With real estate booming the way it is, there are more people than ever looking to get into this asset class. Prices are skyrocketing which leads to the question: with prices so high, how do you find cash flowing revenu properties? Despite the fact that most revenu properties on the market today do not cash-flow, they are still getting snatched up by eager investors. You might be asking yourself why? How?
First, let’s discuss both strategies.
The Cash Flow Strategy
There are many investors out there who would not purchase a building if after all monthly expenses, accruals included, there is not a sizable profit left over. This strategy protects you from dips in the market and an increase in interest rates when it comes time to renegotiate your mortgage. Not to mention that, if a property doesn’t cash flow, you will be paying out of pocket for whatever expenses the revenue doesn’t cover on a monthly basis. Monthly cash flow from rental properties is one tried and true way that many real estate investors (yours truly included) have been able to retire from their 9-5 jobs.
Some investors choose to forego monthly cash for the appreciation potential. There are, in fact, several Canadian markets where this approach has paid investors well. It’s easy to find investors who have stories of their properties rising in value by over $100,000.00 per year. There aren’t too many people who would say no to that! This is amazing for those who choose to use the equity in their portfolio to purchase other properties.
Most conservative investors use 3% to forecast passive appreciation on a building. However, certain markets are historically stable and grow no more than 1-2% in value per year. We own properties outside of Montreal which have grown by 30% in the past year alone! Where there are other markets which just don’t really change.
Although this strategy involves some level of speculation, investors pretty much all agree that you can bank on some level of appreciation year over year, no matter what market you’re in.
Forced appreciation happens when you make improvements to a property to increase its value, such as adding an extra bedroom or bathroom or updating the kitchen. This is a powerful tool when used properly, however, it requires a good understanding of the market you’re in as well as material and labour costs. It’s easy to overdo it on renovation costs and price yourself out of the market.
What makes real estate so amazing is that you don’t really have to choose one strategy over the other. They both contribute to your overall ROI, along with mortgage pay-down. What is important, however, that you take all factors, your market, income situation and your long term goals, into consideration before making a purchase.