How to Spot an Investment Property with Maximum Return Potential

(February 28, 2014 )

Finding the right investment property in Vancouver can be a challenge, especially for first time buyers who don't know some of the tricks of the trade when it comes to maximizing your investment property's return potential. By knowing what to look for, you can make a wise purchase and put your investment property to work. Here are a few things to keep in mind when you start your search for a profitable investment property.



Make a List of Investment Criteria Before You Start Looking

Your investment property criteria will likely be different from those of other investors in terms of what should or should not be included in order to achieve your specific goal as an investor. If you are looking for commercial space, then your criteria will look much different than someone looking for multifamily properties. Some of your criteria will come down to your personal preferences, such as "I only want to buy property in Gastown", but most of the things you consider will depend on what type of investment you are pursuing. Deciding on your criteria ahead of time will make your search much more manageable, and you'll be able to effectively communicate your plans to others who might help you buy your property. Criteria you might want to consider, no matter what kind of Vancouver real estate you'll be looking at, are the neighbourhood you're buying in, property size, lot size, potential cash flow you can make from the property, appreciation potential and property conditions, to name a few.

A Few Good Rules for Buying an Investment Property

There are some rules in buying investment property, and although every rule in investing is still not an exact science, employing these rules might help you to get a larger return and avoid bad investments. For instance, "The 2% Rule" states that your monthly rent should be about 2% of the purchase price of your property. If that were the case, a $100,000 home should rent for $2,000 each month, or a $50,000 home should rent for $1,000 per month. This might seem like a simplistic estimate, but it can help you decide whether a property is worth a closer look. If you don’t believe you can justify charging $2,000 in rent per month for a property with a $100,000 price tag, you shouldn’t invest in the property. Another rule to look at is "The 50% Rule", which predicts how much your expenses are going to be each month. The rule states that your expenses will consume 50% of your income, and any income left over becomes your cash flow. The 50% rule is helpful in teaching investors that expenses are almost always more than they might anticipate.

What Makes a Good Investment Property?

There are four typical ways to build wealth with investment properties. The first is appreciation, which means as property values rise, so does the value of your investment. The second is cash flow, where the amount of money you make on your property exceeds the amount you're paying. The third is principle reduction, which means if you carry your loan to its end, the property becomes yours outright. Finally, there are tax benefits that could allow you to use your property to offset your other sources of income. Consult your tax adviser for how tax benefits apply to your specific situation.

Anytime you are making a big purchase, it's always best to do all your homework and research you can before diving in. Maximizing your returns on an investment property takes effort and real estate savvy. By following these steps, you can avoid losing money in real estate and maximize the return potential on your new investment property. 

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