Are you ready to start building wealth? If you’re looking for a relatively safe investment with the potential to provide high returns, real estate is a great bet.
The truth is, every property investor begins as a first-timer. Fortunately, a thorough understanding of the basics will help ensure that you make smart (and potentially lucrative) decisions.
If you’re new to real estate investment in Ontario, here’s what you should know…
Property Investment For Beginners
Let’s start with the most common questions that first-time real estate investors ask.
How do investment properties work?
Investment properties generate wealth in two major ways. The first is through rental income. By taking on a reliable tenant and charging them monthly rent, investors can enjoy a steady stream of income.
The second is through resale. Selling an investment property can provide a sizeable return—so long as its value appreciates between the time that it’s bought and resold.
A smart investment strategy can maximize the income you receive from one (or both) of the streams above. The right finance and real estate professionals can help set you up for success—but first, you must have a solid grasp of the fundamentals.
What are the benefits of buying an investment property?
Have you been asking yourself, is an investment property a good idea? While it depends on a variety of factors (including your financial situation), the first step to answering this question is knowing the advantages.
Here are some of the biggest benefits associated with real estate investment in Ontario.
Passive income – One of the best things about investing in real estate is the money it can bring in each month. It’s known as passive income because it doesn’t require excessive effort to generate or maintain.
Long-term stability – Market corrections happen, but real estate tends to appreciate at a reasonably steady rate. Put simply, there will always be renters and buyers seeking places to live.
Leverage – In Ontario, you can borrow money to invest in real estate. The ability to use funds from a lender to boost your returns is one of the most attractive aspects of purchasing an investment property.
Tax benefits – If you own an income property, there are numerous tax deductions you can claim—from insurance to property taxes.
Basic Investment Strategies Explained
Here are the major pros and cons associated with three of the most common real estate investment strategies.
One of the most popular methods of generating income through real estate is through flipping. This strategy consists of finding a property with potential, carrying out key improvements, and then quickly reselling it for a higher price than you paid.
When it’s done the right way, flipping properties can lead to large profits within short periods of time. It can also help you develop various skill sets (from budgeting to negotiating) that may contribute to your future real-estate investing success.
Lastly, the hands-on nature of flipping can lead many investors to feel a sense of accomplishment. When your efforts are successful, it can be a very rewarding experience!
Like any investment, flipping comes with risks. You could sink a significant amount of money into improving a property, only to see a lower return than you expected. If you’re unable to find a buyer quickly, you’ll also be responsible for covering the mortgage payments.
In addition, there’s a lot of work involved and many skills required. It’s important to be prepared for the level of effort you’ll need to put in.
Buy, Hold, and Rent
A buy, hold, and rent strategy is ideal for investors who prefer a less hands-on approach. It consists of buying a property, holding onto it long term, and renting it out to a tenant until you decide to sell. Here are the major pros and cons of going this route.
Renting out an income property has the potential to bring in steady monthly income. While you’re receiving your rent cheques, your property’s value will almost certainly be growing.
You’ll also have the opportunity to claim tax deductions for relevant expenses. These costs may include advertising, property taxes, utilities, and home insurance (among others). Lastly, an income property can be relatively low-maintenance if you choose wisely.
Leasing a property comes with tenant risk, insofar as choosing the wrong person could make your life more difficult. From late payments to property damage, there are hazards involved—which is why doing your due diligence is crucial.
Depending on the situation, the rent you bring in could be lower than your cumulative expenses. When that happens, your property is cash-flow negative. That doesn’t necessarily mean it’s a bad investment, but that could be the case. Fortunately, talking to the right real estate and finance professionals can help you make an informed decision.
Buy, Renovate, Lease
In some cases, adding property renovations to a buy, hold, lease strategy can further boost your returns. Here are some of the positive and negative aspects of this approach.
Performing key renovations to a living space may enable you to charge higher monthly rent. That means more passive income today, and (hopefully) a significantly higher price when you sell down the line. The property value increases enabling you to refinance and to purchase another property.
Once you learn how to spot properties with potential, you can use a buy, renovate, and lease strategy to scale your investments. As you grow your wealth, you may be able to do this without taking too much financial risk.
Tenant risk and a lower return than expected are possible cons—but that’s not all. The goal of this strategy is often to scale, which usually involves refinancing. High carrying costs can go along with these loans.
Another potential issue is your appraisal, which your lender will require if you plan to refinance. A professional will determine the value of the property, and the number could come in lower than you expected—and hinder your efforts.
What types of properties are best for investment?
The key to maximizing your return is selecting the right property. When you’re searching, there are a few things to keep in mind. The first is location.
Both well-established neighbourhoods and those that are up-and-coming can provide high returns. For a given community, looking into current rents will help give you a sense of what you can reasonably charge.
Of course, nearby amenities can be just as important as the overall desirability of a neighbourhood. Reputable schools, green spaces, and local conveniences can all boost local rents.
When it comes to features, open layouts are preferred by most renters. Avoiding outdated finishes and appliances is also a good rule of thumb. Think hardwood and stainless steel, not popcorn ceilings and laminate floors.
Lastly, the math should add up. For any property you’re considering, look at your income, your potential expenses, and how your finances are likely to shake out.
What To Know About Real Estate Investing In Ontario
If you’re investing in real estate, there are some things you should know. Here are a few frequently asked questions about purchasing an income property here.
What is capital gains tax?
When you sell a property that isn’t your primary residence, you must pay a capital gains tax. You’ll be taxed on 50 per cent of your profit at your marginal tax rate.
How much do I need to put down to invest in property in Ontario?
If you aren’t planning to occupy your investment (or one of the units it may contain), you’ll be required to make a down payment of at least 20 per cent.
It’s a different story if you decide to live in your income property. In that case, you’ll put 5 percent down on the first $500,000 and 10 per cent on any amount above that. For places that cost less than $500,000, you can pay as little as 5 percent if you’ll be living onsite.
Where are the best places to purchase an investment property in Ontario?
From the GTA to Hamilton and beyond, there’s no shortage of locations with investment potential in the province. Here are a few that are worthy of your consideration.
Mississauga is a diverse city on the rise. There’s more affordability to be found here than in the Toronto market, and there’s plenty of demand for local rentals. From lively amenities to a beautiful waterfront and strong job market, Mississauga truly has it all.
Brampton is a fast-growing urban centre that has a whole lot going for it. Situated in the GTA not far from Pearson International Airport, the city is conveniently located. It offers a fantastic mix of housing, efficient transit, and plenty of economic development.
Not far from Toronto sits the community of Caledon. This idyllic place is perfect for commuters—and those committed to small-town living. Here you’ll find gorgeous conservation areas and trails, charming restaurants and galleries, and plenty of highly-sought-after real estate.
There are so many investment opportunities in Ontario, and across Peel Region. To start growing your wealth, all you need is some basic local market knowledge—and a little guidance from the right real estate professional. Are you ready to start your investment journey?