Hey everyone! It’s Mike here! A lot of people wonder: how do I buy my first investment property?
How much money do I need?
What do I do first?
Who do I talk to?
And most importantly, what do I look for in an investment property?
That’s why I’ve created this guide! It’s meant to be high-level but it gives you some actionable tips on what to do and what to look for when getting started investing in real estate.
Lenders will need at least 20% down payment on a rental property or investment property in Canada. That means for every 100k in purchase price, you will need 20k in cash for down payment.
Down payment is the most regulated part of mortgages in Canada. FINTRAC has strict rules on where funds can come from and what needs to be shown.
There are really 3 ways you can get your down payment:
The lenders will need to see 3 months of your bank statements proving that there is nothing sketchy going on with your down payment.
This step is cliche.
But it’s cliche for a reason.
You absolutely should get pre-approved or pre-qualified before looking at properties.
Your mortgage agent will not only tell you how much you qualify for, but if they’re worth their weight in gold, they’ll also guide you about:
Typically the lending part is the most document-heavy and tedious piece of the journey. Everyone’s situation is unique but here are the general documents that lenders look for:
3 months banks statements of where the money is coming from. If there are larger transfers, they will ask about them and likely need to “follow the money”. For Investment properties, lenders will need to see 20% down payment,
If you already own a property, you will need to show documents like mortgage statements, rental leases if applicable, and property taxes
Before you find “the one” you need to start looking at investment properties.
A lot of them.
And all different kinds too.
Why?
If you don’t explore your options it’s difficult to know what opportunities exist in the market. You may find something that is good, when the next property over is great. Or worse yet, you may find a rental property that has a lot of red flags, but because you don’t yet have the eyes for it, you may miss those red flags. Once you’ve seen a hundred properties you will get a “feeling” (or intuition if you’re a robot like me) for what to look for.
Red flags will help you filter out properties that will cost you more headache than the return you make.
Also, take notes. Lot’s of notes.
You want to take note of everything at first. Condition of the property and condition of each part of the property. For example, the roof, foundation, dry wall, windows, etc. You want to look for leaks, mold, anything broken, anything that is too old or outdated and might need replacing or repairing.
Take notes about the area and demographic you see – what is demographic like for employment? How run down is the area / community? What do the houses in the area look like?
Take notes about any numbers you find. Average rents, average prices, costs of renovations, do house prices typically go up in the area over time?
I suggest at this stage speaking with a realtor or two as well in the areas you’re interested in investing. And I highly suggest you speaking with an investor focused realtor. They will be able to give you the proper data and insights on the properties you’re looking at. Generally, the realtors will have access to comparable data, rental data, after repair values, and since they’ve likely seen 10x as many properties their “eye” will be developed to spot red flags.
If you’re looking in BC, a great tool to help with this is zealty.ca . Zealty is basically a public version of the Realtor’s MLS. They let you analyze properties, statistics, comparable properties, etc. It’s a fantastic tool for running number on investment properties.
Now that you’ve seen a ton of properties, let’s get into how to look at the numbers.
Real estate is an amazing investment for many reasons, and one of the main ones is… there’s just so many strategies and ways to make money.
From BRRRR, to Short term rentals, to developments. The possibilities are actually endless.
Your first investment property is more than likely a buy and hold property – which is relatively straight forward. And that’s a good thing. You will get a firm understanding of how things work this way.
** Note: if you are doing a more complex strategy, most of this guide will still be useful. I have another guide on the separate strategies which you can find here. **
What we’re looking for in a buy and hold property is a mix of rental income and appreciation. For the first property, it’s generally best to look for a strong cash flowing property. There’s a few reasons for this:
“If you need to use a computer or calculator to figure it out you shouldn’t invest in it.” -Warren Buffett
This is all you really need when you are in the filtering stage.
VERY important note here – do your own analysis. I am not telling you to make your investment decisions based on this video alone. You are solely responsible for the outcomes of investing.
This is a rule of thumb for very quickly looking at properties.
It’s a quick and dirty number.
It states that a property cashflows IF monthly gross rent is greater than or equal to 1% of the purchase price.
For example if you buy a property for $350,000 and the monthly gross rent is $3,700, then the rent is 1.05% of the purchase price so this rule is valid.
Now, an important note here… in Canada, there are not that many markets that this 1% rule applies. So I wouldn’t say that this number is a must for your investment to be good. This rule comes from the USA where there are many more markets that cash flow.
In Canada, I would suggest looking at properties above the 0.75% mark.
** usually used to look at a market as a whole, but still useful for individual properties too **
GRM = Total Price / Total Annual Rent
Let’s say you find a property that is $500,000 to buy. The rent is $2,500 / mo or $30,000 / yr. Then the GRM is 16.6.
This let’s you compare two markets or even two properties against each other. The lower the GRM the better the gross income.
This asks, how much cash will you get for the amount of cash you put into the investment.
This is CoC = NIAF / Cash invested
NIAF is the net income after financing, in other words, the net cash flow of the property
Cash invested is the down payment, renovation costs, repairs, etc.
If you get $200 / mo in cash flow from a property and you put $20,000 in for down payment then you are getting 12% cash flow per year from the capital you put in.
Keep in mind, this metric does not take into account the other “4 ways to win” with real estate investing!
You should understand where the market is going. Typically real estate appreciates in price in North America.
One of the main factors as to why wealth people invest in real estate is because you can leverage this inflation by borrowing 80% of the asset. That means you 5x the return on equity you put in.
If you find a market that appreciates 3% per year, your equity in that asset actually multiples by 5 because you borrowed 80%. That means you’ve now seen a 15% increase in your return on investment (ROI)
I don’t suggest buying your first investment property without a realtor.
95% of the time, nothing bad will happen if you don’t have a realtor. But the other 5% can cause huge disasters. Keep in mind, you are buying an asset potentially worth half a million or more. There are legal contracts that you can get sued over. If you don’t go through the contracts and have a firm understanding of the conditions you are putting into the contract, you could be in hot water.
Your realtor will also be able to negotiate for you. Not just on price but on other terms like closing periods, add ons, repairs, and other things.
Some key things to note here:
There are 2 very important conditions to offers that you need to consider:
You’ve got the accepted offer! Now what?
This used to be a term that only institutional investors used. Now it’s common place.
Due diligence is the act of digging into the property and understanding all of the risks. You absolutely MUST get an inspection on the property. This isn’t for anyone else. It’s for you. The inspection should tell you all of the problems with the property and what needs repairs, maintenance, and are hidden skeletons.
During this stage you will also get the financing approval started. Send your accepted offer and other documents to the mortgage agent for approval and select your mortgage options. Select carefully because there are terms that can be very important to you as an investor. Some key terms are:
You will also want to get started with a real estate lawyer or notary for the conveyancing (basically they take care of the mortgage stuff, money stuff, and legal documents).
Lawyers and notaries are a bit different.
Notaries are typically able to do the signing and title registration – but they usually can’t advise on legal issues. That means if something comes up, they may or may not be able to take it on.
That’s why for purchases I generally suggest paying the extra money. If anything comes up then you want to make sure you are taken care of.
You also may need to talk to contractors for renovations, repairs, etc. Don’t just use Google here. There are a lot of companies that are great at showing up on first page but aren’t necessarily the best company to work with. Great contractors are usually word of mouth. Ask your realtor, ask a real estate group, ask friends, etc. If you can’t find anyone, then try Google.
Once the property is closed, you will want to complete any renovations or repairs needed before renting it out.
Some cases, you just need to clean and do paint.
In other cases you may have some extensive renovations to do before you rent the property out.
The key here is that you do not want to over renovate or under renovate. Remember: you are renting this property out to a tenant. Think about who the tenant will be – if they aren’t a luxury client, don’t use luxury appliances. If they are a luxury client, then use luxury appliances.
Tip 1: it can be helpful to buy some things in bulk and store them.This can be exceptionally useful if there’s a shed or storage at the property. Things like: light bulbs, paint, drywall material, etc.
Tip 2: if you are self managing it can be helpful to know how to do odd jobs to save money on your first rental. But keep in mind, the more work you do, the less passive of an investment it will be.
Tip 3: try to find sturdy materials that can withstand wear and tear
Tip 4: make sure you check the contractors work through the process. Fly-by-nighters cut corners. I used to be in general contracting and I’ve seen it so many times. The old school guys that build things to last centuries are great.
Renting out the property is a job in itself. This can either be done by yourself as a “self managed rental” or for a fee there are companies out there that will take care of the rent for you. These are called property management companies.
There are many different types of leases out there and many different terms that you can use. More importantly, each municipality has different tenancy bylaws and so it is key to read into them and understand what you can and can’t do as a landlord.
If you are wanting to AirBnB the property or do a short term rental, there are likely different rules as well. Your municipality will have this on their public site.
The choice between short term rentals and long term rentals usually depends on the market you are investing in. Keep in mind that short term rentals is more profitable but is closer to running a business as opposed to passive investing.
That’s it for now!
These are the 8 main steps to buying your first rental property.
Each stage could have been a post on their own – which they will when I write them up. But for a guide to get you started this is going to get you 80% of the way there.
The cool thing about real estate investing is what happens in 30 years. Once the mortgages are paid off, you will have added a massive income to your retirement fund. Real estate is the ultimate pension plan. It’s scaleable, it’s real assets, and you can do it all while you work your day job!
Yours in mortgages,
Mike Browne
MBrowneMortgages
Mortgage Agent at The Green Mortgage Team
P.S. If you have any financing questions or you want to get pre-qualified for the start of your real estate journey, schedule a call with me:
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