Investing in real estate can be one of the most rewarding and profitable choices you make, especially if you know how to do it correctly. Whether you’re a savvy investor looking for long-term returns or someone just starting out in the area, there are several ways to get involved with real estate investing. This blog will discuss some of the most common and successful strategies for investing in property. Read on to learn more about the three common strategies and to help you decide which one is right for you!
Strategy 1: Buy and Hold
Definition: Buy and hold is a strategy used by real estate investors looking to build wealth over the long term. The investor will typically purchase a property and use it as a rental, hold it for five years or more, and refinance or sell when the time is right. This strategy will generate recurring rental income and build your equity over time. Because of this, the buy-and-hold method is the most common strategy when investing in real estate.
Buying property and holding on to it for a while is a great strategy to generate income, as its value is likely to appreciate over time. This will likely be the case when you purchase a property in Ontario, as long-term real estate values in our province have been on an upward trajectory. Kingston is also a great place to get started with residential real estate investments because of the lower prices of homes compared to other cities in Ontario, along with potentially higher rents and lower vacancy rates.
While maintaining property ownership, you can have tenants rent it and cover the costs, including mortgage payments over time. When it comes time to sell, a good portion of your mortgage will be paid off by the rental income. The appreciation over time, plus the portion of your mortgage that tenants pay off, will land you a high return on your investment. Patience is the key to the buy-and-hold strategy.
Example of Buy and Hold: Rental Properties
Definition: Rental properties are homes purchased by an investor and lived in by a tenant who pays off the mortgage.
What better way to grow your real estate portfolio than have tenants pay off your monthly mortgage costs? Not only do rental properties offer the potential for appreciation, but they can provide a steady stream of income and help cover your property’s costs. This can be a great way to build equity in a property while also generating monthly cash flow. So, if you’re looking for an intelligent way to grow your real estate portfolio, consider investing in rental properties. With the help of your tenants, you can start to see some serious returns on your investment over time.
Strategy 2: House Flipping
Definition: Purchase a fixer-upper, update it, then resell it for a profit.
The basic premise is simple: buy a property, make some renovations, and then sell it for a profit. While there are risks involved, flipping houses can be a great way to earn a significant return on investment.
The key to success is finding the right property. To be successful, you need to be able to see the potential of what the home could be. Look for homes that require cosmetic updates rather than major repairs. These properties will typically be priced lower, which leaves room for you to increase the value with your renovations. Once you have found the perfect property, it’s time to start planning your renovations. Again, go for cosmetic updates that will appeal to buyers. New paint, flooring, and fixtures can go a long way in making a house more appealing. Finally, set a realistic price for the property based on comparable sales in the area. With a little bit of hard work and some luck, you should be able to flip the house for a healthy profit.
Some things to consider when flipping a house:
- The real estate market: The real estate market: You’ll need to understand the real estate market in the area where you’re investing. This will help you find undervalued properties that have the potential to be sold for a profit.
- Home inspection: You should have a home inspection done on the property when making an offer (if possible) to ensure there are no surprises when you start renovating.
- Focus on strategic upgrades to key areas, such as the kitchen and bathrooms. If done correctly, these alone can increase the value of the home.
Example of House Flipping: BRRRR Method
Definition: Buy, rehab, rent, refinance, repeat
The BRRRR method is a popular investment strategy as it creates passive rental income and allows you to purchase properties without using much of your own money. The key to the BRRRR method is to buy an undervalued property, rehab it (i.e., upgrade and renovate), rent it out, refinance it to cash out equity, then use the equity to buy more properties. The rent collected from tenants should be enough to cover mortgage payments and ideally generate additional cash flow. The BRRRR method is a great strategy for investing in real estate as it can grow your portfolio and build your equity quickly. It is a flexible strategy that can be used on various residential properties, from condos to multi-family homes. Click here for more information on the BRRRR method.
Strategy 3: Pre-construction
Definition: Buying a unit or condo at a discounted price before construction.
To get financing for construction, developers will often presell units at a lower price than what they could sell it for if it was already completed. Not only are you buying at a discounted price, but the unit will appreciate in value over the time it takes to complete the project. During the time it takes for a build, there is no mortgage obligation (other than the deposits). This allows investors to save up their money for future mortgage payments. Once the building is complete, you can rent the property out or sell it at the appreciated value. Renters are often more willing to pay a premium for newer space, and with your unit being a part of the newest development, you can charge more for rent compared to similar, dated properties in the area. Click here to learn more about investing in pre-construction condos.
Investing in real estate is a great way to diversify and grow your portfolio. You should carefully assess the different strategies to determine which strategy best fits your situation. Whatever technique(s) you choose, educating yourself and understanding the associated risks is crucial. Speak with your accountant before entering into an agreement so that you are aware of tax implications. A good handle on your financial situation is a must before moving forward. If you are new to real estate investing, be sure to check out our Guide for Beginners. Our team of experienced professionals can help guide you in making an informed decision about whether investing in real estate is the right move for you. Reach out to us today with any questions you may have.
Interested in learning more? In a previous blog post, Investing in Real Estate: A Smart Move for Your Future, we discuss the seven reasons why you should invest in real estate.