Chapter 5

Scouting Properties: Where to Look and What to Look For

IN THIS CHAPTER

check Identifying the best time to buy

check Finding the home or rental property for you

check Choosing a location to invest in

check Understanding the types of land ownership

check Knowing when a property’s just right

check Getting help from property resources

Finding the right property takes skill, maybe some luck, and a whole lot of intuition. But the hard work of scouting properties will give you the gut feelings you need to make the hard decisions successful real estate investors make. This chapter is something of a scout’s handbook, and we can’t help but advise, “Be prepared!”

This chapter discusses everything about finding properties, from the big picture down to the specific property. Some of the basic issues are tackled in Chapter 1 of Book 7, but this chapter gets into the nitty-gritty of sizing up the conditions in specific markets, neighbourhoods, and even the property you’re looking at investing in. We can’t know the specifics of every situation you have to choose from, of course, but we hope we can provide some useful examples and guidelines.

Assessing Current Market Cycles

The past two decades have been kind to Canadian real estate. Global threats have attracted international buyers to a country generally seen as stable and safe. The global financial crisis of 2008 came and, in many parts of the country, left until 2015 when the picture became more complicated. Knowing how to read the shifting landscape has been key to staying on top of local markets across the country.

Chapter 3 in Book 7 offers a general overview of market cycles, along with concepts important to understanding the market. These basic elements help you to decide when to buy and sell properties, but putting the concepts to work requires research, keen observation, and a measure of intuition.

This section walks you through an analysis of market cycles as they apply to the process of purchasing a property. Three main steps go into assessing the current market cycle: conducting research, analyzing the facts you’ve found, and making a decision.

Research: Doing your homework

The first step is to figure out what type of market you’re in (Chapter 3 in Book 7 describes the three market types). Is it a buyer’s market, with plenty of product to choose from? Or a seller’s market, with rising prices and limited supply? Or are conditions stable, reflecting a relatively balanced market?

To help you figure out where the market stands, this section looks at the key factors identified in Chapter 3 of Book 7 as affecting market conditions.

Knowing where to find basic information — and when to dig for more — is an important skill for researching market cycles. This section gives you the pointers you need to be an effective market analyst. More sources of information appear later in this chapter.

Tracking interest rates

Higher interest rates aren’t something borrowers appreciate, but the lenders financing real estate investments certainly do! The lower the interest rate charged on a mortgage, the greater the incentive for you to borrow when buying a property. During the early 2000s and then again following the financial turmoil of 2008, rates dropped. Today, they’ve come off their historic lows, but they remain relatively low compared to the long-term average. When rates rise, borrowing becomes more expensive, but an investor who does her homework will ensure that the property will have positive cash flow even in a high-interest-rate environment.

Tip The Bank of Canada (www.bankofcanada.ca) is the primary source of information on interest rates in Canada. Based in Ottawa, it’s the central bank that sets the pace for rates at lending institutions across Canada. The bank provides regular updates on its policy rate, the target for the overnight rate, and reasons for changes. It also offers charts with historical interest-rate data that allows you to see where rates have been and draw conclusions about where they might be heading.

Canada’s major chartered banks and other lending institutions regularly issue newsletters with their own commentary on interest rates and the Bank of Canada’s policies. These updates and newsletters from their chief economists are important resources to consult when trying to figure out where rates are heading and how real estate markets will respond.

Though you shouldn’t try to second-guess interest rates, closely looking at past rates, current trends, and what the various banks are saying should indicate whether rates are set to rise, plateau, or fall. By gauging interest rate trends against other factors including the health of the economy, you can make your own call as to whether financing will be more or less expensive in the future and whether or not you should select a variable or fixed-rate mortgage. Interest-rate trends also indicate whether you should buy now, wait a few months when financing might be cheaper, or sell while low rates are creating opportunities for buyers to hop into the market.

Tip Rising rates may make financing more expensive, but they can sometimes create opportunities for buyers by putting pressure on owners who have overleveraged their portfolio. Selling when buyers are active can provide financing you can use to purchase properties when debt-burdened owners have to unload assets.

Determining property taxes

Property taxes may seem like fixed costs, but they are important considerations for investors. A booming market with rising sale values pushes up assessors’ valuations of properties. A slack market, by contrast, could see property values fall. This has a direct impact on the annual tax assessment, not only in the coming year, but often in the three years following the change in value. Taxes levied on a property will affect the return you see as an investor, and possibly your financing costs.

Different investors have different expectations and projections for their profit margins. Most investors want a double return — that is, a positive cash flow for a rental revenue stream, and a capital gain over the original purchase price. Traditionally, real estate has gone up an average of about 5 percent a year for the past 30 years. However, that figure can be higher or lower depending on the real estate cycle, location, type of property, and other factors. Most investors would like to see equity in their properties increasing at least 5 percent a year.

This will affect municipal property taxes, which are the primary revenue source for cities. Residential property taxes are often just a small percent of annual assessed value, but those few percentage points will eat into your cash flow. Knowing which way property taxes are likely to head in a particular market will help you determine the kind of cash flow you’ll need to get from the property to cover costs, as well as the long-term drag on your return.

Remember Property tax assessment records are available through the provincial assessment authorities, municipal offices, and online tools maintained by these organizations. You can also find explanations of trends in each municipality’s annual financial reports. Often, local media cover trends in property taxation, providing you with insights into overall municipal approaches to setting tax rates (in some provinces, the provincial government sets the rates).

Tip Be sure to discuss the impact of property taxation policies on your investment with an appraiser, who is often able to coordinate appeals on any assessments you consider out of line with the reality of your holding. Given the range of factors that affect the value of a property and its performance in any given market, you should understand how property taxes will influence your own cash flow as well as the property’s appeal to future investors. Assessments that indicate opportunities for investment can easily rise after investors move in, improve the properties, and improve the tone of the surrounding neighbourhood.

Considering capital gains

Capital gains are another consideration. If your property gains an average of 10 percent a year in value over ten years, the property will double in value. If you buy it for $100,000, and sell it for $200,000, you have a $100,000 gain in your original capital investment. You are taxed by the Canada Revenue Agency on 50 percent of your gain. In this example, that means you could keep $50,000 tax-free, and pay tax on the remaining $50,000. At the top marginal tax rate of approximately 50 percent, you would pay approximately $25,000 tax. At the end of the day, you could keep $75,000 of your original $100,000 gain, after tax.

If your original purchase price was $100,000, that would mean a 75 percent return over ten years, or an average of 7.5 percent a year non-compounded. But you’ll also have to factor in positive cash flow from rental income to determine your actual return.

On the other hand, maybe you just put down 10 percent and borrowed the other 90 percent on a mortgage. Therefore, you actually received a 75 percent return on your original personal resource down payment of $10,000 over ten years. The reason is that your original $10,000-down “investment” resulted in a $75,000 net gain, or an average of $7,500 a year on your original $10,000, or a 75 percent return per year. Better than obtaining, say, a 3 percent return on a term deposit that is taxed as investment income in your hands in that taxation year. Depending on your tax bracket, you could pay 30 percent or more on that interest income, meaning that net after tax you actually received only about two-thirds of your interest, or 2 percent in the example given.

Reviewing leasing conditions

Fully leased properties with long-term tenants make for great investments from a revenue perspective, but a close look at the tenant mix may reveal nothing more than a good tease. The last thing you want to do is enter a market on the basis of an apparently healthy lease market, only to find that leasing activity is actually heading south and taking property prices with it.

Tip Fortunately, several sources can help you investigate the current and long-term history and prospects for local leasing markets. If you’re looking at residential rental properties, have a gander at the annual rental housing market survey that the Canada Mortgage and Housing Corporation (www.cmhc.ca) produces. Commercial brokerages such as Colliers International (www.colliers.com), CBRE (www.cbre.ca), and Avison Young (www.avisonyoung.ca) prepare similar reports on a quarterly basis for commercial and industrial markets. Retail leasing reports are also available from the big brokerages, but high rates of turnover make these more difficult to produce.

Knowing where vacancies stand in your market, and the rents tenants are paying for their spaces, will indicate investment opportunities and reflect landlords’ capital requirements. High vacancies may indicate buying opportunities as existing owners may want to sell out because of cash flow pressures; alternatively, low vacancies may make assets attractive to purchasers, resulting in a seller’s market as buyers compete for assets.

Remember A good leasing market doesn’t necessarily mean a good investment market. The balance between supply and demand might be just right, and the long-term potential for appreciation in values is low. Conversely, landlords might hold on to properties despite high vacancies because they’re willing to wait till the market turns back in their favour. Still, knowing rental conditions can help you build an argument for investing in particular locales and devising a negotiating strategy that will win over vendors.

Gauging buyer confidence

Buyers’ confidence in markets is as changeable as the markets themselves. The two, after all, have an intimate relationship. Confident investors contribute to a strong market, while conservative investors limit the volume of activity taking place in the market.

But short of doing psychological assessments of a random sampling of active investors, how can you gauge the level of confidence in the market? Let others skilled in the art research it for you, of course!

Tip The Conference Board of Canada (www.conferenceboard.ca) is one of several organizations that issue business and consumer confidence surveys. For a fee, the Board provides detailed analyses for specific regions. The information gleaned from these sources, like interest-rate projections, can help you gauge whether markets are in for a boom or a downturn.

Rising consumer confidence may indicate an increased willingness to invest in real estate. As an investor, you may consider preparing your residential property for sale to potential buyers, or perhaps you’ll opt to buy before the market heats up. On the other hand, falling confidence in the market may signal purchase opportunities as people retrench in anticipation of harder times.

Warning Consumer confidence is less definite than monetary policy and interest rates, and it relies on a good grasp of the current economic climate. Unforeseen events can put the kibosh on existing predictions, so although you should consult assessments of the market’s mood, know that the mood is just that — a mood. It won’t necessarily obey scientific laws.

Considering local planning

Urban planning activities have a peripheral influence on market cycles but may play a role in spurring demand in local areas. Including a glance at urban planning initiatives in the areas where you’re considering investing is therefore a good plan.

Here’s how planning has an influence: An area that has languished at the bottom of the local market cycle may find itself at the top of a council’s priority list because of public concern over its status or the potential for improvement if it is rezoned for certain purposes. A community planning process may identify certain goals and uses for the area. Perhaps planners will propose development incentives. A combination of these factors may spark a rush into the area.

Knowing the pressures facing specific neighbourhoods and where these areas rank in the city’s planning priorities will give you clues to the future direction of the market in these areas. This gives you an advantage over other investors, potentially allowing you to get in when the market is low and sell when the market is high. Conversely, if an area is set for rezoning, you want to be aware that the market for properties with uses allowed under the previous zoning is about to collapse.

Analysis without paralysis: Tallying the variables

Making sense of the information you glean through your research into market conditions and perceptions of the market may seem like voodoo. And to be fair, seeing the big picture takes a good deal of intuition.

To make your job of determining market conditions a bit easier, Table 5-1 assembles various variables and suggests an appropriate action based on the variables most prevalent in your corner of the market. Of course, determining a market’s character is hardly an exact science, but this table should help you put circumstances into perspective. Find the set of criteria that come closest to what you’ve discovered about the market, and gauge how you’ll respond.

TABLE 5-1 Sizing Up the Cycle

A

B

C

D

E

Values

Depressed

Increasing

Increasing

Declining

Depressed

Rents

Low

Increasing

Increasing

Declining

Low

Vacancy level

High

Beginning to decrease

Low

Increasing

High

Occupancy level

Low

Increasing

High

Decreasing

Low

New construction

Very little

Increasing

Booming

Slowing

Very little

Profit margins

Low

Improving

Widest

Decline

Low

Investor confidence

Low

Negative to neutral

Positive

Slightly negative

Low

Media coverage

Negative and pessimistic

Positive and encouraging

Positive and optimistic

Negative and pessimistic

Negative and pessimistic

Action

Buy

Second best time to buy

Sell

Be cautious

Buy

The decision: Trust your gut

Whether you’re buying or selling, don’t make your decision lightly. Consult your long-term investment plan and take stock of what your advisers are saying. Knowing when you’re ready to sell is as important as knowing when you’re ready to invest. Though you may consider selling a handful of properties in your portfolio, the range of properties you can buy is typically larger. Knowing whether the market is at the right point for a purchase, however, is just one aspect of your investment decision.

Remember Few markets are uniform, after all. Even an unfavourable market can harbour good investments. Finding the good deals in difficult circumstances is part of the challenge — and joy — of investing in real estate.

X Marks the Spot: Identifying a Target Market

Throwing a dart at a list or map showing the areas where market conditions are favourable is one way of identifying a target market for investing, but you should put a bit more effort than that into your decision. A number of factors may sway you in favour of (or against) a particular locale. The landscape can change rapidly, and although stable, long-term areas may not see much change in their appeal (or lack thereof), shifts in the market often create new opportunities for investors in marginal or transitional areas. Alternatively, sudden shifts in government or popular opinion may send once-robust areas into prolonged doldrums.

The following sections explore some of the considerations you’ll want to take into account when you’re narrowing down your list of potential neighbourhoods for investment. Keep the fundamentals of the local market in mind, looking past the fads to the actual investment potential of the area. Of course, your perception and affinity for a particular neighbourhood may count more than the hard financial stats. To ensure your investment balances financial wisdom with personal feeling, find out what conditions on the ground are really like.

Separating the fads from the fundamentals

Successful real estate investment requires that you know what you’re buying and trust that it’s going to deliver a return. Remember the old joke about diplomacy being the skill of telling someone to go to hell in a way that they actually look forward to the trip? Real estate marketing can be a lot like that; a marketer will sell you a piece of hell and you’ll enjoy the heat and other amenities!

Although the marketing of new developments tends to focus on lifestyle and neighbourhood options, you may look at other aspects of the property and wonder whether that development is really so great. The hottest new neighbourhood under development or redevelopment may not fit your investment strategy, no matter what advantages the marketers tout.

Remember Points to consider when comparing a property in a hot neighbourhood to one in a locale generally considered less favourable include not only their price, but also their potential for appreciation, maintenance costs, and cash flow:

  • Price is an important factor when stacking up properties, and especially when gauging the relative merits of two properties whose neighbourhoods differ in quality. Check whether the list price of each property is within area norms, and whether either of the two is undervalued. A market correction may create opportunities to buy undervalued properties simply because the original owners have become skittish and want out. An undervalued asset in a good neighbourhood is a wise bet, but steer clear of an overpriced home in an undervalued neighbourhood because you’ll have less room for long-term appreciation while the rest of the neighbourhood catches up with your property’s value (or the property’s value may actually fall in line with the rest of the neighbourhood).
  • Potential for appreciation will indicate the return you can expect on your investment. The greater the potential for appreciation, the better the investment. Consult an appraiser for a prognosis on the kind of return you can expect on the various properties you’re considering.
  • Potential maintenance costs could cut into your margins, especially in a less-favourable neighbourhood. We’re not talking only about deferred maintenance that’s contributed to the lower asking price of the property and greater potential for appreciation; we’re talking about the ongoing maintenance associated with graffiti, litter, vandalism, and the like. You may be able to make something of the property, but will you be able to keep that something?
  • Potential for cash flow could moderate your enthusiasm for that high-end asset if you find tenants hard to come by. Depending on your investment strategy, it may be better for you to invest in a more modest property with solid cash flow potential than a trophy few can afford to rent from you. On the other hand, if you have a chance to pick up two residential properties, and can swing the financing, you may opt to live in one and rent the other — effectively having two slices of cake and eating them too. (Just be sure you know which piece is sweeter.)

Getting to know markets and neighbourhoods

Bearing in mind the fundamentals of sound investing, part of your job as a diligent investor is to familiarize yourself with the neighbourhoods you’re targeting for investment. There are several ways to do this, from research to walkabouts, and a number of factors to consider.

Tip Based on your research into market conditions, identify three neighbourhoods that could yield investment opportunities. Doing so allows you to see how each compares with the others, tally up the relative advantages and disadvantages of each, and generally get a feel for which neighbourhood you’re most comfortable with.

Basic factors to consider before you even visit a neighbourhood relate to its age, its character, and its unique mix of properties and infrastructure.

Sizing up age

Older neighbourhoods either are well-to-do and established, or show their age. The good news is that a neighbourhood with an aging stock of properties with rock-bottom values can offer great value. You may be able to renovate the property and make it into something people want, either as tenants or owners. On the other hand, an established neighbourhood with good-quality homes may offer few opportunities for you to enter the market.

A new neighbourhood may be the hottest place for some investors, but it also has the potential for surprises. Where an established neighbourhood has a reputation, a new neighbourhood has yet to prove itself. The quality of the homes may be good and the infrastructure may be there, but what will it become?

Sizing up character

The kind of neighbourhood character we’re talking about isn’t necessarily the vibe you’ll pick up during a stroll down the street. Rather, it’s the mix of people actually in the neighbourhood, the age and income levels, and education and employment indicators. These factors are worth considering because they contribute to the kind of tenant you attract, and also how the locale maintains itself.

For example, an upper-income neighbourhood in a suburb with a growing working-class population may have a prime piece of real estate to offer. Buying the upper-end property hoping to lease suites to workers or students may not be the best idea because the rents you’ll have to charge to make ends meet on the property probably won’t match what the workers and students are able to pay. Chances are the better opportunity will lie in an asset that can provide affordable housing to the growing population of workers.

Tip Statistics Canada (www.statcan.gc.ca) collates data from each census into profiles for communities across Canada as well as specific tracts within communities. These community profiles provide detailed information on the age of residents, the housing stock, as well as income levels and other demographic and socioeconomic information.

Remember We don’t recommend a snobby attitude in selecting properties, but as an investor you should consider what serves the market. Paying attention to the demographics and overall character of a neighbourhood helps you find an asset that’s the right fit, not only with your own goals but also with those of the people to whom you hope to lease.

Sizing up the mix

The right mix of properties in a neighbourhood ensures a match made in heaven between the kind of property you want to own and the needs of any tenants you hope to secure.

Perhaps you’ve got a penchant for a small industrial building. The three mid-size bays inside are perfect for light industrial users. But a glance at the uses of surrounding properties indicates that it’s nowhere near any amenities, and neighbouring properties don’t really complement the kind of users you hope to secure. However good a deal it is, and whatever the future growth potential of the area where it’s situated, chances are the small industrial users you’re looking for may not want to lease the premises. If it doesn’t suit their needs, the investment won’t live up to your expectations.

Tip Community amenities are key to the users you hope to attract to a revenue-producing property. Several online resources allow you to gauge the potential of a neighbourhood before you even see it. These include Google Street View, of course, but many real estate listings include video tours of listed properties and the surrounding neighbourhood. Many municipalities have mapping tools that can give you a sense of adjacent land uses, rights of way, and other key information. These tools help give a sense of the area’s layout as well as what the local amenities are.

Honing your vision

You wouldn’t buy a car without kicking the tires, so it makes sense to take a walkabout in each area where you’re considering investing. (Don’t kick the properties, though. You might break something!) Testing your response to these neighbourhoods gives you a sense of how others are likely to respond to them.

Tip To become familiar with a potential neighbourhood, pay it a few visits at various times of day and night. Give yourself a chance to experience it as a driver, a pedestrian, and a transit user. Are traffic patterns unusual? Is it walkable? Are transit connections frequent, smooth, or a hassle? Your experience of these aspects of the community may give you an understanding of why a neighbourhood is hot or not, and may point you to areas within the neighbourhood that are more convenient places to be than others.

A walkabout is a more intensive way for you to gauge several of the factors discussed in this section. Keep your eyes open for the following:

  • The fabric of the neighbourhood: This includes the condition of the properties and landscaping. The better the condition of the neighbourhood, the more attractive it will be to potential tenants and the less risk to the condition and value of your own property. Priming yourself with neighbourhood history tells you whether the condition of properties is improving or declining.
  • Local businesses and amenities: These are important indicators of your fortunes in the neighbourhood. A handful of local businesses serving up staples and a few pleasures is a good sign. Communities that lack a decent grocery store and other basic shops stand to be less favoured by potential tenants and future buyers.
  • Street vibe: This is a significant factor in making a neighbourhood a place people want to be. Good traffic flows, people who chat with one another, maybe even street-side decorations are all signs of a vibrant neighbourhood. On the other hand, desolate streets where the windows of the homes have bars may not send the right message to people you’re trying to interest in your property.
  • Noise and environmental factors: These affect different people in different ways. Unless you’re investing in commercial or industrial property, chances are you won’t want to buy something on the flight path to the local airport. Similarly, properties that are downwind from a pulp and paper plant or wastewater treatment facility may not be the most attractive assets.

Remember Be sure to consider the full range of factors at play in the neighbourhoods you’re considering. A personal visit may help you make sense of issues local newspapers have raised about the area, or may temper the impressions you’ve received from others who claim to know what’s going on.

Consulting the locals

One of the best things you can do as a potential investor in a neighbourhood is to get to know the locals. This gives you a feel for the area, as well as local concerns and attitudes, and furthers your understanding of the community. You may even discover information about the property you’re looking at that may encourage you — or prompt you to think twice about the investment you were hoping to make.

Opportunities for meeting locals abound. Browse the local stores. Visit the local coffee shop (if there is one) and listen to the chatter; maybe strike up a conversation with the people at the neighbouring table. You may not be good at small talk, but even chatting about the weather can create an opportunity to hear what people are saying about the market.

Dimitri took a more direct approach. He wanted to buy a waterfront home for his young family. He found a home for sale in southern New Brunswick, but decided he would do his research homework and check with its neighbours before he made an offer. It was a wise move. He discovered that rats were a serious problem in the area, and that successive attempts to eradicate them had been unsuccessful. The area was also prone to flooding in spring; though none of the people Dimitri spoke with had ever had water in their own homes, they said it wasn’t unusual to find it lapping at their basement doors. Dimitri moved on and eventually opted for a house in a new subdivision overlooking a lake.

Tip Building relationships with locals is something you can never begin too early. This is especially true if you plan a major development of a property or are considering a rezoning. Cultivating an open relationship with members of the community will help bring them onside with your plans. The goodwill you foster by participating in the community as either a homeowner or business operator is invaluable.

Selecting a Property

The property you’re seeking in the locale you’ve chosen may not be simple to find. You have to look for it, or have your broker do so. Chapters 1 and 2 in Book 7 discuss strategies for locating potential investment properties. After you’ve selected a neighbourhood in which to invest, scan the Multiple Listing Service (www.realtor.ca) listings for your asset class or from brokerages specializing in your area of interest, and keep your eyes open.

Facets of the property to consider include its location, the availability of amenities and services, and the property’s potential for appreciation. The criteria are largely refinements of the principles that have allowed you to narrow your search to a handful of properties. By now you should know what you want.

Home sweet home

A house draws out a lot of emotion, regardless of whether you’re the owner-occupant or simply a tenant with the option of moving out if it gets on your nerves. You have a lot more conditions you want to satisfy when you’re looking for a chunk of residential real estate than, say, a retail unit. Your standards are especially high if you’re also planning on living in the house. Any tenants you welcome into the building are there because they’ve chosen to rent from you and can move on if the place isn’t what they expect, but you’re going to be stuck with the place as the primary occupant and user. So be selfish and put your own interests first!

Remember First off, consider where you want to live. Price, affordability, and availability each play a role in determining where you buy, but your own idea of what makes a livable neighbourhood also factors into your decision. Being practical won’t hurt; what appeals to you may appeal to tenants or future buyers. Being able to tout a feature of your neighbourhood that has been of particular value to you will help the sales pitch you’ll make to the next purchaser.

You have many factors to consider when selecting a home, whether for your own use or as an investment. Here are a few questions to ask yourself:

  • What is the neighbourhood like? A thriving neighbourhood promises to be a great place to live, whereas one where not much is going on could make for dull evenings and weekends. Or the run-down nature of some of the buildings could mean more excitement happens than you really care to know about. These factors won’t just affect your quality of life as a resident, either; they could be indicative of long-term trends that will either make it easier or more difficult for you to sell your property in the future.
  • What are traffic flows like? The local highway may be a great feature if you do a lot of commuting, but you don’t necessarily want to be living next door to it. Consider, too, the potential health impacts from living next door to a major traffic artery. These factors could limit the resale value of your property, but convenient access to transportation networks could be an asset for some buyers. Research the traffic patterns and impact on property values in any area in which you’re considering buying.
  • What community amenities are within a 10-kilometre radius? Nearby schools, places of worship, parks and recreation facilities, transit, and shopping can be points in the favour of residential real estate. The closer your property is to amenities, the more you’re able to offer others. The higher value of a location can pay itself back if you approach the purchase as an investment rather than simply your own home.
  • What does municipal zoning allow for the property? Favourable zoning can open the door to enhancements that can affect the value of your property. Depending on your neighbourhood, changes may be in the works that will either increase the value of your property or diminish it. Researching what the city plans for a particular residential neighbourhood is an important part of analyzing a property.
  • What are property tax rates like? Taxes are one of the few certain things in life, so make sure you study which direction residential property taxes are heading before you buy. Rates typically differ from city to city, so you may be able to find a property comparable to one you like in a municipality that levies a higher tax rate on homeowners, and thus end up paying less tax.
  • What are the prospects for an increase in property value? Regardless of where you buy, try to make sure your home has potential to appreciate in value. Some of the basic market research you’ll undertake to determine a location (see the earlier section “Separating the fads from the fundamentals”) can help you make this call.
  • What are condo fees and building regulations like? Don’t forget to take condo fees and bylaws passed by the building council into account when you’re looking at condominiums. Be sure to review building council minutes prior to buying to become aware of any ongoing issues. (Chapter 2 in Book 7 discusses condos.)

Tip Having chosen a neighbourhood in which to buy, scout potential homes using the Internet. Here are a few sites to check out:

  • The Canadian Real Estate Association maintains the Multiple Listing Service (MLS) site, which boasts the majority of residential listings across Canada (www.mls.ca). This will give you an idea of the homes available for purchase in a given area, after which you can approach a Realtor to assist your search. You can identify several potential Realtors through listings on the MLS site.
  • Independent agents also exist who can offer insights and connections regarding the area where you hope to buy. You need to find someone with the experience and skills to serve your needs and with whom you can work — so look around.
  • A number of services give owner-vendors a venue for pitching their properties, such as ForSalebyOwner.com and PropertyGuys.com. Approximately a quarter of homes in Canada trade this way. Although we encourage you to use a real estate agent in your various transactions, it’s worth remembering that not all people will. You may find a deal on one of these sites that, given some skillful negotiating, will hand you a bargain.

In addition, you can find listings of court-ordered sales, either at the local courthouse or through services that collect such data and distribute it for a fee. Websites such as www.foreclosuresearch.ca exist, but as often as not vendors facing foreclosure are actively trying to avoid the circumstance and working with brokers who will be able to tip you off to potential opportunities in your locale.

Accommodating tenants

A home isn’t a good investment if you can’t achieve a return on it. Although appreciation over time is one means of achieving this goal, sharing your home with a tenant provides an ongoing cash flow. To ensure your experience with a tenant has the best chance of success, you want to make sure the home you buy has certain features.

Ideally, if the previous owner of the house has had tenants, you won’t need to imagine the modifications needed to make the residence double as a rental property. Though you may need to make adjustments to the layout, the structure itself should be flexible enough and include some key features:

  • Dividing walls, to ensure a more complete separation of your living area from the tenant’s living space
  • Potential for sharing laundry facilities and other amenities, which could eliminate your need to set up a separate laundry area for tenants
  • Wiring and circuitry necessary for the installation of a fridge, stove, and other appliances

These features make the space less hassle for you to adapt for rental use, and create a more desirable space for potential renters.

Tip Dividing walls are just one element that help ensure a happy co-existence between your family and your tenants. A separate entrance is often a requirement for both practical and regulatory reasons. On the one hand, it gives the tenants a feeling of privacy and decreases the chance their comings and goings will disturb you. It also establishes the unit as its own dwelling for legal and tax purposes. But if you’re buying a two- or three-bedroom condo and want to rent a room to a tenant who will help pay the mortgage, you’ll want to put a higher priority on having an extra washroom as well as adequate sound-proofing.

Buying a home located close to a major public transit route will enhance your chance of securing a tenant. A parking spot is another attractive feature.

Warning Not all municipalities allow secondary suites, so be sure to check the legality of having tenants before you buy. Some jurisdictions will turn a blind eye to tenants, but you invite a range of hassles by not complying with the letter of the law. For example, the arrangement may compromise your insurance coverage or mail delivery may be denied. Lenders may also refuse to lend if the suite isn’t legal, reducing your borrowing power. For peace of mind check what local bylaws have to say, and speak to your lawyer.

Attracting purchasers

Gauging future demand for housing in your neighbourhood is difficult, but you can take steps that will position your home to be attractive to potential purchasers in 5, 10, or even 20 years. Some of these will be reasons that you’re attracted to the home yourself, such as proximity to schools, parks, shopping areas, transportation, and other amenities. But looking at the locale is also worthwhile:

  • Is it close to major institutional employers with ongoing employment needs, such as a hospital or university?
  • What is the potential of the home to be adapted for other uses, say rental to tenants, home office use, or the like?
  • Does it have the potential to appeal to buyers completely different from yourself?
  • Does the local zoning allow expansion or redevelopment of the home? You may not be interested in doing this, but the possibility might attract a future owner.

Location, location, location

Okay, “location, location, location” is a time-worn phrase, but it makes sense. And what would a book on real estate be without it? A property’s location isn’t something to take lightly, given the potential impact on appeal to tenants, your cash flow, and potential resale value.

Appealing to tenants

Many of us, at one time or another, have had a landlord who’s baffled us. The rent was good, but property conditions were such that we didn’t have to wonder why we were the ones living in the suite rather than the owner!

When you’re a landlord, why do the same thing to your tenants? As discussed in the previous section, choosing a property that’s in a location where you would want to live yourself makes sense even if you don’t live there. That’s because lots of other people probably would look forward to finding the place you’ve found. A decent neighbourhood makes for happy tenants, which makes for stable cash flow and, ultimately, a better return on your investment. (The value that amenities can add to a property’s location is covered in the later section “Amenities and services.”)

Tip A property that’s attractive to tenants is better than a utilitarian rental property with no cachet at all. Chances are you’ll also be able to charge higher rents, potentially securing yourself a long-term advantage that beats buying a larger property in a less attractive neighbourhood commanding lower rents.

Cashing in

The quality of the neighbourhood will affect not only how long tenants stay and the rents they’re willing to pay, but also the cash flow the property generates. You’ll be able to charge tenants higher rents for suites in well-located properties, and you’ll likely face lower operating expenses.

Though you may pay closer attention to the overall appearance of a property that’s surrounded by attractive neighbours, the quality of the tenant that a better-groomed property attracts helps your investment property deliver a return. You’ll find it easier to secure better-quality tenants — that is, tenants who respect your property — who reduce your maintenance costs. This ensures better margins on the rents you’re able to charge.

Trading up

Future buyers will have an interest in the property you’ve bought if it is in a better-quality location. The chances for appreciation increase if the fortunes of the surrounding area are also on the upswing.

Even if the locale seems to be facing a downturn, a better-quality asset will tend to lose less of its value than one in a poor location in a poor neighbourhood.

Amenities and services

The kinds of amenities and services you hope to have near your investment property vary. Users of residential properties want something different from tenants of commercial and industrial properties. When identifying amenities available to users of the property you’re considering buying, you’re generally safe to look in a 10-kilometre radius around the property.

Tip Many property listings now tout scores from www.walkscore.com to highlight the ease of walking, commuting and cycling to local destinations. (You can use the site to check the score of any address you like, of course.)

Residential

Standard residential amenities include schools, places of worship, parks and recreation facilities, transit links, and shopping areas. The closer a property is to a greater selection of amenities, the more you’ll be able to command in rent.

Amenities are also increasingly important to resort properties, with those who want to get away from it all not wanting to leave their urban comforts behind. Ensure that the resort property into which you’re buying is well-served with amenities suited to the recreational user.

Commercial

Commercial properties, such as office and retail buildings, have their own unique set of needs. Depending on the size and kind of workforce, selling points can include proximity to recreational amenities and shopping facilities as well as food service. Postal outlets and business supply and service centres are also important.

Infrastructure such as parking areas, proximity to main commuting routes, and transit services can also enhance the value of the assets in which you’re looking to invest.

Industrial

Connections to transportation infrastructure are among the most important amenities you can provide industrial users. Because these properties are typically where items are made, stored, and distributed, it’s important that users have ready access to roads, and even rail and port connections. In many areas of Canada, quick access to the U.S. border is also a consideration.

Like commercial users, industrial tenants appreciate proximity to food service and retail outlets.

Looking to the future

Here’s a startling revelation: No one can predict the future. But based on the amount of research you’ve put into finding a property, you should be able to take an educated guess at what the future holds for the ones you’re considering buying. Because the main success of your investment will be in its appreciation, you want to make sure the property itself stands to gain in value. You should also have some confidence that the prospects for the surrounding neighbourhood are good.

Looking in

The future prospects for your investment in and of itself depend on the quality of the building and overall market conditions.

It’s worth pointing out here that your property should be structurally sound. A building with potential for adaptation will also have stronger potential to appreciate in value in future years, as residential and other requirements change. The greater the number of uses to which a future owner can put a property, the greater the chances that it will retain its value, and even become a more valuable asset.

The overall market conditions are something over which you have little control. A glance at the history of the property’s value should indicate whether or not it has seen a steady appreciation, or whether it has suffered depreciation in the past. Researching the causes for past fluctuations in value may not reveal the potential for appreciation or depreciation, but such research will indicate whether any unusual circumstances were behind the fluctuations.

Looking out

The surrounding neighbourhood can sometimes work to lower or raise the value of your property. Although your property is a passive player in the phenomenon, any increase or decrease in the quality of the community could have an impact.

Remember As an investor, aim to find a property in a stable neighbourhood with potential for appreciation. Recognizing the warning signs that could indicate the start of a downward trend in value is a skill that should prompt you to sell the property — or stay away from it if you thought it might be a good purchase.

Identifying the Types of Land Ownership

Just as there are different kinds of properties, there are different kinds of ground on which properties stand — and we’re not talking about sandy or rocky soil. Rather, two kinds of ownership will define your ownership of land: freehold and leasehold.

Technical stuff Both freehold and leasehold properties can be left in your will as an asset of your estate, or specifically bequeathed.

Holding freely

The most common form of property ownership, especially for investors, is freehold, or fee simple ownership. Owning a property freehold allows you to use the property for an indefinite period, and to do as you please with it free of any encumbrances such as lease conditions. Owners of leasehold properties deal directly with the government and are responsible for compliance with the laws and contractual obligations regarding the land as well as any charges that encumber the title of the property, including mortgages, liens, and judgments.

Having freehold ownership is advantageous as an investor because you face virtually no constraints on what you may do with the property, save what liens and laws may require. This allows you to alter, develop, or otherwise maximize its potential as you please so long as what you’re doing falls within local planning, zoning, and other guidelines (and of course your own investment strategy).

Holding with limits

Sometimes a landowner will lease rights to the property to a developer who will in turn create improvements on the land and sell his interest in the land (complete with lease obligations) and improvements. The improvements are typically buildings or units of buildings developed on the property. A leasehold property allows those holding an interest in land to use it only for fixed periods of time. An agreement between the landlord, who owns the property, and the owner of the leasehold interest, or tenant, sets out the terms and conditions of the relationship. The leaseholder can sell the right to use the land only for the time remaining in the lease — subject, of course, to the conditions of the lease.

Various forms of risk mean this is not the favoured type of property for an investor. A leasehold property may be subject to rent increases if the lease hasn’t been prepaid by the developer; alternatively, the tenant may want to hold the property longer than the lease allows. In addition, the lease may place limits on what the tenant can do with a property (sometimes no improvements are allowed, even if the improvements would enhance the property’s value).

On the other hand, leasehold properties often have a lower price because of the limitations owners face. This may make them a more accessible starting point for novice investors, especially if they’re buying apartments to lease. Toward the end of the lease, however, or in the event lease rates increase significantly, a greater risk of a discount on the price arises because the ownership costs will be significantly higher relative to comparable freehold properties.

Government-owned properties are often available on a leasehold basis. Development is allowed with the goal of generating income for the owner. Many leases for development properties stipulate a 99-year term, although 999-year terms are not unheard of for public amenities. Queen’s Park, home of the Ontario legislature, sits on land the University of Toronto leased to the province for a 999-year term expiring in 2858.

Knowing That a Property’s Right for You

Just as with falling in love, you know you’ve found the right investment property when it happens to you. But here are a handful of tips and warnings for you to keep in mind.

Tip Make sure the property in which you’re interested shows potential to serve your investment goals. Check it against the objectives you’ve set for yourself, and verify your opinion with those of your advisers. You might be missing something that’s obvious to them. Consulting them will ensure you’re making the best possible decision under the circumstances.

Your actions in the market aren’t the only reason to know about market cycles. The information you glean may help you negotiate a better deal, perhaps even a few concessions from the vendor. Building up your knowledge of the local market and the factors affecting it will make you a better negotiator.

Warning A property valued at above the current market average could narrow your margins, or potentially become a burden to you if the market slips. This is particularly true in run-down neighbourhoods, where you haven’t only general market conditions to worry about but also the conditions of the market in the immediate vicinity of the property.

Run-down neighbourhoods aren’t always going to have good long-term potential. Knowing the history of an area will help bring to light any long-term negative perceptions that area faces, and the potential for a turnaround. Although many neglected areas in Canada’s major cities have undergone gentrification — simply put, the process of being made more attractive, more expensive places to live in — and improvement in recent years, many others have experienced periods of prolonged decline. Your investment may be a glimmer of hope among those who wish for a turnaround, but it’s not likely to solve the problem by itself.

Many areas in Canada have older neighbourhoods that boast character buildings and local landmarks. A wave of redevelopment — gentrification, if they’ve been down-at-the-heel — can give them a new lease on life. Property values could easily double or triple in response to buyer demand as they become the hot new places to live, work, and play. The Cabbagetown and Yorkville areas in Toronto and Yaletown and Gastown neighbourhoods of Vancouver are a just a few examples. Redevelopment of the former Woodward’s department store in Vancouver kicked off a wave of redevelopment handed many long-time owners a windfall they never expected to see as the surrounding area — long known as Canada’s poorest postal code — spiraled into disarray. On the other hand, persistent social issues and community opposition to redevelopment underscores the importance of a long-term commitment and vision for your investment.

Checking Out Even More Resources for Property Information

All the chapters in Book 7 mention various professionals and professional organizations that offer the skills, expertise, and information that can help you build a successful real estate investment portfolio.

Knowing that help is available is one thing — knowing when to call for help and what the best source of information to help you understand any given situation is another. Sometimes, a combination of sources can be more helpful than the most logical or obvious choice.

This sections highlights some of the resources available, the problems they can help you solve, and the ways you can make use of the expertise they offer to develop a profitable portfolio.

Government agencies

The federal government oversees several ministries and agencies that collect and provide information to help you navigate the real estate market. Some agencies also provide advice, guidance, and even financing to help property investors.

The key federal organizations that can assist property investors include

  • Canada Mortgage and Housing Corporation: Commonly known as the CMHC (www.cmhc.ca), this federal organization focuses on residential housing, but it’s about a lot more than mortgages and housing. It provides various forms of research and support, including financing to the residential real estate sector that are worth investigating. With respect to property information, it collects and regularly reports data regarding everything from housing starts to rental trends. Snapshots of specific markets and neighbourhoods are available through its housing information portal (find the link at www.cmhc-schl.gc.ca/en/data-and-research). Special interim reports focus on specific issues and opportunities. CMHC produces a variety of guides and reports to help you plan upgrades, full-scale renovations, or even new construction that will improve your property’s value as an investment. Many of these are eligible for CMHC financing.
  • Farm Credit Canada: Canada’s federally backed agricultural lender, FCC (www.fcc-fac.ca) produces an annual report on the value of farmland across Canada among other information related to rural and agricultural properties. It’s a good source of information if you’re investing in farmland or are involved in an agricultural venture. Some purchase and projects may be eligible for funding if they’re directly related to agriculture or supporting activities in the farm sector.
  • Statistics Canada: Property information and statistics related to investment in the housing, construction, and real estate sectors generally are available through Statscan (www.statcan.gc.ca/eng/start). Many of its housing statistics are shared through CMHC, but it also has its own regular release schedule for information related to investment intentions, building permits, and other measures of business activity that can help you size up a particular market.

Real estate brokerages and boards

Residential and commercial brokerages and their staff are good sources of information for two reasons:

  • The brokers and agents who work for them have firsthand knowledge about local market conditions and can steer you to areas and properties you might want to consider.

  • Most also issue quarterly and annual reports demonstrating that knowledge. These reports examine sales and sales trends in particular areas, asset classes, and market segments.

    Tip Get to know the firms dealing in the kind of property that interests you; regardless of the firm’s size, it will likely produce a report that fills you in on what the firm and its agents are seeing. Most of these reports are available for the asking because they’re a good way for the brokerage to keep its name in front of potential clients; you’ll often be able to access them online through the brokerage’s website.

Some of the firms to contact for reports for residential properties include

For commercial properties, contact

Some local firms specialize in project marketing. Although not brokerages in their own right, many also track market conditions, particularly with respect to new homes. If you’re considering condominium apartments, investigate the options in your area.

Provincial real estate boards and the regional and local boards they represent also produce monthly reports, typically based on their members’ activities. (The local boards represent Realtors and the real estate industry in a given municipality or region.) A portion of this information is aggregated nationally and distributed by the Canadian Real Estate Association (www.crea.ca), the umbrella group that represents the industry nationally. You can sign up to receive these reports to gain a basic sense of local conditions, where the hot areas are, and the number of listings available for a given month. This information can help you determine where a particular market is in a cycle and areas where you might consider investing.

Financial institutions

Banks, credit unions, and other financial institutions that provide mortgages have a vested interest in the state of the real estate market, particularly from an investment standpoint. This means they’ll often produce reports examining both general and sector-specific trends. The research typically takes a look at both national and provincial trends, and sometimes includes sections focusing on larger metropolitan areas. The reports sometimes have a direct connection to the investment trends; other times they highlight consumer issues such as housing affordability that may indicate where opportunities lie for investors. To access the reports, simply go to the publications section of the bank’s website and see what’s available.

The organizations representing and overseeing lenders also produce reports that may be of interest. For example, the Canadian Bankers Association regularly produces a report on mortgages in arrears (https://cba.ca/mortgages-in-arrears), which provides a proxy for court-ordered sale activity in each province. Mortgage Professionals Canada (www.mortgageproscan.ca) produces an annual report on the mortgage market in Canada that provides insight into the market, and how people are investing in real estate.

Policy statements from the Bank of Canada (www.bankofcanada.ca) as well as occasional reports from the Office of the Superintendent of Financial Institutions (www.osfi-bsif.gc.ca), which sets lending guidelines, may also help you gauge the future of the market.

Real estate consultants

A wealth of market reports is available for free, but focused information has a value. For a tailored report that addresses your specific interests or circumstances, you may require the services of a consultant — and can expect to face a bill commensurate with the degree of information you’re seeking.

Several options are available in major cities across Canada to help you understand conditions in the local market. Nationally, however, the data solutions team at Altus Group (www.altusgroup.com) issues regular reports, while its team of consultants can provide guidance in applying the data to your specific challenges and questions.

Within specific markets, Urban Toronto (www.urbantoronto.ca) maintains a database of current development projects that provides insights into the state of the condo market and the latest projects to hit the market. Urban Analytics Inc. (www.urbananalytics.ca) maintains its own database for Metro Vancouver, while also producing custom reports for local industry organizations and companies.

Professional appraisers, accredited through the Appraisal Institute of Canada (www.aicanada.ca), have also become more than people who tell you what your property’s worth. An increasing number is branching out to provide services ranging from selecting sites for investors to studying the potential for developing specific properties in order to deliver the best return on an investor’s dollar. Appraisers can also work in concert with financial planners to ensure your portfolio is acquiring the right kinds of property to produce the maximum value in a given situation or that properties are fulfilling their highest and best use.

Tip Appraisers know property values, so they’re ideal allies when appealing property taxes. They can build a case that may help you avoid a higher levy than you’d pay if you just sized up a property by itself. Similarly, they can also challenge the assessment of a property by a banker or insurer to ensure you’re getting the best value for the property.

Owners’ associations

Not surprisingly, given the large number of property investors in Canada and the range of issues they face, organizations exist that can help property owners with just about anything they might face. Owner organizations allow property investors to speak with a common voice on important issues ranging from property taxes to major development projects having an impact on a region. Some major organizations in Canada include the following:

  • Apartment owners’ associations: Most operate on a provincial basis with local divisions. Membership may be most appealing to large property owners, but smaller investors with just a handful of properties are not barred from joining. In fact, if you’ve got plans to build your portfolio, hooking up with an association like this may allow you to develop relationships that make further investments possible.
  • Building Owners and Managers Association of Canada: This national organization (www.bomacanada.ca) represents commercial property owners. Consider joining if you own several commercial properties and would like to meet others responsible for their management.
  • NAIOP: This organization (www.naiop.org) represents industrial and office property owners in Canada’s major cities. Membership typically includes larger investors and suppliers to the industrial and office sector.

Tip The cost of an annual membership in any one organization may outweigh the benefits of membership. Many of the events the organizations host are open to non-members for a slightly higher fee than members pay. Even if you aren’t a member, you can benefit from the organization’s services and events.

Builders’ associations

Renovating your property may boost its value as an investment, but make sure you get the proper advice! Several organizations that may not at first glance seem to have a connection to investment property may have the tips to help you make the most of your investment.

Swapping stories with friends who’ve done projects similar to yours may be a great way to gain tips, but approaching the right organizations can put you in touch with workers who have unique skills, granting agencies willing to support your project, and resource people with guides that can bring you up to speed on current best practices for your type of building.

These organizations include the following:

  • Canadian Home Builders’ Association (www.chba.ca) and local counterparts can refer you to companies that have the skills, experience, and credibility that will make sure your job gets done properly.
  • Canada Mortgage and Housing Corporation (www.cmhc.ca) whose interest in fostering energy-efficient housing makes it an ideal resource for background information, tips, and forms of financing that can facilitate your renovation project.
  • Sustainable building organizations are able to offer tips on retrofitting your property and direct you to professionals with the expertise to realize your goals. For example, the long-established Canada Green Building Council (www.cagbc.org) set standards for certification of new construction and retrofits and also works to educate industry and the public about green building practices in tandem with provincial and local advocacy groups.
  • Local heritage organizations provide not only resources that can help you complete a renovation that reflects a home’s history and architecture, but also provide access to funds from various levels of government. Allowing an older property to express its age may make it a more valuable asset to potential purchasers. Moreover, knowing its history may allow you to tap grants for part or all of the renovation.

Provincial land registries

Title to each property in Canada is registered in the province where it lies at the provincial land titles office, or land registry. The title will record (and reveal!) the registered owner, the exact dimensions of the property, and any charges, liens, or encumbrances on the title. For example, a lien may be registered in the event of unpaid construction bills or other charges associated with the property. Rights of way that affect what can be built and where will be noted.

Some of this information may be worth knowing before you purchase, because it may affect how you use the property in future. Other segments of the information may give you insights into why the current owner has offered the property for sale. Regardless, making sure you have the information prior to purchasing a property will be part of your due diligence.

Tip The information held by the land titles registry in each province is public information, but typically comes at a nominal cost. The cost could be minimal, however, compared to the hit you take if you purchase the property and discover a problem with the title or a condition that limits your use and enjoyment of the real estate.

Property assessment offices

Property assessments are more than numbers. They’re a source of valuable information regarding the estimated market value of a given property, the surrounding properties, and the year-to-year shifts in value. Knowing this information for a specific property, or group of properties, can give you a better sense of the property’s potential, the state of the market, and the opportunity it presents.

Tip Many provinces now offer a limited amount of assessment data online, which can help you undertake some rudimentary research on properties so you can make some initial judgment calls and have an informed discussion with your advisory team (see Chapter 3 in Book 7).

City hall

Municipal records and databases offer a surprising amount of property information. Some of this information is mapped, allowing you to quickly compare a specific property with its immediate neighbours and those in the surrounding area.

Some common forms of civic info are zoning and development permit information. Some properties may have come before the local council in the past, and council minutes will provide a record of that history. Most civic sites are searchable, but Google is also a fine option for pulling up the information. A good strategy is to enter both the municipal website URL and your property address in quotations marks so the search is focused; for example, searching the two terms “podunk.ca” “2356 William” would yield any references to 2356 William Street (or avenue) in the town of Podunk.

Major cities are also making a large volume of data available through open data initiatives, revealing everything from crime statistics to dead animals. If you want to avoid buying in a place with high rates of property crime or dead birds, this information could come in handy.

Court records

Clues to why a property has hit the market may turn up by doing a search of provincial courts records for either the owner or the property address. You may discover documents related to the financial woes of the owner or the launch of a court-ordered sale process.

Court records can provide helpful information that lets you understand what went wrong with a property in the past and how you can avoid repeating them. We assume your financial management will be better than the owner who lost it to a lender, but if the property was accused of releasing contaminants, then you might want to take a closer look at what you’re buying.

Court records typically fall into higher and lower court proceeds — that is, provincial supreme court and courts of appeal (primarily civil claims and petitions) and provincial court (primarily criminal proceedings). Most of the information of interest to you as an investor and property owner will be found in Supreme Court filings.