Investing in rental property: Myths and tips for success
Real estate is starting to fall. Prices are falling visibly in all regions and the main players are worried. The methods of calculating prices have been questioned by the director of the national federation of real estate agents, which has earned him the door.
If real estate was a game of musical chairs, the music will soon stop and you will have to be ready to invest. Real estate is a subject that I am passionate about and that I study. Here are the tips and rules I've gathered and will follow.
6 myths in rental real estate
- You have to be rich to be able to invest: if you have to have income and not be in debt, you don't have to be rich to be able to borrow. The "trick" is that you certainly won't be able to buy your house and invest in rental property because of your limited debt capacity. Make a choice.
- Start small, big investments are too risky: experience shows that it is sometimes easier to borrow a lot than to borrow a little. I have real-life stories of people who started out with large investments with few resources. The secret? When you borrow to buy an apartment, the bank relies on your income. When you buy a building, the property becomes the collateral. I'm not saying it's simple, but it does exist. The risk on a building is also limited because your rental income will always have more resistance if you have 10 apartments than if you rent only one.
- You can become rich by buying and selling properties without any contribution: I would not recommend this type of approach. It's risky and only allows for capital gains instead of generating regular income.
- You have to know people to succeed: things often go the other way. Get started, show interest and you will get to know the people you need.
- You have to be confident and not afraid to make a mistake: find me someone who invests without fear and I'll show you someone who is unaware. Every new investment is a risk and a challenge to your stability. This is normal and part of the game. You will have problems, but it's how you handle them that counts. It's all about what you do to prevent a problem from turning into a catastrophe.
- The tenants are a bunch of creeps who break everything and destroy everything they rent. They all wait for the winter break to stop paying rent: I know some serious ones. I guess they are not the only ones.
10 Tips to follow
What is your goal with this investment? A goal is only valid if it is written down, communicated and if it frames all your decisions. If it's not, you're just wishing, and I'm not taking much of a risk in saying that they will remain wishes. A goal is something you absolutely want to accomplish.
The rental investment process is simple: look for a property, finance the investment, manage the property and start over.
1. Find a motivated seller
One of the basic rules is to buy well. To buy well, there are no secrets, you have to buy from someone who really wants to sell. The number one rule of rental investing is simple: you make your profit when you buy, not when you sell. If you don't, it's not worth it.
If you buy too high, perfect management will often not restore the profitability of your investment. One of the reasons I recommend buying at the right price is that you have no way of knowing what the market will be like at the time you want to resell and therefore it would be a bit surreal to bet on the price of the property going up.
By focusing on immediate profitability, you protect yourself against several things, including having to resell your property if you can no longer afford to maintain it.
Find a seller who is not making money on his investment, who lives far from his property and has to travel, who is not well informed about the market and you have a good chance of buying at a good price.
The purchase price is decisive and so is the rent you can get for it. Do not overpay for the property and do not overestimate the rental value.
2. Define your target
For a first investment and according to our borrowing capacity, the choice is often between a studio and a F2. Regardless of your choice, you must be consistent and use common sense. If you are targeting students, small surfaces are traditionally reserved for them.
The consequence is that the location should be chosen according to the target. Everyone knows that location is one of the key factors for a successful investment, but in the field reality often takes over.
Also in the example of our studio for students, the environment of the property is determining. If you intend this studio for young workers, the criteria are different. Know who you are targeting. Depending on the population, there are known advantages and disadvantages such as the fact that the student stays for a short period of time and regularly needs to look for a replacement but benefits from the parental guarantee.
The location should not be chosen in spite of its low attractiveness.
3. Do your research, visit a lot and make few offers
Wisdom dictates that you should visit a large number of properties to make a purchase. The research method can be confusing because there are many different media: internet, newspapers, real estate agents...
Level 1 : internet
Attractiveness of the city or the good district ? The factors that attract people are simple: work, schools and reputation. If there are many jobs, the city attracts people. If it has a good reputation, even better. University towns are also popular with students.
Other features of interest are casinos, airports, national events and government buildings.
Limited property supply? If there are too many properties, you are heading for disaster. Currently, many medium-sized cities are overloaded with De Robien due to the negligence of developers and investors.
Is the quality of the infrastructure satisfactory? Is the city or neighborhood properly managed? Are the investments made on time?
Is economic activity increasing? Quite tricky at the moment but still an important indicator for your choice. Diversity in this regard is important. Avoid cities that are dependent on a single large employer.
Level 2: People and Trends
Meet, discuss and verify your findings with local people. Are your findings validated? Can you define the trend and imagine what the neighborhood will be like in 10 years? Is there any construction or change that could influence the market? (rental demand, property value)
Level 3: immediate environment
Shops, schools and transportation are the 3 key points. The immediate environment determines the attractiveness of a property for a tenant. He is ready to concede things about the building or the neighborhood but he must have the elements he needs nearby. The environment is not changeable.
There is never just one market, even in a neighborhood. Sometimes a few blocks away is all it takes to find yourself in a very different environment. Know how to differentiate between sub-markets.
Number of properties to visit
The number of properties to visit may be limited by the configuration of the area, but the basic principle is simple: the more you visit, the more likely you are to find an interesting property. You can visit 40 or 50 apartments without any problem. It takes time but that is the price to pay for finding the diamond in the mine.
The visit of the properties should start only after you have done your research and defined your objectives because it allows you to make a decision in a few moments.
Ideally you buy your property from someone who has not yet put it up for sale. You want to avoid being in competition with all the investors.
4. Buy near your home
This criterion is simple but I make it a point to do so. Always buy close to home. The alternative is to buy in a place you know well (for example the city where you come from). Proximity is necessary for 2 reasons:
To really know where you buy, to be able to intervene in case of problem.
If you manage the property yourself, it is even better to be close.
There are of course many examples where remote management works well. What I would like to avoid is having to make an emergency visit once or twice to solve a small problem that requires my presence and that discourages me.
5. Create your team
You must consider that the first investments are a learning process. A real estate agent, a notary and an accountant are 3 members of your team that you must select carefully. Sometimes finding a good craftsman is also necessary.
Other members can be: architects, insurers, bankers and surveyors.
If you really want to be serious about this, you will have to create a team.
If you invest with a partner, make sure that you :
- are complementary,
- can discuss an idea in a healthy way,
- work and reap the rewards equally,
- have the same goals,
- share the same values.
6. Unplug your instinctive side
You need to analyze assets rationally. The best way is to establish a written list (typically in Excel) of criteria. The list of criteria guarantees that you don't "fall in love" with a property and that you compare different properties correctly.
Analyze the property from all angles. There are many things to look at, but that doesn't mean you shouldn't check them. If you find a problem, it may not be a reason to cancel the purchase but to negotiate the price accordingly. In this case, nothing beats a quote from a serious professional to do the repair.
You can find a more complete list of checks to make before a rental investment here.
Generally speaking, a tenant will be less demanding than a buyer. This is a point to keep in mind.
7. Make your profitability calculations
Calculate the profitability of your investment. Below 6% net (after taxes), the investment is questionable. You should not have any surprises.
The price asked by the seller has no basis. It is often based on his expectations or on an estimate itself based on questionable data.
It is up to you to calculate the price you can give according to the return you want to obtain. To do this you need to get the rent price and be sure it is the real rent. Trust but verify.
Many times properties will be overpriced, but that doesn't mean you're doing it wrong. You are buying financial income, not real estate. If the income is not good, your investment has failed.
However, two other elements can play in your favor: the potential rent and the future rent.
The potential rent is the rent that the current owner could obtain by making some simple changes. These are the same changes that you can make immediately to raise the rent.
The other point, the future rent, is the assumed rent increase based on the property, its environment and the maximum increase allowed by law.
Maintenance costs should not be underestimated. The older the building, the more expensive the maintenance is a general rule of thumb that you can follow.
8. Finance your investment
The search for financing can be time consuming, but to avoid losing an opportunity, it's a good idea to check your borrowing capacity before making an offer, just as you would if you were buying your own home.
9. Do the right thing, stay informed
What the beginner grabs during a first investment, he usually loses later on as a self-fulfilling prophecy: you can't win with real estate.
The professional investor does not hesitate to do whatever it takes, whether it is marketing to rent the property, insurance to protect himself or a lawyer to investigate a thorny problem before the purchase. There are areas where you should not cut corners and the whole pre-purchase study of a property is critical.
On another aspect, all the news can interest you to follow the value that your property has: crime and investment in infrastructure are 2 important elements.
10. Find good managers
Management is a critical point. If you bought well, management can ruin your purchase and your cash flow. Even if you don't plan to have a manager, make sure you include a margin in your calculations for this eventuality.