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Historically low interest rates coupled with highly active markets might have you wondering whether now is the right time to purchase an investment property.
Canada’s housing markets have shattered records since the early summer, posting a 45.6% year-over-year increase in sales activity during September, according to the latest data from the Canadian Real Estate Association (CREA). During the first nine months of this year, 402,578 homes changed hands over Canadian MLS® Systems, a nearly 6% jump from the same period in 2019.
The market has clearly rebounded following a plunge in sales activity during March and April, but beyond the eye-catching headlines, there are some complex considerations for anyone thinking about buying an investment property during this time. Across the country’s major markets, condo and detached home sales and prices have been diverging over the course of the summer, and it’s unclear where those trajectories will take them.
“I think for anyone that is looking or investing, making decisions with prudence and having cash buffers at least in the short-term is a wise move,” said Steve Saretsky, a sales representative with Oakwyn Realty Ltd. and a Vancouver-based finance and real estate blogger.
Investing in residential real estate has traditionally been a sure-fire way to create wealth and build assets, but it’s important to approach it in a smart and informed way, especially given the unpredictability of the COVID-19 pandemic. If you’re thinking of taking on the responsibility of an investment property amidst the current market conditions, here’s what you should keep in mind.
Understand your market’s present and future
While the market could be in for some further volatility, Saretsky explains buying opportunities are possibly on the horizon.
Pre-COVID, Saretsky describes his local Vancouver market as one where multiple offer scenarios were common due to steep buyer competition. In major Canadian metropolitan centres such as Vancouver and Toronto, declining immigration and tourism as a result of the pandemic has created softness within the long- and short-term rental markets in particular.
“I think as an investor, if you’re going to be pulling the trigger, I think that you need to be negotiating fairly aggressively because there’s a lot of inventory that’s building,” said Saretsky. “And again, you should be compensated for the risks [and] giving up your capital.”
To stay up to date on what’s happening in the housing market, buyers and investors can follow CREA’s monthly market stats, which are published here.
Have reserve funds and strategize pricing
In the event of a home repair or loss of rental revenue, it’s important to have some emergency cash—commonly known as a reserve fund—tucked away to cover costs as an investor.
Based on historical patterns, Saretsky explains economic shocks tend to happen every eight to ten years, underscoring the need for additional funds in the event of missed rental payments.
“I think [the pandemic] should just be a subtle reminder to anyone that is buying real estate—you always have to have some cash buffers for a rainy day, and this one is no different,” said Saretsky.
Using a mortgage calculator is one way to estimate your monthly payments and expenses before you buy, including taxes, interest and utility fees. This should give you an idea of how much cash you should have on hand in a reserve fund, covering at least a month’s worth of costs. Don’t forget there are also one-time expenses to consider every time you purchase a property, like land transfer taxes, lawyer fees and a home inspection.
When it comes to determining an appropriate rental price to charge, Saretsky explains it really comes down to individual strategies and the investor. Monthly expenses, cash flow and loss of revenue are a few of the factors you’ll need to consider.
“Some people want to maximize, some people want to lower their price to open up their buyer pool and take a little bit less,” explains Saretsky. “It obviously depends on your cash flow situation.”
It’s also important to look at comparables in the rental market to ensure the price you’re hoping to charge to cover your ownership costs isn’t out of step with the market. You can ask your REALTOR® to take you through some comparables currently on the market and advise you on the best approach to pricing your rental. REALTOR.ca is also a great resource to do some research yourself.
Consider the best property for your needs
The age-old adage of real estate, “location, location, location,” is certainly applicable when choosing an investment property.
Some investors exclusively buy pre-construction, while others opt to buy downtown condos or suburban single-family homes on the resale market. You might even find a laneway house, choose to build an addition or buy a property with a basement suite; whatever is best for you. When choosing a location or specific type of real estate investment, Saretsky says the right property is dependent on the individual investor and their goals.
“I think everybody has different desires and outcomes,” said Saretsky. “Are you looking for more on the price appreciation side, are you looking more for something that’s got sustainable cash flow?”
When buying a personal or investment property, it’s important to weigh your income or rent revenue against your recurring expenses to determine how much mortgage you can comfortably afford. Using an affordability calculator can help to provide a clear financial snapshot of your mortgage payment in comparison to your local property taxes, debts and maintenance costs.
If you want to find out more about investment properties, or are actively looking to purchase one, enlist the help of an experienced REALTOR® who can provide you with sound investment advice and up-to-date market information.