Five ideas to maximize the return on your real estate investment
Real estate is a great place to stash money and build equity
by Drew Fossum
Last fall, Stephen Hamelin and his girlfriend Natalie Holroyd upgraded from a 750-square-foot condominium in Calgary to a three-bedroom house. Rather than sell the condo, they decided to hold onto it as an investment and rent it out. The condo is seven years old, located in an award-winning complex and has grown in value year after year. The neighbourhood, Royal Oaks, is on the rise, with grocery stores close by and an LRT station coming online late this year. The condo doesn’t generate any cash flow, yet, but Hamelin hopes to build equity and, one day, to buy another property in warmer climes. But how does he do it? How can he maximize his return on his current condo investment? Should he be renovating the kitchen? Re-flooring the living room? Should he continue renting the condo out or should he not? Are there short-term strategies for Hamelin to generate longer-term gains?
Real estate is a great place to stash money and build equity. Unfortunately, it can also be a cash cow if managed improperly. There are two approaches: pay the mortgage down and hope the housing market keeps going up, or be proactive and manage the investment closely. We asked the experts how to do the latter.
With Renos, Easy Does It
Renovations are a great place to increase your return on investment, says Kyle Stone, a real-estate agent with Sotheby’s, in Calgary. Just don’t go overboard, he says. The two areas of the house to renovate for maximum returns are the bathroom and the kitchen. Start with the hardware, Stone says: change the light fixtures, door knobs, cupboard handles, and splash some fresh paint on the walls for instant returns. These are affordable options and they can be done on your own.
The next step is to hire a crew to change countertops, update the shower and redo the floors. But Stone says you have to be careful. “Don’t go over the top on what you replace,” he says. “Stick to medium priced products.” Often, more expensive products don’t carry the same return on investment as middle-of-the-line goods.
Hamelin echoes Stone’s perspective. He says he wanted to replace his condo’s countertops with marble ones, but after crunching the numbers realized that it wouldn’t pay off in the long run.
Aside from the kitchen and bathroom, Stone recommends keeping large scale renovations to a minimum. Window updates, siding and appliances upgrades will only cut into your return. Often, homeowners will feel urges to make grand improvements on the property, but the little things pay off the most.
Troy Champ says good renters can make or break your investment. Champ owns eight rental properties in downtown Calgary, so he should know. If a couple of bad eggs destroy your rental suite, Champ says you may have to pay thousands bringing it back up to code. To keep tabs, Champ picks up monthly rent cheques from tenants to make sure the property is being kept up to snuff. “We’ve had a few issues with renters who are messy and stuff like that,” he says. “You give them a few warnings and then when their contract comes up to be renewed you can make a decision at that point.”
Holroyd, Hamelin’s girlfriend, has owned her own property for several years and has faced bad renters. It took roughly $15,000 to fix the damage they left behind, she says. Good renters mean you will spend less time dealing with neediness or actual destruction, improving your work-life return on investment.
Clayton Achen with Achen Henderson Chartered Accountants in Calgary says when managing the financial side of a real estate investment like a rental property, it pays to be smart. Achen advises many of his clients on how to maximize returns. Investment properties are for long-term financial planning, and if that investment is a rental property, it may come loaded with costs, like condo fees, land taxes, maintenance and property management charges. Achen says owners often just break even on a monthly basis or generate small sums of cash flow, though there can be significant gains when they choose to sell the rental property. Still, he advises to hold on to rental properties for long periods to allow them to build equity.
In Families We Trust
There are other ways to maximize a return on an investment property, Achen says. Consider, for instance, designating your family’s vacation property as your primary residence when you sell it. You do not pay tax on capital gains generated from the sale of a primary residence. “This option may be available to you in situations where your vacation property’s value has grown at a higher rate than your family home,” Achen says. You can designate your primary residence on your tax return in the year of the sale. It can restrict your ability to use the property as a rental, but there are a few circumstances where a property can be both a principal residence and a rental (for example, if you rent rooms out in the house you live in).
Another way to manage an investment property is to set up a family trust. The water gets murky when talking about family trusts, and involves nuanced language. This is how Achen summarizes when a trust can be used: “The idea with a family trust is to hold property in trust for the benefit of your heirs (kids/grandkids), like a family vacation cottage. When you pass away and leave the property to your kids, there is a deemed disposition on that property which can result in capital gains on which taxes could be payable. This is not the case with property held in a family trust. Property distributed from the trust to your heirs is distributed at its cost, meaning that any capital gains would be delayed until your heirs sell the property or pass away. It is even possible for your heirs to use their principal residence exemption on the sale, eliminating all or a portion of the tax that would otherwise be due, so the potential to defer or eliminate tax by using a family trust can be substantial.”
As you can tell, this is not a simple process. Specialized lawyers or accountants should be consulted.
The Star Pupil
Hamelin’s condo is a long-term investment and an equity builder. He is holding on to it for the foreseeable future. He rented it below market price and has, he says, great renters. Hamelin won’t sink a bunch of money into the condo; instead, he plans on watching his equity build while maximizing the amount of time he spends with his newborn daughter.
Kyle Stone’s number one piece of advice: buy the worst property in the best neighbourhood. Stone says by being selective you can make minimum improvements and allow the community to bring the value of the property up. This takes a considerable amount of searching, so be picky. Look at a hundreds of properties before you pull the trigger. Stone says these kinds of properties are often found close to downtowns. If they haven’t been snatched up by a property developer, it might be the steal you are looking for.Related