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For first-time investors, the world of real estate can seem daunting. Should you focus on buying rental properties, wholesaling, fix-and-flips or perhaps another means of investment? Out of all the options available, there is one that new investors tend to reliably turn to the majority of the time, buy and hold investing.
Buy and hold investing is the art of buying and renting out properties. This method is heralded for its ability to generate a consistent cash flow from each property you rent out every single month. This is drastically different than methods like fix-and-flip investing or wholesaling because you are aiming to hold on to that property for a long time.
Buy and Hold Explained
In essence the buy and hold strategy is when an investor purchases a residential property they plan to own for an extended period of time. This period traditionally ranges from five to 30 years. They take that property and rent it out to tenants in order to develop a steady cash flow.
As the property increases in value, the investor is then able to raise the rent on the property. In Ontario, rent increases are limited to a specific percentage determined by the Ontario Ministry of Municipal Affairs each year for existing leases on residential units made or occupied prior to November 15, 2018. When a lease agreement ends, the property owner is allowed to raise the rent for the next tenant beyond limitation set by the government.
The income made from a rental property is called ‘cashflow’. The cashflow on a property should exceed the monthly mortgage payments as well as any maintenance or insurance costs you are liable for as the property owner, so be sure to figure out your rent accordingly. As well, you will almost certainly want to make a profit on the property in order to enjoy the wealth you are generating for yourself.
The Advantages of Buy and Hold Investing
The buy and hold strategy has plenty of advantages that will help you grow your wealth in both the short and long terms.
- In the short term, you have a consistent monthly cashflow coming from your tenanted rental properties.
- In the long term, your property is going to appreciate, and you will be able to make a sizable profit if you decide to sell.
Additionally, the cashflow generated through buy and hold investing allows you to save up for new properties more quickly, allow you to grow your portfolio off the wealth you have built in each property you buy. You are also able to leverage the equity you have created in your properties to buy even more properties.
Renting out a property can also help you pay down the principal (the value of the property still owed) much faster. This not only builds equity, but it can save you money on interest payments because you are owing for a shorter period of time.
Discover How To Buy Unlimited Rental Properties With This Step By Step Guide
What to Consider Before Investing in a Buy and Hold
Before you make any investment, you need to make sure you have done your research and plan ahead. Here are a few things you should consider before buying property.
It is very important to determine an estimate of all the expenses you can expect a property to have. That means getting estimates for mortgage payments, insurance costs, immediate and long-term maintenance costs. While these costs can be covered by your rent, it is also important to make sure you can afford to cover them in the event your property is left vacant for any period of time to avoid foreclosure.
While you are getting started, it may be feasible for you to do all of your own property management. However, that is not always the case. If you are investing while maintaining a full-time job, or investing out of town, you may need to consider property management options right away. Additionally, if you buy larger multi-unit properties or multiple properties, you may need a property manager, or management company to maintain your investments because it is not humanly possible for you to do it all by yourself.
Changing Property Values
While you can typically expect a property to appreciate over time, the market is still full of highs and lows that can not always be predicted. Unfortunately, some properties and areas may decrease in value and fail to produce a profit, or worse lose you money when it comes time to sell. To avoid this, you should look at the history of the property values in an area you wish to invest in. As well, when investing in multiple properties, you may wish to invest in multiple regions or neighbourhoods to increase your overall security.
As well, you may find yourself in an unexpected financial emergency in the future and forced to sell a property at a suboptimal time or price. So, try to prevent becoming wholly dependent on the profit you are making from your investments.
Not all properties are created equally. Some homes are located in better neighbourhoods with wider profit margins and higher rates of appreciation. On top of that, certain locations are simply in higher demand and will be much easier to rent from due to the surplus of tenants to choose from.
Understanding The Tax Benefits
In Canada, there are a wide variety of tax deductions you can claim on your buy and hold rental properties if you qualify such as:
- Advertising: The Canadian government allows you to deduct any advertising fees for your properties. This includes advertising in Canadian newspapers, on television and radio stations.
- Professional and Legal Fees: You are able to deduct fees for legal services such as collecting overdue rent and preparing leases.
- Repairs and Maintenance: You can deduct the labour and material costs for any minor repairs and maintenance completed on an income property, except for your own labour.
- Utilities: You can deduct utility costs from your taxes in the event that your rental agreement specifies you pay those fees on your rental units.
- And More
Financing Your Investments
Most investors cannot afford to outright purchase a buy and hold investment property when they are starting out. Fortunately, there are plenty of options for financing such as:
- Hard Money Lenders
- Joint Venture Agreements
- Private Lenders
- Traditional Mortgages
Each of these options have their own pros and cons. To weigh your options and find a financing option that is best for you, visit LendCity.ca or call 519-960-0370 and book a consultation today. Alternatively, click the link below to book a free strategy call with our team at LendCity.