Are you thinking about real estate investment but don’t know where to start? That’s  okay! We all have to start somewhere. Here is a very basic breakdown of the basics of  real estate investment. 

Financing 

Getting a mortgage for an investment property isn’t as easy as borrowing for your  primary residence.


You’ll need at least 20% of the purchase price for a down payment, and only a portion  of your rent income (usually 80%) will be considered in qualifying you for a mortgage. 


For commercial property investments, you’ll likely need a down payment of 50%. 

Taxation 

In Canada, any money collected from rent is considered income, and thus subject to  income tax.


Increases in the value of your investment property (from the time it becomes an  investment property to the time you sell it) will be subject to capital gains taxes.


If you’re thinking of buying an investment property, make sure to talk to your accountant  to fully understand the tax implications.


 

Timing 

Most real estate investments should have longer-term objectives.  

Because of the unpredictability of the real estate market, expecting to profit in a short  period is risky.

Goals 

What are your investment goals? For example, there are three ways to make (or lose)  money by investing in Toronto and GTA real estate: 

1.  Cash flow (cash return) – Cash flow is the difference between what you  collect in rent and the expenses you pay out. In Toronto, cash flow positive  properties (purchased with 20% downpayment) are hard to come by, though  it’s fairly common for investors to break-even on a monthly basis (meaning that  the rent they collect is equal to the expenses they pay). Cash flow is affected  by factors outside of the real estate market, for example, it depends on your  down payment and mortgage terms. 

2.  Appreciation – When you sell your investment property for more than you  paid, that’s called appreciation. For example, you buy a triplex for $1,300,000  and later sell it for $1,600,000, that $300,000 difference is the appreciation in  the value of your investment. Toronto and GTA properties have historically  appreciated favourably for investors. 

3.  Equity (mortgage paydown) – When a tenant pays down your mortgage,  you’re building equity. For example, you buy a property for $600,000 with a  $120,000 down payment and you apply the rent to the mortgage and rent it for  25 years. Eventually, you will have a mortgage free property. When you then  sell that property for $800,000, you’ll have built up $680,000 in equity (and  you’ll get your original investment of $120,000 back). 

Return on Investment (ROI) 

Real estate investors use different calculations and tools to calculate the returns on their  property investments: 

• Cash flow is the net amount of cash moving in and out of an investment ? Calculation: Income – operating expenses – financing costs 

• Capitalization Rate (cap rate) is the rate of return on a real estate investment  property based on the income it is expected to generate.

• Calculation: Operating Income / Purchase Price 

• Return on Investment (ROI) – a performance measure used to evaluate the  efficiency of an investment or to compare the efficiency of several different  investments 

• Calculated by adding the cash return + mortgage pay down + capital  appreciation. 

There are many tools to help you predict the ROI of investment properties. If you would  like to learn more about real estate investments, watch out for my Blog post every  Wednesday.  

Thanks for reading today’s BLOG!!!

Brian Kondo
Sales Representative / Team Leader
The Brian Kondo Real Estate Team
Re/Max Hallmark First Group Realty Ltd.
905-683-7800 office
905-426-7484 direct
brian@briankondo.com
www.BrianKondo.com
www.BrianKondoTeam.com

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