Today I share with you an article written by Scott McGillivray for Realtor.ca.
When it comes to investment properties, there’s a lot to take into consideration. Aside from the financial and tax responsibilities, finding an investment property that makes sense for your situation requires some serious soul-searching.
It’s best to take a look at some of the pros and cons before getting into the market, as each type comes with its own set. However, there are some pros and cons that apply to every type of investment property. One pro, of course, is you’ll have a second income—always a plus. The biggest con for any investment property is you’re not guaranteed to have tenants at all times, which means that second income may not be consistent. As the landlord you’re also on the hook for any repairs or issues that need to be dealt with.
Let’s walk through some of the other pros and cons of the most common investment properties to see which one suits you best.
Duplexes
Duplexes are popular choices for investors looking to be close to their property—really close. They can also be great family investments, allowing different generations to live under the same roof but with private dwelling spaces. There are additional tax deductions available to you as well when you live on the property! Typically, work done to common spaces such as your yard, roof, or adjoining wall can be written off at 50% if the duplex is owner-occupied. Some people also consider the proximity to your investment to be a pro. If issues arise you can deal with them in a timely manner, plus you can keep an eye on how your tenants are treating the space. If you’re not living in the space and are instead choosing to rent out each portion of the duplex, the biggest advantage is collecting that additional rent.
On the flip side, duplexes can be more expensive to purchase, which puts you at a bigger risk if you can’t find tenants. It can also be harder in general to find tenants for duplexes, as more and more people are looking for privacy and larger spaces. Living attached to your tenants, albeit in a designated space, can also be a bit strange depending on who they are. If you’re not choosing to live in the duplex, you’ll have double the tenants to find—and double the repairs to deal with.
Single family homes
Over the last 18 months, single-family homes have been in demand as buying trends have changed. With an increase in working and schooling from home, the need for space has become paramount. Because of this shift, single-family homes could potentially be more attractive as investment properties.
Let’s start with the pros! In comparison to a full duplex, single-family homes are typically less expensive (depending on the home), which could see higher gains in your net income. Plus, the market for single-family homes is hot right now, meaning if you need or want to sell your property you’ll likely have an easier time doing so. From a rental perspective, single-family homes tend to attract longer-term tenants, providing a sense of stability to your financial situation.
In terms of cons, there’s one big one that stands out. Owning a single-family home as an investment property means a lower return on investment the longer it sits vacant. The costs to maintain a single-family home can be higher, and when the house sits empty those costs can quickly add up.
Pre-construction
With new developments popping up all over the country, buying pre-construction properties (either homes, condos, or apartments) can seem enticing. It’s easy to find the big pros for this type of investment. The customization allows you to create a space potential renters will find appealing. When you choose fixtures and finishes for a new construction home, you can find options that are agreeable to most people without breaking the bank. Plus, newer builds are more attractive to renters since they know things are in good working order and there likely won’t be any repairs needed in the near future.
That being said, pre-construction comes with a unique set of cons some people just don’t want to deal with. These cons can really be summed up into two words: the unknown. Your build could be unexpectedly delayed, leaving you to navigate these financial waters without additional income. Your down payment could be up to 30% up front for a new build, and it may not be complete for up to two years, which means you’ll be waiting a while to recoup that money as well as start making any profits. You should always consider the type of tenant you’re looking for (students, young professionals, growing families, etc.) so you can assess and align the property and neighbourhood with what they’ll need and want.
Basement apartments
Basement apartments have come a long way in the last 10 years or so! They can be spacious, private, cost-effective, exactly what young professionals are looking for as they save to buy their own home. Having a basement apartment in your home shares a lot of the same pros (and cons!) as duplexes. They help pay the mortgage of the home you’re in and you can write off a lot of the repairs since the space is owner-occupied. But it also means you’re living in the same home as your tenants and you lose a portion of your home.
There are two additional cons to consider when it comes to basement apartments, though. The biggest one comes if you’re adding a basement apartment to your home vs. buying a home that already has one built. Adding a basement apartment requires money up front to ensure the space is up to code, not to mention any regional requirements (i.e. permits, inspections). You also have to consider things like parking for your tenants, how they’ll get into their portion of the home, etc. When it comes time to sell your home, not having a “typical” basement could affect your resale value. You eliminate the group of people who aren’t looking to purchase an investment property, which could make the home harder to sell.
Something to consider when it comes to basement apartments is actually living in it yourself! I got my start in real estate by purchasing a home with a basement apartment and renting out the main floor while I lived in the basement apartment. I was able to charge a higher rent, allowing me to pay off the mortgage more quickly and ultimately make my way up the real estate ladder. If you’re going to purchase a home with a basement apartment, or are considering adding one to your current home, I really do recommend living in the basement portion yourself if possible!
Identifying risk factors
As with any investment, you need to identify the potential risks. There are four main risks to consider before purchasing an investment property.
Financial
You need to spend money to make money, but owning an investment property does come with some financial risks. If you can’t find tenants for an extended period of time, you’ll need to cover the mortgage out of your primary income, which may leave things a little tight.
Property location
Do some research on the neighbourhood to see if there’s a high demand for rentals in the area. If not, you may struggle to find people willing to commit to a lease. It’s also a good idea to ask a REALTOR® about the projected evolution of the neighbourhood. If it’s an up-and-coming spot, you may find yourself getting a great deal! Other things to consider include transit access, proximity to schools and daycare, nearby amenities, and access to the highway.
Age of the property
Older homes can be appealing for a vintage look, but they may end up causing you more issues than they’re worth. Homes over a certain age will likely need more frequent (and more expensive) repairs, which will ultimately cut into your profits.
The real estate market
No matter when you buy, this will always be an important thing to consider. The real estate market is unpredictable, which means any time you enter the market there are a lot of factors to consider. However, when you’re buying an investment property, you really want to be sure you’re getting a good deal so your profit margins can be higher. You’ll need to look at it as a longer-term investment and consider how it will affect you over a course of years, not months.
Investment properties can be a great way to earn a secondary income while getting yourself onto the property ladder. There are plenty of different property types you can find, each with their own set of pros and cons, but one thing remains constant: owning an investment property is a commitment! It’s not something you can do on a whim, which is why doing your research is the most important first step you can take.
