Advanced Real Estate: Investment Properties
By ZARAH WALPOLE
Real estate is hot right now. I have many clients purchasing a second property for recreational and investment purposes. I’m a real estate lawyer so, of course, I think property can be a great way to hold and grow wealth. However, it is also an area that you should enter with your eyes wide open and an awareness of the many pitfalls that can await the unwary.
First, you need to fully assess how you will finance the purchase. Different considerations come into play when mortgage companies consider properties that are owner occupied, a pure investment, leased to a 3rd party or a combination of the foregoing. Don’t assume your financing options are the same as when purchasing a home. When assessing whether you can afford your carrying costs, don’t forget to include costs such as property taxes, insurance, and maintenance fees, etc.
Also, make sure you understand the tax implications related to the income earned while holding the property and the role of capital gains or losses when you the sell the property. For example, unlike the family home, the capital gains exemption will not apply. Consulting with an accountant to understand the tax implications and with a lawyer to determine if the property should be held personally, in a trust, or by a corporation can be an extremely important part of maximizing your return on investment.
If you’re going to be covering some of your costs by renting the property to a tenant, you’ve become a landlord and will need to be conscious of landlord tenant law. The law varies considerably whether you are renting a residential or commercial property. In either case, you need to know the rules that will apply to your situation. An absolute minimum requirement in either circumstance is to enter into a well drafted lease agreement. From a practical point of view, I cannot emphasize enough the importance of checking potential tenants’ references. Knowing how to legally evict a tenant is one thing, never having to do so is an even better thing.
If you plan on changing the current use of the property (i.e. adding an apartment, putting in a business), it is vital to ensure that your proposed use is permitted. For example, municipalities have zoning by-laws that only permit commercial uses in certain areas. Here in Barrie, not only are basement apartments only permitted in certain zones but they also have to be registered with the City.
Be aware that how the property is occupied can affect your insurance coverage. It is relevant whether the property is being owner occupied or occupied by tenants. If it is not occupied at all, your standard policy may not provide coverage unless the property is being visited / inspected weekly, or even daily. Make sure your insurance agent understands the uses to which the property is being put and that you understand the coverage that is being provided and what, if any, steps you are required to take to maintain the policy in force (i.e. hiring someone to check the property).
These are a sample of the type of issues to be aware of when considering an investment in real estate. My recommendation is to get the experts involved from the beginning. Make sure your lawyer, accountant, mortgage broker, financial advisor and/or insurance agent know what you are doing. Take advantage of their education and experience. And then, enjoy your property.
<-Back
The above is not intended to constitute
legal advice. Please contact a lawyer to clarify your
legal rights.
