Buying an investment property, earning income and managing tenants can very profitable if you clearly understand the basics of property investing. Investment properties are quite lucrative for some savvy real estate investors because they understand the basics and use them when making decisions.
Many people don’t realize the equity in their current house can be put to work on their behalf. An investment property is a great way to bring in extra income and being prepared will help you successfully navigate the process.
This article lists the 6 primary factors involved with purchasing investment properties, but you can also read our extensive guide on flipping your house for more information on the fine details.
1. You Can Put Your Home Equity Into an Investment Property
Home equity is the difference between the value of your home and how much you have left owing on your mortgage.
This remaining balance lets you apply for a home equity loan to be used as a down payment on an investment property.
An example of how home equity is calculated
- Purchase price of home: $500,000
- Amount owing on mortgage: $300,000
- Home equity: $200,000
If your home has increased in value since you purchased it, your home equity could actually be even more.
You can borrow up to 80% of your home equity
Current regulations allow homeowners to borrow up to 80% of their home equity, usually at reasonable interest rates to make investment properties easier to secure.
Home equity loans are also tax-deductible, which reduces your overall income tax while expanding your financial portfolio.
2. A 20% Down Payment is Mandatory
A down payment of 20% is mandatory (most of the time) when purchasing a secondary property.
If you plan to rent out your second residence, you are going to need to come up with the full 20% down payment to purchase the home. There is an exception to this rule if you live on the property yourself in a separate unit from the rental space which is less than 50% of the total square footage.
3. Take Note of These 3 Taxes
When buying an investment property, you need to be away of these 3 taxes.
- Land transfer taxes are paid by the buyer when they take possession of the property and are a percentage of the sales price.
- Rental income is considered taxable. That means the net profit you make will be added as a source of income and taxed. Many expenses related to the income property can be written off to help offset the profit such as mortgage interest, management fees, condo fees, utilities, and many more.
- When you sell your investment property, you will have to pay capital gains taxes. These are taxed on 50% of the profit after selling expenses. This will be added to your income at your regular tax rate.
4. You Cannot Use Government Benefits
There are great government buyer programs available to help first-time homeowners enter the market. As an investor, your qualifications for these programs are limited.
Many people go into the process of buying their second home with memories of the first time around still fresh in their heads. While you may not have access to the First Time Home Buyer RRSP Plan and Land Transfer Tax Rebate (because they only apply to your primary residence), you have a leg up with money already invested in your original property.
If you can come up with the down payment, the rental income will be well worth the effort.
5. Make Numbers-Based Decisions
When you are buying a home for yourself, things like granite countertops, bay windows and wood floors can play a big role in which home you buy. Most people want features that match their personality and style.
With an investment property it’s the opposite. With investment properties it’s all about having durable finishes that can stand the test of time.
You should ask yourself, how much do you want to put into the property and still be able to recoup those expenses by charging a reasonable rent, or are there condo fees? How much are the annual taxes? What price are other units/homes renting for in the area?
Real estate investment really is just a numbers game and these are the primary factors you need to carefully weigh before putting in an offer.
6. Work With a REALTOR®
Working with a licensed REALTOR® is the easiest way to get the most out of your investment property. An agent can guide you through the process by helping you find the most profitable homes and avoiding homes that won’t offer much in the way of returns.
Buying an investment property doesn’t have to be an overwhelming task. It’s a great way to expand and grow your financial portfolio. If you live in Brantford, you can partner with Brantford’s #1 team of REALTOR® and we’ll walk you through the process to finding a property that will offer positive returns for many years to come.
Are Your Ready to Own an Investment Property?
In the end, owning an investment property isn’t only about whether you can afford it, but also about whether you can find and keep good tenants that will respect the property too. If you think you’re ready to take a dive into investment properties, check out these tips on becoming a successful landlord and choosing quality tenants.