The real estate market today is nothing like it was a year or even six months ago. The rise of interest rates has caused the cost of servicing a mortgage to rise, and with that, the difficulty of being approved has also increased. While many may see a difficult market as a bad omen, smart investors are able to recognize opportunities to turn things in their favour. Such is the case with the strategy highlighted today.
This strategy comes to us from AJ Hazzi, an investor and founder of Vantage West Realty based out of Kelowna, and one of our CREW Top Investor Agents. Hazzi founded his brokerage just before the 2008 financial crisis, so he prides himself on knowing his way around market shifts.
Recognizing two major issues in the market, Hazzi has found success with an investment strategy that can solve both, while achieving low-risk returns. The two major problems at play, according to Hazzi, are both symptoms of rising interest rates.
“The biggest problem for sellers is the shift towards more of a buyer’s market. You’ve got a lot of people that are now facing fairly heavy payment increases and need to sell. Google searches for “sell me home fast” are up over 2700%, and homes aren’t moving like they used to.”
“Problem number two is the number of buyers with good down payments and good income that no longer qualify for the home they want due to the mortgage stress test. So we've got a lot of would-be buyers that are displaced.”
Hazzi’s clever solution was to combine buying homes for cash now at their discounted prices, renovating to force appreciation and employing a rent-to-own plan with would-be buyers who have been pushed out of the market.
“The first part of our strategy is buying homes for cash at a nice discount, providing those sellers with instant liquidity rather than the hassle of listing their house and waiting months for it to sell,” explained Hazzi. “Then I'm taking that same property, employing a BRRRR strategy on it, and finally using a rent-to-own offer to connect with that clientele that has been displaced by tighter lending. We get to sell the property at a predetermined premium, and for two to five years, depending on the buyer and the market, I have a hands-off rental property.”
“The great thing is that this is a very conservative, downside-protected strategy. We’ve combined a few strategies together in order to remove some of the risks involved in buying a rental property. For one, having a tenant-buyer is a huge step up from a regular tenant in terms of risk, because they see themselves as owners and have a lot of skin in the game. Same with buying a home to rehab and resell, you don't always know if there's going to be a buyer on the other side that's willing to give you the profit margin that you need to justify the effort and expense. With rent-to-own, you have the supply and demand dynamics in your favour, and you've got your pick of good tenant-buyers.”
Across the board, this strategy works so well because it presents a win-win for all parties. Sellers get to sell their homes fast, even those that may be in less than perfect condition. For buyers, they get to postpone getting mortgage approval while still enjoying the sense of ownership that rent-to-own provides. The investor gets a reliable tenant with little to no maintenance, and a favourable margin once the home sells.
This option will admittedly take some legwork for an investor—finding the right home, rehabbing it, and connecting it with the right rent-to-own tenant. You will also need to decide on a term length with your tenant that works for both of you, and have a lawyer carefully review all agreements to make sure they are sound.
For those interested in pursuing such an option, Hazzi provides some insight from his own experience. Everything starts with finding the right home to buy.
“Make sure that you're buying single-family homes that are near the centre of the bullseye, as far as the price point. Don’t go too high-end into the luxury space, and don’t go too entry-level. Mid-range single-family homes will be your best target.”
Next, you will need to make yourself and your offer known to salespeople in your area.
“You want to make the busier realtors in your area know that you're standing at the ready to offer an instant cash offer to any clients who may be in need. The key is to be well known as someone who does deals and can be counted on to close quickly. So you've got to be solid, but once you've done a deal or two, you'll be at the top of their list.”
It’s also important that investors have a solid plan for completing improvements and ultimately getting their home on the market in a timely manner while improving the home to a satisfactory extent, without going overboard.
Finally, marketing your rent-to-own offer will help you to find the right tenants. Since you need serious applicants for this plan to work as well as possible, it is in your interest to be choosy with who you enter into an agreement with. There will be many tenant-buyers looking for alternative buying options, so do your due diligence to make sure they are capable of closing at the end of the term.
“You have to work with a mortgage broker to kind of prequalify buyers into the future. If they can't service the payment based on their income, they really should not be approved, because it's unlikely they'll be able to close the deal in a couple of years. You can work with bad credit, but you can't really work with insufficient income.”
“A lot of people make the mistake of rushing to choose their tenant-buyer and they take the first person that comes along. You want to protect all parties' interests and ensure you don't enter a deal destined for failure. It pays to be a little choosy.”
This strategy has been working well for Hazzi in recent months, though it should be noted this may be a strategy best suited for advanced investors, as there are many moving parts.
Alternatively, if you aren’t interested in all of the busy work but still want to benefit from a strategy for a down market, Hazzi is offering investors the opportunity to invest along with him and have the work taken care of, while collecting passive returns. For more information about this unique iBuyer offer, visit the Cash Offer information page here.
When you flip houses, you are not usually intending to live in the house; rather the strategy is to sell the property as fast as you can so as to avoid paying taxes and other expenses on the property. While there will obviously be initial costs that you will need to budget for, house flipping can be done with few resources and little experience.
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