Remember the days when buying an investment property meant dredging up an old beater that needed tons of work, drove you nuts with constant repairs and attracted a tenant you wouldn’t want to meet in a back alley?
The last few years have opened up opportunities to us as investors that normally would not have made good financial sense. With the price of resale homes steadily rising and the cost of building new properties coming into a more reasonable price bracket, this shrinking gap between old and new product has created an investor’s nirvana. It is now possible, in some markets, to find modern, clean and affordable properties with cap rates that often beat those of maintenance-intensive older homes.
New opportunities always bring with them new challenges, and working with a builder for the first time is no different. Here are our top five tips for working with builders on an investor-friendly product
Most builders cater to homeowners, not investors. There are minor changes that can be made to a property so it becomes investor friendly; an investment-focused Realtor will know those changes and may even prenegotiate them for you. This is a priceless service that requires considerable effort from your Realtor, but it’s critically important. The success or failure of your property depends on the right investor inclusions being made. An off-the-shelf product just won’t work as well.
Every change you make incurs an upcharge, so choose wisely. The reason why building costs are more reasonable now is because they follow a consistent system. The builder's staff, contractors, subcontractors, etc. all systemize their products and services so costs can be firmly estimated. Every change has a ripple effect, so make changes only when needed, not when wanted. ROI, not what you would want if you lived there, is your only deciding factor.
That means there will be multiple commissions and fees to be paid, at the very least, on the listing side, the buyer’s side and to the mortgage broker. These may be paid as percentages, as flat bonuses or as project marketing fees. Mortgage brokers, developers and advertising agencies may all be paid on a project, but don’t worry – this doesn't affect the price of the house. The builders include those costs at the planning and budgeting stages of the build, not upon sale.
Upon closing, there are so many things that didn’t come with theoriginal build package – landscaping, fences, decks, soundproofing, appliances, etc. – all of which can cost a lot of cash out of pocket. When that happens, ROI plummets, so your Realtor can and should guide you toward what investor inclusions to make so that those things are wrapped into your mortgage rather than unexpectedly bombarding your pocketbook after closing.
Houses may look the same, but the quality and investor inclusions can be worlds apart. Pocket size, tenant finishes and square footage alone make huge differences once you begin renting a property. How do you avoid paying for suboptimal – or excessive – pocket size? What’s the square footage sweet spot for higher rents without overspending on price? What kind of paint should be used to avoid extra costs when repainting? There are so many factors to consider. Make sure you’re evaluating each one on its own; be specific and be exacting. You’re better off looking at your property with a magnifying glass than through a telescope.
New product now makes more sense for investors, so use these tips to navigate this great opportunity. In the meantime, don’t take too seriously those emotion-stoking headlines, uninformed speculation or your own sometimes irrational thoughts. Ironically, by eliminating emotion from your decisions, you’ll find that the results actually lead to greater happiness and excitement.
TIFFANY YOUNG and her husband, Corey, are the founders of InvestorOnFire. To find out more about their strategies and view preanalyzed properties across Canada, visit investoronfire.com.
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