7 Questions to Ask Yourself Before Buying Real Estate
Whether you’re looking to buy your first home, invest in property or both, knowing where to begin can be a challenge. The first step is figuring out what You want. Read on for 7 key questions to ask yourself before buying real estate.
Have you ever played Monopoly? All those properties. Which ones should you buy? How valuable would buying real estate be to you? Can you afford it?
Well, now it’s real life and you’re thinking of buying your own place or even starting your real-life Monopoly empire. The first step is understanding more about what you want.
1. Are you planning to live in the place you buy?
The answer needs to align with your personal plans. So, you should ask yourself:
- Are you looking for a home, an investment or both?
- Do you have another place to stay if it’s only an investment?
- What type of down payment can you afford? Typically, properties with more than 4 units need a greater down payment since banks consider those as investments and so are seen as riskier
If you’re going to live in the property, there’s usually some emotion attached to your purchase and you’ll be looking for specific attributes. If you’re only going to rent it out, you’ll be catering to a broader group of people.
You can also consider buying a bigger place even if you don’t need that space right now. Would you be able to make more money renting it out, while renting your own smaller place to live in? Or, do you mind living with roommates?
2. How much risk am I willing to put up with?
Some risks to consider include:
- Personal financial risks: In terms of affordability, do you have flexibility? If you don’t have much slack, you might be at greater risk of losing your investment if costs increase for mortgage rates, taxes, major repairs, etc.
- External financial risks: market crashing and the property losing value, mortgage rising and your monthly payments increasing, etc.
- Vacancy and bad debt risks: tenants not paying, unforeseen damages, etc.
- Hidden defects in your property
- Negative neighbourhood transformation
However, risks depend on the investment.
Buying real estate as an investment can be an excellent option that grows in value while you build your ownership.
If the research is done in advance and you use the right professionals, you can mitigate for risks and come out a winner in the property game.
3. Do you have enough down payment?
The amount of the down payment you need is affected by
- Whether it’s an investment property and/or commercial building (larger down payment)
- Whether you obtain an insured mortgage, which means a smaller down payment at the cost of paying monthly for the insurance over time.
You don’t always need to have the full down payment – Did you know that some banks allow up to 50% of your down payment to be loaned money? Funds can be borrowed from friends and family, a portion can be borrowed through a private lender (example, mortgage brokers) or deals can be made with the current owner. An example of the last one is a property that has been sitting on the market for a while, where you can try to negotiate a sale resulting in a payback from the owner that will count towards the down payment.
However, some savings are required and the amount you have will affect the type and location of the property you buy. But it’s often less than you think!
4. Do you have enough for the other expenses?
Having enough for the down payment is key but it’s not the only cost you may have to cover:
- Notary fees/legal fees for title search, reviewing status certificates, registering the deed and mortgage, etc.
- Inspector fees to assess the state of the property, hidden defects, type of costs to put in to maintain property, etc.
- Welcome taxes
- Land transfer taxes (first-time home buyers can get tax rebates)
- Mortgage set-up/appraisal fee (depending on the lender)
- Environmental phases costs, for example, water testing, soil testing (not applicable for condo)
- Appraisals for value of the property (the fee depends on the lender)
- Certificate of location to verify the plot of land you are buying (not applicable for condo)
- Title insurance, which can protect against mortgage fraud, hidden fees, etc.
- Outstanding prepaid expenses/services owed to the owner, example, property taxes, utility bills, maintenance services, etc. These are prorated to you when you purchase the property
- Furniture – it’s possible that purchased property can come furnished or a deal can be made with the owner to buy their furniture/furnishings Regardless, depending on whether you’re living in it, renting it out. furnished or not, factor in costs of basic furniture/appliances that you’ll need
5. Are you willing to accommodate tenants?
They can be a way to cover your monthly expenses and even earn a profit. But, there are some trade-offs when buying real estate to rent…
- Your privacy and general noise level could be affected, with the degree depending on the type of property you have (multi-unit vs. house with several bedrooms).
- No matter where you live, there are tenant/landlord laws that you need to follow. While the laws serve a purpose, they can potentially make evicting bad tenants or claiming damages to your property difficult.
- Accommodating tenants requires a time commitment. Do you have the time necessary to manage the process: finding tenants, replying to maintenance requests, collecting rent, etc.? Property management companies can be a viable alternative. If you plan to use them, the cost should be factored into your expenses.
- It’s also important to remember that the upkeep and location of the property will attract a certain quality of tenant. Ideally, you want tenants who keep the place clean, pay rent on time, etc. It goes both ways; these tenants will also be looking for a clean place in a good location.
6. Where do you want to buy?
This goes hand in hand with whether you plan on living in your property. Again, if you’re buying real estate for yourself, there’s a personal factor involved. You want to consider the following:
- Close to friends and family
- Close to work
- Close to school/school district
- Your partner/family’s needs (if applicable)
- Close to specific amenities that are part of your lifestyle
However, there are some factors that are consistent, regardless of whether you live in it or someone else lives in it, including:
- Proximity to general amenities and transportation options
- Safety of neighbourhood and nearby areas
- Nearby current or future construction that may impact noise level
- Proximity to unfavourable areas: loud highway, noisy or smelly factories, etc.
- The price you can reasonably rent it out for, which will be affected by the purchase price, which is affected by the location
If you’re looking at it solely from a business point of view, you should also consider nearby developments, i.e., rail systems, subway stations, schools, new amenities, etc. that can add to the value or gentrify a neighbourhood.
Tenants you get will be impacted by the location. A less-developed neighbourhood, even if the property is well-renovated, will deter certain tenants. On the flip side, if you’re buying real estate in an expensive neighbourhood, the investment might be overpriced, and you might not get the best return. In other words, the rental price may not cover the costs of owning the property. As a rule of thumb, look for the lowest price house in a good neighbourhood (the value can go up more) vs. a higher priced house in a worse off neighbourhood.
Knowing an area helps you understand the aspects above. So, start doing your research. If it’s a developing area, do your research to understand the aspects above and consult the news, other real estate investors, Agents, friends and family living in the area or in similar areas which are already developed.
7. What type of property do you want to buy?
This question will typically depend on whether your want tenants or not, your time commitment and the amount of your down payment. The types include:
- House: less limitations and no condo fees. You control what you maintain and you potentially save money by doing your own upkeep and/or by hiring your own contractors
- Town house: This is a type of house where the houses are connected to others in a row. Your land is comprised of your front and back yard. It’s also possible to buy one at the end of a row so that you also have the land next to your property.
- Condo: You own the unit itself and not the land surrounding it. Condos have bylaws that you must abide by and monthly maintenance fees that you pay for the upkeep of common elements, like the lobby, and amenities, like the gym or pool.
- Multi-Unit: You can live in one unit and rent out the rest or live in all of them. These are usually more expensive but have a greater potential for rental income
The above make up the typical types of residential properties. Commercial properties can also be invested in and are intended to generate a profit. They can include office building, stores, warehouses and multi-units that exceed a certain number of units. Commercial properties are usually more expensive and have different lending rules.
In conclusion…
Thinking about these 7 questions will give you a better understanding of what you want before making your big purchase! Then, you’ll be ready for the next step.