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How to Properly Finance Your First Investment Property: Part One

November 17, 2011

For most people, purchasing their first investment property can be a frustrating and somewhat confusing experience.

Where should I buy my first investment property? What type of investment property should I buy? How much can I afford? How is land Transfer tax calculated? What is Title Insurance? And so on.

Buying your first Investment property can be an anxious experience because your only point of reference is your principle residence purchase. Many individuals make the mistake of using this knowledge as their only guide for the investment purchase. It takes a different mindset and level of knowledge to buy and finance rental investment properties.

Insuring that you understand how the entire process can work to your financial benefit is fundamental to your outcome. You, the tenant and the government, believe it or not, are all in this together…let me explain.

Although there are many topics to cover in this category, I will concentrate on three specific ideas:
• Location, Location, Location
• How to create a Rental Pay cheque
• Tax Advantaged borrowing

I recognize that most people who have bought an investment property in the past 10 years have done extremely well with capital appreciation. Heck, all you had to do is buy a property and wait, right? But could they have bought more property with more knowledge?

Do you know when to buy? Do you know when to sell? Did you know how to maximize the deductibility of interest? Do you understand the tax rules?

Let’s start with a very brief discussion on location.

You have heard it many times before, but you need to truly understand where to buy and then what type of property to buy.

Some simple examples: Property values in larger cities have always appreciated faster then small communities.

Rental vacancy rates are always lower in areas that offer good access to public transit, especially the subway system. This is simply a fact. Property values are higher but rents reflect good locations.

Next, look at the type of dwelling you’re looking to purchase. The value of a town home will appreciate faster then a high-rise condominium. Why? Two reasons: Families will always prefer a small back yard to no back yard at all. Another factor to consider are condominium maintenance fees – why would you, as an investor, want to pay for your tenant’s pool, gym, security and underground parking? This does not make sense. Live in a condo? Fine. Invest? No thanks. It won’t give you the biggest pay cheque.

What most people do not realize is that a renter will never pay you what your home is truly worth – or they likely would just buy it themselves. Think about that for a moment.

Next week I’ll go through an example of a client of ours who made for an excellent example on the different types of decisions you’ll have to make when investing in your first rental property. There are a few strategies you could use, however; I’ll take you through an example of a strategy that outlines the usefulness of tax deductibility