A long term investment strategy is key for novice real estate investors. These tips will help you get off on the right foot and enter the market with a proven winner.
We have a mantra here at Buttonwood Property management: “Real estate wealth over time…” It’s part of our core values, and it’s also profoundly true. In order to become a successful real estate investor, you need time to find, buy, hold, and maintain real estate assets. Great investors know that you make your profit on the “HOLD” part in most cases. Charlie Munger, the legendary investor, was once asked about the duration for which he plans to hold certain investments. He paused, smiled, and then insinuated that he intends to hold some investments pretty much forever. We are saying this not to impress you but to impress upon you the importance of thinking about and adopting a long-term real estate investing strategy from the onset.
Now back to our topic, it all starts when you sign on the dotted line and make that first investment.
Given the highly competitive rental market and persistently low vacancy rates here in Toronto, condos are a sensible option for those who are just getting started in real estate investing. Choosing the right unit is critical, though, and will have a major impact on your success or failure. Here are 10 tips to help you get the most bang for your real estate buck and make a wise long-term investment.
- Plan your investment carefully and really do your homework. It’s a good idea to get pre-approved for your mortgage, so you know exactly how much of a budget you have to play with. Do not overextend yourself buy/invest within your means. If your down payment is less than 20% for an investment condo, you should probably think twice before proceeding. Research your desired area, learning all you can about the property values and average rental costs. Find out all you can about the condo fees and the rules and regulations for properties in your desired area. When you are ready to move forward, it is a good idea to find an experienced real estate agent who is familiar with the area and specializes in the condo market. Your agent will be able to identify units with good potential as investments and steer you in the right direction as you start your search.
- Decide if you prefer a pre-construction or existing/resale unit. There are advantages and disadvantages to both options, and neither is inherently better or worse from an investment standpoint. When you purchase a new unit, you may be able to buy it for less than a resale unit of comparable size in your desired area. You may also be able to choose some of the fixtures and fittings for the unit. However, you may be faced with a long wait before you can take possession and start generating profit from your investment. With a resale condo, the price may be higher, but the lead time is generally shorter, and it is certainly not subject to the construction delays that plague new condo developments. Furthermore, an older unit may offer you the opportunity to renovate and upgrade the unit, thus adding value.
- Always choose the largest unit that you can. This is true no matter what you intend to do with your unit, even if you are purchasing your condo for personal use. Studios and one-bedroom units are more difficult to resell, and they restrict your rental demographic to singles living alone or couples with no children. In the downtown core, where space is always at a premium, every extra square foot you can find is an added benefit when it comes time to sell your unit, particularly if you intend to keep the unit as a rental for a number of years.
- Look for a unit with a pleasant view. If you can find a layout that overlooks a park, the lake, or an attractive cityscape, it is often worthwhile to pay a premium for the view. Avoid condos that overlook the garbage pickup area, parking lots, or other high-traffic areas. This makes your unit more attractive to prospective tenants and prospective buyers and helps ensure your unit is quiet and peaceful.
- Avoid units adjacent to noisy infrastructure or common areas. It is a good rule of thumb to avoid a condo located next to the elevator shaft, mechanical room, or too near the party room. Tenants may complain about the excessive noise, and it could lead to frequent tenant turnover and difficulty with resale.
- Invest in amenities. Look for a unit that comes with a parking space and a storage locker. Even if your tenant doesn’t drive, you can always rent the space to another resident. These features add long-term value to your investment and increase your unit’s resale appeal.
- Remember – condos are all about the condo lifestyle. Look for a property with convenient access to public transit and amenities such as a gym, pool, or rooftop terrace. Some properties offer daycare, group fitness classes – I’ve even heard about one Toronto condo that features an on-site recording studio! Check MLS to view the property’s walk score (a measure of how easy it is to walk to stores, restaurants, nightlife, parks, etc.) and visit the local area to assess its appeal.
- Review the condo’s by-laws. Once you have narrowed down your search, it is time to get into the details. Some condo developments have strict rules regarding renting, and you need to be aware of them in advance. In some buildings, prospective tenants need to be vetted by the condo board; in others, you will be required to work with a board-approved property management company. Make sure you understand your limitations as an investor before you sign on the dotted line.
- Pay attention to the maintenance fees. Low maintenance fees are certainly appealing, but if they sound too good to be true, they likely are. New condos are often subject to large fee increases after their first year in operation, so be wary and read all the fine print.
- Work with a well-qualified real estate lawyer. Make all offers conditional upon a review of the condo disclosure statement. This will help you spot potential problems before they arise and respond accordingly. If the condo board is operating with a deficit or is facing other financial difficulties, the disclosure statement will tell you so.
Remember, our mantra is real estate wealth over time. Estimates suggest that Toronto will need almost 90,000 new rental units to meet demand over the next 15 years. As an investor, look for a modest short-term return – let your tenant pay down the mortgage and cover the costs of the unit. Your pay-off will be the long-term capital appreciation of the property or a steady monthly income.
Thanks for reading, and good luck investing!