Getting started in real estate and choosing to purchase an income property is a big step; it requires a lot of time, research, and energy to ensure that you find the best investment possible.
To guide you in this arduous process, here are a few tips:
Step 1: Determine the Amount of the Loan
The first step in any real estate investment project is to visit your financial institution. Indeed, before you do anything else, you should discuss with financial advisors to assess your project and establish a plan based on your financial situation.
This balance sheet will be based on your credit history, which is your debts and your income. According to this information, your financial institution will tell you the maximum amount you can obtain to buy your real estate property.
It is important to know that income properties will provide an income, which will cover some of the costs. Thus, your rental income, your down payment, and the rest of your income will determine how much you can pay.
Step 2: Plan Your Budget
Now, you have your financial statements. Can you really purchase an income property? Before making an investment, you need to make sure that you will make a profit. Not only will you have to bear the initial cost, you will also have to pay for monthly expenses related to owning a building, such as home insurance, property taxes, and maintenance costs, among others.
In addition to these monthly expenses, remember to set a budget for other recurring expenses like repairs and mortgage payments.
You can use iAnalyzeREI, our real estate profitability tool, to know the financial situation of the property you wish to purchase. Not only will you have a complete report telling you if the property is profitable and if the ratios are satisfactory, you can also forward this report to the financial institution that assesses your project.
Step 3: Get a Mortgage Pre-Approval
With a mortgage pre-approval, you know if you have the necessary funds to purchase a property, so you can make an offer. Moreover, this pre-approval tells you the approximate amount of your mortgage payments.
Before pre-approving your mortgage, your financial institution will ask that you provide them with information about yourself and about the property you wish to buy. This information includes, among other things, the approximate purchase price of the property and the rental income you will receive from it.
Step 4: Search for a Property and Make an Offer
When searching for an income property, you must consider various factors, such as its location, the current tenants, how easy you can rent the units, renovations and repairs, etc.
As the owner, you must be able to act if need be. Do you want the property to be close to your home? If you need to be there often, you will not have to drive as much if the property is close to your home. Alternatively, you could hire a property manager or any other person who can react in case of an emergency.
Once you have made your offer, and it has been accepted, your financial institution may request other documents related to your project (this depends on the institution).
Here is a list of documents you should have on-hand:
- Most recent financial statements (if you are purchasing the property for a company);
- Copies of the leases and the building renewal;
- Tax returns and notices of assessment;
- Current personal balance sheet;
- Details of any loan with other institutions;
- Agreement of purchase and sale signed by all parties;
- Declaration by the seller signed by all parties;
- Property and school tax of the coveted property;
- Proof of energy cost of the coveted property;
- Insurance costs;
- Environmental assessment phase 1 (if applicable);
- Environmental assessment phase 2 (if necessary depending on the result of phase 1);
- Proof of down payment source;
- Professional evaluation of the property by a certified appraiser (if applicable).
If this is your first time purchasing a property, we recommend that you work with a real estate broker to help you with the transaction. Nevertheless, if you are comfortable with purchasing off-market or with duProprio, you can use these documents to complete your agreement of purchase and sale.
Step 5: Learn more About the Rights and Obligations of the Lessor and Lessee
Before you start a real estate management project, you should learn more about your rights and obligations when it comes to choosing your tenants, maintaining the property, and managing certain processes. It is crucial to consider these factors, because the real estate industry is strictly regulated, and you can be fined if you do not fulfill your obligations. We suggest that you visit the website of the Tribunal administratif du logement to learn more about the laws.
In conclusion, if you carefully plan the purchase of your income property, it can be a very profitable investment! Simultaneously, the property will increase in value, and you will collect monthly rental income. As time goes by, this investment can help you achieve sustainable financial security.