15 Sep Guide: What To Look For When Buying A Real Estate Investment Property
When I first started to look for real estate investment properties, my heart would start racing every time I walked into what I thought was a strong potential candidate. I had read a few books and had a mini checklist. It would take me a long time. I’d take pictures, measurements and I would second guess myself all the time. I would try to justify the purchase even though there was an obvious deal breaker with the property.
It is now one year into my adventure and I own 6 real estate investment properties. I’m much more confident when I walk into a property and can make a decision within a few minutes. I thought I’d share my thoughts on what to look for by walking through a real life example.
Here are the most important factors to look at when buying a real estate investment property
- Buy a good house not a cheap house
- Unobstructed parking for all tenants
- Be able to split the property into two units
- Be able to install separate laundry
- Good use of space
Buying a cheap real estate investment property will attract cheap tenants.
I’m repeating myself for the 100th time so I’ll keep it short. If you buy a cheap run down property, you will attract low life tenants or your property will sit vacant. I know it is tempting. When I was looking for my first property, I fell in love with a $230k dump in Oshawa. I’m so thankful it didn’t work out. Unless you are planning on renovating, stay away from dumpy properties. The same goes for the area. I you have a top notch investment property, you will have pride of ownership, you will attract great tenants and your tenants will respect your property. I’ll leave it at this since I’ve gone on about it many times. See my one year after buying my first real estate investment property post for more on this subject. The house we will be analyzing is a bungalow for sale in Oshawa. List price of $489k (Currently Sept 2016). Initial pictures online looked wonderful. Overall a solid property. 99% better than most investment properties you will go see.
What I loved:
Nice grey carpet in the basement (gets cold down there)
Good curb appeal
What I disliked:
Use of space
A bit small upstairs
Orange floors (ew!)
The investment property needs to have two unobstructed parking spots.
It kills me when I see a beautiful property with only one parking lane and no possibility of expanding it. 99% of tenants will have cars. I don’t have a tenant who does not own a car, and in the 200+ viewing applications I’ve received, everybody checked the box saying they had a vehicle. I’m guessing that the owners of duplexes with 1 parking laneway assume that tenants will talk amongst each other whenever they have to move a car to get by. I just don’t see how that would ever happen. You are asking for problems. The last thing you want to do when managing a few investment properties is get calls about ridiculous issues. I can also see obstructed parking being a deal breaker for potential tenants and this would leave your unit vacant for a while. It drives mosts couples nuts when they have to do it on their own. Imagine having to coordinate parking with a stranger you may or may not get a hold of.
In the property being analyzed, you can see that there is only one laneway for parking. You could fit multiple cars but they would blocking each other in. The first thing to look at is if there is an opportunity to extend the driveway. The general rule of thumb is that you cannot pave or get a curb cut for more than 50% of the frontage. There are also a few more stipulations, one of them being any cut or paving has to be 1 metre away from utility boxes or trees. Unfortunately there was a tree and an extension wasn’t possible. If the tree wasn’t there I would still be a bit weary. You don’t want to “uglify” the front of the house and make it obvious that it is a rental property. Look around to see if other properties have broken the rules. If yes then it may be an option.
You need a separate entrance and you need to be able to split the investment property into two units.
To have a true money making machine, you need to have two incomes coming in from your real estate investment property. If you don’t you’ll be sinking a few hundred dollars into the property each month. You don’t want to be out of pocket. Yes you might still be ahead in terms of mortgage debt pay down, but personally I don’t think it is the greatest strategy. I won’t argue or go into it here. I have another post here that talks about the math behind real estate investment properties.
To have two units, you will need a separate entrance. If the unit does not have a separate entrance then move on. You shouldn’t have booked an appointment to go see it in the first place. Adding a separate entrance is a challenging task. Chances are you will be sinking too much money into it and if it does not have a separate entrance it most likely has other big deal breakers that would cost a lot to fix. Also, if you don’t plan on making the property a legal duplex, putting in a separate entrance will attract a lot of attention and will tip off the nosy neighbours.
If the property does not have 2 completely separate units when you buy it (most will not but the downstairs will be set up as a separate living space) you will need to close up the stairway leading to the basement. In this case that would have been no problem:
Your investment property needs to have separate laundry facilities.
This last paragraph sets us up for my next point. Same as parking, you will need to get separate laundry for your investment property. Why? Once again, a better quality home will attract better quality tenants and will cause less troubles down the line. Tenants already hate the fact that there is someone else living in the same house as them. I would too. The last thing they want to do is interact with the other tenant or have to take out the wet cloths that have been sitting in the washing machine for hours. It is a few thousand dollars that will save you a ton of headaches down the line, increase the value of the house and attract better tenants.
If there is no rough in for upstairs laundry, you will have to put it in yourself. The best place to put it is in the staircase leading to the basement where you are closing off both units. It is truly the perfect spot: out of sight and you don’t lose the use of a bedroom. In this particular unit, they put a rough in for the laundry in the linen closet. Although it is great to have the rough in, a linen closet is very small and you would most likely need a tiny machine. It would also make it very tough to install and disconnect. The third and fourth pictures are of my own investment property. Since the stairway to the lower level was at the front, I closed it up, extended the closet out a few inches and stuck my laundry in there. It worked like a charm.
Your investment property must make good use of space on both levels.
You cannot neglect the lower level. If the upstairs is gorgeous but you cannot make the lower level work, let it go. Move on. Basement apartments are horrible. As a real estate agent I’ve seen some horrible units. So much so that I now refuse to do rentals under $1400 (which practically eliminates basement apartments). Even multi-million dollar homes in Markham and Toronto have the dumpiest basement apartments. I would be embarrassed to call some of these apartments my own. Sometimes the basement cannot be modified due to structural issues. Other times whoever has renovated the unit has done a horrible job of trying to make something work when there was no hope in the first place. The rule of thumb is, if you wouldn’t live there or be proud to show it around when tenants come to view it, then pass on it.
Unfortunately the unit in question did not make good use of the space. The lower level space felt divided into two. When you walked down, you were in what I could only describe as dead space. From the picture I drew you would think it would be a great eating space. But it was a bit more narrow than my attempted floor plan and felt like a hallway to the furnace room. Any useable living space was shoved into the right hand side of the basement. The living space was a bit crammed. It is hard to truly explain good use of space. It is also very subjective. You feel it when you walk through the unit.
Upstairs wasn’t too bad but it was smaller than most bungalows that I’ve looked at. The biggest problem was the wall between the kitchen and the living room. It felt much too closed off. Tenants would be spending 80% of their time in a small closed off living room. Furthermore, all bedrooms were a bit small and there was no access to the backyard.
To recap: Your investment property needs 2 unobstructed parking spaces, two laundry systems, two units and you must choose quality over price.
Lastly don’t overpay for a property. There will always be another one to fall in love with. Don’t buy for the sake of buying. I know it is tough, but resist the urge. The above house was listed for 489k. This is already higher than most investment properties out in Oshawa. There was an offer night set which means they were looking for multiple offers. To my surprise it sold for $521k. This is the first time I’ve seen an investment property in this area break 500k. A month ago I purchased a beautiful ravine lot property for $469k. It also met all my criteria (parking, units, laundry, quality). Buy quality but don’t go crazy. Good investment properties are now about 400k in Oshawa (or anywhere 45 minutes from Toronto). Great ones will be about 450-480k.
Norman Hill Realty Inc
20 Cachet Woods Court #2