Three simple rules for revenue properties

There's more to it than just buying a condo

In last week's column, I discussed a client who recently purchased a rental property that will return 17 per cent annually on just the cash flow and mortgage repayment.

That's a pretty good return, especially when considering that return will increase as more principal is paid down, and as the property starts to appreciate in value.

However, there is more to consider than just buying a condo and renting it out. Our client is a smart buyer who followed three basic rules when it came to buying her investment property. While these rules are simple, they are also important. Rule #1 – Location, location, location

The first rule of purchasing a revenue property is to buy in a great location. For Calgarians, this is pretty simple as our fair city is one of the greatest in the world to live in.

Still, that doesn't mean all of Calgary is created equally when it comes to purchasing a rental property. In a cyclical town that is largely dependent on oil to power its economy, you want to make sure rental properties are located in areas that will thrive in good times and bad. Examples include obvious

areas near downtown, such as Kensington, Inglewood and 17th Avenue S.W., as well as areas near post-secondary institutions such as the University of Calgary and Mount Royal University.

When the economy does dip, having a property in one of these prime areas will make sure there is still a high enough demand that renting the property will not be a problem.

Rule #2 – Buy the right property

The second rule is to purchase the right property. Sure, a one-bedroom condo is cheaper to buy than a two-bedroom. But when it comes to renting it out, the two-bedroom will always be easier to rent.

Furthermore, just like with location, if the economy ever takes a downturn, a two-bedroom condo will have a distinct advantage over a one-bedroom when renters decide it is more cost effective to share the rent then to go at it alone.

Rule #3 – Have a flexible mortgage plan

The third rule is to have a mortgage that is flexible. Yes, a five-year fixed rate at 2.89 per cent seems tempting, but if you ever need to unload the property quickly it could come with a large payout penalty that would eat up most of, if not all of your profits.

A variable-rate mortgage has the benefits of only having a three-month interest penalty and a lower interest rate. A lower rate means a lower payment, which means more cash flow and subsequently a higher return.
A smart landlord will use the extra cash flow from a variable-rate mortgage to sock away some extra money for a rainy day or to pay down the mortgage quicker.

If you would like to know more about investing in real estate consider joining our Cash Flow Club. Membership is free.

Nolan Matthias holds a bachelor of arts in Economics, is the co-founder of Mortgage360 and the author of The Mortgaged Millionaire. Call Nolan at 403-615-6132 with your questions or to set up an appointment with an Accredited Mortgage Professional (AMP).

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