Investing in real estate:
Real estate investors can make financial returns through various ways: from rental income, to passive income, to capital appreciation, to commercial / industrial acquisitions, to developments. Real estate investors have to consider various factors to judge if an investment is worth it, or not. From: location, to crunching the number’s, to the overall health of the estate and much, much more.
We’ve dedicated this page to our tips and tricks, do’s and dont’s, and different avenues that you can venture into, as a real estate investor – all of which is based off of our personal and gathered experiences.
Getting started! And what to look for when investing?
As a real estate investor, there’s a bunch of different ways to crunch down an investment to it’s core, and judge if it’s worth it or not. Based off of our gathered knowledge and experiences, here’s some key things to look for:
A) – Location, location, location! The location has got to be perfect for your needs. Location means demand and as an investor, there needs to be demand for your investment for you to make any money off of it. Here’s some key things we’ll consider before investing: is there anybody else offering the same product as I am, and if so – what are they renting it at? What’s the market’s vacancy rate? How’s the demand for the supply? Is this an under-utilized area that can’t keep up with the demand – giving us great potential for capital appreciation, or is this market saturated with supply?
if you’re looking to purchase a cottage for short-term rental, here’s some key questions
B) – Crunching the numbers: There’s various ways to crunch the number’s to judge if an investment is worth it or not. The big ones (in our opinion), are:
R.O.I. (return on your investment): How much money are you injecting into this project, and what will be your return on your investment? Another important factor to look into is, how much time will it take for your investment to be paid back in full?
Income vs Expenses: How much money is your investment generating per month vs it’s costs! Is the property generating a positive cash flow, or a negative cash flow? If it’s generating a negative cash flow – will there be a strong capital appreciation of your investment that will offset the negative cashflow, and make this investment worth it?
Cap rates: A capitalization rate = N.O.I. (Net operating income) of a property, divided by property value. For example, a property generating a N.O.I. of $47,000.00 / year with a property value of $650,000.00 has a cap rate of 7.23%. To certain investors, cap rates is every day lingo and is the main thing they look for when investing: a high cap rate. What’s considered a good cap rate? It varies depending on the type of investment: residential, multi-residential, commercial, or industrial. Why are cap rates so sought after? Cap rates are important in finding out the effectiveness of the property’s income in comparison to the value of the property. The higher the cap rate, the higher the effectiveness of the property’s income in comparison to it’s value (generally speaking).
Predicting expenses: It’s also very important to try and predict on-coming expenses. If the property is 10-15 years old with an asphalt shingled roof, the roof’s probably going to need to be changed in 5-10 years. What about the windows, furnace, hot water tank, insulation, well, septic, doors, paint, etc.
C) – Overall health of your investment: This is also extremely important. The location and number’s can be second to none, but if the health of your investment is taking a hit – so will your wallet. We strongly recommend you getting a reputable building inspector to inspect a property with great potential, prior to you investing.
The residential resale sector has been, and continues to be a great avenue for investors to venture into. Depending on your budget and knowledge of the market, here are a few avenues that can be utilized as an investment:
A) – ‘Buy and flip’: The ‘buy and flip’ has been utilized for years now. Buying a property at below or fair market value, disbursing capital to renovate the home, and re-selling the home to it’s new market value with the goal of ‘buying low, and selling high’. This sort of investment relies heavily on the capital appreciation of the property – buying low, and selling high.
B) – Duplexes, triplexes, fourplexes: This can also be a great avenue to venture into. Purchasing a duplex, triplex, or fourplex as an investment, and renting each door to tenants to have the building pay for itself – and possibly make a revenue, too. This type of investment relies on a good mix of capital appreciation, and cashflow.
C) – Multi-residential: Purchasing a multi-residential building can also prove to be a great investment. This type of investment usually generates more equity per year, due to the sheer volume of units and tenants that occupy the building. This type of investment relies heavily on the cashflow of the property.
D) – Short term rentals: Purchasing a property for short-term rental use can also be a great investment! The short-term rental approach is fairly new to this market. A few examples of short-term rentals: purchasing a property near a city and renting it to travelers, or purchasing a cottage and renting it to vacation seekers.
Residential new build:
The residential new build sector of the market has been gaining more and more popularity – mainly due to the ease of the process, with less expenses and repairs to encounter in the first few years of the investment.
A) – Single dwellings: From semi-detached units, to townhomes, to single-detached homes. We’re seeing popularity grow as investors will buy a single-dwelling, and utilize it as a rental unit. This type of investment relies on the capital appreciation, and cashflow of the property.
B) – Duplexes, triplexes, fourplexes: From bungalow homes with legal apartments in the basement, to owning half of a fourplex (usually being the left or right hand side), to triplexes, to fourplexes. This can prove to be a solid investment! This type of investment relies on both the capital appreciation, and cashflow of the property.
C) – Multi-residential: From 4, to 6, to 20 units in one block – the sky is the limit. This investment can also prove to be great, as it usually greater amounts of equity and capital being paid per year – meaning more equity under your name. This type of investment relies heavily on the cashflow of the property.
Commercial / Industrial:
As a real estate investor in the commercial and industrial sectors of the market, there’s various ways to purchase buildings and structure a lease to create great returns on your investment.
There’s various ways to look into a commercial investment and calculate your returns. Based on our experiences, here’s the two most popular:
Here’s 2 popular ways a landlord can arrange a lease with a tenant (please keep in mind that these arrangement vary from one to another, and usually contain various clauses changing the dynamics of the arrangements):
A) – Triple net lease: In a triple net lease agreement, the landlord is (typically) responsible for the structure of the building and mortgage expenses, whilst the tenant takes care and pays for the rest (taxes, insurance, maintenance fees, and utilities). Triple net leases can be favorable to the landlord as it can leave the landlord almost headache free: rent comes in, mortgage payments go out, and taking care of the building’s structure. This can also be favorable to the tenant, as the tenant runs the building without owning it.
B) – Gross lease: In a gross lease agreement, the landlord is (typically) responsible for the building and operating expenses (i.e. but not limited to: taxes, insurance, utilities, maintenances fees), and charges the tenant a larger rent payment. This can be favorable to the tenant as the tenant only needs to pay rent, without having to worry about operating expenses, and the escalation of their costs. Landlord’s will usually try to insert a clause in the agreement allowing the landlord to raise the rent if the operating expenses escalate by X %.
There’s a bunch of different ways to structure a lease: single net, double net, modifying a gross lease, modifying a triple net lease, and clauses may also change the dynamics of a lease.