Real estate investment has always ranked as a top wealth generating investment approach. According to the
College Investor, “Over the last two centuries, about 90 percent of the world’s
millionaires have been created by
investing in real estate”.
Considering the competitive market with extremely high demand, unpredictable conditions related to COVID, and the unprecedented low interest rates, entering the market can be a difficult. In the face of these challenges, investors must carefully evaluate their financial circumstances and plan for the long term when in Real Estate.
So what are some key considerations when considering a Real Estate investment? Many people get excited about adding to their real-estate portfolio and consider the financial gains on the property purchase and sale price, but don’t examine the impact of mortgage financing options as one of the strategic ‘make it’ or ‘break it’ factors in calculating the holistic capital gains related to a given property acquisition decision.
We are going to examine the
4 key factors to help you make an informed decision regarding your real estate portfolio.
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The Market
Low interest rates, competitive mortgage rates, and the increased level of market activity is making homeowners and investors wonder if it makes sense to purchase additional investment properties during a real-estate boom. The Vancouver real-estate consumers are falling increasingly and madly in love with single family detached homes and condos. Pre-sales are hot commodities and multiple offers are becoming the ever day norm when it comes to prime locations.
Multiple offers are not a new phenomena in the Vancouver market and most successful investors are able to build a healthy portfolio irrespective of the market conditions. While the condo market in Vancouver has been witnessing a slight shortage in inventory there are many new development projects coming down the pipeline. So it is critical to consider current market inventory in relation to the unbuilt projects under construction or approved for construction in the coming years. Learning about any anticipated development sites in a particular neighbourhood allows you to negotiate more aggressively as increased supply in the coming years may flatten the price curve.
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Property Type
Whether looking at a detached, single family, apartment condo, or pure land; it is always important to consider the location where the property sits. Some investors like buying pre-sales to take advantage of equity that is yet to be built. Others look at rental incomes as a key consideration, which is why location is hugely important to ensure the envisioned rental income is attainable over the ownership term. You might consider a condo in downtown if you are concerned about vacancy and if you are not looking to do much maintenance. A single family home may have a higher return potential but also comes with higher taxes and property maintenance.
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Your Strategy
While some real estate investors like to stick to a single strategy, most investors like to diversify their risks to get a blended return inclusive of capital gains, and rental incomes. Diversifying investment decisions across long-term, medium-term, and short-term investment strategies help make the best purchase decisions in consideration to current market conditions and timing. The following 5 are popular strategies for real-estate investors:
|
Timing
|
Strategy
|
Pros |
Cons
|
| Short-Term |
Buy to Sell or Flip |
Quick turnaround by purchasing a property that is highly desired or that allows for value creation through remodeling and renovations |
Quick flips or fix and flips are risky as there is no guarantee that there is a buyer out there willing to pay for a property more than you purchased without any increased value generated – there could also be market implications that prevent a quick sale and may turn into a medium-term strategy that requires cash injection, and extra money on hand to hold |
| Medium-Term |
Buy to Hold
|
While there are no guarantees, property prices often times go up over time, and most investors leverage rental income to maintain the property and build equity. |
May not be able to find the right tenant to rent the property, can incur unexpected damages that require repairs, and ultimately may not be able to sell it at a desired price. Upkeep and maintenance charges are unavoidable in most rental arrangements. Also some land-lords experience unexpected vacancies or damages to their properties. A downturn in the market can lead to lower valuations. |
| Long-Term |
Buy to Build |
Potential ability to create significant value in an under developed neighbourhood to support housing needs and benefit from market growth as well as increased valuation |
Typically lack cash flow until developed and there are many dependencies on permits, public hearings, density, and land development strategies planned by city planned in the particular neighbourhood |
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Financing
It is critical to consider holding costs for the entire life of a real-estate investment. Let’s look at an example where a condo is purchased at 1 Million dollars – Keeping the purchase price constant in the following scenarios will be looking at the impact of mortgage rates with regards to sales prices in 1 year term under 2 scenarios:
- A) Purchased at $1Million, Sold in a year at $1.1 @7% Mortgage = 3% Earning
- B) Purchased at $1Million, Sold in a year at $1.1 @3% Mortgage = 7% Earning
In addition getting your hands on the best mortgage financing possible, is critical to also consider other costs and fees related to legal, brokerage, taxes, inspection, vacancy in case of rental properties, permits in terms of rezoning or development, and potential maintenance costs – as such it is always advised to maintain a reserve of cash on hand to ensure these costs could be covered during. Real estate by nature is a long term game and one must be prepared to play the long game, even if intentions are for a quick exit.
Considering some short-term plans could end up becoming a medium-term holding strategy, it is key to analyze rental incomes in a particular neighbourhood along with vacancy rates to determine if renting a property out will create enough rental income to cover or partially cover the mortgage payments. It is also important to be aware of the mortgage terms you are selecting to ensure that your strategy aligns. For example, while a short or medium-term strategy could benefit from variable rates, a long term strategy could align best with a fixed mortgage rate.
When making financing decisions selecting a mortgage lender that is flexible to support you along the way with additional cash needs could be helpful.To ensure that your financial speculations are fruitful, it is always advised to take advantage of an independent appraisal process and do a professional inspection to ensure you are not betting your hard earned or borrowed cash on a house of cards.
Financing an investment property is not a simple task, and you need to be able to provide 25-35% down payment, especially if you already have an existing mortgage. It is important to have existing equity in your former properties along with a strong net worth to be approved. It is also critically important to source smart mortgage solutions thoroughly and know what is available to you in the marketplace. Banks are not the only source and depending on your strategy you may want to access credit unions, smaller banks and other financial institutions who have other products.
At
WiiBid you explore the best Canadian mortgage rates through many readily accessible options. When it comes to financing, you might always have an opportunity to reduce your rate to maximize your gains, so its best to get shopping to take advantage of bargain rates. Through our simple application, your unique circumstances will be presented to many lenders and you will be able to chose between the different lenders based on your own priorities with respect to loan amount, rate, terms, and other features of loans.
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