Buying Your First Investment Property - Steps and Due Diligence When Purchasing An Investment
Updated: Jul 21, 2022
Last weeks post was a horror story about what happened to a first time investor. Spoiler alert, it all ended well because he had people to call that were able to give him sound advice and provide him options to move forward. Buying your first property, or even your 5th, can be a nerve racking experience. There are a lot of pitfalls to look out for, and a lot of things that can happen if you get too excited and jump in without a sound base. As investors, we are supposed to be calm and rational, not emotional. However, when you have $500,000 or more on the line, it is easy to let your emotions get the best of you. Here are a few things to look out for.
Area To Invest In
Market research is key here. It is natural to want to invest close to home because that is the area that you are most familiar with. However, it is very important to conduct research to identify the large industry trends that are driving the real estate market and then see what the impact of that will be on your target market. For an example of some of the research that might be relevant to your search, check out this post on the Canadian economy and this post on growth in the Niagara Region.
If you live in an area with strong fundamentals, great! However, if you don’t all is not lost. There are many resources available online and people willing to help you achieve your goals. Something to think of here is that the study of real estate is the study of people and migration trends. Where are people moving and why? What are they looking for when they get there? If you can answer these 2 questions, you are doing better than most investors.
Once you identify a target market, it is important to identify a strategy that you want to pursue. There are many ways to invest in real estate and no one can be an expert at all of them. Play to your strengths and pick a strategy that you feel is manageable given your unique skill set. Do you want to do renovations and force some appreciation, or would you rather find something that is turnkey? Would you like to invest in single family homes or are you more interested in multi unit buildings? Would you like to find a property that you can sever off a spare lot for extra income? Would you like to add another unit to the existing building? Or maybe you like pre-construction condos. All these strategies are good, you just need to find something that works for you. To help you make your decision, it might be best to first think of an ideal tenant that you would want to rent your house to. What is their income? Where do they work? What kind of car do they drive? Do they have kids or pets? If you can answer these questions, you can pick a home and a neighbourhood that your ideal tenant would want to live in. From there, look for opportunities that fit your tenant profile and your strategy. For example, a single-family home will generally attract a better-quality tenant than a multi unit building. The cash flow may not look as good on paper, but they will typically be lower maintenance and more stable.
Build Out Your Team
Before you decide to jump into purchasing an investment property, make sure you have the right people on your team and in your target market. Some of these professionals can be remote, such as your lawyer or mortgage broker, but your real estate agent must be an expert in your target market. This next section is going to be a repeat from last weeks post. It is so important that it is worth stating twice. Here are a few people who will be able to help you on your journey.
· First and foremost, a coach or someone with experience that can help you to set your goals, and develop a plan to go after them
· A real estate agent that not only has investment properties, but is also familiar with the strategy you are interested in and can provide you with ARVs (After Repair Values)
· A mortgage broker that works primarily with investors and can put together a financial road map for you
· An accountant that has rental properties and is familiar with the best ways to structure your deals for tax savings.
· A real estate lawyer (not every lawyer is created equal)
· A good quality home inspector, preferably with a P.eng designation.
· A good quality contractor (or two!) that is very familiar with the building codes and unique requirements of each individual municipality
· An engineer that is also used to working with the municipality that you are in.
· A quality property management company that can provide you with an idea of market rents and what tenants are looking for. Something to note here is that it isn’t wrong to want to self manage. In fact, I encourage new investors to manage their own properties for a little while to understand what goes into keeping a property running smoothly. That being said, if you are planning on self managing, make sure that you read the Residential Tenancy Act from front to back and have an experienced landlord or property manager that you can lean on when questions arise.
Whew! You finally found an opportunity that fits your above criteria. Congratulations! Now it is time to make sure that this deal is everything that you think it is.
· First, put in a call to your mortgage broker and make sure that you will be able to finance this at the agreed purchase price with the existing or expected rents.
· Schedule a home inspection with an inspector that has a P.Eng designation and that is familiar with rental properties and the strategy that you are pursuing.
· Get a zoning certificate from the municipality to ensure that rental properties are allowed in this area, and that any renovations or second units will be allowed under the zoning by laws. Minor variations are often ok, but it is a costly, lengthy process to get a property rezoned if your proposed use isn’t allowed.
· Get up to speed on what is required for a fire code inspection to ensure that all units are up to code with working smoke alarms and means of egress.
· Run your numbers. Let the excitement of having an accepted offer cool off over a few days and double check that your expected rents can cover your costs. Don’t forget to factor in vacancy and repairs. Remember, you negotiated a due diligence period for a reason! If you feel like you need to go firm on an offer without performing your due diligence, that is a big red flag.
Something to note here: in a hot market like we are currently seeing, it is often tough to negotiate time for financing and inspection periods and the inclusion of these conditions can often be the difference between losing the deal and securing it. It is a great idea to go into the market search with a solid relationship with your mortgage broker and a good idea of what you are capable of purchasing. It also is a good idea to know the zoning bylaws for that area and a good understanding of what is permitted. A good real estate agent will be able to get you a walk through or two where you will be able to check things out a bit. It doesn't hurt to get a contractor to come with you as well for a second opinion on what might be required.
Structuring The Deal
You’ve finally made it through your due diligence period and firmed up on your purchase. Wow. It’s been an exhausting ride. You’re not quite done though. Remember that accountant and lawyer that we talked about earlier? Here is where they come in handy. Discuss with them your preferred way to hold this investment. Does it make sense from a liability and tax perspective to hold the asset within a corporation? If so, is your lender on board? Most banks don’t like lending to corporations. If you decide to go with a corporation, speak to your lawyer about setting up a trust agreement. Discuss all your tax implications with your accountant beforehand to set things up properly. Are you looking to take depreciation to reduce your tax bill? Are you looking for right offs or are you looking for more income to fund your life? Are the renovations you are doing considered capital improvements? Figure out the best way to track your mileage and expenses so that you aren’t scrambling come tax time. All these things need to be considered during closing.
You finally made it
As you can see, there is a lot of work that goes into purchasing an investment property and this is before you even take possession! After closing is when the real work starts and you begin searching for and managing tenants, setting up lawn maintenance, completing renovations, setting up bill payments, and ensuring everything goes as smoothly as possible. If all this sounds like too much for you but you are still interested in investing in real estate, you are in luck. We work with investors to find them good quality, cash flowing deals in appreciating markets.
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you to achieve your goals. His travels are available at www.realestateandrepeat.com
For a free market analysis on 2 markets within the Niagara region that we are currently investing in, please visit the home page and fill in the contact form at the bottom for your free report!