After owning a home for two decades, Jodi Echakowitz and her husband decided it was time to buy their first investment property.
Like many people, they decided to look for a condo that they could rent or offer to their children later. The couple ended up buying a newly built condo near York University, with their sights set on potential student renters, but it won’t be ready until next year due to delays related to the pandemic.
Just over a year later, Echakowitz found himself buying a condo again, this time to help his father, who was forced to leave his apartment. After purchasing a resale condo, he was able to provide him and his stepmother with a long-term place to live, for the same rent they had been paying before.
Looking back, Echakowitz said that he has learned a few things about real estate investing. For example, while it was nice to be able to choose the finishes on the newly built condo, it was also expensive, and it is not yet rented, which means you still don’t get any income from it.
Now she realizes that if she and her husband had considered a resale condo at the time, they could have found a larger property for less money and started renting it much earlier.
But she’s also happy about some things: that she waited to take the plunge until her children were grown; that you have a financial advisor to help manage all your investments; and that he worked with a real estate attorney.
“It’s a scary thing when you make your first investment property purchase,” Echakowitz said.
RE / MAX Hallmark Realty broker Linda Ing-Gilbert said pre-construction condos, like the ones Echakowitz bought, used to be a more affordable way to enter the market. But now you agree that they are not necessarily a best buy.
“Everyone is in the game,” Ing-Gilbert said, which has raised the cost of new construction. That is why in today’s market, she recommends a resale condo for anyone into real estate investing.
Budget, budget, budget
As with any major financial decision, you need to calculate your numbers first, said Ian Calvert, vice president and director of HighView Financial Group. If you have a particular area in mind, you need to know how much you can charge for rent and include it in your budget. Once you’ve bought the place and are renting it out, you’ll want to at least break even, if not make a profit every month.
“If you’re breaking even, you’re at least paying off the mortgage,” Calvert said. “So he’s still building equity in that house.”
It’s important to create a reserve in your budget, Calvert added, to account for the possibility that you may not find a tenant right away, as well as to plan for unexpected expenses like renovations or new appliances.
And while having so-called passive income may sound great, owning a home requires work. If you don’t have time to answer your tenant’s calls or if your property is far away, you may want to budget for a property manager.
Also, if you buy a freestanding building like a house, you’re looking for more upkeep costs than a condo, Calvert said.
While having a real estate agent on your side is helpful, Ing-Gilbert cautions that they cannot help in every way.
For example, you’ll want legal advice when dealing with potential or existing tenants, he said.
Many people don’t realize that if they are buying a property with an existing tenant, they are bound by that tenant’s lease, including the rental price, Ing-Gilbert said.
However, if you’re buying a property that already has tenants, you may be able to use it to qualify for a larger mortgage, Calvert noted.
But don’t get too anxious and push yourself; Stick to your budget or you could end up with negative cash flow despite your best intentions.
Can tenants also buy?
While many people, like Echakowitz, wait until they own a home before buying another property, it’s not uncommon for renters to buy investment property and continue to rent themselves, Calvert said.
This can be a good option if you have a good rental deal or are buying property in a cheaper city than the one you currently live in.
“You are using that time to generate some capital while you are still renting,” he said. But it is only worth it if you are sure that you will make a profit.
Ing-Gilbert agrees that it may be a good idea for renters, or people still living at home, to buy an investment property: “You are really making your money work for you.”
But it is not for everyone.
“If your rent is low enough and you have the money,” Ing-Gilbert said, go for it.
Shopping now for your future
When many Torontons were moving out of the city in favor of working from a larger suburban home, Andy Kromkamp and his wife were doing the opposite.
The couple own a home in Scarborough and had been considering buying a downtown condo with the intention of renting it out for about a decade before moving downtown before their retirement years.
They ended up buying an older building, which Kromkamp said had some advantages: a larger footprint and the ability to see the building’s condo rate history so that they could accurately price the rent in preparation for future expenses.
The couple also hired a turnkey property management company, which manages the lease for a percentage of the rent, but also took it upon themselves to find a tenant and run background checks.
After you include that additional cost in your rent, “you take a lot of that burden off,” Kromkamp said.
However, he did one thing differently than most: Instead of getting a second mortgage on the condo, the couple obtained a home equity line of credit against their primary residence.
That way, they pay less upfront and monthly, Kromkamp said, and can rest easy knowing they’ll be able to pay for the condo in full when they sell their current home and move downtown.
“I think it’s a good option,” he said.
Reference-www.thestar.com