Real Estate Investment Strategies Overview
This is an additional resource on common real estate investment strategies. This is not an allinclusive list, it only lists the common strategies, only choose the ones that align with your lifestyle.
Pick what works for you as exit strategies and record these in your business plan.
Remember, the Real Estate Investment Business Plan is something that can be revisited regularly
and build on. I would recommend reviewing it every 4-6 months to see how you are progressing. In
addition, if you are going through a sticky time in your life, it's another way of helping you focus and
keep motivated.
Process:
1) Read through the common real estate investment strategies
2) Choose what works for your lifestyle as exit strategies
3) Add to it if you see anything missing
4) Record it in your business plan
Empowering women to invest in real estate Copyright © www.financialnirvanamama.com Overview of RE Investment Strategies
Traditional Buy and Hold:
This strategy involves buying a starter home, renting it out, holding it for at least five years and
then selling it. Think of it as “little green houses” in the Monopoly® board game. They can
make for a solid asset base of cash flowing real estate. And they are great as wealth creators.
Pros:
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Easiest properties to find
Easiest to finance
Easiest to get professional help with
Cons:
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Could be tricky to cash flow, need to be creative, especially in higher priced urban
markets like Vancouver, Calgary and Toronto. The trick is to be creative, find bargain
homes below market value. Usually in higher priced urban markets, it requires a bit of
sweat equity to fix it up to generate top rental income.
Typically need to hold onto it for many years (at least 5 years) to create a decent
payoff.
In certain areas, a house can experience high vacancy rates because there are no other
units in the house to offset expenses.
Risk Mitigation Strategy:
The key is finding houses that can generate annual rental income of at least 7% of the
purchase price.
And better if you can buy a property under market value and force
appreciation by putting in sweat equity. You will benefit from the appreciation on a more
valuable home over the long run.
Buy, Upgrade, Live in, Sell
This strategy is very similar to the Buy and hold concept except you live in the unit and
upgrade while you live in it. Once upgraded, you sell the home. This strategy only works if you
buy the property at a significant discount from the average price in the area.
Pros:
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No capital gains equates to tax-free profit because it’s your principal place of residence.
After a certain amount of time, at least a year, then you can start the process again.
Less pressure and stress to have the house upgraded in a tight schedule.
Empowering women to invest in real estate Copyright © www.financialnirvanamama.com Cons:
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You may become attached to your investment and never sell
You’ll move a lot!
Canada Revenue may recognize a trend in your investment strategy and come looking
for capital gains.
A lot of people get caught up with renovations, think they can do it all and the project
ends up taking a lot longer than expected.
Risk Mitigation Strategy:
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The key is to not be emotional in the renovations.
Manage it to your budget.
Buy an under market value home needing only cosmetic renovations (paint, flooring,
new kitchen)
Buy, Fix and Sell, a.k.a. Flip
In concept, the flip is simple: buy a home significantly under market value, renovate it, stage it,
and then sell it for a profit.
You work with an experienced handy man or contractor to
renovate the unit and you may manage the renovations.
Pros:
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Instant pay off when you sell the property.
Profits can be significant in a hot real estate market
With some sweat equity and creativity, you can make a good chunk of cash.
Cons:
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Can take quite a while to find a great property to buy and flip and when you do, the
process is very competitive.
A little trickier to finance a ‘flip’ property since there is no income from it until it is sold.
Keep in mind that you may have to work with specialized lenders to obtain the
necessary financing or use Cash.
Many variables up in the air when you are trying to fix up a property to sell immediately.
There are market fluctuations, financing changes, unexpected repairs, time for permits,
etc. Its all out of your control.
More unpredictable renovation costs in “fixer-uppers” because you don’t know what’s
behind the walls.
You are creating another job more than you’re creating wealth.
Profits can be limited, especially when you factor in your time.
Risk Mitigation Strategy:
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Easier to live through a Flip if you or someone you trust has home renovation skills.
A strong project manager is key to managing scope, schedule and budget.
Empowering women to invest in real estate Copyright © www.financialnirvanamama.com Student Rental Properties:
This strategy involves renting rooms out in a house to students. Often you can have three to
five students+ in a house paying anywhere from $400 to $600 a month, each! As a result these
properties cash flow extremely well. This strategy generates more cash flow by renting a
house by the room rather than renting out the entire place to one tenant.
Pros:
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Maintenance will be slightly higher than on a single family home.
Need to have proper insurance.
Need to become an expert in local residential tenancy acts.
May require special licensing for student rentals.
Cons:
• Tend to generate more headaches.
• Its time consuming, think of beer bottles and vomit on the carpet.
• Noise complaints are also common.
Risk Mitigation Strategy:
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Rent to more mature students.
Conduct monthly inspections.
Bring food for the hungry students during your visits.
Duplexes & Triplexes:
A great way to increase the cash flow of any property is to maximize the revenue. A single
building that can be set up to house two or three families in separate units can generate solid
cash flow.
Pros:
• There are benefits of having “one roof” and three families in a single family.
• Diversified income – if one family leaves you have two others paying rent.
Cons:
• Many of these units are “non-conforming” and don’t meet local by-law standards for
things like utility meters, entrances/exits and parking.
• Inter-tenant issues as you have more tenants to manage.
• More maintenance like lawn mowing, more appliances that can breakdown etc.
Empowering women to invest in real estate Copyright © www.financialnirvanamama.com Risk Mitigation Strategy:
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Lease agreements can be written to include special clauses for ‘paying your tenants’ to
mow the lawn, remove snow, etc.
Have good insurance including rental loss.
Conduct frequent inspections.
Multi-Unit Apartments:
They can be excellent investments and because commercial financing can be secured for
these (because they are six units and above) financing can be obtained based on the
building’s revenue rather than your personal income (otherwise known as based on the
building’s capitalization rate instead of your personal debt service ratios).
Pros:
• As revenues increase (your capitalization rate) then the appraisal price of the apartment
increases (sale price is directly proportional to your net operating income)
• Maintenance costs shared across multiple units, i.e. only 1 roof, 1 furnace, etc.
• Efficiency in sharing one handy man, and decreased costs with a property manager
• Increased cash flow.
• Considered one of the most safe and conservative commercial real estate investments.
• Diversified income – if one unit is vacant, you have others paying rent.
Cons:
Large expenses like underground garage repairs or balcony updating or roof repair or
boiler replacement amounting to thousands of dollars.
• Inter tenant issues like noise complaints.
• May be hard to sell i.e. no emotional buyers willing to pay above market value because
your market is only investors.
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Risk Mitigation Strategy:
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Have an onsite handy man or site supervisor or a very reliable and experienced
property manager.
Conduct more preventative work to reduce after the fact maintenance bills (ex.
Inspect/maintain the boiler, renovate out dated units after tenants move out to increase
rent).
Empowering women to invest in real estate Copyright © www.financialnirvanamama.com The Rent to Own strategy:
This strategy operates like this: investors purchase a property with the intention of finding a
future buyer that is also the tenant. Rather than advertising it as a traditional rental, they look
for future owners. These future owners are typically people who want to own their own home,
but can’t, because they either have credit issues or an insufficient down payment. So in the
mean time, they rent your home with an intention to buy the home from you in the future. From
an investor perspective, you would negotiate a contract with them to have them
purchase the property at a future price at a future date.
In addition, an “option fee” of at least 2.5% is charged up front to secure the property. The
future buyer pays rent payments while living in the house but pays a bit extra each month,
known as rent credits. The extra amount is usually credited to the final purchase price, so it
reduces the amount of money the buyer has to come up with when purchasing the home. The
extra rent credits are non-refundable – it shows good faith that the renter intends to buy the
property.
To obtain financing, the investor needs to demonstrate that the property “cash flows” at the
market rent. Just as importantly, the tenants/ future owners should work with a qualified credit
specialist/mortgage professional to help them end up in a satisfactory financial position with
good credit, in order to qualify for a mortgage when the time comes for them to purchase the
property.
Pros:
• The great thing about this strategy is that the renter offsets your initial down payment.
• Property management is very minimal when you purchase a rent to own home.
• Cash flow can be high.
Cons:
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Has high chance of failure, approximately 30%-50% failure rate of the tenant walking
away from the property.
This strategy is fairly complicated and when the renter is unable to buy the future
property due to ex. credit issues, the renter is not going to happy, and may in fact leave
you feeling like the most horrible person in the world when you keep their option fee of
2.5%.
Home prices might fall, and if your renter does not buy, you would have been better off
simply selling the property.
Not a wealth creator as you are disposing of the property every few years.
You lock in a future price when you sign the contract, but you may get into a situation
where home prices might rise faster than you expected.
Risk Mitigation Strategy:
Empowering women to invest in real estate Copyright © www.financialnirvanamama.com •
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Ensure an experienced real estate lawyer reviews your option to buy agreements.
Ensure that you have strong lease agreements and option to buy agreements
developed by a lawyer to reduce legal battles in the event an ex-tenant takes you to
court for not returning the ‘option fee’.
Work with an experience mortgage broker or credit specialist to develop a plan and
execute a strategy that will increase the future buyer’s credit rating and probability of
qualifying for financing.
Buying Pre-Construction Condos/Homes and Resell Upon Completion.
This strategy involves buying properties before they are constructed. You are buying off a
plan, otherwise known as buying a “preconstruction” or “off-plan” home or condo. Often homes
being sold from a developer off of floor plans will be discounted to reflect a price that would
present day. Therefore, you have an elevated value when the home is finally built. The
developer does this to raise capital to get financing from the bank. In a hot market, these
condos can appreciate significantly over a year or two.
Pros:
• The great thing about this strategy is that there is little maintenance if any for the first
five years.
• Low management investment as the place is new (minimal maintenance calls as
everything in the house should be in good working order and much of it covered under
the warranty from the builder).
• You can make large profits buying in the path of growth and holding until values rise.
Cons:
• The price set by the developer is not market value, but based on profit + construction
cost.
• Considered a speculative investment if you intend to flip the condo once its constructed.
• You will lose your HST if you don’t hold for at least a year after the condo is
constructed.
• The money for your downpayment/deposit to the builder is not producing monthly cash
flow.
Risk Mitigation Strategy:
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Ensure you can rent out the unit with cash flow in your pocket if you cannot sell the unit.
Ensure that the building allows rentals (no limits on rental units allowed in the building).
Buying a parking spot is always advantageous (if the numbers work out) as it’s easier to
sell with the unit.
Buy the smallest unit as they are the easiest to sell because the price is lower.
Empowering women to invest in real estate Copyright © www.financialnirvanamama.com