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Why You Should Buy an Investment Property and What to Look for

Guide to Buying an Investment Property

Buying a rental property can be a great way to invest your money. The cash flow from a rental property can provide you with a reliable income stream, and the property itself can appreciate in value, making it an ideal long-term investment.

Here are some reasons why you should consider investing in a rental property:

  • Easier to obtain a loan – banks are more keen to loan money for an investment in real estate because the returns are more likely to occur than those for other investment vehicles, such as stocks and bonds.
  • High return on investment (ROI) – real estate is considered a “high-performing asset” as the ROI is typically larger than the ones on other assets.
  • Great for diversification – real estate is a great asset to purchase to diversify your investment portfolio, especially when stocks, bonds, GICs, etc, are lagging. Real estate also keeps good pace with inflation, and it’s quite stable and reliable in periods of economic volatility.
  • A form of passive income – Owning real estate generally comes with fewer day-to-day responsibilities. Once you’re set up, there’s not much that you need to do to keep it running.

If you’re thinking an investment in a rental property is a great choice for you, take the time to do the research to know what you’re getting into – you want to gain an understanding of what to look for.

Cash flow and investment return

Ensure you’re purchasing property that will function as an asset, not a liability. You can achieve this by making a large down payment, which will result in fewer mortgage expenses. To figure out whether a property is a solid investment, calculate the cap rate. The cap rate is a rate used in the real estate industry to evaluate an investment property. Good cap rates typically fall between 4% and 10%, depending on the property.

New construction vs used

Do you want to spend time and money on renovations? Unless you have experience renovating properties, you’re better off choosing a rent-ready property.

Renter profile

When searching for a rental property to purchase, keep in mind that type of renter you’re targeting like families, retirees, or college students. Apartments are generally more suitable for students or retirees looking to downsize while houses are preferred by families.

Location

Location is key when it comes to selecting the optimal rental property. Conduct research on neighborhoods and the types of tenants that predominantly rent there. You’ll also want to examine things like public transit, parks, restaurants, schools, and hospitals; areas that have access to many amenities are highly valued by renters. Focus on established neighborhoods where demand for rental properties is high and neighborhoods that are new and experiencing healthy growth.

Tenant screening

Bad tenants are a nightmare! Tenants are vital to your success in rental property investing, so ensure prospective tenants are thoroughly screened. Online applications are available for tenants and landlords to verify criminal backgrounds and eviction histories, so be sure to utilize them.

While rental properties are not necessarily the cheapest way to invest your money, they are one of the most lucrative and stable, if you do your homework and purchase the right one. It may take some time to find the right property, crunch the numbers to figure out your cash flow and investment return, and ultimately select a quality tenant, but the rewards will be well worth the effort.

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