Catherine McGill - Blog

How to Find a Good Investment Property

cathy.mcgill@century21.ca — Fri, 29 Oct 2010 00:00:00 GMT

The idea of owning rental real estate seems to be gaining popularity as investors tire of the swoops and swoons of the stock market. Not everyone has what it takes to be a landlord. But those who do may find rentals to be a good way to build wealth.

Once you've made the decision to buy rental property, your real work begins. Finding a profitable rental property usually takes time, connections and plenty of research.

Here's what you need to know to get started:

Know your time horizon

As with any other investment, you should have a good idea how long you plan to own a rental property before you buy it.

The longer you plan to own the property, the more you'll probably need to invest in maintenance, repairs and improvements.

If you're only planning to own a property for five years, by contrast, you'll probably want to avoid making any major improvements unless you're sure you can recoup the cost with a higher sale price.

For many small investors, long-term ownership makes the most sense. You'll have plenty of time to ride out any swings in the market, and rental income can make a nice supplement to your day job.

Develop a network

Experienced landlords find their properties in a variety of ways. Some hunt for foreclosures, making friends with city hall clerks or bank employees who know which properties are about to be sold. Some run ads in local newspapers. Others work with real estate agents who keep their eyes peeled for possible buys.

Several landlords recommended joining a local landlord or property owner's association to make contacts.

You also can try approaching landlords directly to see if they're willing to sell, by calling the numbers listed on rental ads in the classifieds, by cruising neighborhoods looking for "for rent" signs or by talking to any landlords you know personally.

Get your finances in shape

The better your credit, and the less credit card and other consumer debt you have, the better your prospects for getting a decent loan. Lenders usually require bigger down payments, higher interest rates and generally stronger finances when you're buying rental property. That's because they know people are more likely to default on investment property than they are on their own homes.

Landlords say it also pays to have a substantial cash reserve left over after buying a property this can help pay for unexpected repairs and vacancies.

Although there are few rules of thumb, setting aside at least one month's rent for each unit is a good start.

While rental income can supplement your retirement kitty, most people shouldn't count on it to replace other investments or allow themselves to be entirely exposed to the whims of the local real estate market. Rents and property values can fall as well as rise, and those who are adequately diversified with investments in stocks, bonds and cash will be better able to endure the bad times as well as the good.

Avoid overpaying

Pay too much, and you'll never recoup as much as you could have had you driven a better bargain.

The rental real estate market is generally tougher on investors who overpay than on homeowners who do the same thing. While a home is often an emotional purchase, which can lead to "I must have it!" offers and bidding wars, most landlords look strictly at the numbers to see if their investments will pay off. If you pay too much for a rental, you can't count on a "greater fool" coming along later to bail you out.

Not overpaying can be tough in a hot market, however. Some landlords use formulas, such as not paying more than six to eight times the rents they expect to make the first year. Others try to estimate what the property could be worth after needed repairs and upgrades are made, and they don't pay more than 70% of that price, less the cost of those repairs.

Every real estate market is different, however, and these formulas may not work in your area.

What's key is to make sure your rental income will cover your out-of-pocket costs. That includes the mortgage payment on the property, as well as taxes, insurance, maintenance, repairs and a vacancy rate of around 5%. (If you have five units, for example, you should expect at least one unit to be empty three months each year. Here's the math: 5 units times 12 months equals 60; 60 times .05 is 3.)

If you can at least break even, you'll be able to profit from any price appreciation as well as from tax breaks available to rental property.

When crunching the numbers, you should know that there's a big difference in how repairs and improvements are treated for tax purposes. You can typically deduct the cost of a repair, such as patching a roof or fixing a leaking pipe, on your tax return for the year in which the repair is made.

Replace that roof or those pipes, however, and it's typically considered an improvement, which means the cost can't be deducted. Instead, it's added to the amount you paid for the property to determine your tax basis when you sell. The higher the basis, the lower your taxable profit. But if you have to wait 20 years after making a major improvement to recoup any of the cost for tax purposes, you may think twice about buying a property that needs a lot of upfront work.

To better estimate your costs, get a thorough inspection before you buy a property. Some landlords have favorite electricians, plumbers and contractors that they send to any prospective property, promising them that they can do any repair work they find. Others use professional inspectors they trust.

Longtime landlords say all this work pays off in profitable properties that build their net worth while providing a steady income stream

Choosing Which Mortgage is Best For You

cathy.mcgill@century21.ca — Fri, 29 Oct 2010 00:00:00 GMT

Not sure which mortgage is right for you? Use the My Mortgage Selector tool for advice on which mortgage meets your needs.

The basic features to consider when selecting a mortgage include:

A conventional mortgage is a loan for no more than 80% of the appraised value or purchase price of the property, whichever is less. The remaining amount required for a purchase (20%) comes from your resources and is referred to as the down payment. If you have to borrow more than 80% of the money you need, you'll be applying for what is called a high-ratio mortgage.

Here's how a high-ratio mortgage works:

Any purchase where the down payment is less than 20% is considered a high-ratio mortgage, and the mortgage must be insured by the Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada (Genworth). The insurer will charge a fee for this insurance. The amount of the fee will depend on the amount you are borrowing and the percentage of your own down payment. Typical fees range from 1.00% to 3.50% of the principal amount of your mortgage. This amount can be paid up front or added to the principal portion of your mortgage. A Mobile Mortgage Specialist can help you determine the exact amount.

Fixed rate or variable rate

When you take out a fixed-rate mortgage, your interest rate will not change throughout the entire term of your mortgage. As a result, you'll always know exactly how much your payments will be and how much of your mortgage will be paid off at the end of your term.

With a variable-rate mortgage, your rate will be set in relation to TD MORTGAGE Prime at the beginning of each month. In other words, it may vary from month to month. Historically, variable-rate mortgages have tended to cost less than fixed-rate mortgages when interest rates are fairly stable.

When rates change, your payment amount remains the same. However, the amount that is applied toward interest and principal will change. If interest rates drop, more of your mortgage payment is applied to the principal balance owing. This can help you pay off your mortgage faster.

Short term or long term

The term is the length of the current mortgage agreement. A mortgage typically has a term of six months to 10 years. Usually, the shorter the term, the lower the interest rate.

A short-term mortgage is usually for two years or less. A long-term mortgage is generally for three years or more. Short-term mortgages are appropriate for buyers who believe interest rates will drop at renewal time. Long-term mortgages are suitable when current rates are reasonable and borrowers want the security of budgeting for the future. The key to choosing between short and long terms is to feel comfortable with your mortgage payments. After a term expires, the balance of the principal owing on the mortgage can be repaid, or a new mortgage agreement can be established at the then-current interest rates.

Open or Closed

Open mortgages can be paid off at any time without penalty and are usually negotiated for very short terms.² They are suited to homeowners who are planning to sell in the near future or those who want the flexibility to make large, lump-sum payments before maturity.

Closed mortgages are commitments for specific terms. If you want to pay off the mortgage balance, you will need to wait until the maturity date or pay a penalty.

Conventional or high-ratio

Closing Costs

cathy.mcgill@century21.ca — Fri, 29 Oct 2010 00:00:00 GMT

Closing costs are the legal and administrative fees and disbursements associated with buying your home. Understanding each one will help you budget more accurately and lead to a more comfortable home-buying experience.

CMHC or Genworth Financial Canada insurance

Here's how it works:

You must have at least a 5% down payment when you buy a home. Any purchase where the down payment is between 5% and 19% is considered a high-ratio mortgage, and the mortgage must be insured by the Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada. The insurer will charge a fee for this insurance. The amount of the fee will depend on the amount you are borrowing and the percentage of your own down payment. Typical fees range from 1.00% to 3.25% of the principal amount of your mortgage. This amount can be paid up front or added to the principal portion of your mortgage. A Mobile Mortgage Specialist can help you determine the exact amount.

Land transfer taxes

Most provinces levy a one-time tax when you buy a home (subject to change). The tax is based on a percentage of the purchase price of the property, and varies from province to province. In Ontario, for example, the rate is ½% on the first $55,000 of the purchase price, 1% on the next $195,000, 1.5% on the next $150,000 and 2% on the remainder.

Legal/notary fees

You should be represented by a lawyer or notary during the purchase and mortgaging of the property, and you are responsible for paying the lawyer's or notary's fees and disbursements.

Fire insurance

You are required by the mortgage lender to have fire insurance effective at the time you legally take possession of your new home. Some insurance companies may demand proof of a home inspection or may not insure certain types of dwellings. Make sure that you enlist your insurance agent early.

The Importance of Your Credit Score

cathy.mcgill@century21.ca — Fri, 29 Oct 2010 00:00:00 GMT

Many people do not realize the importance of their credit scores. Some people think that credit scores are only limited to approval of loans. In reality, a credit score can have a large effect on your financial life.

Before going into details, it is important to properly define what a credit score is to ensure that readers have a solid ground on this topic. A credit score is a three digit number rated by credit scorers such as FICO. It is based on your credit report which includes all your credit information – from your previous loans, balances, payments to bankruptcies and inquiries. A FICO score can range from 300 to 850, the higher score the better.

Since your credit score depends on your credit history, it is vital to always keep your record clean by paying your payments and balances on time and preventing bankruptcies. However, most people do not realize the importance of getting a good credit score. They do not care about what their credit history and credit score will be since they believe that it is only required when applying for loans. The funny thing is that this is the most common misconception about credit score.

Your credit score is really essential when you apply for loans. This is the first thing that grantors will consider. On the other hand, the use of your credit score is not limited to loans. It can also affect your insurance rates and employment opportunities.

It maybe car insurance or any other forms but determining your premium is also dependent on your credit score. Insurance companies issue a form of “insurance scores” which are mainly dependent on credit scores and a host of other factors. With a bad credit score, you may end up paying hundreds of dollars in additional premium. Credit scores also have a weight in job applications especially for finance related positions. Employers see credit scores as an indication of whether you are responsible or not.

With those things in mind, you must be giving a lot of thought to your credit report. If you have a good financial history then you probably can sleep well at night. However, if you just received your low credit score do not freak out. It is not yet too late to get things right.

The best way to get a good credit score is to manage your credit responsibly. It is much like what the doctors would say about “prevention is better than cure”. When paying bills, pay on time if not early. Delinquent payments stay in your report for as long as seven years. Also, it is always important to avail of credit cards when only needed. Open accounts that are only necessary. There will be a time when you will have to close accounts due to poor managing. Remember that closed accounts still show on your credit report – they don’t go away. If you have had problems in the past, it is better to open new accounts and pay off your balances on time to get a good impression on your report. Lastly, it is advisable to check your credit report for accuracy. Sometimes cases of ominous entries can occur in your report.