Starting any business can be difficult, but when it comes to real estate, there’s some fairly straightforward steps that can make things easier.
Depending on where you live, there are different rules around how banks can lend out money for mortgages. Typically a rental property isn’t included in any sort of home ownership plan, so you’re looking at a bank’s standard requirements to borrow. It can be helpful to have a conversation with a mortgage broker or banker in your jurisdiction to understand those requirements.
If you’d like to learn more about the process for applying for a mortgage, I’ve created some content in the past you can check out below:
Understanding your own capacity to borrow, the capital you have to deploy, and the amount of time and energy you can put into your real estate business are important considerations. Owning a triplex versus a 60 unit building come with dramatically different responsibilities and expectations.
Unless you’re planning to start off by building from scratch, you also need to understand the inventory in the area you’re looking to invest in. As I said on this week’s podcast, generally the better the deal the more issues to navigate. So there’s a pretty direct correlation between cost, your time and effort, and your risk of major repairs cropping up. Rental properties tend to degrade overtime, because maintenance isn’t always kept up by every single owner by a property. As well, as parts age there’s just a natural increase in the potential for problems. Older buildings are also where you’ll find more affordable buildings, and are often where new investors get started.
Are you handy?
The best way to earn a return on a property is to manage it yourself. Margins on rental properties are not always large enough to accommodate a property manager, and even if they are, a manager represents a substantial drag on your profit on a property.
If you’re not close to a property, or you don’t have the time then the cost can be worthwhile. However if you are close, are you do have some extra time, then you can save yourself some cash while you’re starting out and manage it yourself. If you’ve got some practical skills in home repair this can also be huge for you. Money saved on repairs and maintenance that you can perform yourself is going to make your turnaround on your next property faster if you’re looking to grow. Or improve your cash flow if that’s your intention.
Don’t rely on price increases
Housing prices don’t always go up, so if you’re buying a property and you can’t see a way to profitability, assuming that you’ll eventually make money on the property when you sell it can be a painful assumption.
You’ll want to make sure that a building can cover it’s costs. There’s a lot of nuance to rental rules and legislation and depending on where you’re investing those rules generally favour tenants. If you’re looking at a property and assuming you can just raise rents and do with it as you please, you probably can’t, and starting out on the wrong side of those rules is not going to be fun.
When you look at the cost to run a building, as well as your borrowing costs (your mortgage) and some retained earnings for problems and issues that can arise, if there’s not enough money, or very little money left over. That’s probably not the right fit for you. You’ll see the term cap rate (short for capitalization rate) floating around, and determine that number can be a useful metric for you to see how profitable a property is.
Real estate can be a lucrative business, but it isn’t an easy business. Especially when you’re starting out. The skills you need, and the capital required are both extensive. So go in with your eyes open and you’ll do yourself a lot of favours.
If you’d like to learn more about investing in real estate, this week’s podcast was on that very topic, you can listen to it below.