If you’re just getting started in real estate investing, you probably have more questions than answers. What market/sub-market should I invest in? How can I get a strong return on investment? How do I increase cash-flow? What strategy is best for me – Buy Rent Hold? Rent to Own? Or Student Rentals?
Rachel Oliver, Monika Jazyk and Gillian Irving were real estate investors grappling with these same questions, on top of managing their large families and unique financial situations. Together they formed Mothers of Real Estate (MORE) in 2015, and have been leveraging their different areas of expertise to help others achieve their goal of financial security through real estate investing since then.
To illustrate the different ways you can invest in a property, each of the women of MORE examined the same home to share their strategy. The sample home is a two-story, single-family detached home with three bedrooms and two baths with a purchase price of $350,000.
Read on to learn how Rachel, Monika and Gillian apply their individual specialties and present an analysis of potential earnings (and risks).
Rachel specializes in ‘people-first’ RTOs to help aspiring home buyers get into home ownership. In her extensive experience, when done correctly, RTO is a win-win for both the investor and the rent-to-own tenants (called tenant-buyers). Since the tenant-buyers will ultimately own the home themselves, they act more like owners and less like tenants. Ideal for the investor who wants avoid issues like lost rental income, repairs and property management expenses. Tenant-buyers are typically recovering from a financial setback but are committed to achieving home-ownership. They have been saving up for a down payment and need to rent-to-own to accumulate a higher down payment through their monthly RTO payments to the investor.
Rachel crunched the numbers on how the RTO strategy could yield lucrative returns for this type of investment property. An investor could expect $595 in monthly cash flow, without having to deal with maintenance or repairs.
Rachel is assuming three things to make this work – the tenant-buyer has at least $15,000 for a down payment at the start of the RTO and needs a typical 36-month RTO term to become “mortgage-ready” to buy this house. Plus the investor and tenant-buyer sign a contract at the beginning stating specifically the fair market price the tenant-buyer will pay for the house at the end of the RTO. The investor can use the tenant-buyer’s initial down payment to help offset capital tied up in this property, one of the reasons the RTO strategy can be so profitable.
Investing in a rental property goes beyond the initial purchase: With a long term buy-rent-hold strategy you’re committing to managing the home for several years and need to pay attention beyond the property itself and also consider wider trends such the neighborhood’s economic growth. Buying in areas where demand is growing (but not where all buyers are looking) and where the likelihood of finding undervalued properties is higher, is the ultimate goal.
Monika specializes in long-term rental properties at MORE. She suggests that a great way for the sample property to generate maximum cash-flow would be to convert the home into a legal duplex. Adding in a legal suite not only increases rent potential, it also reduces rental risk (if one tenant loses a job, there is still another). By adding a secondary suite, you are also creating forced appreciation which heightens the value of the home!
Renting to students sounds intimidating, but when done strategically, Gillian thinks student rentals are an A+ investment.
Using the single-family home example above, the goal would be to create as many bedrooms as comfortably possible. If three additional bedrooms are added to the existing 3 rooms, this would allow for as many as six student tenants and six separate rental incomes. At a competitive rental rate of $525 per student, that amounts to a cash-flow of at least $540 monthly after expenses.
Gillian has two suggestions for protecting your investment and dealing with students. First, invest in a reliable property manager who specializes in student rentals to save you time and headaches. Second, protect your income by having your lease signed by a guarantor (ideally the parent of each student).
Make real estate work for YOU
Regardless of which strategy you select, the key is to always do a thorough market and sub-market analysis before even committing to a neighbourhood in which to house hunt. Once you have satisfied yourself that your area’s economic fundamentals are sound, the next step is to carefully evaluate the property for potential for cash-flow.
Rachel, Monika and Gillian know there is no one-size-fits-all answer. The same property can be successful with multiple strategies. Maybe you’re hoping to maximize cash-flow, or are willing to earn less in exchange for less tenant interaction? Ultimately, the right strategy is the one that aligns best your personal goals. Just remember to commit to your strategy and always cover your bases with careful due diligence.
By: Gillian Irving, Monika Jazyk and Rachel Oliver aka the “The Mothers of Real Estate” (MORE). With almost 30 years combined experience and $100M in deals across multiple strategies, new investors have been turning to MORE for online training in real estate fundamentals since 2015. For MOREinformation, go to: www.mothersofrealestate.com