Investing in real estate has always been rated as one of the best ways to invest your money. This was undeniably true in the past, but is a property investment still a viable option today?
The answer is yes and there are good reasons for this.
Is Property Investment Worth It?
Over the last several decades, a housing availability crisis has been slowly developing in many Canadian cities. Current statistics show that 1 in 5 Canadian renters will be unable to find the type of accommodation they want. This means that for the foreseeable future, there is going to be a constant demand for more housing in many Canadian cities.
Second, a high percentage of millennials and baby boomers are choosing to rent, rather than own homes. There is a growing trend among the younger generation to place greater value on the freedom of renting than the security of owning a home. This is increasing the demand across Canada for rental properties.
The result of these two factors is that rental properties in many cities have a vacancy rate that is just a little above zero percent. What this means, says Leenan Properties, is that apartments are barely vacant before they are snapped up and that is good news for would-be property investors.
In addition to these factors, Canada is such a huge and diverse country that opportunities in the real estate market vary significantly across regions. There is never a lack of places where savvy investors can buy properties to make decent profits.
But just in case you are still asking why you should invest in rental properties, here are reasons why investment property trumps other forms of investments.
Why You Should Invest in Rental Properties
1. High Leverage
Getting a loan to invest in rental properties is relatively easier than getting a loan for other types of investment. Additionally, the loan amounts for real estate investments are higher.
With competing forms of investment, like stocks, gold, or cryptocurrencies, investors are often required to put up 100% of the purchase cost. But with investment properties, it is not uncommon for investors to provide only 20%-30% of the cost of the asset.
This means that with $30,000 of your own money, you will be able to purchase a property worth $210,000. This is because banks will readily lend you the rest of the money needed for the investment. This kind of leverage is not available with stocks or mutual funds.
2. Steady Cash Flow
For rental properties, investors do not have to endure a long waiting period before they begin to enjoy the rewards of their investments. A rental property can start to generate cash flow in its first month through rental income.
The property can provide all the money that the landlord needs to cover mortgage payments, running costs, and investment property taxes. After these expenses, owners will still have some money left over every month as their profits.
3. A Rental Property Pays for Itself
A rental property’s ability to generate enough cash to cover the property owner’s obligation to lenders is a huge advantage. It means the investment eventually pays for itself. Landlords can use their tenant’s money to pay off the mortgage on the property.
For every year that they hold the property, landlords reduce the amount they owe on it while also increasing their equity in the property. The owner can eventually gain access to this money by refinancing the loan or selling the home.
4. Higher Return on Investment
The ROI on investment real estate surpasses that on many other types of investment. This is partly as a result of the higher leverage property investors enjoy. It is also due to the steady cash flow generated by the asset.
Leverage allows investors to purchase properties far above their means. Monthly incomes from the property take care of marginal costs and interest payments on the loan. The owner does not pay out-of-pocket to own or maintain the investment, yet their asset keeps growing.
5. Tax Benefits
Owners of rental properties perform a public service; they take on personal risk to provide homes for other people. The government recognizes landlords’ roles and encourages them by offering tax incentives.
Tax benefits on rental properties come in several forms and landlords can take advantage of them all. Tax-deductible expenses for a rental property includes repairs, depreciation, interest on the mortgage, property taxes, legal/professional fees, insurance, and more.
6. Greater Flexibility
Investing in real estate offers landlords greater flexibility in how they manage an asset. Investors in stocks and mutual funds may have the freedom to choose what they want to buy, but they must give someone else the right to manage the assets. The manager invariably controls the investors’ money.
With rental properties, on the other hand, landlords are involved in every step of the way. They can choose to rent in the short or long-term. They may also choose to manage their property directly or use the services of a property manager.
7. Asset Appreciation
Even though the value of properties may rise and fall in the short run, real estate prices tend to go up in the long run. Owners can buy and hold a property to take advantage of this long-term value appreciation.
The rate at which property prices appreciate varies according to market conditions in a location. But it is not uncommon for owners to make multiples of their original investment, after a few years.
8. Hedge Against Inflation
Home values are relatively stable compared to other types of assets. They do not fall as sharply as the value of stocks often does. And when property prices move, they do so, invariably, in the same direction as inflation. This means that the value of the asset is not eroded by inflation. Rather than losing value, investment properties retain value in the face of inflation.
Homebuyers often wonder which option is better when buying a property. Which is better, a move-in ready or a fixer-upper? Initially, making the best choice may seem difficult. But after going through this article, you will have the necessary information to guide you in making the best choice.
If you want a move-in ready or a fixer-upper, there are several factors to consider. Below are the pros and cons of move-in-ready and fixer-upper homes.
Pros of Move-In Ready Properties
Less Work & Stress
If you are not a do-it-yourself person or you have a tight deadline to make use of the apartment, you may want to consider a move-in-ready house. That is because it doesn’t require any additional work from you. Also, you wouldn’t have the stress of performing repairs.
If you buy a new move-in-ready property, you have lower chances of acquiring a home that has significant issues. But a fixer-upper may give more risk of buying a house with serious problems such as mold issues, pest infestation, structural damages, electrical defects, etc.
You Get a Modern Property
Since the real estate market is highly competitive, most move-in-ready properties have modern trends and features. Some of the new trends you may see include eco-friendly features, open floor plans, modern appliances, etc. It may be expensive to incorporate all these trends in a fixer-upper property.
Cons of move-in ready properties
The prices of homes that are move-in ready are far higher than fixer-upper houses. That is because the properties have all the crucial fixtures. However, sellers expect more returns on their investment. For that reason, they will increase the price to earn more interest.
When you buy a move-in-ready home, you have less control over the customization. The seller will design it according to their taste. To enjoy the layout or design that you want will involve spending more money on remodeling. Else, you may have to accept the property that way.
Pros of fixer-upper homes
Fixer-upper homes provide you the opportunity to personalize your home according to your lifestyle. Here, you have more creative control than move-in-ready homes. If you are a creative person with skills, you can perform some of the remodeling projects. It feels so satisfying when you behold the outcome of your creativity at the end of the project.
Fixer-upper homes are not as pricey as move-in-ready properties. If you are lucky to find a fixer-upper house in a costly neighborhood, you can spend less to acquire the property. But after your renovation and upgrade, the house will amass more value. That will make you pay only a fraction of what others did to have a move-in-ready home in that environment.
Fixer-upper homes are less competitive than move-in-ready properties. Since the competition is low, you have a better opportunity to negotiate with the seller. But this is not obtainable with the move-in ready properties because of the hot market.
Cons of Fixer-Upper Homes
Although the cost of fixer-upper homes is not as expensive as move-in-ready properties, the expenses on repairs and upgrades may be outrageous. That usually happens when the property has hidden issues like mold or structural damages that incur additional expenditures.
Home renovation takes time. For that reason, you will need to secure another place to reside and have more patience while upgrading the house. Performing the project by yourself will take more time. But the duration can be lesser if you hire a contractor. However, a move-in-ready property will still be faster than a fixer-upper.
Tips to Reduce Your Home Renovation Costs
Fixer-upper properties are more lucrative, especially when you know how to minimize your home improvement costs. Below are some helpful tips.
1) Hire a Home Inspector Before the Purchase
A home inspector will help you avoid properties that will be very expensive to repair. As a result, they help you minimize costs. Home inspectors will assess everything on the property and identify issues that can cause more expenses in the future.
2) Consider the Re-Sale Value
If you are planning to sell the property, the deal needs to be rewarding. For that reason, it is vital to know the resale value of the home. If you sum up the purchase price and the expected renovation costs, will you have more returns after selling the property?
3) Get Help from Professionals
Get bids from at least three contractors and compare them. Ensure that the contractor of your choice has the necessary licenses and insurance.
The Bottom Line
A fixer-upper home is an excellent choice. That is because you can acquire the property at a reasonable price. It is easy to add more value to the property if you hire the services of professionals that have experience in upgrading fixer-upper homes.