Common Mistakes When Purchasing an Investment Property (Part 3)
Assuming a Special Assessment is a Bad Thing
A special assessment also known as a special levy, is when the members of a strata vote to make major repairs or upgrades on the building. This leads to the strata imposing a levy on the unit owners for part of the costs of the repairs.
Examples of repairs can include upgrading the roof, installing new energy-efficient windows, repairing defects related to the envelope of the building(s), replacing old plumbing etc.
When potential buyers see these special levies in the strata reports, they often jump ship because they don’t want to get stuck footing the bill for a building under repair. This can be a short-sighted perspective for an investor causing you to miss out on what could be a great investment opportunity.
Repairs and upgrades on any home whether it be a strata or detached home are to be expected. What’s important to determine is how much that cost will affect your ability to cash-flow but also how much it could increase the value of that asset.
For example, upgrading windows to more energy-efficient ones will be an upfront cost but would not just lower heating cost but could also contribute to appreciation value as this will appeal to future buyers.
The more important question when considering a strata with upcoming special levies, is determining if the strata has a healthy contingency fund for these upcoming repairs and how well management is handling the allocation of these funds appropriately.
When assessing a strata’s ability to manage the repairs and upgrades of a building, you will need to review the many documents involved including the strata minutes, annual general meetings (AGM) and the depreciation report.
Your realtor should be able to help point out important details found in these documents.
However when I am looking at investing in a strata I use a third-party service called Condo Clear. For a very reasonable fee, they will review all the documents for you and draft an easily readable summary of what you need to be aware of before pulling the trigger on your next purchase.
Limiting Where You Buy
I would say this is the most limiting factor potential investors place on themselves when considering investing in real estate.
Often times, when investors want to discuss purchasing a rental property, they think they need to buy where they live. If you live somewhere like Vancouver or Toronto, for the average person this is not going to open up many options.
Consider opening up your horizons by doing some research on the best places to invest in real estate either nationally or in your resident province.
As a good rule of thumb, look outside of densely populated areas and consider municipalities where infrastructure is being put in place to support increased population growth. Small university/college towns are a good example.
If you need some help on this, you can always schedule a call with us and we’ll be happy to share some ideas of where to look.
Not Considering Repairs and Maintenance in Advance of Purchase
Separate from special levies discussed above, there will always be individual repair costs to the property you’re buying whether it be a strata or a detached home.
These repairs could be immediate upon taking possession of the home, or later on as part of general maintenance.
In part 2 of this series, we discussed why it’s important to make your financing re-advanceable so you can increase cash-flow, but this is equally important so you can avoid having to dip into capital reserves to cover these repair costs.
Furthermore, using your mortgage to cover these costs can be an effective tax strategy as you can write-off the interest. Make sure you speak to a certified professional accountant about this.
This wraps up our 3 part series on the common mistakes people will make when purchasing investment real estate. If you have questions or wish to schedule a call to discuss your options, reach out to us either by email at codyrowe@dominionlending.ca or by scheduling a call. We look forward to assisting you accomplish your goals in real estate!
