Investing in a Second
Property
If you're thinking about buying a piece of real estate as an
investment property, market conditions are definitely in your
favour. While the resale housing market has seen a tremendous
amount of activity from first-time buyers in the past year, it's
also a perfect time for existing homeowners to invest in secondary
residential properties.
With record-low interest rates and significantly lower prices
it's hard to go wrong - unless, of course you lack the financial
means to make the investment. After all, you have to be ready
to meet all the obligations that come with owning more than
your principal property.
For instance, keep in mind that if you intend to rent out the
second property, you'll also have to be prepared to deal with
tenants and handle maintenance costs.
Leverage
Secondary home ownership is an attractive
investment option because it gives you even more leverage than you
have with your principal residence. Leverage is when a
relatively small amount of your money controls a much larger asset -
like a property.
The more leveraged you are, the greater the financial return on
your down payment becomes if the value of your property
increases. There are very few other investments which can be
purchased with such a small percentage of your own money.
For instance, let's say you acquire a second property for
$100,000, with a $15,000 down payment, and during the first year
that you own it, the property increases by a value of three per cent
for a $3,000 gain. As a result, the return on your down payment of
$15,000 is 20 per cent - $3,000 divided by $15,000.
Other Investments
By comparison, let's say you were to
buy a term investment of $100,000 (in cash) for one year and it
increased by $8,000 over the course of the first year. Since it cost
you $100,000 in cash to buy it, the return on your investment is
only eight per cent before taxes. Obviously, leveraging is a
powerful way to make your money work for you.
Getting Financing
You should be aware that many lenders
place non-owner occupied deals in the high-risk category and
it's not that unusual to find lenders who will not finance rental
units at all - or those who will only finance them if they are
insured.
Obviously, lenders will want to know whether the property will
carry itself. (Is there sufficient rent to cover the mortgage
payment?)
Don't make the mistake of assuming that a rental income of $500
per month will carry a mortgage payment of $500 per month. Only
a portion of the rent is used to pay the mortgage; the remainder
must cover taxes, maintenance, vacancy, bad debt and expenses.
(Many inexperienced purchasers think that owning rental
properties will allow them to "get rich quickly" and when this does
not happen, the owner becomes disillusioned and loses interest in
the property.)
Costs
You should also be aware that the cost of
obtaining a mortgage (for legal and appraisal fees) on a non-owner
occupied property can be higher than the cost of obtaining a
mortgage on an owner-occupied property, when more than one unit -
such as a duplex or triplex is involved.
Interest rates charged on rental properties might also be higher
because some lenders view these properties as being a higher
risk.
As mentioned above, the main responsibility of having a second
property is being able to carry it financially. And if you're like
most people, you'll probably have to rent it to someone as a
result.
This is also a great deal of responsibility because you will have
to maintain the property in addition to your own principal
residence, and you'll be responsible for finding tenants who you
trust and feel comfortable with.
Some parents with grown children ready to go off to university or
college choose to purchase secondary properties for their offspring
to live in while they attend school. This gives them an
excellent investment and they are assured that the occupants will
take good care of the home.
If you'd like more information about purchasing a second
property, consult a REALTOR.
Mississauga Real Estate
Mississauga is Canada's 5th largest city and the growth continues. In the years to come, Mississauga real estate will only become more valued. The congestion, crime, air pollution, high rents, high taxes, and lack of recreational parkland make life in the big city less desirable. Mississauga has clean, open space, plenty of shopping, good schools, and recreational opportunities. And it's no too far from Toronto should you want to enjoy the great things Toronto has to offer. There's never been a better time to take a look at Mississauga real estate listings for a home or condo that fits your lifestyle.
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