Understanding Your Investment Goals Part 1
If you’re thinking of investing in property, your goal may seem simple: to make money, of course. But there are various kinds of investment properties, lengths of timelines on returns, and degrees of investor resources. Each of these will determine the type of property investment you should make. Read on for some tips on what to consider when choosing the type of property investment that’s right for you, and stay tuned for a follow-up post about crunching the numbers on your chosen investment property type.
BE SPECIFIC: WHAT ARE YOUR INVESTMENT GOALS?
Understanding your specific investment goals is an important starting point.
Maybe you’re investing to pay for your kids’ education or to boost your retirement savings (these are common uses of long-term real estate investment income). Or perhaps it’s a short-term investment you’re after, a quick turnaround to cover renovation costs on your existing property or to pay for a family vacation (these are less common, as property is not an easily liquefied asset, but they could be the right choice if you have the risk tolerance to enter into a rapidly booming market). Or maybe you’re a seasoned investor with multiple properties and transactions under your belt, and your goal is to grow your already-thriving portfolio.
Be as specific as possible when outlining your goals; for example, don’t simply say “I want to sell this property for more than I paid for it.” Outline a goal using something like the following parameters:
- A specific monthly income target (e.g. breaking even on your mortgage payments and ownership costs via rental income).
- A particular timeline for reaching a certain percentage of profit (e.g. 10% over 4 years).
- A lump sum to work towards in the form of a long-term investment (e.g. a $250,000 retirement nest egg, realized within 20 years).
When you have a specific investment goal, it’s much easier to track your progress, measure your success, and take pride in your achievements.
START YOUR RESEARCH… AND THINK OUTSIDE THE BOX
It may seem prudent to invest in locations and property types that are familiar to you, but keep in mind that there could be undiscovered (and profitable!) opportunities elsewhere, not only in the city where you live, but in your larger geographic region. Is there hidden value in a regional growth corridor? Should you be considering investments outside of the residential property market, in commercial or industrial spaces?
Consider the following types of investment properties, and their pros and cons:
- Single Family or Small Multi-Family Property Investment: Purchasing a condo or house with the intent to rent or sell it to a tenant or buyer is a comparatively smaller-scale investment with lower overhead costs, so it’s a good choice for those just starting out in property investment. However, if the housing market takes a downturn, it may be difficult to find tenants or buyers—although this kind of downturn doesn’t look likely in Toronto in 2019.
- Mixed-Use Property Investment: Purchasing a building whose amenities and zoning laws facilitate both residential and commercial use (such as an apartment located above a storefront) means your commercial property can support your investment even if the residential market takes a downturn (and vice versa). However, it can be more difficult to secure financing for these types of multi-use investments, as lenders are effectively assessing the risk of two different types of business ventures.
- Retail/Industrial/Commercial Property Investment: Purchasing a non-residential building for business or commercial use by tenants can be a more secure form of rental income, as business tenants tend to enter into longer-term leases than residential tenants. However, your tenants’ success is directly tied to the health of the economy, so a downturn in the commercial sector may mean bad news for your rental income. Moreover, for commercial properties, you’ll likely need a down payment of at least 50%, so this type of investment is not suited for beginners.
- Land Property Investment: Purchasing undeveloped land is a great way to enter into a multi-use investment. You can re-zone and sell the property to a developer, you can eventually build on the land yourself, or you can rent the land to neighbouring businesses or residents for uses such as storage or parking. However, this investment may be riskier due to the difficulty of predicting increases in land value over time.
Now that you’re aware of all the options open to you, it’s time to crunch the numbers. In the next post, 'understanding your investment goals part 2', we’ll look at how to predict your regular income (cash flow), the overall profits you can expect (return on investment), and the importance of understanding and securing financing, interest rates, and down payments.
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