The great thing about investing in property is that you can buy according to your financial goals and personal lifestyle needs – present and future.
A good investment will produce returns in the form of cash flow, equity build-up as your loan is paid off, property appreciation and structuring and tax benefits. While all of these are important, to get the most out of your real estate investment, you really need to think about what it is you’re trying to achieve. This will help inform the decision on the kind of property or properties you will buy and the kind of loan product you need.
An investor wanting to supplement their retirement income, for example, would be more likely to focus on cash flow, one who has already earned a decent income, may look to the tax benefits, while a newer investor will be advised to look more towards equity and property appreciation.
It’s important to clarify your goals before embarking on building a property portfolio and know what you are able to do financially in order to meet your needs. The actual property price aside – can you afford it? – there are a number of other considerations. How long do you want to stay put? What is your debt to income ratio? Can you get a bank mortgage? What is the local real estate market like? What’s the economic outlook? What level of financial risk are you ready to take?
If you’re borrowing money to buy a property – which many investors believe is a good strategy when it comes to real estate – keep in mind that this is a long-term commitment. You may be paying your mortgage for the next 30 years and your expenses are likely to rise over that time. Whether borrowing to invest is the right strategy really depends on your long-term objectives, says Scott Irving, Carrick Property General Manager.
“It might make sense for a younger investor looking to leverage an investment account to fund their real estate purchase which is part of their long-term financial plan. But any investor looking to leverage their investment portfolio needs to ensure the strategy meets their overall financial goals and tolerance for risk,” he adds.
You may find a few years after taking out a mortgage that your cash flow has increased and you are able to either make additional payments into your mortgage (this can reduce the total amount of interest paid for the remainder of the loan and therefore bring the payoff date much closer) or refinance your loan to a shorter-term mortgage, so that the amount of principal reduction paid with each payment increases. This can have a big impact on your cash flow. Do however check that your loan doesn’t have a prepayment penalty.
Regarding the structuring and tax benefits, your best move is to consult the experts prior to buying anything. “The answer might be simple, but sometimes you have to absorb a little bit of complexity to get to the simple answer,” says Louis Venter, Fiduciary Specialist at Carrick Consult. “When it comes to bricks and mortar, we are introduced to the law of the land. There are no cookie cutters – it can be the same transaction with the same participants, but in a different jurisdiction and the answer will change. Depending on the jurisdiction, you might want to structure things differently.”