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Investing successfully in real estate requires thoughtful planning and strategy. Learning how to invest in real estate successfully requires understanding the different types of investment strategies available and how they work. In the next few weeks, we will cover basic investment strategies so that you start to prepare for your next investment decision.

 

BUY AND HOLD

Buy and Hold strategy involves purchasing properties, renting them out and holding them for the long haul, typically five or more years.

This strategy is the most common type of real estate strategy because it's generally considered easier than fix and flip and requires less experience.

Pros

  • A great way for beginners to get started in real estate investing
  • High return in long term with property value appreciation and equity build up
  • Monthly cash flow from rent, parking or storage
  • Claim depreciation and deduction on costs associated with maintaining the property (Capital Cost Allowance)

Cons

  • If you buy in the peak market, your return may be lower
  • If your revenue is lower than your income, you will be in negative cash flow meaning you will need to cover the deficit
  • When compared to successful fix and flip, it may take longer to generate profit

 

Tips For Successful Buy and Hold

  • Positive cash flow: talk to experts and make sure your cash flow is positive. Negative cash flow means you will need to keep putting your own money to cover the expenses
  • Repair allowance: budget 5% of gross rent as repair allowance so that when you have to replace a water tank, roof or furnace you have peace of mind that these expenses are covered
  • Vacancy allowance: budget 8% of gross rent as vacancy allowance so that you are covered when there is a vacancy. If there is no vacancy this becomes your bonus money
  • Tenant screening: interview your property manager. Find out how many properties they manage, what tenant screening process they have and how many evictions they had in the previous year. Having a professional property manager working for you will alleviate the majority of your tenant related headaches
  • Contingency fund: when you close a deal on the property, budget for $5,000 to $10,000 contingency fund. This fund will cover any unexpected expenses for the first 1-2 years. If not spent, consider this a bonus when you sell the property
  • Location: Location is one of the most important decision you will be making in your investment decision. Make sure your property is located close to transportation, major employer and amenities

 

How To Get Started In Buy and Hold

  • Understand your comfort level in buy and hold strategy and create a strategy (consult your advisor to understand capital required, cash flow analysis, property type, location and etc)
  • Create your investment strategy (consult your advisor for property management, insurance, contingency, market rent, property inspection, real estate agent, mortgage, target area, and exit strategy)
  • Start searching for your first property (for every property do your cash flow analysis and assess the risk for every issue you come across)
  • Once you take possession, maintain a positive relationship with your tenants and contractors, monitor rental and real estate market to maximize your cash flow and to assess your exit strategy

 

For all your real estate related questions and challenges, contact your Real Estate Investment Advisor at cchang@prepareyourlegacy.com

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