How Buying A Home Is Different When You Are An Investor
Recent gains in Real Estate caused investors to not just jump into the market, but to dive in head first without knowing how shallow the water is. Since February 2019, prices have risen by 70% in just 3 years (to Feb 2022). High returns brought new investors looking for a piece of the action to join an already crowded Home Buyer field. However, Buying Real Estate as an investor is different from purchasing your primary residence and using it as a home. Here are 5 things that Buyers may be overlooking when Buying Real Estate as an investor vs an end user:
Vacancy Costs: You don’t need to give consideration to vacancy costs when you purchase a home to live in; however they can have a big impact on your bottom line when Buying an investment property. Vacancy rates in the GTA tend to be quite low, but they are still a cost that should be factored in when calculating your expected returns. You are likely to experience a vacancy period when transitioning to a new tenant, doing repairs and renovations, and selling your property. Many Toronto condo investors experienced unexpected vacancies when demand for downtown condos dropped dramatically as we entered the pandemic. Forcing owners to drop rent or suffer months of no rent. Minimizing vacancy is important to your bottom line. One month of vacancy for a typical two bedroom apartment will cost you about $2,900 + utilities which is equivalent to reducing the rent by $240/month for one year. Finding the right balance of what rent to charge to avoid vacancies but maximize rent can sometimes be like walking a tightrope.
Marketing Costs: If using a Realtor, expect to pay 1 months rent to find a new tenant. If marketing by yourself, get ready for a lot of work to screen tenants, schedule and host showings, and to pay for costs to promote your rental, often equivalent to 1/2 months rent.
Property Management: Expect to pay $150 ++ a month as a starting price if you are hiring a property manager.
Taxes: One of the reasons owning your own home is so attractive from an investment perspective is that you don’t pay any taxes on your gains. It’s a different story for investment properties. Selling a property that isn’t your primary residence means you owe capital gains on the sale. While owning an investment property can still be appealing, be prepared to pay capital gains on your returns.
Inflation: Often real estate is seen as a great hedge against inflation, and it certainly can be. However, it’s not all roses. As labour and material costs have risen significantly in the past couple of years, so have the costs to maintain your home. Everything from a call to your local plumber, to a new washing machine, to dare I say lumber for a new porch, have shot up in price. Toronto property taxes are also going up 2.9% in 2022. These extra costs have caused homeowners and investors expenses to increase while rents are just getting back to pre-pandemic levels.
Investing in Canadian Real Estate has created a lot of wealth for many investors. Investors were able to leverage their investments at minimal costs with ultra low interest rates offered in recent years. Dividend producing stocks have done better than their growth counterparts in the stock market recently, maybe the same should be expected for Real Estate. As borrowing costs become more expensive, properties producing positive cash flow are likely to become more relevant for investors. Understanding what can impact that cash flow will help you make a better investment.
