4 Mistakes to Avoid When Buying an Investment Property

Whether you’re looking to purchase your first home or are looking to build a portfolio, owning one or more properties is one of the most rewarding ways to passively build your wealth. Imagine being able to live the lifestyle you’ve always dreamed of. To have the financial freedom to travel the world, to spend more time with your family, to pursue your passions without being tied to your 9-5. All while securing a legacy for the next generation of your family.

It’s a dream that seems to be only feasible for the already wealthy, or financially comfortable. The search for the perfect property, navigating through countless financial and legal hurdles, not to mention the day-to-day responsibilities of being a landlord. It’s easy to feel overwhelmed and discouraged.

Fortunately, building your property portfolio doesn’t have to be as challenging as you might first think. Not when you know the mistakes to avoid. You can break through that uncertainty and achieve your financial goals when you have the right people and systems in place to help you get there.

But first…

IS IT THE RIGHT TIME TO INVEST IN VANCOUVER PROPERTY?

While it’s impossible to time the market perfectly, there is decades of historical data at our disposal that provides direction on how we should think. The Vancouver real estate market has a reputation for significant growth over the last twenty years, and the numbers speak to that:

Year	Residential Benchmark	% change previous decade
2002	$354,000
2012	$658,600	+86.5%
2022	$1,263,500	+87.7%

With prices getting so high, many homebuyers feel priced out of the market. However, things started to change at the start of 2023, presenting a prime opportunity for investors.

In January 2023 the benchmark price for all residential properties dipped by 6.6% compared to January 2022. Meanwhile, the average rents for January 2023 were up 24% in Vancouver, 33% in Burnaby, and 20% in Surrey/Langley (source Paul Danison rent.ca)

Even with interest rates being what they are…when you look at the whole picture…the right moment is now.

Don’t wait to buy real estate. Buy real estate and wait.

What if in 2032 the residential benchmark price increases by another 85%? How much wealth will you have accumulated if you buy this year?

Buying an investment/rental property requires a slightly different approach when it comes to search parameters. The following points will help to ensure you are buying a profitable investment property:

1 – Identify a hidden gem property

2 – Understand City Development plans to asses risks/opportunities

3 – Learn and follow Vancouver’s Rental Regulations for you role as a landlord

4 – Stay on top of vacancy rates to keep your property profitable

5 – Get familiar with Property taxes and what you need to know to save money

6 – Have an inspection and regular maintenance plan to protect your investment

7 – Location, location, location. But make it all about transport

8 – Strata living, rules and regulations as a property investor

This list may seem like obvious research and due diligence, yet so many investors fail to grow their portfolio. Why? They make mistakes.

4 MISTAKES TO AVOID WHEN BUYING AN INVESTMENT PROPERTY

Mistake #1: Investing in properties that produce a negative cash flow

It’s crucial to ensure that the property you’re investing in generates positive cash flow, or at the very least breaking even. Positive cash flow means that the property’s income exceeds its expenses. This allows you to generate a profit.

Analyze potential rental income. Before investing in a property, make sure you are familiar with the potential rental income. This will help you calculate if you can generate a positive cash flow.

• Research the local rental market to give you an idea of how much rent you can expect to charge for your property.
• Estimate the occupancy rate by looking at averages for similar properties in the area. This will help determine how often you can expect the property to be rented out.
• Calculate the monthly rental income. Multiply the rent by the occupancy rate. For example, if you estimate charging $2,000 per month in rent and you expect the property to be rented out 90% of the time, your monthly rental income would be $1,800 (2,000 x 0.9).

Consider property taxes. Remember that the taxes you pay on a property are a significant expense as a real estate investor. Make sure to factor those property taxes when analyzing the potential cash flow of the property.

Factor in maintenance costs. Maintenance costs can eat into your cash flow, especially any unexpected ones. When evaluating a property, make sure to consider the costs of routine maintenance with a slush/contingency fund for repairs and upgrades.

Consider all expenses. It’s essential to consider all expenses associated with a property before making an investment. There are fixed and variable costs to factor in as well as anticipatory annual rate increases. For example management fees will more than likely increase every year, especially as buildings begin to age and warranties expire.

As a best practice you can overestimate your expenses as you prepare for making an investment decision. This will provide a comfortable margin or buffer zone to keep you in a positive cash flow position.

Mistake #2: Investing in buildings that don’t have a strong reputation

Investing in a property developed by a developer with a poor reputation, or a building that is in poor condition can be a risky move as a real estate investor.

Developer reputation. The reputation of the developer (builder) is a crucial factor. Research the developer’s track record, including past projects, financial stability, any legal issues they may have faced, and consumer forums. Look past the fancy marketing and latest design trends and focus on quality workmanship to protect the longevity of your investment.

Condition of the building. The condition of the building is also an important factor to consider before making an investment. A building that has not been well maintained or is in poor condition may require significant renovations, which can be costly and impact the return on investment. This is where the home inspection will be invaluable in providing this information.

Management reputation. Even the most structurally sound building will deteriorate over time if it is not properly maintained. You may need to invest in reputation management to make significant improvements to the property to rectify this, which can be very costly. If you’re looking at a strata-title property make sure to research the property management company’s reputation and strata documents and carefully evaluate any potential risks/rewards before making an investment.

Mistake #3: Underestimating renovation costs

Underestimating renovation costs is a common mistake that real investors make. Here are some factors to consider to avoid making that mistake yourself:

Scope of renovation. Before investing in a property, consider the scope of any renovation work that needs to be done. Understanding the difference between cosmetic work (painting, updating fixtures) and more extensive renovations (structural changes) will help you estimate your costs more accurately.

Contractor quotes. If you don’t already know of a reputable contractor whom you trust, make sure to get multiple quotes before starting any work. Compare these quotes, ask to see a portfolio of previous work, and check Google reviews. It’s important to choose a contractor that has experience working on similar projects and  can provide an accurate estimate of the costs.

Hidden costs. Renovation costs can quickly add up, especially if there are unexpected issues that arise during the project. These hidden costs can include:

• Electrical and plumbing upgrades
• Structural repairs
• Permit fees
• Material and labour costs

It’s a best practice to build in a buffer (10-20%) for these hidden costs when estimating renovation costs.

Market value. Consider the potential market value of the property after completing renovations. Will the renovation increase the property’s value enough to justify the cost of the renovation?

Understanding renovation costs can have a substantial impact on real estate investment profitability. By understanding the costs that impact the bottom line, along with good planning and management, it is possible to invest in a property that requires renovation and generate a strong return on investment.

Mistake #4: Overpaying for a property

Overpaying for a property is perhaps the most common mistake real estate investors can make, especially in a competitive market. Here are some tools and metrics to help determine if a property is worth investing in.

1. The Cap Rate Calculator: A fantastic way to compare potential investments. Just remember the formula: Cap Rate = (Net Operating Income / Property’s Purchase Price) x 100. Aim for a cap rate of 4-6% or higher for a solid return on investment. Here’s a handy calculator: https://www.omnicalculator.com/finance/cap-rate
   
2. The Cash Flow Analysis: Make sure you’re not sinking your hard-earned cash into a black hole by assessing your cash flow. Subtract your monthly expenses (mortgage, taxes, insurance, etc.) from your monthly rental income. Positive cash flow = happy investor! https://www.calculator.net/rental-property-calculator.html
   
3. The Comparative Market Analysis (CMA): Compare similar properties in the area that have recently sold or are currently listed to estimate the true value of your target property. You can use websites like Realtor.ca, REW.ca, and Zolo.ca to find comparable listings.

4. Calculate the Gross Rent Multiplier (GRM): The GRM is the ratio of the price of a real estate investment to its annual rental income before accounting for expenses. It is calculated by dividing the purchase price of the property by the annual rental income. The equation results in the estimated number of years the property would take to pay for itself in gross received rent.

For example, if the purchase price of the property is $600,000 and the annual rental income is $30,000, the GRM would be 20 ($600,000 / $30,000).

These formulas are merely starting points, and should be used in conjunction with obtaining data from professional sources. It’s also important to consider your investment goals and criteria when evaluating a property to ensure it aligns with your personal goals and strategy.

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THE BIGGEST MISTAKE OF ALL

Investing in property isn’t as simple as moving a couch. There are many factors to consider, as mistakes can cost you thousands of dollars and set you back years in your journey to achieve your dream.

But just like moving a heavy piece of furniture alone, it’s better to seek assistance rather than risk injury or failure. Perhaps that’s the biggest mistake of all; going it alone.

That’s why seeking expert advice from an experienced Realtor is crucial. Why risk missing out on a great opportunity and setting yourself up for financial success when you can tap into the expertise, network, and proven systems to breakthrough and create the legacy you’ve always dreamed of?

Allow me to show you what could be possible for you!

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