What to Watch for When Buying an Income Property in Toronto.
So, you want to start building a real estate portfolio and you require some insights with what to watch for when buying an income property in Toronto.
The first thing you must be aware of, is the property performing well with its financial metrics? Analyzing an investment opportunity can be a daunting task, but if done properly it's the first step to financial freedom. The biggest mistake most newbie investors make is misunderstanding the difference between the NOI and CFBT when projecting cash flows. The NOI (net operating income) is the amount of money collected and then expenses are paid, the CFBT (cash flow before tax) is the amount of money collected minus all expenses including the monthly or yearly mortgage debt. A cap rate is calculated by dividing the NOI by the purchase price, this percentage represents the correct capitalization rate.
The second most important factor to watch for is the buildings state of repair and how much capital it will cost in leasehold improvements to bring the property state up to par. Also, the initial cash required in order to facilitate the transaction from a lender, meaning how much of a total down payment including closing costs it will take to be approved for the mortgage. Once that is all out of the way you can precede with analyzing the opportunity more in depth.
Which brings us to the next step, understanding the importance of location-location-location, the most used phrase in real estate, and there is a reason behind the madness! Location may be the most important factor when analyzing and investment opportunity in Toronto. The right location will allow the investor to take advantage of the equity buildup in a shorter period of time, the better the location, the faster and higher the appreciation value increments, thus allowing the investor to borrow the equity to purchase another property and build his/her portfolio. This business model only works with real estate.
If everything looks good so far then we need to better understand the local vacancy rates and the competition surrounding the subject property. local vacancy rates fluctuate from neighbourhood to neighbourhood. Also, knowing how other buildings are registered as single family or multi unit homes are important in our buying decision. If the local vacancy rate is low and most other homes near the subject are being utilized as single family then the opportunity becomes more favorable to the prospective investor.
Once you have completed all the due diligence regarding costs, vacancy rates and competition then it’s time to move forward and research the tenants that will be living in the property once the deal is completed. It’s important to note that the more you know about your prospective tenants the better, including the rent amounts, when rents are due, contact information, and their ability to keep the property in a good state of repair. Now, please understand that the perfect tenant is not the norm to say the least. Lets assume that the subject property that an investor is potentially going to purchase does not have the “perfect tenants” then re-assessing the strategy is in order. This is why it’s so important to have a team of experts working with you along this journey, experts like real estate lawyers who can advise you how to better deal with a rogue tenant. Other experts like a Chartered Accountant is a must have as they will better advise you how you can take advantage of any tax benefits as the CRA is favorable to investment real estate.
The more a newbie investor rolls up his/her sleeves and educates him or herself, the better and increases the chances of being successful.
Written by: Vincent La Fiura, Broker, Author, RPS Specialist