In today’s changing market, first time investors are expecting to find golden nuggets at every corner. What they don’t realize is that although interest rates are higher and inventory is rising, a golden nugget remains exactly that. Today, I’d like to discuss the probability of finding a golden nugget and being able to purchase it, as well as a secondary purchasing option (which I strongly recommend) that all first time investors tend to forget about.
The golden nugget
Unfortunately, a positive cash flow property in todays market usually comes with some “declarations” that are a turn off for most first time investors. What do I mean by this? – Soil contamination, foundation issues or major renovations needed. This is the main reason why the price is usually low enough to be able to bring a positive return on investment. In the not-so-often case that the golden nugget is exactly that… You will be in competition with other first time investors that have been stalking the market for months!
Buying a property that generates even the smallest of cash on cash returns at the start (due to higher interest rates) is a dream, knowing that from the get-go you are able to cover all costs is a peace of mind that is so often unfound that we call it a “golden nugget”. But what if you were to buy into a different investment strategy? The less common strategy of course because it tends to cost buyers more at the beginning but is guaranteed to bring in a great ROI afterwards. Behold, the “Second Option”
Now it goes without saying that a golden nugget will always be just that, but how about a different opportunity? Maybe a golden nugget covered with a bit of grime, and with a bit of polishing can become something great?
Second Purchase Option – The Long Term Cash Cow
Often forgotten or frowned upon by first time home buyers, this option is much easier to find (in any market) but requires more elbow grease and consumes more time, however it couples great with the saying “never buy the nicest home on the street, always buy the ugliest and make it nicer”. As buyers we are consumed by the idea that all of our parents, uncles and investor friends started their real estate portfolio with a triplex in HOMA that brought in 50,000$ a year and made them money every month… WRONG. Although your grandparents may have started off with some positive cash flow, your friends, uncle and even cousins probably didn’t.
Buying a property that is positive cash flow either comes with problems that need solving, or sometimes can be capped on revenue (meaning the vendor already increased rental income to its maximum capacity, allowing you to generate a small ROI) – What if we shop for the complete opposite? Why not target location rather than cash flow, and buy properties with the potential
to become cash cows. How does this work?
Let’s say we are shopping for a great rental location, for argument sake we’ll call it the Plateau/Mile-End, now typically these triplexes range between $850,000 – $1,100,000. and generate around $50,000 – $60,000. They are offering a small ROI, but a great location, tenant quality and rental turn over. So why not shop for a similar triplex that needs some love (Aesthetic and functional renovations) asking less money (Lets call it $750,000) and generating less revenue (Let’s say $30,000 per annum) and maybe even in a slightly less desirable neighbourhood that is gentrifying. Sounds silly to be looking for a plex that costs you money right? So where am I going with this? .
What if, since the $750,000 property does not have much to offer (not positive cash flow, needs TLC) the vendor is more negotiable than the “good deal” at $879,000 for a similar property? – What if that means you can bring his price down to $730,000, invest an additional $30,000 in functional renovations (that will help you bring up your rental income YOY) and slowly rotate tenants to bring up the rent, or even better renovate the units and increase the rent dramatically – 3x renovated 3 1/2 can bring in easily $1,300 each (Yearly income of $46,800).
You see, the trick in real estate is to be patient. To do things yourself and to never forget that a little elbow grease goes a long way. If you would opt for the “cash cow” option, you would have purchased a triplex in one of Montreal’s most sought out neighbourhoods at a lower than average value, renovated for around $100,000 and raised revenues by 15-20k per year before the end of your first term (assuming 5 year term average). Now you own a property that, 5 years later is easily a competitor with the “good deals” and because of yearly inflation is probably worth $950,000, which either gives you approximately $100,000 of equity to repeat the project, or a great first investment and long term ownership option.
As time goes on and you accumulate property into your investment portfolio of course you can become pickier and wait for the “great deals” with 4.5%+ ROI, but until then, you need to learn to create your own wealth in opportunities. Sometimes a young, untrained investor cannot see these deals… That’s what we are here for!
For more information about our services, or a great triplex deal in the Mile-End, don’t hesitate to give us a call.