Investor Corner
Our strategy at Solitaire Properties has always been simple:
Strategically identify opportunities, create strong partnerships – and manage both exceptionally well.
The top 5 investment strategies for real estate investors
There are many different ways to invest in real estate. As with any investment, the opportunities range in complexity, risk level, and ease of entry. Below are five of the more common approaches to real estate investing. Your approach will depend on your personal financial situation, access to financing and risk tolerance.
The 5 most common investment strategies for Ontario real estate are:
- The “Buy and Hold” strategy
- The “Flip”
- The “Hybrid” – buy, fix up, and hold
- The “Joint Venture”
- The “Rent to Own”
1) The Buy and Hold
The strategy for ‘Buy and Hold’ is a popular option for investors because it is one of the most straight-forward: buy a rental property that is slightly under market value and hold it for the long term. Tenants will pay down the mortgage so that in the end, you have a property that is mortgage-free and rental income will continue to be received indefinitely. An important consideration is to ensure that the property’s income covers the monthly expenses (note that each lender has slightly different ways of calculating this).
2) The Flip
The Flip is a popular strategy that has been the subject of many investor. In concept, the flip is simple: buy a home significantly under market value, renovate it, stage it, and then sell it for a profit. In reality, it can take quite a while to find a great property to buy and flip. As well, it is typically easier to live through a Flip if you or someone you trust has home renovation skills. In any event, if done correctly, the rewards can be significant. On the financing side, it is a little trickier to obtain a mortgage for a ‘flip’ property since you won’t be able to show an income from it until it is sold. Keep in mind that you may have to work with specialized lenders to obtain the necessary financing. The key to success? Ensure that you factor in all your financing costs when calculating the expected profit on your Flip.
3) The Hybrid
The Hybrid strategy is a combination of the Buy and Hold, and the Flip. Most Hybrid strategies start with the purchase of a property that is undervalued due to the fact that it needs a fair amount of renovation or care. The property is then improved with the intention of holding it for a longer term and renting it, before ultimately selling when the market is favorable. As with the Flip, you may need to look at financing the property more creatively, possibly using a combination of financing sources. As with the Flip strategy, being realistic about your financing costs when calculating your expected profits is critical to ensuring that your investment goals are achieved.
4) The Joint Venture
Many investors who don’t have (or don’t want to tie up) funds in purchasing an investment property on their own, will team up in a partnership with someone with the same investment goals. In a joint venture it is vital to have absolutely everything in writing before any money changes hands. You should outline not only the initial financial expectations of each party but also things like:
- how you’ll decide when or how to do repairs or renovations (and who pays for them)
- how you’ll select tenants and who deals with them (if applicable)
- when you intend to sell and based on what criteria
To obtain financing, make sure that your investment partner has good credit and is not overextended before sitting down with your mortgage professional to talk about your financing options.
5) The Rent to Own
The Rent to Own strategy has once again been gaining in popularity. The way it works: investors purchase a property, but rather than advertising it as a traditional rental, they look for future owners. These are typically people who want to own their own home, but can’t, because they either have credit issues or an insufficient down payment. From an investor perspective, you would negotiate an agreement to have them purchase the property at a predetermined price, by a predetermined date. In addition, an “option fee” of a few thousand dollars is typically charged to secure the property. For a predetermined length of time (usually 2-4 years) market rent is charged, plus a predetermined amount is charged on top of the rent, that goes toward the tenant’s future down payment. On the financing side of things, the investor needs to ensure that the property “cash flows” at the market rent. Just as importantly, the tenants or future owners should work with a qualified mortgage professional to develop and stick to a plan that will enable them to 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.