In part 1 of the ‘How to become a property tycoon’ series we discussed the common characteristics and behaviours of successful real estate investors, which we observed in our client base. We also discussed various aspects of how you can kick off your investment career, including:
• Being clear upfront on what you want real estate to accomplish for you and your underlying non-monetary motivations for investing in real estate
• Understanding your capabilities, skills, risk tolerance and selecting an investment strategy that aligns with your profile
• Identifying opportunities to better manage your budget
• The different strategies for profiting in real estate
• Becoming a master in select investment strategies
In this article and subsequent series, we will primarily focus and expand on the cash flow and equity building strategies, which are cornerstones for building a profitable and sustainable portfolio.
Cash flow and equity building strategies
Buying and holding a property
This strategy is simply about buying a property, leasing it and holding it for the long term. Your objectives are to:
• Buy smart (right area, location, property, financing, tenant and value)
• Manage smart by paying down your debts and wisely managing your expenses while keeping your property in excellent shape so that you can reduce your vacancies and continue to increase rents
• Pay it off: as time passes, your cash flow will increase, you accumulate equity and if you have bought in the right markets (i.e. the market value of your property continues to go up), your property would get an extra equity boost
1. Gives you a stream of passive cash
flow, where you don’t have to work for
your money (to the extent you would in a full-time job) but your money is working for you
2. Increases your overall net worth and helps you build sustainable long-term wealth
The drawback of this approach is that you are holding for the long term so you need to maintain the property. Also, this is the strategy where you need to be very familiar with tenancy laws as tenants will play a crucial role in your success.
This strategy entails buying a property and leasing it to a tenant for 1–5 years with the option to buy it at the end of the term. This strategy is similar to a buy and hold but the hold time horizon is shorter as you have to sell the property to the tenant-buyer at the end of the lease term.
A lease option strategy generally provides a stronger cash flow compared to a standard buy and hold as your expenses are reduced through lower maintenance, vacancies and marketing costs. Moreover, your existing strategy and equity upside is defined upfront as you know:
• The length of time you will be holding on to the property
• The future purchase price the tenant will buy it for
The disadvantages include the need to continue to fill in the gap in your portfolio with new properties as you sell some of your existing properties to tenants. With this strategy, you are also exposed as an investor to some added risks that you have to learn how to manage, such as:
• What if your tenant does not buy the property from you at the end of the term?
• What if market value goes down?
• What if market value goes up?
• What if your tenant wants to buy the property earlier than you planned?
• What if your tenant can’t buy by the end of the lease term?
Whether you choose to go with a buy and hold or a lease to own strategy, you need to buy smart, and manage smart. Under a buy and hold, your focus is paying off your debts while with a lease option, your focus is to sell the property by the end of the lease term.
To read the rest of this article and learn more about taxing questions for investors, pick up a copy of our February issue, now on newsstands.
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