But for now, we’re going to take a chill pill. It’s time to talk about something very sobering: risk minimization.
Real estate investing has a lot of upsides, but make no bones about it: it’s an investment, just like any other. And like any investment, there is a chance you could lose money.
It’s for this reason that we use risk minimization techniques to reduce the likelihood losses. For this article, we’ve compiled a few of the major risk minimization techniques to help you avoid potential losses.
Adding another property to your portfolio is always exciting. But when you’re buying a property, there are several things you can do to avoid buying a lemon.
If you put all your eggs in one basket by focusing only on one neighbourhood, you’re taking a gamble. Sure, the city might happen to build a stadium nearby in the next two decades. Or a rougher area could gentrify. But the risks are there, lurking in the shadows – what if crime rates spike in that neighbourhood? What if developers overbuild and saturate the market? What if the city puts in a waste management facility instead of a stadium?
That’s not to say that any of this is likely to happen. With due diligence and a team like CONNECT supporting you, you are setting yourself up for success.
As we like to tell our clients: if you have several properties in your portfolio, you should consider diversifying within different sub-markets in your respective real estate market. If you only own two rental properties and they happen to be in the same neighbourhood, this isn’t really an issue. But, as you add properties to your portfolio, consider exploring other development areas.
You can never guarantee the security of your investments. But by investing in different neighbourhoods, you are playing it safe by hedging your bets. And, as we’ve pointed out a number of times, there are so many great sub-markets in Toronto to pick from. Consider Toronto’s waterfront, or Yonge and Eglinton, to name a few.
That said, there are times when you do know something good is coming – whether it’s a new major transit hub, an attraction, whatever it may be – that will increase the value of your property. We’ll discuss that next week, in Condo Investing Secrets Part 4: The Power of Location.
The point is to find a balance between finding an up-and-coming area, and not putting all of your eggs in one basket. That’s where a professional team can help you.
Imagine the worst-case scenario happens to your real estate investments. No, not a zombie apocalypse. Even worse – you’re forced to sell during an economic downturn. Now, you’re trying to unload your two-bedroom condo in an over-saturated and under-valued market.
How do you minimize your risk in this case? Well, we are buy-and-hold investors, so we suggest not selling. But, if you have to sell, it’s important that your property has elements that make it more appealing that comparable units.
When you’re first buying a property, you should be asking yourself: what sets this property apart from others?
Sometimes it can be an appealing aspect about the location. Maybe the condo is close to a park or along a major transit line. Other times, it can be appealing architecture in your condo or upgraded features. A bath tub with jets? Bingo! Beautiful granite counter tops? Now we’re talking! Heated floors? Oh baby.
As you can see, the initial purchase of the property is important. But equally important is the maintenance of your property. If your property isn’t maintained well, you won’t get the return on investment that you hoped for.
Do your due diligence! You don’t want just anyone living in your condo. The crazy woman with forty cats? No thanks. The professional squatter who never pays rent after the first month? Uh-uh. The party animal college frat boy? Nein, danke.
Screening your tenants properly isn’t a hard process. This is especially true in Toronto, where there are low vacancy rates. Lots of people would love to live in your condo! While simply giving the place to the first person who shows up is easier, finding the right fit for your condo could save you big bucks in the long run.
Whether you manage the property yourself or you have a property manager, someone should be checking in on the property regularly.
If you catch an issue early, you will save a lot of money in the long run. Fixing the small leak in the bathroom might be a $50 fix if you catch it early. But if you didn’t catch it in a timely manner, you could be spending hundreds, or even thousands, of dollars to repair the damage.
Inspecting your tenant’s carbon monoxide or smoke detectors is a great excuse to check in on your property every six months or year. That way, you can see if your tenants are treating your property with respect.
Real estate is an investment like any other, and should be treated as such. Don’t buy properties expecting that real estate is a get rich quick scheme. It’s not.
But if you take the proper precautions and minimize your risk, you’ll see some great (and sustainable) returns on your investments.
Safe investing everyone!
Ryan Coyle, CoFounder CONNECT Asset Management