41783
Investment-Real-Estate

Right strategy for this market

The phone as of late has been ringing off the hook with investors looking to claim their piece of the inclining real estate market that we are experiencing. On the surface this is a great thing. The problem is that everyone has the same idea, thanks in part to the plethora of HGTV flip shows we see. Everyone wants to quit their job and flip homes for a living. Now I believe that this is entirely possible in certain markets, particularly the buyers market we just came through. Two years ago you could negotiate a great deal with an anxious seller. Now the market has shifted to the advantage of the sellers, homes sell quickly and for top dollar, often for bidding wars as inventory has dipped to near 2007 levels.

A successful flipping venture requires you to find a distressed property and purchase it at a deep discount. You then must renovate and control your costs to eventually sell at a new premium. The challenge now, is that anything cheap goes into multiple offers and contractors if you can find them at all, don’t do anything “for cheap”. This makes executing on budget and on time a real challenge. Again not impossible, you are just swimming against the current.

That aside, I want everyone reading this column to understand that you don’t flip your way to prosperity. Anyone who has created serious wealth through real estate has done so by holding properties that cash –flow. Now here comes the good news, this market that may not be so great for flippers, is a hell of a market to be a landlord in. In Kelowna, you have near a zero vacancy rate, which means you can have your pick of quality tenants willing to pay premium rent for decent units and you have mortgage rates that just got even lower making your mortgage payments well below what you can rent for.

"But AJ, I want to showcase my amazing design skills" you say, "I want the big before and after reveal." No problem, buy a home that needs your TLC, showcase your design skills and impress the heck out of your friends, realtor, appraiser and most importantly the lucky tenant that will occupy the property for the next few years.

With a buy fix hold strategy, you still profit from your hard work, in fact you get even more sweat equity, because you don’t pay real estate commissions or capital gains tax. All of the value increase would be immediately available to you on a line of credit.

Let me illustrate:

You purchase a 5 bedroom home on a decent street for $400,000 with 20% down you invest $80,000 of your hard earned savings into the property when you purchase. You wisely spend $20,000 on the home updating floors, paint, trim, fixtures etc and raise the value of the home to conservatively $450,000. This is doable even if you paid market value for the home on the way in. This may sound like a profitable flip, but If you sold now you would at best break even after fees and carrying costs. A better plan is to hold and utilize a STEP mortgage. To remain a conventional mortgage you can access up to 80% of the appraised value.

(80% x $450,000 = $360,000)

Since your original loan was for $320,000, this means that you can draw $40,000 out. You spent $20,000 to profit $20,000. The cost to access the profit is an interest only payment on the 40k at 2.75% which equates to $91 dollars per month.

By investing in the cosmetics you attract a high quality tenant willing to pay a minimum of $500 more per month than the time warp you started with.

Example: A 5 bedroom home with wood paneling and stinky old carpet would rent for approximately 1800/mo. The same home with new floors, paint and fixtures will fetch 2300/mo. all day long.

Your annual net on the $40,000 you pulled out tax free is nearly five thousand dollars in increased revenue. ($6,000 increased annual income subtract $1,092 annual interest cost.)

So not only do you make a 100% return on the investment and receive it tax free, your $20,000 invested continues to return $5,000 per year infinitely. If all of that wasn’t sexy enough on its own, you get the massive benefit of the tenant paying down your mortgage to the tune of $10,000 per year. You get to participate in the market appreciation we are seeing this year of at least 5% approximately another $20,000.

Now add it all up:

You created $20,000 profit on the renovation

You received $20,000 in market appreciation after a year

Your mortgage got paid down by $10,000

And you saw positive cash flow of $5,000 per year even after hiring a property manager

That’s $55,000 on an $80,000 investment!

Do that twice this year and you create the magic $100,000 per year that you wanted to make only in this example you aren’t spending it as it comes. You are building an impressive net worth.

This is an important distinction and to be candid, a life lesson I learned from watching my dad in his real estate dealings over the years. To his credit, he was an amazing flipper, he made well into the 6 figures renovating ordinary homes every year that I could remember even long before I became a realtor. He was masterful at adding value and creating equity, but because he didn’t hold any of the properties, he never realized the full promise of real estate investing. He needed his profits to live so nothing ever accumulated.

By adopting a Buy – Fix – Hold strategy you can have your cake and eat it too. You will utilize your god given talents to design wonderful spaces adding all kinds of value to your properties, but you will also realize the dream of building a portfolio of rentals that will, before you know it, be paid off providing a steady stream of cash-flow that will truly allow you to quit your job, not just trade it in for a more stressful one without the guarantee of a pay check.

A quick tip for knowledge thirsty folks out there, of the hundreds of books and courses I've devoured over the years, the book HOLD remains the authority on the strategy discussed in this article.

In addition, I always keep a short list of fixer upper investment properties for anyone ready to take the next step and actually get out there and see some Kelowna Investment properties.



More Investment Real Estate articles

38398
About the Author

AJ is the owner of Kelowna’s downtown boutique firm, Vantage West Realty. The firm takes pride in breaking the mould when it comes to how they practice real estate. With a well-deserved reputation as a real estate renegade, Hazzi has been shaking up the Kelowna real estate scene since 2002.

Having been a student of real estate through two market cycles, AJ has come to see an absence of truly qualified professionals specializing in investment real estate. This has become AJ’s role within the firm and the community: To educate clients on how to achieve financial freedom through real estate.

Arming his clients with knowledge on where to find positive cash-flow, how to renovate for profit, and other creative avenues that most agents completely ignore, Hazzi has carved out his niche as a real estate investment advisor (REIA), and loves nothing more than educating people on the right strategy to capitalize on both boom and bust years.  AJ is a firm believer that the Kelowna market is rich with opportunity, if one knows where to look.

If you are in search of an advisor who practices what they preach, consider that AJ has built his own real estate portfolio up to include multi and single family cash-flow rental properties, development property, resort property, fix and flips, and commercial properties. By sharing the lessons learned from his own experiences, his clients get the knowledge and confidence to invest without having to make the expensive mistakes he and many new investors have made along the way.

His goal is to impart on people, especially of the X and Y generation, that depending on RRSPs and Government Pension Plans to look after us down the road is risky business. Most people don't realize that as little as one or two properties added to your real estate portfolio now, can secure a comfortable, even lavish, retirement.

Bringing a consultant's approach rather than the tired, old-fashioned sales approach, AJ and his partners offer a world class service from finding, pre analyzing, and negotiating your next acquisition, to property management, all tailored to today’s busy investor.

To hear what AJ Hazzi's clients have to say about his service view the testimonials.

Contact Information

For more details or to reach AJ Hazzi, please visit www.vantagewestrealty.com

Email [email protected] Cell 250.864.6433



40405
The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

Previous Stories



39729


40015