How to Build a Profitable Real Estate Portfolio

Written by Henry Balaban

 Broker of Record, Sutton Group - Associates Realty Inc.

Navigating the real estate landscape can be a confusing and frustrating experience. Whether you’re making your first foray into the market or in the process of building your portfolio, keep these essential principles in mind in order to come out on top.

Think long term (even if you end up acting short term)

It’s important to understand that about 10 percent of any appreciation will be eaten up by soft costs, which range from Toronto and Ontario Land Transfer Taxes to real estate commission and capital gains tax. In order to make your investment worthwhile, you’ll need to hold onto the property for several years. Hopefully within those years, a property will generate a positive cash flow, which can afford you the opportunity to expand your portfolio and buy other investments.

Get into the market early

While interest rates are low, use it to your advantage as an opportunity to build equity faster. In the case of Toronto’s real estate landscape, you can try entering other markets within 100 kilometers of the Greater Toronto Area (GTA) if downtown prices aren’t feasible. In these places, you can still get good investment properties from $300,000. The faster you pay off or reduce the mortgage, the sooner you’ll be able to borrow against the income property and increase your net worth.

Think future appreciation potential and cash flow

Look for locations with an upside, as the cash flow is what will help carry the property until you are ready to cash out or expand your portfolio. As such, choose locations near universities, large hospitals, transportation routes, or large employment hubs. These locations are usually easier to rent out and retain value over time. Also, try to think outside the box and look for different types of properties. Student rentals in university towns, or small commercial plazas with good tenants in smaller markets, are just a couple of ways to diversify your real estate portfolio.

Use real estate for tax planning

If you’re in a high tax bracket, in some cases, losses from a rental property may be used to offset other taxable income. You can depreciate your rental property while your income is high (thus reducing your taxes) and recapture the depreciated value when selling the asset, hopefully at a time when your income is lower and at a depreciated dollar. When your property appreciates and starts returning a positive cash flow, you can re-mortgage and use the money to buy other investments, thus increasing the size of your portfolio.

Buy worry-free properties

Unless you have experience in construction, and have a lot of free time at your disposal, buy properties that require less repair and maintenance – condos may be your best bet. In most cases, condo corporations look after the exterior, heating, and common areas. This makes ownership a lot less complicated.