• WHICH REAL ESTATE STRATEGY WORKS BEST FOR YOU?

  • A few weeks ago, I attended a creative financing course and met some first-time real estate investors.  Many of them have been taking courses and spending thousands of dollars to get better educated about real estate investing, but even after all this they are still confused about, which strategy is best for them.

    Like many other investors (myself included), we take courses, go to network groups to meet other investors and learn from them and we learn and analyze real estate deals to get acquainted with the process of investing. Some get stuck in analysis paralysis but others take the jump and actually start investing!

    So in light of the questions I have been getting, I thought a quick primer may be helpful.

    Rent to Own: Being a Rent to Own investor myself, this is my personal favourite. You get to help a person or family become homeowners, who might otherwise not be able to due to past or current credit issues or lack of downpayment. You purchase the property and base the end purchase price at the beginning of the term. You get monthly cash flow and future appreciation all in one! The imporant thing in rent-to-own is that you are vested in your tenant buyer’s success in the program and must be able to help them fix past or current credit issues, so that they can qualify at the end of the term, which is usually 2-4 years in length.

    For rent-to-own to be a good investment for all, there are three things that must be in place; one, you want to be in an area with population growth not decline; two you want job growth and not only in one industry and three you want infrastucture growth, which also supports the first two. If your tenant buyer cannot succeed within the term, you want to make sure you won’t have any issues finding another potential tenant buyer.

    Buy and Hold: This is my second favorite. Depending on the market, you can buy a piece of real estate, hold it forever and rent it out for monthly cash flow. This works great in residential but even better in multifamily as you have economies of scale. If one apartment or even a few apartments in a building are empty, it does not affect the overall bottom line, however if you had 1 single family home and you had vacancy over a few months, you would be out of pocket and your cash flow would be directly affected. Am I saying that it is not worth buying and holding a single family home? Not at all- you just need to be prepared for a short-fall in your cash flow as well as an effect on your bottom line if you do in fact have a vacancy.

    Fix and Flip: This strategy will work best only in certain markets! For instance if you want to buy in Toronto, you are already purchasing a property that is expensive and then if you add in renovations and expect to flip it for a huge profit, you will be hard-pressed to do so.   The strategy works only if you buy a property at a cheap price (lower than market value), do some renovations and then have the opportunity to sell it a higher price. It works even better if you are able to purchase the property and sell it again without incurring realtor fees. (Sorry Realtors!)  My partner and I are currently looking at this strategy in the US – certain markets, which have rebounded, still have significant numbers of foreclosures coming on the market. Again, knowing the markets that will assist you in flipping the property for higher than market value or at least market value is key!

    Buy it, Fix it, Refinance it, Hold it: Another strategy that really works for only experienced investors is to buy at a reduced price (lower than market value), fix it up and then refinance it to pull the equity out as you now have forced appreciation. Hold the property and rent it out for cash flow. That equity you just took out can now be rolled into another property. However, here’s where the risk and lack of knowledge can hurt you. If you buy a property in an area that is not going to appreciate no matter what you do (Windsor) and it takes that much longer to rent out – you are now holding a property that is not worth the money you paid for it. You must know your markets and numbers to be successful in this strategy.

    Student Rentals: This can be a great cash-flow machine, however if you don’t purchase at the right time or work on getting students at the right time, you could face vacancy’s that you were not counting on. Furthermore, a lot of the universities and towns are now attracting companies that are building purpose built student rentals, that have all the top amenities, which can make competing difficult.

    JV Partnering or Being the Lender: Not interested in owning property or being a landlord? Here are two ways to make a monthly cash flow that can have very attractive returns. The first one is to become a JV partner with another investor. You are the financing partner; you bring the funds and qualify for the mortgage. The other partner takes care of the property, finds the tenant and makes sure that anything and everything to do with the property is overseen by them. You split the monthly cash flow 50/50. There are numerous ways to organize your JV partnership – know what works for you before entering into a partnership. Make sure you consult with a real estate lawyer, who can help you structure the deal properly.

    The second method is to become the lender. Most people these days have realized that they are not going to amass wealth through their RRSP’s or even their cash savings. By lending your RRSP’s, TFSA or even cash as a 1st, 2nd or 3rd mortgage, you can earn between 10-12% return on your money on a one-year term. How safe is it? It is secured against real estate, that has been vetted by a mortage broker. Keep in mind that after the debt crisis in 2009, Canada’s foreclosure (power of sale in Ontario) rate was less than .50%.

    I personally have started being the lender with my husband’s RRSP’s. I set it up through Community Trust and with the reduced fees (1/2 due to my broker’s great negotiation), am enjoying the monthly returns.

    Hopefully this primer gives you the keys to know, which strategy will work best for you. Whatever strategy you choose, know the risks and make sure it works with your present lifestyle and goals. Getting started is the key – the rest will come through learning and experience!

    To your Wealth!
    Amina