Buying an investment property is a big decision. Sure, purchasing a property to rent out short- or long-term can help you build wealth and set you on the path to a financially stable future. However, there’s a lot to know and manage when you own a rental property, too.
We’ve seen a glimpse of what it takes to enter the investment property market on Scott’s Vacation House Rules, but there are many overall considerations to keep in mind, from maintenance to capital gains. Read on to learn more about what you should know before signing the paperwork in 2024.
Watch Scott’s Vacation House Rules on HGTV Canada. Stream Live or On-Demand with STACKTV. Try it free today!
The Market
One of Scott’s golden rules is to do your research, and that’s especially true when you’re buying an investment property. Understanding current market trends in the area you’re looking to invest in is essential. It’s always a good idea to work with a seasoned realtor in the city or town you’re scoping out and to assess changing property values and growth projections to ensure you’re investing somewhere with growth potential.
Location
You should also know what the area has to offer potential tenants and look for a property that will attract the kind of tenants you want. Hoping for young professionals? A property close to an urban area might be ideal. Interested in renting to a family? Check out local parks, schools and amenities. If you’re thinking of a vacation property, scope out similar rental listings and consider chatting up fellow owners to get an idea of how hot the area actually is.
Related: Questions to Ask Yourself When Buying An Investment Property With Friends
Financing
Before purchasing an investment property, it’s a good idea to speak with a financial planner or investment expert to get a clear picture of your finances. How much can you afford to spend, how much are you willing to potentially lose and how will you specifically pay for your investment property and all of its related costs while you get it up and running? If things go south, how hard will it be to get money back from your investment? These are all questions to ask when buying an investment property.
Repairs and Renos
Another huge consideration when looking for an investment property is the state of the property itself. Know how much money and time you’re willing to put in for repairs and maintenance, and ask yourself exactly what kinds of updates the property in question needs in order to attract the right renter. You should also put together an estimate of how much money you might spend on unexpected repairs and maintenance because, as the owner of the property, that falls on you and not the renter.
Related: 10 Ways to Ensure Your New Vacation Rental Business Succeeds
Tax Rules and Regulations
There are big capital gains changes coming in Canada, and they will affect your bottom line if you eventually sell your investment property. Capital gains are the proceeds from the sale of an asset — like an investment property. Under the old rules, 50 per cent of the profits an owner receives from a sale can be added to a taxable income that year. Under the new rules, any capital gains over $250,000 annually will rise to 67 per cent instead.
In addition to capital gains, rental income is taxable in Canada. That means you should speak with your accountant about how owning a rental property will change your taxes and how to best navigate those changes.
Income Potential
Speaking of extra income, you should also ask yourself whether you want to be a short-term rental owner or a long-term rental owner. Each has pros and cons, but whichever one is your goal will determine the type of property and location of your potential investment.
Managing the Property
No matter what kind of income property you’re investing in, it’s important to plan the property management. Short-term rentals require regular cleaning, advertising, booking and check-ins in order to be successful. But long-term rentals also require management, whether it’s ensuring repairs are done in a timely manner, screening potential renters or getting renewal agreements signed. If you don’t have time to do these tasks yourself, you’ll need to hire someone who can.
Related: 5 Steps to Safeguarding Your Finances When Buying an Investment Property
General Rules
There are many rules and regulations that come with being an owner, and those laws are different in every Canadian province. If you plan on renting out your property, then you should definitely know them. Do your research, speak with a lawyer who specializes in real estate and consult with others in the community to protect yourself.
Long-Term Goals
While you may be asking yourself how to know if a property is a good investment, you should also be asking yourself what your long-term goals are in acquiring an investment property. Are you looking to purchase a place that you’ll eventually settle down in yourself? Do you plan on renting the place out for the rest of your life? Or will you sell it down the line? The answers to those questions can determine the location of your property, but they may also impact your overall financial plan and investment strategy.
Related: 15 Things You Need to Know Before You Buy Your First Rental Property
Overall Risk
Investment properties can be a big risk, so you need to make sure you’re okay with that risk before proceeding. Job loss, market changes, wear and tear, unexpected vacancies and a slew of other things can affect what you might initially think is a sure thing, so be sure to research every possible scenario and then budget and plan accordingly.
Not all risks lead to rewards, but some rewards come from taking the biggest risks. By educating yourself and putting in the work to know the pros and cons, you can put yourself one step closer to that dream investment property.
