Real Estate Investment Strategies 101
Real estate can be a complex and multifaceted industry, and as such, there are a variety of different real estate investment strategies that investors can employ. While we always believe that a passive strategy such as investing with ReDeal is best for most people, being more actively involved can be attractive to some but it comes with it's own set of risks.
In this blog post, we will cover the most popular strategies and general information about the risks involved.
Buy and hold
This is perhaps the most traditional real estate strategy, and involves purchasing a property and holding onto it for an extended period of time, with the goal of generating income through rental payments and appreciation over time. This strategy requires a long-term investment horizon and a willingness to deal with the day-to-day operations of managing a rental property.
Here are some reasons why buying and holding real estate can be a smart investment strategy:
Cash flow: One of the main benefits of buying and holding real estate is the potential for passive income. By renting out the property, you can generate a steady stream of income that can help cover the mortgage, property taxes, and other expenses associated with owning the property. As you pay down the mortgage, your cash flow can increase over time.
Appreciation: Real estate tends to appreciate in value over time, which means that your property may be worth more in the future than it is today. By holding onto the property for the long-term, you can benefit from this appreciation and potentially sell the property for a profit down the road.
Tax benefits: Real estate investors can take advantage of a number of tax benefits, including deductions for mortgage interest, property taxes, and depreciation. These tax benefits can help reduce your overall tax liability and increase your cash flow.
Control: When you own a property, you have a great deal of control over it. You can make improvements, raise rents, and manage the property in a way that maximizes your profits. This level of control can be appealing to investors who want to have a direct hand in their investment.
Of course, there are also risks associated with buying and holding real estate. Vacancies, property damage, and unexpected repairs can all eat into your profits, and the real estate market can be unpredictable.
Flipping involves purchasing a property with the intention of quickly renovating and reselling it for a profit. This strategy is often popular with investors who have experience in construction or renovation work, as it requires a keen eye for identifying properties that can be improved and a good understanding of the costs involved in making those improvements. While it can be a lucrative investment strategy, but it's not without risks.
One of the biggest risks of flipping real estate is that the renovation costs can quickly spiral out of control. It's important to have a solid understanding of what repairs and upgrades are necessary, as well as how much they're likely to cost. You should also have a contingency plan in place in case unexpected costs arise.
Another risk to consider is the current state of the real estate market. If you're buying in a market that's experiencing a downturn, it may be difficult to sell the property for a profit. On the other hand, if you're buying in a hot market, you may face stiff competition and have to pay a premium to acquire the property in the first place.
To mitigate these risks, it's important to do your research and have a solid plan in place before you begin flipping real estate. This may involve working with a real estate agent, contractor, or other professionals who can help you assess the potential costs and profits of a particular property.
It's also important to be realistic about your timeline and budget. Flipping real estate can be a time-consuming process, and it may take longer than you expect to complete the renovations and find a buyer. Make sure you have enough financial cushion to cover any unexpected expenses, and be prepared to be patient if the property doesn't sell as quickly as you'd hoped.
Finally, be prepared to put in the hard work required to successfully flip real estate. This may involve long hours, managing contractors, and dealing with unexpected setbacks. However, if you're willing to put in the effort, flipping real estate can be a rewarding way to build wealth and achieve financial freedom.
Real estate investment trusts (REITs) are a type of investment vehicle that allow investors to buy shares in a professionally managed portfolio of properties. REITs pool money from multiple investors to buy and manage a portfolio of properties, such as office buildings, shopping centers, apartment complexes, and hotels. The income generated from these properties is then distributed to the investors in the form of dividends. This strategy provides exposure to the real estate market without requiring investors to directly manage properties themselves.
There are several types of REITs, including equity REITs, mortgage REITs, and hybrid REITs. Equity REITs invest in and own physical properties, generating income from rents and property appreciation. Mortgage REITs invest in and own mortgages on real estate properties, generating income from interest payments on the loans. Hybrid REITs invest in both physical properties and mortgages.
One of the primary advantages of investing in REITs is the potential for steady income. By law, REITs must distribute at least 90% of their taxable income to shareholders in the form of dividends. This means that investors can potentially receive regular, predictable income from their investment in a REIT.
Another advantage of REITs is the potential for capital appreciation. If the value of the properties owned by the REIT increases over time, the value of the shares may also increase, allowing investors to benefit from long-term capital appreciation that they could access once they sell their ownership in the REIT.
However, investing in REITs also carries some risks. The real estate market can be cyclical and subject to fluctuations, which can affect the performance of the REIT. Additionally, changes in interest rates can impact the value of the properties owned by the REIT and the income generated from those properties, especially for mortgage REITs which may be heavily affected by higher defaults caused by increasing rates.
It is also important to note that not all REITs are created equal. Some REITs may have a more diversified portfolio of properties, while others may focus on a particular type of property or geographic region. Before investing in a REIT, it is important to do your research and understand the investment strategy, performance history, and fees associated with the REIT.
Wholesaling real estate is a popular investment strategy that involves finding distressed properties, securing them under contract, and then selling the contract to a buyer for a profit. Wholesalers typically do not actually purchase the property, but instead act as intermediaries between the seller and the buyer.
Wholesaling can be a lucrative investment strategy for those who are willing to put in the work to find distressed properties and negotiate deals. However, it is important to understand the risks and challenges associated with this strategy before getting started.
One of the main advantages of wholesaling real estate is the potential for quick profits. Since wholesalers do not actually purchase the property, they can secure a contract and sell it to a buyer in a matter of days or weeks. This can allow investors to generate significant returns on their investment with relatively little capital.
Another advantage of wholesaling is that it can be a low-risk investment strategy. Since wholesalers do not actually own the property, they are not responsible for any repairs or maintenance. Additionally, if they are unable to find a buyer for the contract, they can typically walk away without any significant financial loss.
However, wholesaling real estate also carries some risks. One of the biggest risks is that the wholesaler may not be able to find a buyer for the contract after firming up on a property or being not including the correct terms in the agreement of purchase. This can leave the wholesaler responsible for the contract and potentially facing significant financial losses and even legal repercussions for acting in bad faith.
BRRRR stands for "buy, rehab, rent, refinance, repeat." This strategy involves purchasing a distressed property, renovating it, renting it out, refinancing the property to pull out equity, and then repeating the process with another property. This strategy can be highly effective at generating income and building a real estate portfolio, but it requires significant capital to get started and a willingness to take on risk.
Here's a closer look at each step of the BRRRR strategy:
Buy: The first step in the BRRRR strategy is to find a distressed property that's priced below market value. This could be a foreclosure, a short sale, a property in need of major repairs, or a motivated seller who needs to sell quickly.
Rehab: Once you've purchased the property, it's time to rehab it. This could involve minor cosmetic repairs, such as painting and flooring, or major renovations, such as a new roof or HVAC system. The goal is to increase the property's value so that you can command higher rents and a higher appraisal value.
Rent: After the property is rehabbed, it's time to rent it out. This will generate cash flow and help you pay down the mortgage on the property.
Refinance: Once the property is rented out and generating cash flow, it's time to refinance it. This involves taking out a new mortgage on the property that's based on its current value, rather than the purchase price. The goal is to pull out as much equity as possible, so you can use it to purchase more properties.
Repeat: The final step in the BRRRR strategy is to repeat the process with the same capital. Once you've refinanced the property and pulled out equity, you can use that equity to purchase another distressed property and repeat the process all over again.
The BRRRR strategy is a powerful way to build long-term wealth through real estate. By using the same capital to purchase and rehab multiple properties, you can quickly build a portfolio of cash-flowing properties that generate passive income and appreciate in value over time.
Of course, the BRRRR strategy isn't without its risks. It requires a lot of upfront capital, a strong understanding of the real estate market, and the ability to find distressed properties that are priced below market value. But for those who are willing to put in the work, the BRRRR strategy can be a highly effective way to build wealth through real estate.
These are just a few of the many real estate investment strategies available to investors. Each strategy has its own unique set of risks and rewards, and investors should carefully consider their individual goals and risk tolerance before deciding which strategy is right for them.
Alternatively, if you are interested in investing in real estate without any of the risks and work, leave it to us and we'll make sure that you're investing in the absolute best properties in Ottawa. Please contact us to get started today. Our investment specialists will be more than happy to show you how you can invest in real estate on autopilot.