Buying Real Estate as an Investment in Ottawa
We've all heard the radio ads and at one time or another seen a television infomercial telling us how we can become INDEPENDENTLY WEALTHY OWNING REAL ESTATE with little money down. Do you really think this is as simple as they make it sound? If it were, everyone would own multiple properties and retire on the income their properties generated.
It's true that real estate investing has been a primary and highly effective wealth-building tool for more than a century and buying real estate is traditionally a sound and profitable investment. But owning investment real estate is not for everyone. It involves time, risk, good old-fashioned work/management and large sums of capital. Let's take a moment to discuss some of these elements.
First is the easy and fun part. Making the decision to invest in real estate and searching for the preferred property based on your investment criteria. Next, it's time to analytically 'number crunch' and negotiate the transaction. Following that, one must perform ‘due diligence’ which includes property inspection, reviewing and verifying income, expenses and any existing leases and contracts. Next, an investor must determine what the property market rental rate is and that the current rate is not inflated. Research and confirm that current permitted property use is legal. Provide the necessary financial information to a lender to secure the financing. Following this, perform the closing procedure with a solicitor. The rest seems simple at first. As a new landlord/investor you need to rent the property and the money will flow in, without any effort on your part. Do you believe this? Well if you bought into radio talk shows and infomercials, then this would appear to be true.
What really happens is you have to start educating yourself on how to advertise for tenants and how to screen and research a tenant's background. You must learn how to tell a good tenant from a possible 'trouble tenant' and not just simply go by your 'gut feeling' about someone. A landlord must learn how to handle the stress associated with a vacant property and not just rent it to anyone. Did I mention, as a landlord you are subject to knowing and abiding by the rules of Ontario’s landlord and tenant legislation which defines your responsibilities and tenants rights? You will need to learn what documentation is applicable for leases, rent increases, notices, etc., what income tax rules and regulations are now applicable to you. Creating a list of professional trades’ people to contact when you need help is also good planning. What I'm describing is referred to as the 'burden of management' which can sometimes be daunting and overwhelming.
To buy investment real estate you're going to need capital (money) and in many cases 20% to 35% of a purchase price as a down payment. Why? Because lenders consider an investment property to be a higher risk than lending capital on one's principal residence. Lenders want to minimize their risk of default and by securing more of your capital they reduce that risk.
You can still purchase an investment property with as little as 15% down, but this involves other added expenses which again lowers your return. For example, you will not be getting the most attractive interest rates available and you won't have a choice of terms, fixed or variable rates.
Plus, the mortgage will need to be insured which is an added cost to you that affects your short to medium term return.
By now I think you are getting the picture. Yes, you can pay a management company to do all this for you, and there is nothing wrong with that, you just need to lower your expectations on investment rates of return.
Okay, so if everything mentioned above can be considered as a burden, then why do people invest in real estate? A few reasons are pride of ownership, hedging against inflation and the ability to use borrowed funds to finance a portion of an investment known as leveraging. Most importantly, with investment real estate there’s income. This income can be determined from four different sources:
1) Cash Flow 2) Tax Savings 3) Appreciation 4) Equity Build Up
CASH FLOW is determined by the amount of income available to the investor after deducting operating expenses and loan debt payment.
TAX SAVINGS is the reduction in one's income tax liability created by expenses and ‘paper losses’ and the sheltering of income.
APPRECIATION is the property value increase as a result of inflation, property demand and or both.
EQUITY BUILD UP is the increase in equity ownership through loan reduction (principal portion of mortgage being paid down).
Investment real estate, if managed properly, can be a great asset in one’s portfolio and a nest egg for retirement years. If you think about it, your asset increases every month as long as the projected income is being produced from the property. Every month your principal is being paid down by a tenant and your interest and expenses are used as a write off from your income.
Another thing to remember is that the first property generally involves the steepest learning curve. After the first purchase, the next few are relatively easy, provided you don’t over stretch yourself with too much leverage on the properties.
Should you invest in real estate?
Consider the five elements of investment decision making and then decide:
1) Risk 2) Appreciation 3) Liquidity 4) Management 5) Yield
Risk – Generally, real estate is considered to be a low risk investment because it is a tangible asset of limited supply.
Appreciation – The fixed supply of real estate tends to increase consumer demand which increases the value of properties in general.
Liquidity – Real estate generally suffers from lack of instant liquidity. It takes time to sell and costs principal dollars to get money out.
Management – As stated before, real estate suffers from the ‘burden of management.’ The level of owner management depends on the skill level of the individual and/or the desire to provide it.
Yield – The yield is the percentage return on each dollar invested.
If you have the means (money) it is wise to invest in some form of real estate. My preference is any real estate that generates an income and not simply speculative (vacant land, or new construction). With an income there is always a cash flow that reduces the amount of carrying investment dollars and produces a yearly ‘cash on cash’ return.
The last crucial point I would like to stress is to not simply choose any Realtor to help you with this complex process. Choose a Realtor who has an investment background and actually owns investment properties. There is a much higher likelihood he or she will have an in-depth understanding of the entire process. In Ottawa, I recommend you speak with me, Peter Sardelis. I have the education and hold the esteemed CCIM designation - Certified Commercial Investment Member, since 1996. Only 14 Ottawa Real Estate Professionals hold this designation which is recognized across North America and represents those with unsurpassed Investment Real Estate expertise. Most importantly, however, I have many, many years of extensive experience with investment real estate which is a must to help you make informed decisions.
I hope this information helps you with your decision to own investment real property and I look forward to working with you in what can be an extremely rewarding and profitable experience.
Peter Sardelis, Broker
Century 21 Capital Realty Inc.
www.petersardelis.ca email: firstname.lastname@example.org
phone: 613-564-0021 or toll free: 1-(866)331-2121