Residential real estate investing has so many great angles and opportunities to create wealth it really gets my juices flowing with excitement.
For a beginner or even experienced residential real estate investor there is lots to learn and we're going to break out some of things to think about right here.
Everyone, and I mean everyone... your neighbour, friends, family, even in-laws have their opinions on what is right and what isn't when it comes to real estate.
And that's what makes this such an entertaining and if done right, profitable, topic.
Ready to rock? Let's go...
One of the first things you should know about real estate investing is that in general any building that has four or more units in it is referred to as a commercial property.
Even if those units are used for residential purposes. So an apartment building is a commercial property.
There are exceptions to this but in general that's the case.
Commercial investment properties are also things like strip malls, office buildings, industrial units, warehouses etc..
This is important to know because lenders (the banks) treat these properties very differently when it comes to getting financing.
For commercial properties it's much more likely you'll have to put 25% or more as a down payment.
As we have discussed in this investment property mortgage article you can put as little as 5% down on residential properties.
The difference with commercial transactions is that it's much more typical to see 'vendor take backs'.
This is where the seller carries back a portion of the value of the property (let's say 25%) and you pay a fixed amount every month to them just as you would the bank.
So the ability to get commercial investment properties at 0% down exists and there's definitely more creative vendor/seller take back financing that goes on in this arena compared to residential real estate investing.
If you use a mortgage broker for the transaction you will also likely pay a 'broker fee'. For residential real estate investing transactions the broker's fee is paid by the bank that takes the mortgage.
The way residential properties are valued is very different than commercial properties.
To value commercial investment properties it requires more detailed understandings of things like cash flow , cash on cash return, net operating income and return on equity.
Residential real estate investing is a different animal all together.
People who focus on commercial investment properties may not focus as strongly on the factors that are important to residential real estate investing.
Things like, the importance and appreciation of the neighborhood, comparable property prices, financing options, the residential real estate investing purchase and sale process and finding residential tenants.
In summary, commercial properties are typically valued based on some form of income calculation while residential real estate investing uses comparable properties to come up with a dollar value.
The concepts are similar but the expertise required is different.
There are a few key ingredients when choosing an area to invest.
You'll first want to decide if you prefer to have your properties close to you or not.
Are you going to buy resale or new build?
If you'd prefer to have easy access to your properties then you will want to choose a strategy or type of investment (outlined below) suited for your particular area.
If you're willing to drive a little bit you likely have to ability to choose different residential real estate investing strategies because different locations are best suited for different investment types.
Maybe you're looking to invest close to home. Converting your own home into an income property is another investment strategy.
Once you build some confidence in your residential real estate investing abilities you can form your team of experts (mortgage brokers, lawyers, real estate agents, home inspectors, handyman, property managers) in far off cities and achieve success.
Let's break down what I look for when choosing an area:
If you look at any of the growing suburbs around Canadian cities you'll see a very common trend that you can use to your advantage.
New highways will go into an area, and then the very first new residential subdivisions will follow.
The first new big box retailers will then begin setting up shop. And then an influx of additional residential builders build some more homes around these big box outlets.
So watching out for new highways is an easy way to spot areas that will appreciate well.
Here in Ontario this is happening right now between Toronto and Hamilton along Hwy 407. Milton, Oakville, Burlington and Hamilton are all experiencing new growth because of this.
If the new highway is cutting through an established neighborhood you will still see infill development projects by smaller builders and big box stores muscle their way in.
This is happening right now off the Red Hill Expressway in Hamilton where Lowes opened up one of it's very first stores in Canada.
Population trends can be tracked at a provincial level from Statistics Canada, click here to check out the Census Trends website.
And a quick search on Google for any city will turn up some great detailed population, immigration and employment trends that are key when determining if you are in an area that is appreciating or will appreciate shortly.
You can see an example of what I'm talking about by clicking here to view a summary of Toronto's population and immigration numbers.
If you keep looking it's easy enough to find immigration and population data and trends for the individual communities in your city/town.
Toronto has made a nice little map that divides up all the different communities and gives a full report on each. Click here to check it out.
You can easily analyze demographic data until your head swells.
There's another way to get similar information.
Use the information that we discussed above to your advantage.
When you see a bunch of new retail shopping being built in an area that's a great sign that there are great opportunities for your residential real estate investing.
If you see a Home Depot, WalMart, Cineplex, Loblaws, Best Buy, Home Outfitters etc. being built, it's a great sign that the area is appreciating or will soon.
These companies have teams of people analyzing demographic data. Why not piggy back of their research for your residential real estate investing?
If they are plunking down big bucks to put up these retail properties you can bet they have spent the time to analyze the decision.
Better yet, call up your city planner and get public information regarding the development of these even before the first shovel hits the dirt.
Knowing where the next WalMart is going in before the masses puts you in a great negotiating position.
Perhaps the residential investment property you are putting an offer in on is about to be worth much much more than the seller's believe.
Doing a bit of homework can really make your returns jump nicely.
Most people will just blindly purchase properties based on some sort of tip or because they see everyone else lining up in front of a new condo sales office.
Look, when you see line ups outside condo developments with prices increases every hour on the hour, you won't find experienced investors any where in sight.
They're the ones selling the condos at that time, not buying.
Always watch what the masses are doing and do the opposite...you'll be in good shape.
When you are residential real estate investing you want to pick a strategy or investment type that works for the specific part of town you are looking to purchase.
Will you choose regular single family home rentals, student rentals, multi-unit dwellings?
And you should ask yourself these two questions...
Do you want to Buy & Hold real estate to create long term wealth?
Do you want to Buy & Flip real estate to make immediate income? (Note: this strategy is less about investing and more about creating income for yourself.)
Given it some thought?
Great, now click below to learn about some residential real estate investing strategies...
Read this before you rule out becoming a landlord as a real estate investing strategy... To return from Residential Real Estate Investing and learn more about Investment Property Financing click here...