Looking to invest in the Prince Edward County (PEC) real estate market? You aren’t alone. The past few years have seen an influx of investors flocking to the County. Is it the right real estate investment for you?
The Basics of Investing in Real Estate
Whether you invest in real in Prince Edward County or elsewhere in Ontario, the basics are the same. (Note: I’ve borrowed heavily from our real estate website in Toronto for the following section.)
Financing
Getting a mortgage for an investment property isn’t as easy as borrowing for your primary residence – you’ll need at least 20% of the purchase price for a down payment, and only a portion of the income you get from rent will be considered in qualifying you for a mortgage (usually 80% but it could be less depending on your lender).
Taxation
Any money collected from rent is considered income, and thus subject to regular taxation. Increases in the value of your investment property (from the time it becomes an investment property to the time you sell it) will be subject to capital gains taxes. If you’re thinking of buying an investment property, make sure to talk to your accountant to fully understand the tax implications.
Timing
Most real estate investments should have longer-term objectives. Because of the unpredictability of the real estate market, expecting to profit in a short period of time is risky.
Goals
What are your investment goals? There are three ways to make (or lose) money by investing in real estate:
- Cash flow (cash return) – Cash flow is the difference between what you collect in rent and the expenses you pay out. In addition to being affected by market conditions (how much you pay for the property and how much you can rent it out for), cash flow is affected by the amount of your down payment and the terms of your mortgage.
- Appreciation – When you a sell an investment property for more than you paid, that’s called appreciation. For example you buy a house for $450,000 and later sell it for $625,000 – that $175,000 difference is the appreciation in the value of your investment.
- Equity (mortgage paydown) – When a tenant helps you pay down your mortgage, you’re building equity. For example, you buy a property for $400,000 with an $80,000 downpayment, and you apply the rent to the mortgage and rent it for 25 years. Eventually, you will have a mortgage-free property. If you then sell that property for $450,000, you’ll have built up $370,000 in equity (and you’ll get your original investment of $80,000 back).
Return on Investment (ROI)
Investors use different calculations and tools to calculate the returns on their real estate investments:
- Cash flow is the net amount of cash moving in and out of an investment
- Calculation: Income – operating expenses – financing costs
- Capitalization Rate (cap rate) is the rate of return on a real estate investment property based on the income that the property is expected to generate.
- Calculation: Operating Income / Purchase Price
- Return on Investment (ROI) – a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments
- Calculated by adding the cash return, mortgage pay down and appreciation.
Investing in Prince Edward County
There are six different ways of investing in real estate in Prince Edward County:
Option 1: Buy a house and rent it in full or in part, to a traditional long-term tenant.
The Pros
- The tenant pays down your mortgage and helps you build equity
- Having an income suite may help you offset the costs of living there
- The rental market is HOT in the County with high demand and low vacancy.
The Cons
- You’re a Landlord, and with that comes landlord headaches: repairs, renovations, tenants that don’t pay their rent…
- If you’re renting out only part of your home (e.g leasing your basement and living in an upstairs apartment yourself), you’ll need to cope with the noises and smells of your tenant
- Having tenants in leases may make it harder to sell your home when the time comes
As of writing, investors in Prince Edward County real estate can often get a cap rate of 6.5-8.5%.
Option 2: Buy a house and rent it out short-term (e.g. Airbnb)
This is an extremely popular investment option in the County right now, and for a good reason. Note: the County has passed some Airbnb regulations that are effective January 2020. Click here to read more about the short-term accommodation rules.
The Pros
- Offset your costs and have your tenants pay your mortgage while equity increases
- Cash flow – PEC rentals can generate $500-$1000 or more in monthly cash flow (annualized)
- Rentability – the County is in high demand from short-term rentals and properly priced short-term rentals are usually booked solidly throughout the summer months
- Great option if you want to use the property personally some of the time – it can generate income during even short periods when you aren’t there.
The Cons
- Lots of time and effort required to market and manage a short-term rental
- Possibility of issues with guests, damage, increased wear and tear
- Potential insurance issues
- Your lender won’t consider your projected income when deciding how much money to lend to you
- The county’s short-term rules severely restrict what constitutes a short-term rental and where and how many can operate. Read the rules here.
Make sure to read our Ultimate Guide to Short-Term Rentals for all our tips and tricks.
Option 3: Renovate and Flip
The Pros
- There are plenty of properties in County that are in need of some TLC – and just as many out-of-town Buyers looking for a no-hassle purchase of a renovated property
- If you buy the right house, in the right area and do the right kind of renovation, flipping can be profitable.
- Flipping can be a great way to build your real estate portfolio and climb the property ladder.
The Cons
- If you aren’t living in the County, managing a flip from a distance can be difficult.
- Renovations always take longer and cost more than you expected. With a flip, every dollar spent and every month where you have to pay a mortgage counts.
- No matter what HGTV tries to tell us, flipping for profit isn’t easy – it takes a lot of time and can be a risky venture for someone who isn’t a contractor or tradesperson
- Prices haven’t historically appreciated as fast in the County as they have in Toronto or some of the other big cities, so making a quick profit will likely be more difficult.
- Not everybody makes a profit when they try to flip a house. Losing money is never fun.
If you’re considering buying a home to flip it, make sure you’re working with a REALTOR who knows the game and can make sure you buy the right property, put the right amount of money into it for the area and that you sell it at the right time. (Contact us and we’ll put you in touch with a local realtor who regularly flips houses for profit).
Option 4: Buy a Multi-Unit Residential Property
There are plenty of multi-unit properties in the County. They don’t come up for sale often and are in high demand.
Pros
- There’s huge local demand for regular rental apartments
- If the property has 4 units or fewer, it qualifies for regular residential financing and HST is not applicable
- A multi-unit property can allow you to have a bigger investment in PEC, without having to buy multiple properties
- Spread out the risk of bad tenants – if one tenant goes rogue, the other tenants continue to offset your costs
Cons
- If there are more than 4 units, it’s considered a commercial real estate investment, which means different downpayment requirements, interest rates, lending requirements and tax implications
- More tenants = more landlord headaches
Option 5 – Commercial/Residential Mixed Use Properties
A fifth option for real estate investors in PEC, is buying a mixed use property that contains both residential and commercial units.
Pros
- Opportunity to benefit from PEC’s growing retail and commercial sector
- Spread out your risk with multiple tenants
- Cap rates can be attractive
Cons
- Mortgage financing for multi-unit and mixed use properties is more difficult and expensive. Expect more inspection demands from your lender, higher interest rates and bigger downpayment requirements.
- With more tenants come more Landlord headaches
- Unlike residential homes, commercial properties are subject to HST
- Higher property taxes because of the commercial component
- Commercial tenants can be more demanding than residential tenants
- Not a great option for the novice investor or Landlord
Option 6 – Raw Land
In the County, there is still plenty of raw land that you can purchase, and it can be a great investment option.
Pros
- Possibilities: buy it and improve it yourself, or buy and hold
- Possibility of selling to a developer
- Can be ahead of the curve by buying in the next hot area
- If you buy farmland, farmers can often rent the fields and cover your taxes
- Affordability: buying raw land is obviously more affordable than buying land with a house already on it
Cons
- Time – it may take a long time for the property to appreciate
- There’s no guarantee you picked the right location
- Dealing with the municipality on zoning and potential uses
Ready to invest in the Prince Edward County real estate market? Get in touch and we’ll connect you with a local expert who knows how to evaluate investment options and maximize your ROI.