Picking the right properties is always a challenge. In order for you to make the best choice possible, I outline the important concepts to consider and questions to ask yourself.
A good investor should be taking the time to do thorough research on any kind of investments - like you are doing now!
Make sure you take a deeper-than-deep market research. Even if you have a particular area in mind, check to see if there may be more profit to be made in other areas. You might be thinking “Hey these 3 neighborhoods are doing great, I want to invest there!“.
But the whole city could be appreciating and those 3 neighborhoods are relative average. You may not know because you haven’t done your homework.
The Point: look around even a little outside of what you are looking for. That way, you will be able to gain a wider understanding of the market.
Is the property rentable? Are there lots of demand? Is there a lot of competition? What kind of renter are you looking for? Is this the right area to attract students or professionals? Is the rental price here able to cover the mortgage, taxes, and maintenance?
Just some questions to ask yourself…
Some governments have policies to limit the rental price appreciations. Cough coughquebeccough. This is important to note, because how would you prepare against rising levels of expenses? The amount you charge for rent has to be able to cover the mortgage, property taxes, maintenance and repairs, and still give you a profit to make it all worth it.
Okay so you researched the market. What about the area?
Do you want to attract families? Because schools matter a lot to families with dependents. A property near a good school make it a very ideal property for many families. However, it will also raise up your property taxes.
Check if your neighborhood has a high crime rate, because nobody wants that.
Similar to what is mentioned for schools, but property taxes will vary across neighborhoods. This can easily eat into your profits, so take good note of this. While it makes sense to think that highly-valued properties in good neighbourhoods have high taxes, it doesn’t mean they are always profitable.
Some neighbourhoods are more expensive than others. Again, this can lead to a difference in property taxes, but also indicate a higher cost of expenses and maintenance. The higher the property value, the higher the maintenance fee. Well, not always of course but always look out for this. You want to make sure you can bring in enough cashflow to pay off all your expenses and still have a profit.
Who do you want to attract as a renter? Students? Young professionals? Families?
Or maybe you care more about the type of property. That’s fine too.
First, let’s discuss single-family and multi-family units.
Single-family units are properties with just 1 unit. Multi-family units have multiple. Both are great choices, with their pros and cons.
Single-family properties will give you less of a headache. It’s easier to get financing, sell, maintain, and most of all you don’t have multiple tenants complaining and fighting with each other.
Multi-family properties, like duplex / triplexes for example, allow you to consolidate some of the expenses, like yardwork, snow removal, trash, etc. It’s a lot harder to get financing for this, and this is probably out of the scope for junior investors, but it’s a great way to rack up cashflow and accelerate your real estate portfolio.
Now let’s consider students and young professionals versus families.
These clients can be great for your properties that are in densely-populated areas. Universities can attract thousands of prospective tenants within a small area, boosting housing demand. A complex of offices can house dozens of companies, which can employ hundreds of employees, many of which could be young and want to live nearby. Universities and downtown are typically full of these clients. Take the case of Montreal: there are 4 universities located within downtown, which makes it such a prime location for rental properties. There is a growing and consistent supply of students coming in every year, which really boosts housing demands.
Higher demands are followed by higher rent. This is limited for already-existing properties by the Régie du logement, but new construction units get to price their rents at whatever price they want. For example, you will be able to find older studios right now for $800-900, but studios on newer condos are priced $1400 per month. Go check for yourself.
These clients typically look for smaller housing units, like condos, and aren’t necessary after bigger units like detached houses.
The downside of students and young professionals is that they look for shorter leases. They are more susceptible to moving for career-releated ambitions. Students, especially those that come for internships, may not even stay at a city for a full year. This results in more time spent on the management of the property to look for prospective tenants.
Family clients are great because they are very stable. They typically look for longer leases and are looking to settle down. The long-term agreements help you minimize the time spent on finding prospective tenants for your property. Also, families are typically more mature and reponsible tenants, which helps you minimize management.
Families are usually located further away from the densely-populated areas like downtown, and seek for family-suitable homes like detached, semi-detached, or town houses. They can be your ideal tenant if you have a house in an urban neighbourhood. Plus, they are more likely to rent your entire property whereas students would be looking to rent individual units, like single bedrooms.
I hope this helps. Remember to do your work and do a thorough check. Once you know enough, you will be able to make decisions with confidence.
Happy investing :)