. Instead, clear your debts first and boost your credit rating. This will make it easier to not only buy a rental property but obtain financing for that property.\u00a0\u00a0<\/p>\n
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2. Start saving<\/b><\/h3>\n
Step 2 is to start saving. As soon as you have cleared your debt, start putting money aside for the down payment on your rental property. Keep in mind that down payments for rental properties in Canada, assuming the property is your second home purchase, are high (usually no less than 20%).\u00a0<\/p>\n
\u00a0–<\/span><\/p>\n3. Do extensive research<\/b><\/h3>\n
Start researching as early as you can. The purpose of the research phase is to learn as much as you can about real estate, such as market trends, up-and-coming neighbourhoods, and the smartest types of investments near you. The more you know about rental properties, the greater your odds of success. During this phase, we recommend consulting books and articles, as well as networking with real estate professionals in your area, whether they be other investors, REALTORS\u00ae, or real estate attorneys. Many cities offer seminars and courses on real estate investing for you to take advantage of. You might also be able to find an online community or forum dedicated to rental property investments in your city.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\n4. Settle on a location and type of rental property<\/b><\/h3>\n
Step 4 is to settle on a location and property type for your future rental property. Location is everything, so take your time to carefully consider not only which city but which neighbourhood is right for you. Consider housing prices, average rent, market trends, demographics, unemployment rates, cultural attractions, nearby schools, and local facilities like parks, recreation centres, and libraries.\u00a0<\/p>\n
\u00a0–<\/span><\/p>\n5. Find a REALTOR\u00ae you can trust<\/b><\/h3>\n
Once you know what city and type of rental property you want to buy, it\u2019s time to contact a REALTOR\u00ae. Take your time finding a REALTOR\u00ae who\u2019s right for you. Interview several to get a feel for each and ask them questions about their experience representing other real estate investors. Specifically, ask about their knowledge of the local housing market and their experience buying investment properties.\u00a0\u00a0<\/p>\n
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