Updated: Jul 8, 2021
Investing in real estate can be scary. From the larger cost of entry to the number of different variables to consider like tenants and varying costs. In this post, I will share with you how we look at investment opportunities and what are some things I specifically look for when sharing investment opportunities with my clients.
For those of you that don't know, I'm Aly, a real estate professional here in Calgary. I've been in the business of helping clients find properties for themselves or for investment for the last 6 years and I'm associated with the top-performing RE/MAX office in the world for the past 22 years.
So let's dive right in and get started.
Where Are the Deals?
Everyone wants a foreclosure...that is where the deals are right? HGTV and news reports out of the US have taught us that bank-owned, judicial sales, and foreclosed properties are where all the deals are.
When we are looking at foreclosure we need to understand who the sellers are. In most cases, it is one of the major banks or insurance companies like SAGEN. These sellers have obtained the home due to some default in mortgage from the seller. However, these aren't distressed properties or sellers that are in an absolute need to sell. The banks and insurance companies require the agents that work with them to list and market the properties they have for sale on the open and free market and want to sell them for market value. This is not to say their prices aren't less, they could very well be as the banks are interested in recuperating their losses from the home. But as we have seen in our market, lower market values can drive up prices over asking with bidding wars.
But the cost isn't always in the price.
When you purchase a foreclosure, generally you are purchasing it "as is, where is". This means that even though you are allowed to complete inspections, there are no warranties from the seller that at the time of closing you are going to get the same home you first saw. This can become very costly for new owners that want to flip and haven't done their full due diligence with inspections of properties. Things like mold, asbestos (yes still a thing if you buy something a bit older), poly b piping, and the list can go on.
Not to mention, some financial institutions will not finance a mortgage with certain types of foreclosures without a significant down payment.
So when looking for an investment property, it is good to keep an eye on the foreclosures but if you are new to the market of investing, be sure to speak to your agent and understand what you are getting into (contact me to answer any questions you have).
Is Flipping The Best Opportunity?
To build on the above section, most that want to invest in foreclosures are looking to buy, flip and sell. I can't tell you the number of times I received requests from first-time investors that want to start a business of flipping homes and want me to send them the "hot deals" to get started.
Flipping a home is hard work and you would be lucky to get over a $10,000 return or more. When I'm speaking to investors, I use $10,000 as my benchmark. If you can earn more than this of your flip, you are coming out ahead.
Why isn't this as easy as it looks on HGTV? The initial cost of entry.
In Canada, the prices of homes are significantly more than in the US. Where you can find a great investment of $300,000 or so in some US markets is just not as readily attainable in a country where a single-family home is north of $500,000.
You cannot really flip a condo because you are constrained with the boards, approvals, timing, and generally less free access to do what you want in the home.
That is not to say this is impossible. There are markets in Calgary where you can find these deals. Most of them are through the foreclosure stream. But finding the home is the first step.
Do you have a crew you run with?
Having a crew of contractors is key to ensuring you are able to flip with success. The contractors around you need to be great at what they do, work on a timeline, and have faith that you can continually find them work so they can reduce their costs for each job and increase your margins. This is absolutely critical for success because the cost to get in is so high, you want to be able to make your margins back somewhere. You can hope the sale will be fruitful, but wherever you can increase the margin is significant.
Flipping is not for everyone. For some, it's a great way to invest in real estate. For those that are around renovations or build homes all the time, or love actual interior design (not the before/after shots on HGTV), this can be a great source of ways to invest. It is by no means passive, but for those that have a passion for it. If you'd like to learn more about flip opportunities, get in touch with me and we can discuss what you are looking for.
How Most People Invest In Real Estate
So if you aren't ready to go to demolish homes right away, what options do you have? This is where a majority of my clients live.
Investing long-term in real estate has been the tried and true method to generate generational wealth. Any guru, coach, or investor will tell you owning an investment rental property is the way to go because you turn your liability of a home into an asset.
Owning a rental property is the way you can generate wealth not only for your retirement but for future generations to come. Send me an email at email@example.com and I can share with you some stories of some of the investors I work with and how they are building their little empires of rental properties.
Owning a rental property is not a low-cost entry process but does cost less than flipping a home. It doesn't provide you the initial return like a flip sale, but it does come back to you in many different forms.
Usually, when you are buying a rental property, you are going to need 20% down to get started. On an average condo here in Calgary that is about $40,000. However, let's look at what you get with that $40,000.
You get to hedge your investment again any increases in inflation by buying the asset at today's value (albeit your interest rate will fluctuate)
Your investment is not $200,000 but only $40,000 since it will be rented and the rent will cover the cost of the mortgage.
As you own it, your cost will ⬇️ while your rents and asset values will ⬆️
Rental properties are the best investment for real estate for the average consumer because it also allows you to be an armchair landlord and have a management company do the grunt work of finding and maintaining tenants in the home as well as maintenance for the property.
Rentals Are What You Want, Where Do I Find The Best Ones?
Finding rentals that are cash-flow generating is where your agent becomes critical. When I'm looking for properties, I'm looking at what kind of rents the area is currently demanding, how much time can I allow for a vacancy, what kind of interest rates for investments my clients are working with, other expenses like insurance and maintenance that will be needed.
I then look at what kind of capitalization rate and cash on cash return my investors will be able to obtain at the current rent levels to ensure that it is a sound investment.
All of these items are critical to finding the right investment property that might work. It doesn't always come down to price, but so many other factors like the style of home or condo, where it is, and what kind of expenses and fees we are looking at.
Working closely with your agent (or if you'd like to chat with me, shoot me an email at firstname.lastname@example.org) is of the utmost importance because we have the time and expertise to show you properties that will give you the best chance for a return on your investment. We as agents are constantly reviewing the market conditions and can keep you up to date about where some investments are good whereas some are not.
Are You An Investor?
In conclusion, you have to ask yourself if investing in real estate is for you. The cost of entry is more significant than a stock or bond, but the return on your investment is there if you do it right. My goal is to ensure you get the best advice possible to make the best decisions for your investments.
What do you think the best style and area for an investment opportunity? Downtown? The NE? Single-family or a condo? Leave a comment below with your tried and true method for investment.
Take care and thank you.
It's not just a house, it's home. Let's chat about how I can help you.