My first real estate investment was my condo, which I rented out to medical residents. I netted $150 dollars per month towards my monthly “jacket fund” after paying all the expenses. I wanted more money, so I immediately bought another property filled with student tenants. I put in sweat equity and made it a super cash flowing triplex. However, over time, the house was unkept, and the yard was filled with junk. I also faced tenant issues, noise complaints, and maintenance problems. The house quickly ate up all the passive income and more. I quickly realized that small multifamily units and student rentals was NOT an ideal investment strategy for me.
I was momentarily distracted by thе “Shiny Objесt” – MONEY!
– Adam Hochschild
My goal was wealth creation so I refocused and now I only invest in starter homes/condos to create wealth and increase my net worth. I like it because not only do these homes attract investors, but more importantly, first time home buyer. With these homes, my big paycheque will be when I sell them; not the instant gratification of monthly cashflow.
What I learned over the years is that there are lot of different ways to invest in real estate. It is super easy to get distracted by “the next big thing”, which can cause you to lose focus, and eventually lose money.
Below are the pros and cons of ten real estate investment strategies. The best strategy for you is something only you can decide to meet your needs and your personality.
To help you do that, I list a couple good points and bad points for each type.
1. Buy, Fix and Sell, a.k.a. Flip.
Good points: Instant pay off when you sell the property. With some sweat equity and creativity, you can make a good chunk of cash.
Bad points: It can be hard to find the right home, and once you’ve found it, the purchase process is often competitive. There is more risk in “fixer-uppers” because you don’t know what’s behind the walls (many unpredictable renovation costs). Must be willing to take on the risk of not selling the home and having other strategies as back up like as a rental. In my opinion, you’re creating a job more than you’re creating wealth.
2. Commercial Properties.
Good points: Multi-year leases means little management and high returns. Dealing with other business owners rather than the hassles of ‘renters’.
Bad points: Need a significant down payment, making it a tougher market to break into. And, when a vacancy does happen, it could be long-term; typically longer than residential units so have some serious coin to cover vacancies before jumping into this strategy.
3. Multifamily Units.
Good points: Similar to any other rentals, but with higher cash flow. Maintenance costs shared across multiple units, i.e. only 1 roof, 1 furnace, etc.
Bad points: Similar to any other rentals, but with more expensive repairs and potential inter-tenant issues. Also, sale price is directly proportional to your net operating income, i.e. no emotional buyers willing to pay above market value. And when you sell, it might be harder to liquidate because you are selling to investors who look at the hard numbers.
4. Rent-to-Own Houses.
Good points: High cash flow, no need for a property manager, and the buyer is usually responsible for maintenance. Excellent exit strategy when you are ready to sell a property.
Bad points: Most tenants don’t complete the purchase (30%-50% failure rate), so be ready with a contingency plan to rent it out or sell it if the deal goes sour. Not a significant wealth creator because homes are sold every 2 to 3 years. This is an income generating strategy, not a wealth building strategy.
5. Subdivisions/Land Severance.
Good points: Simpler than some real estate investments, with the possibility of great profits.
Bad points: It can be a slow process, and you have expenses, but no cash flow while you wait.
6. Student Rentals.
Good points: You can generate more cash flow by renting a house by the room rather than renting out the entire place to one tenant.
Bad points: You’ll generate more headaches, think of beer bottles and vomit on the carpet.
7. Traditional Buy and Hold or Buy, Fix and Hold Single Family Homes.
Good points: An easier way to get started, and good long term wealth creator. Easier to sell because you attract regular buyers and investors.
Bad points: Can be harder to earn positive cashflow, unless you are creative. Typically cashflow is minimal. You will need to hold onto it for many years to create the big pay-off. You can lose all your passive income if the house experiences high vacancy rates.
8. Buy, Upgrade, Live in, Sell.
Good points: The tax law lets you fix it up, and sell it for a big tax-free profit after a certain amount of time, then start the process again.
Bad points: You may become attached to your investment, and you’ll move a lot! Eventually, Canada Revenue will recognize a trend in your investment strategy and come looking for more taxes.
9. Buying Pre-Construction Condos/Homes and Re-sell Upon Completion.
Good points: You can make large profits buying in the path of growth and holding until values rise, and it is a low-management investment.
Bad points: Growth in value isn’t always predictable; speculation could lead to losing a lot of money. The money for your downpayment/deposit is not producing monthly cashflow.
10. Joint Venture
Good points: All the good points from above, but with the added benefit of sharing the cost with a partner and/or leveraging off their real estate investment expertise.
Bad points: Sharing the profits with another investor(s) and dealing with other people’s idiosyncrasies.
Each of these strategies will affect your lifestyle so only you can decide which strategy is for you.
To help you decide, please ask yourself:
- How will this strategy change my lifestyle and am I willing to accept this change?
- How will this strategy get me closer to my vision, will it bring me closer or further away?
- How will this strategy attract the ideal tenants for me?
- How will this strategy impact my capital and are you equipped with enough capital to deal with the business expenses (contractors, vacancies, property management, corporation, etc.)