Real Estate Strategy: Income Properties

With the right strategy executed, real estate income properties yields to sufficient cash flows, and capital appreciation over a period of time. Especially in a ‘landlord’s market,’ such as Toronto, income properties is one strategy to receive a fixed monthly income from an investment.

The vacancy rate for Toronto was 1.6% in 2016 (the Globe and Mail), making it a market desirable for real estate income properties. Owning income properties is one of the many real estate investment strategies. This strategy consists of owning and leasing out real estate assets, such as low rise homes, multi-unit residential homes (i.e. condos), and commercial properties. This article will specifically focus on the strategy to obtaining and maintaining profitable properties within the residential real estate market (low rise and multi-residential homes).

Location

Location is everything, especially within real estate. Choosing an income property in a location that is well serviced by transportation will typically provide more demand for your rental unit. In a sense, the renting price is positively correlated to the distance from the city’s core – as seen in the most recent rent map for Toronto.

Before obtaining a property – look at the jobs within the area, and the different natural amenities available, such as shopping, transportation, and parks. Keep in mind that a strong job market typically provides the snowball effect of increasing the demand for residential real estate. It is no coincidence that Toronto’s office vacancy rate is the lowest in North America (Condo.ca). The thriving job market continues to fuel the demand for the Toronto housing market.




Price

Bidding wars are becoming more common within heated real estate markets. It’s a strategy for some real estate agents to set a low asking price, in order to attract the most attention – leading to a bidding war. It’s easy to get caught up in the asking price vs. selling price dilemma.

Before entering any bidding war – understand your limits. Getting a mortgage pre-approval would potentially make your offer more competitive in a bidding war. Do the calculations, which would include mortgage payments, property tax payments (plus maintenance fees, if applicable), and any other monthly costs that would not be borne directly by the tenants. As seen in the Real Estate Investing: Tips & Tricks guide, the total monthly expenses should be less than or equal to the average rent in the area.

Freehold vs. Condo

Freehold properties are typically worth considerably more than condos, considering they’re comparable properties within the same area. Many buyers face the dilemma of purchasing a freehold or a condo – especially for townhouses. As of February 2017, the average price for a condominium townhouse and a freehold townhouse within the City of Toronto are $596,736 and $878,329 respectively (Toronto Real Estate Board).

In other words, freehold townhouses cost approximately 48% more on average, compared to condo townhouses. However there are two main reasons for this:

  1. Freehold properties have less risk in terms of monthly carrying costs. When a condo maintenance fee skyrockets (which can happen in some cases), the value of the home significantly declines, as seen at 40 Panorama Court, where rising maintenance fees have depleted the value of the condos.
  2. Lenders lend less for the same dollar of personal income on a property that has a maintenance fee. There is a negative correlation between the lending amount and the maintenance fees – an increase in maintenance fees would yield to a smaller mortgage principal amount being approved.

Condo townhouses may be more beneficial to have as an income property, in terms of maintenance (maintenance fees typically takes care of the upkeep of the property’s exterior). However, it really depends on the numbers, and the specific area of the income property. In some areas, condo townhouses would be more profitable, while freehold townhouses would be more profitable in other areas.

Cash flow

Finding the right tenant is crucial for real estate investing. There are different types of tenants that the property can be rented out too, such as students, families, and singles. Many landlords do background checks for credit scores, to ensure the prospect tenant is financially able to make the monthly rental payments.

The rent price can be calculated through a comparison of the previous recently rented properties listed on realtor.ca and/or using a cost based pricing approach. There are many sources in terms of finding the average rental prices within the area – a real estate agent that specializes in that specific area may be able to provide you with more specific stats.  

There are costs associated with income properties, such as insurance, property taxes, mortgage payments, and maintenance fees (if applicable). Depending on the rental agreement, utilities may, or may not be included in the rent. Some landlords prefer to charge a slightly lower rent, and have the tenant be financially responsible for utility payments. This strategy leads to a more consistent cash flow.

Bottom Line

The main objective of income properties is to earn a positive, monthly cash flow. Real Estate Investing: Tips & Tricks guide provides a formula on calculating the average annual return of investment for a rental property. When obtaining income properties in hot housing markets, it’s extremely important to be aggressive, make quick decisions, and know your limits before making an offer. Keeping up to date on the real estate industry will definitely help you keep an eye out for any exciting opportunities. It’s beneficial to attend real estate events, such as the Real Estate Wealth Expo in order to gain insight on the different strategies. All in all, choosing a property in a highly desired area, with the right tenant is the key to successful real estate investing.

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Writer: Jelani Smith

Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.