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Before investing in any type of real estate, an investor should know exactly what type of holding strategy best suits their long term goals and business plan. Here are the 3 most common holding strategies:
The Buy & Hold Strategy
The Buy and Hold strategy involves purchasing a property to rent out over 10+ years. It’s the simplest and safest way of investing in real estate. Essentially, the investor creates wealth by collecting monthly cash flow and waiting for market prices to climb up over the (very) long run. The only rule in this strategy is to make sure not only your mortgage but all your total property expenses including interest are covered by your rental price.
For buy and hold investors, the most important thing is to choose a property that will generate rental income over the long run. It’s important to choose an investment located in a valuable area, and to spot a good investment opportunity as soon as it hits the market. Common mistakes made by buy and hold investors include choosing bad tenants, failing to manage their property, not staging properly, choosing a risky neighbourhood, or choosing the wrong mortgage plan.
To maximize profits on a rental income, investors need to properly understand the market trends in the area in which the property is located. It comes down to recognizing when inventory is high and prices are low (a buyer’s market) and seizing the opportunity to buy real estate. Then, when the market becomes over-saturated, a smart buy and hold investor will stop buying until the market cools down again
The Buy & Flip Strategy
The Buy & Flip holding strategy involves buying a home with unrealized potential and refurbishing it to resell within a short period of time.
The most popular type of property to flip is the single family home. Flippers follow the 70% rule, meaning that homes are bought for 70% of their actual market value after renovations. For example, if a home is worth $100,000 if it were in good condition, but needs $20,000 worth of work, a house flipper will purchase the home for $50,000 ($100,000 x 70% – $20,000) and seek to sell it for the full $100,000 when completed.
Successful home flipping relies on negotiation and speed. The faster one is able to flip, the less number of months they need to pay carrying costs for. Carrying costs include financing charges, interest, property taxes, condo fees, utilities and any other maintenance bills.
The Wholesaling Strategy
Wholesaling Strategy scouts out attractive real estate deals, writes a contract to acquire the deal, and then sells the contract to another buyer.
Technically, a wholesaler never actually owns the real estate, they only transfer it from person to person while charging an “assignment fee.” This fee is typically between $500 and $5,000 on average — and depends on the size of the deal.
In other words, the wholesaler is a middleman who charges a fee for finding the best deals.
While it’s not unheard of that wholesalers resell to private buyers, it’s certainly more common that they deal with other investors or house flippers. These are typically “cash buyers,” who will pay the wholesaler days or weeks after signing the contract.
Which strategy should you choose?
In Montreal, the choice of a holding strategy is an easy one to make; there is no wholesale market in Montreal, and a very small, niched flipping market. To obtain the sagest results on a real estate investment in Quebec, your best bet is to buy & hold.