Should You Invest in an Income Property?
Real estate can be a profitable investment if you know what you’re doing. But like any major venture, there’s a lot you should know before putting your money into a second property. From acquiring financing to finding the right neighbourhood and the right property, there are a lot of factors that can affect the success of your investment. Read on to find out everything you need to know about investing in income property in Ottawa.
What is An Income Property?
In short, an investment property is real estate that generates income. You can earn money through real estate via rental income or appreciating property values. Some people purchase property with the sole intent of using it as an investment property. In other cases, people buy a new home and decide to rent their old home rather than sell it.
There are both residential and commercial investment properties. But commercial properties are generally owned by investor groups or corporations who can afford the large cost of commercial real estate. In addition to residential and commercial real estate, vacation properties can also generate additional income.
Types of Investment Properties
Residential Rental Property – A condo, townhome or house that is rented to one or more persons on a long-term basis. Rent is collected monthly and there is usually a rental agreement that requires notice to be given before ending the arrangement. Provided you have consistent tenants that pay on time and no extended vacancies, residential rentals can be a very good investment.
Short-term Rentals – Short-term rentals are similar to residential rental properties except they are rented out for short periods of time. Depending on the type of rental, this can be anywhere from a few days to a few months. With the rising popularity of sites like Airbnb, short-term rentals have become quite popular. But new regulations in Ottawa and other urban areas of Ontario that severely restrict short-term rentals have made these types of investment properties less enticing.
Commercial Property – Large investors (often groups or corporations) will buy commercial property such as retail space or office buildings and rent out the space to businesses. The investment and maintenance on commercial properties is much higher than on residential income property, but the returns can also be greater. Leasing commercial space can be quite expensive in busy or affluent areas.
Mixed-Use Property – Mixed-use property offers both residential and commercial space. Often this is a building with commercial space on the ground floor and residential units above. The initial investment is more than most residential property but less than large commercial property.
House Flipping – Flipping a house involves purchasing a property that needs work, renovating it, and reselling at a higher cost in a relatively short time frame. If done right, house flipping can be quite profitable, but it requires a significant expense up-front to renovate the property. It also relies on the market remaining strong when it comes time to sell.
Are you Ready to Buy an Investment Property?
If you think a rental property will be a quick money maker, you may want to adjust your expectations. While investing in income property can become a solid income generator, a successful real estate investment involves more than buying a property and assuming rent will cover your expenses. It requires planning and research and usually takes some time before an income property becomes profitable.
Investment properties also require a larger financial investment than a primary home. When you buy an investment property in Ontario, you will have to put down a minimum of 20% for the down payment. You’ll also need to be prepared to cover closing expenses, repairs and maintenance, and rental expenses such as running ads and credit checks before you receive any income from the property. This is on top of all of your current living expenses and payments.
Does an Income Property Make Financial Sense?
With the exception of house flipping, an income property should be considered a long-term investment to help build capital. You should examine the current real estate market, city and neighbourhood rental statistics, local economy, and evaluate the property itself to determine rentability.
It can take years of experience to understand local real estate trends and rental markets accurately. But that’s where an experienced Ottawa Realtor® comes in. Our team has extensive knowledge of the Nation’s Capital and its different neighborhoods. We also have experience in the Ottawa rental market and can help you find the right property for your budget and investment goals. Contact us today to get started investing in income property!