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The Close Up: They Say the Devil is in the Details

Investment opportunities are popping up everywhere, sparking the interest of new potential real estate investors. This may sound like an incredible opportunity, and in many cases, it is. But new-to-the-game investors are advised to do their research. Purchasing investment property is a complicated process, and as they say, the devil is in the details.

There are many questions to ask when considering investment opportunities in real estate: How much profit can be expected? What types of properties can a new investor acquire? Does active or passive income sound more appealing? What kind of mortgage options are available for investors?

Anyone new to the game will be flooded with questions, and that’s a good thing…as long as they do their homework.

Where to begin:

It can all seem daunting, but there are many resources available to new investors now in Canada, opening up investment opportunities in less traditional ways. 

For new investors, it’s best to begin by asking about time and income variables. How much effort needs to be made for each type of property? An investor has many options to make either active or passive income from their investment. 

Examples of active real estate investment include buying one’s own primary residence, owning a rental property, house flipping, buying and holding property, and commercial rental income. 

Passive real estate investment can be made by buying into REITs or Mutual Funds.

REITs, or Real Estate Investment Trusts can be an excellent investment. They may provide greater returns with minimal risk, depending on the market. Capital appreciation makes them a fantastic add to one’s overall investment portfolio. Mutual Funds are also an option for real estate investment. With either option, a new investor must make sound decisions to create greater returns.

The disadvantage to passive investment is that the properties do not belong directly to the investor. The sense of ownership is missing from the equation, and that may not be what a more aggressive real estate investor is looking for.

Active Income Properties:

Whether one is investing in their own home, a rental property, or a commercial property, purchasing active properties has many advantages. Those who flip homes can potentially make tens of thousands from one property in several months, or they can lose their shirts. Rental properties come with their own advantages and disadvantages as well.  It may seem like a gamble in some cases, but seasoned investors will tell you if the market is right, roll the dice.

In terms of active property, investors have the opportunity to make more by maintaining properties on their own. However, there are downsides. That person is now a landlord and must actively vet tenants, repair and maintain properties, learn the laws attached to their properties, and track expenses. This can become tedious, so some investors opt to hire a property management company. The downside to a property management company is that they can be costly, cutting into the amount of monthly income produced by the owner’s rentals. 

An investor who has chosen to create active income from their investment property then needs to look into available purchasing options. Most new investors do not have the full cash value of the property saved up, so most will consult a bank about a mortgage. 

Bank lenders walk through the available mortgage options they offer after combing through the investor’s financials. But often, one bank’s products may not be a good fit for the investor, and the process of vetting banks can become time-consuming and frustrating.

Experts say a new investor should consult a mortgage broker. Banks only offer their own line of products while a broker can supply infinitely more available options. The more products available to choose from, the better chance of finding a good fit within qualifying mortgage products.

Mortgage Options:

For new buyers with a smaller starting investment, mortgage options below the traditional 20%

down are obtainable. To keep large real estate investors from America like AIG from flooding the Canadian market, mortgages with lower down payments have propped up over the past decade. 

Mortgages with down payments at or below ten percent have opened investment opportunities to a wider variety of investors. The positive point: fewer properties are sitting vacant, and foreign investors have remained mostly at bay. But new buyers need to do their homework. Traditional loans with a 20% or higher down payment are considered low-risk and can often garner more attractive rates. One may be able to negotiate an “open mortgage,” and mortgage insurance may not necessarily be required. 

With the newer, low down payment mortgages the insurance premiums are higher, adding to overall monthly cost. It is wise to use an experienced tax accountant or financial planner to assess the risk of purchasing a lower-down mortgage.

Trust Your Broker:

Brokers have the advantage of experience to break down the fine details for their clients, including, most importantly, whether or not the property is profitable. Lenders use a formula called the Total Debt Service Ratio. This calculates the total monthly expenses attached to a new property over the total monthly income from all the investor’s sources. But lenders use their own assessments to assign how much “rent” from said property can be used within the formula. Some lenders may downgrade the rent, thus impacting the value. This is one of the confusing and often frustrating parts of acquiring a loan and why one should always consult a broker before buying.

The Finest Fine Print:

Even after extensive research, an investor may find that there are exceptions to almost every rule. Things like mortgage penalties and insurance terms must be addressed, among other details. This is why it is wise for new investors to hire professionals and also take their time, and do their homework. It’s well advised to ask questions and to clarify any details that may sound confusing. A property investment is a long-term commitment, not to be taken lightly. Choosing the right broker can be a make or break situation.