Ten tips on how to invest in Canadian real estate based on my experiences.
1) The 1% Rule
I’ve used the 1% rule in the past. It’s one of my favourite rules. Can I make at least 1% gross rent annually based on the total cost of the property?
This is a good rule of thumb to use when going through the property with a real estate agent to decide if you want to spend time digging into it further. Of course, it’s no substitution for looking at the financials and having a good inspection done.
Of course, it depends on your objective: if you are just buying the property for capital appreciation, you might not care as much about cash flow. But I personally don’t recommend people rely on capital appreciation alone.
This rule also assumes financing rates are relatively low. And some people use the 2% rule, although I’m not sure that flies in Canada’s red hot property market.
2) Dig Into the Financials
- Get a good accountant: This might seem obvious, but a good accountant, one that knows real estate investing, can make a difference to your business. And it is a business.
- Ask for a rent roll and see if sitting tenants have been paying! Again, seems obvious, but people buy properties without this.
- Ask for copies of utility bills. Maybe that missing insulation in the attic is costing more than you expect. Maybe the hot water tank and furnace are rented on ridiculous contracts.
- Do a cash flow forecast. Build in contingecy for bad debt — at some point in your real estate career, there will be a three month loss when you have to evict a tenant.
3) Use a Specialist Mortgage Broker
Once you have more than a few properties, financing can take on some unique challenges that a normal broker might not be used to dealing with. Finding a mortgage broker who specializes in working with real estate investors can make a lot of financing anxiety go away.
Structuring your loans the right way early on can stop you from painting yourself into a corner.
4) Research Your Legal Rights Before Real Estate Investing
Whilst the scales aren’t always tipped in the favour, you should really familiarize yourself with what is and isn’t legal in terms of a property lease.
For example, in Ontario I’ve come across landlords who continue to put “pets are not allowed” in their leases despite the fact it cannot be legally enforced. This has been such an issue that Ontario now has a “standard lease” document that must be used by law and spells this out!
5) Check Your Insurance Policy
When you leave your home and go on vacation, you’re leaving your property unoccupied. But when a rental property is left empty the term is vacant. Often insurance policies state that a vacant property lapses its insurance in as little as a few days without a rider or notifying your insurance company and having someone check on the property (believe it or not, as often as every three days).
If you have a rental unit that is going to be unoccupied for a while:
- Make sure someone checks on the property at the prescribed interval
- Consider shutting off the water. Leaking pipes are one of the biggest claims in unoccupied property.
- Do everything you can to make the property seem inhabited. Pick up the mail, mow the lawn, put a light on a timer.
Home check services and security companies will visit the property for you. The cost is generally between about $20-30 per visit and gives you the peace of mind you’ll be covered in the event of a claim.
6) You Should Probably Be Considering Multiple Unit Properties
The economies of scale are generally better with multiple unit properties. They may cost more than a single-family dwelling to start with, but each unit is likely cheaper than what you could buy an apartment for.
Depending on where you live, multiple-unit properties might well be conversions of bigger, older homes. Some things to look for:
- Zoning. Is it legally zoned as duplex/triplex/fourplex or whatever number of units it contains?
- Adherenece to fire code. Just because it’s zoned legally does not mean it’s currently in compliance.
- Does it have seperate electricity meters for each unit? Trying to include electricity in rent, or trying to get each tenant to pay a portion, can be a recipe for disaster.
- Sound seperation between units. If someone waking up to get a glass of water sounds like a 747 taking off to the tenant below, probably best to skip on this property.
7) Property Managers are a Blessing and a Curse
The ideal scenario is that a property manager acts as a buffer between you and the tenant. They should only be bothering you for financial sign-off or when there’s a major issue to discuss. The day-to-day running of the property should be up to them: finding and placing tenants, minor repairs, and collecting rent.
The reality can be a property manager constantly involving you in the minutia of running the property, placing improperly vetted tenants, and not addressing issues fast enough. Try and connect with other real estate investors in your area for recommendations on who to use.
The flipside of property managers is that many people often underestimate how much work goes into running a property. I gave up countless weekends to do things as mundane as clean and paint units in between tenants. Even more serious time to do renovations and repairs. It’s a second job, not a free paycheque.
8) There’re Always REITs
There are both residential and commercial (and even some mixed) Real Estate Investment Trusts that you can invest in for a completely hands-off approach. Often these investments pay monthly distributions, so provide a nice form of passive income.
Taxes on REITs are a little more complicated than, say, Eligible Dividends, so consult with your accountant about a specific REIT before investing if you’re unsure.
9) Think Twice About Joint Ventures
Pooling your resources in marriage is a great idea. After all, you love each other already. Meeting a stranger at a real estate meetup or online and deciding to pool your resources in a joint venture can be a disaster.
For example, one investor often gets itchy to sell the property before the other. If you haven’t accommodated for that in your agreement, the outcome will not be good. Another scenario is the motivated person who spends every weekend doing the maintenance whilst the other person sits on them behind collecting half the rent.
I’m not saying joint ventures can’t succeed. You might find someone with a ton of knowledge about the industry that you can learn. Or you might find someone who’s a whizz at turning dilapidated properties around. But treat carefully.
10) Set Goals Upfront and Stick to Them
It might seem obvious, but I’ve come across people who just want to amass as many houses as possible without a thought as to what lifestyle that will lead to. Sure, you might be rolling in money if you’re lucky, but you might also be working 60+ hours a week just to keep up.
My advice is to figure out upfront a cash flow you’d like to see from your real estate portfolio both during and after the financing phase (a real estate prof
Ready for Successful Real Estate Investing?
Hopefully, you’re now a little more primed for how to invest in Canadian real estate. While it can be difficult, being forewarned is forearmed, and it can be a great way to create long-term wealth.
Before you proceed, though, do read about two of my nightmares as a real estate investor in Canada.