So you bought your first Investment Property. Congratulations! Now you can sit back and watch the money roll in, right? Well, not exactly. Many people understand that Real Estate is a great investment, but not all of them known where the gains come from. Unfortunately if you want to see a good return you are going to have to work a little. I hope to show you 5 areas you can address to watch your investment grow.

First, let’s get the misconception out of the way. Many first time investors believe that you buy a property, rent it out, and make your money through the tenants paying off your mortgage and through the property increasing in value over time. While this is true and you will see a typically slow return through this manner, you are vulnerable to unexpected expenses such as repairs, carrying costs from vacancy, and a slow growing real estate environment.

By addressing 5 areas specifically, you can increase the value of your return overall even if 1 of these areas is underperforming. These 5 areas are Cash Flow, Mortgage Paydown, Forced Appreciation, Market Price Gains, and Tax Benefits. We will touch on each of these areas in more depth, but want to highlight first that this information is not meant to replace the advice from your accountant or financial adviser and that you should seek advice from your own professional counsel prior to making any decisions.

Cash Flow

Perhaps the easiest way to gain a higher return on your investment is to increase the cash flow. What this means is to find a way to increase net income while decreasing net expenses. A few ways to increase income would include increasing rent in compliance with the Land Lord Tenancy Act or adding additional rental units to your property. Remember that rent can only be increased by a set percentage per year (Check with your local authorities) or by showing the increase is reasonable due to repairs or renovations. You can also add rental units to your property by adding a separate unit in the basement or renting out a detached garage, etc. Make sure you check with the zoning of your property and local bylaws first.

Decreasing expenses is a little more difficult but you can typically find savings by increasing efficiencies on utilities (low flow toilets, LED lights, increased insulation, modern energy efficient appliances, etc), price shop on insurance or other vendors/suppliers, and  review landscaping (remove high water flowers, plant shade trees for summer, consider artificial lawns if allowed in your city, etc).

Mortgage paydown

Mortgage paydown can increase your return by lowering the amount of interest you pay over the entire period. For example – and please excuse the low numbers to make the math easy to understand – let’s say you currently have a mortgage of $100,000 and are paying 3% interest.  For the sake of simplicity you will pay $3000 in interest. If you pay down your mortgage to $95,000 at the same interest rate of 3% you will be paying $2850 in interest. That is a savings of $150, or 5% off your original interest payment. These numbers are low and simplistic for educational purposes. Please consult your mortgage broker for further details.

Forced appreciation

Another way to increase the return on your investment, and perhaps the most common method, is to force appreciation. To put that in plain English, you will make the house worth more through renovations or repairs. The entire flipping industry is based off this method because it is tried and true. Find a property in distress and fix it up. If you have any areas in your property that can be fixed up – or improved – than you can force the appreciation of your property and realize the return. Just be mindful not to invest too much and price yourself out of the market. A neighborhood can only demand so much of a price no matter how much you invest.

Market price gains

Market price gains are the natural increase in value of your property over time. These increases are subject to external factors such as Government and Bank policies, economic influences, even demographic and geographic changes. While the price of your property may go down over the short term, history has proven that Real Estate will go up in value over all. Demand for property increases but they are not making any more land. Eventually every property will make money, the question is just how long.

Tax benefits

The other method to increase the ROI on your property is to maximize your tax benefits. There are certain expenses that you can write off as a cost of managing your property or doing business. Due to the intricacies of what can and cannot be applied, please refer to your accountant. There are several who specialize in Real Estate investments and while they may cost a little more, they get you much more in return. You don’t argue over the price of the shovel when you are digging for gold.

So if you have purchased your first, fifth, or even hundredth investment property, the best way to increase the return on your investment is to apply these 5 principles. Even if you only gain a few percentage points from one or two of these methods, it could add up to thousands of dollars back in your pocket. Add that up over a five year period and it could be the down payment on your next property…

If you have any questions regarding investment properties, or are thinking of but not quite ready to make the decision, call Ryan Ligeza. He will answer your questions and show you an example using an active listing. No pressure, just a helping hand.