The Canadian housing market is on fire, with prices rising 9.36% in 2020. It’s no wonder many see real estate as an attractive investment.

Despite the Covid-19 pandemic, the Canadian housing market is on fire, with prices rising by 9.36% in 2020, marking the twelfth consecutive year of house price growth. With these statistics in mind, it’s no wonder that many view real estate as an attractive investment.

Not only do you benefit from rising property values, but buying an investment property can also generate relatively passive rental income that can potentially pay off the new mortgage for you. But there are also a lot of responsibilities that come with being a landlord.

Before you jump in with both feet, it’s important to put all your financial issues in order, understand what you’re getting into, and do your best to make sure your investment will pay off. Here are some of the top tips that should get you on the right track:

Think about funding first

One of the first things you should ask yourself is: can I afford a second property? And how am I going to fund it? In Canada, getting approval for a second home mortgage is a bit more complicated than getting approval for your main mortgage. Generally, mortgage providers will want to make sure that you are able to make mortgage payments on both properties, even if your second property is not rented 100% of the time. As a benchmark, they are looking for a debt-to-income ratio of 36% or less. To see if you qualify for a Second property mortgageyour best bet is to hit base with a mortgage specialist.

Determine your monthly margins

Determining your monthly profit margins goes hand in hand with affordability. You’ll want to make sure your margins aren’t too tight or that a surprise vacancy, for example, could have a big impact on your bottom line. To determine your monthly margins, also known as monthly cash flow, subtract your monthly expenses from your monthly income.

Your monthly expenses, which include mortgage payments, maintenance, repairs, property taxes, and insurance, should generally be around 40% of the property’s rental income. This means that if you are renting a property for $1,200 per month, you should budget and plan for at least $480 for operating expenses, which will translate into a cash flow of $720. Obviously, the more cash you have, the more profitable and stable your investment property will be.

Try to ensure profitability

Now that you have an idea of ​​your monthly cash flow, the next step is to determine profitability and answer one of the most important questions: is it a good investment? To find the answer, you’re going to want to take a close look at two main metrics.

The first, called your cap rate, will help you determine the rate of return a property should earn. It is calculated by dividing your cash flow by the value of the property and multiplying by 100. The second measure is your cash yield which will help you determine the rate of return on your initial investment. It is calculated by dividing your cash flow by your investment multiplied by 100.

In general, a 6% return is considered a very healthy return in the first year, as this return will likely increase as you pay down your mortgage. A tip to ensure profitability is the 1% rule, which is to charge rent equal to at least 1% of the value of your property and make sure your monthly mortgage payment is less than this amount.

Get your finances in order

First and foremost, before even considering an investment property, you should pay off any existing debt you may have to increase your chances of getting your second real estate mortgage approved with a reasonable interest rate. . Consolidate all outstanding debts in one place, like a credit lineis a good way to start this process.

Next, make sure you have a decent amount of money set aside. Unlike primary mortgages, you will need at least 20% of the purchase price of your investment property as a down payment, as investment properties do not qualify for mortgage default insurance. And, of course, the more you can put up front, the higher your profit margins will be.

Choose a decent location

As a real estate investor, it is important to find the right balance between a good location and an affordable price. For one thing, you’ll want to choose an attractive location to avoid difficulty finding tenants. But on the other hand, you don’t want to spend too much money to squeeze your margins or become too expensive to manage.

If this is your first investment property, it’s generally a good idea to start with a property that’s less expensive than your primary residence in a relatively modest neighborhood. When selecting the location, you should also look for certain positive characteristics, including proximity to amenities, schools and public transport, high employment rate, rising housing prices, low crime and little of vacant properties.

It’s also important to note that if you’re considering working with a property management company, you don’t necessarily have to limit yourself to investment properties in your own city. Sometimes homes in smaller communities can be priced much more reasonably than Canadian real estate hotspots, especially for first-time investment property buyers.

Don’t buy a fixer upper

Although minor repairs are manageable, you should probably avoid properties where major renovations are needed. You’ll want to get your tenants in as early as possible so you have cash and avoid time-consuming and tedious home improvement projects, which can be prone to delays. So while buying a roof to renovate might be a good option for your primary residence, especially for first-time home buyers, it’s not necessarily ideal for an investment property.

Understand your responsibilities as an owner

Being a landlord involves many responsibilities. The landlord must, among other things, maintain the tenant’s dwelling in a good state of maintenance and living conditions and comply with health, safety, living and maintenance standards.

It can definitely be an asset if you can handle repairs, maintenance and upkeep yourself. You also need to be ready to spring into action at a moment’s notice. For example, if a tenant’s furnace breaks down, you’ll need to start repairs as soon as possible.

For a complete list of your responsibilities as an owner, it is best to consult the Ontario Ministry of Housing and join your local Ontario Homeowners Association. Being a landlord isn’t for everyone, which is why some decide to hire a property management company, even if it cuts into their profits.

As with any complicated financial transaction, it is good to get advice from an expertwho can talk to you about your second home mortgage options, tell you exactly what you need to get approved, and guide you through your home buying journey.