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How to Properly Finance Your First Investment Property: Part Two

November 28, 2011

In January of 2010, a young Architect and his wife came to see me about investing in real estate.

The Architect proudly declared that after 7 long years their property was free and clear. He had put his creative heart and soul into the Toronto property, which the couple loved, but they wanted to move into the country and buy a new principle residence of equal value.

Their idea was to keep their current residence and rent it out as a sought-after Toronto investment property; after all, they loved the home. I proceeded to ask them one simple question: How much rent will you receive for this investment property in today’s marketplace? The answer was $1500 per month.

This brings me to a very important concept when creating wealth – the rent to value ratio. I will talk about this in detail a little later on in this article.

*The next few minutes were tense as I gave them my first piece of advice. Sell your current home because at $1500 per month, it is a bad investment. Silence*

Advice #1. Do not fall in love with any investment property, especially a piece of wood like a home. Do not mix emotion with finance or investments. Finance is often as cold as ice, so I suggest that you should be as well.

I was aware of their affection for this home and wanted to be as sensitive as possible, but ask yourself this question: “do you want to create the biggest pay cheque from your investment property?” or say, as I have heard so many times, “look at my new investment property, I like the property so much, I would move into it myself”.

Unfortunately, the decision must be made; are you moving in or not?
When it comes to investment properties, you should be focused on the bottom line. In fact, beauty should not be a part of the equation; some of the most boring or ugly investment properties provide the biggest pay cheques.

This particular couple would be much better off selling the $400,000 investment property and purchasing two carefully located rental properties at $200,000 with rent of $1,250.00 per home. This would create an income of $2,500.00 per month opposed to the $1500 they were going to collect.

I didn’t say that this is the right thing to do; I simply said it was better then what they were contemplating before we met.

Next week I’d like to spend a few moments talking about a topic near and dear to my heart – Negative Cash Flow. This term makes people very nervous, but if you are an astute investor and have a solid understanding of finance, there is no other way to buy real estate…