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Fred Lum/The Globe and Mail

An asset that can appreciate in value exponentially and produce a sizable monthly income sounds like a dream come true.

But buying an investment property isn't all upside, experts say. An uncertain real estate market, tenant woes, unexpected costs and hassles can make it a real nightmare, especially if you're at, or close to, retirement.

"It's a tricky business being a landlord," says Trish Bongard Godfrey, an agent at Bosley Real Estate Ltd. in Toronto who deals with clients looking for investment properties in the hot residential and commercial market there. "It's a good idea, but it isn't for the faint-of-heart."

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People interested in investment properties include those who have significant funds and are looking to diversify their portfolios, who don't have pensions and are looking for a fairly steady income, or who want a nest egg to cash out of and reinvest when they retire.

Others might want to "bank" property so their children have a toehold in the market. Or they might purchase a student place for university-aged children to use.

But investment properties often "sound good on paper," says Jeanette Brox, a certified financial planner who is a senior financial consultant at Investors Group in Toronto. "You've really got to know what you're getting into."

Investors who might want to reconsider buying an investment property are those who intend to depend solely on the rental income from it, who don't have a significant amount to invest up-front or who might need to liquidate their assets quickly.

Potential buyers should look at market projections and prospects for the area where they want to buy, then consult an accountant about tax advantages and available write-offs, as well as the capital gains they will incur when they eventually sell.

"If you understand what you're going to be getting into with the property, and you hold it for a long time, and you have good tenants and they're not wrecking the place and you're making money, it can be good," Ms. Brox says, suggesting that investors draw up a 10-year business plan for the property and resist the urge to cash out quickly. "This is not a short-term thing."

One of her clients bought a property near the university his son was attending. It was held in the son's name so it wouldn't trigger capital gains, and he rented out rooms to fellow students while building equity.

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An investment property can be a retirement project for some, Ms. Brox says, although most retirees want to simplify their lives. "They don't want to get those phone calls at 10 o'clock at night saying the stove's not working."

Ms. Bongard Godfrey says it's important for investment property owners to be patient and maybe even handy, to understand the real estate market, be willing to manage the property (or hire others to do it) and to hold it for the long term to realize its capital appreciation.

"I don't think people should be too ambitious," she says. "It doesn't work out if you're greedy."

Some people in Toronto's pricey market are looking for duplexes, or larger homes to turn into duplexes, either because they are first-time buyers or couples looking to downsize, Ms. Bongard Godfrey says. That way they can live in part of the property and generate income from the rest.

Those looking to fix up and flip investment properties should have a sharp eye for cost control and a good design sense, she advises. "I see a lot of bad renovations."

Hiring a property manager is smart, both to look after things that break or need regular maintenance and to screen tenants and follow up with those who are difficult, although such a service will cost one or two months of rent each year. Ms. Bongard Godfrey points out that a real estate agent can help with everything from market intelligence to details such as rental applications, credit checks and lease agreements. A financial planner and a mortgage broker are critical to ensure you have a reasonable plan.

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It's especially important not "to go into it with the view that it's going to create a positive cash flow every month and then rely on it," Ms. Bongard Godfrey says. "You can't budget down to the last dollar."

Sheena Steenhart, a financial planner at the Royal Bank of Canada in Airdrie, Alta., says investment properties are usually leveraged investments, with risks involving interest rates and issues such as vacancies, property damage and non-payment by tenants. "Any investment has risks, and the higher the rate of return you're anticipating, the higher the risk involved."

Ms. Steenhart suggests investors draw up an exit strategy at the same time they are buying such a property, in consultation with an accountant and financial adviser. The plan should address taxes, the length of time the property will be rented out, and issues to consider in its eventual sale.

An investment property can bring diversity and significant wealth to a portfolio, but of course many people are already invested in their own homes as a significant part of their net worth, she points out. "For the average Canadian, that's good enough."

It's important to have professional guidance and consider a strategy in which the investment property can be sold when you are retired and the funds redeployed into something that creates additional cash flow, she adds, "so you can enjoy that retirement you've been dreaming about."

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