The real estate market has remained faithful to investor expectations through the many ups and downs in the last couple of years. It is time-tested and widely believed to be immune to market volatility. Many experts believe that positive expectations and upward momentum will continue in the upcoming year because they have demonstrated their ability to sustain themselves.
Commercial real estate funds are becoming more visible on the market as small-time investors increasingly find appeal in the idea of earning a steady passive income from safe real estate investments. For these investors who do not have a portfolio worth crores, the upcoming year may bring a lot more options.
Young investors might be quick to label real estate as “slow” or “boring,” but this is unlikely to be the case. Every type of investor can find something in real estate, with the possible exception of those who may actually be more gamblers than investors.
Real estate investing can be a profitable way to build wealth over the long term. However, it is important to approach it with a well-informed and disciplined strategy. Some of the key factors to consider when investing in real estate include location, property type, financing, and market conditions.
The need for real-estate investing strategies
Creating a real estate investing strategy is important because it helps you to focus your efforts, minimize risk, and maximize your returns. By having a clear plan and set of goals, you can make more informed investment decisions, identify and capitalize on opportunities, and avoid common mistakes that can cost you time and money.
Here are a few reasons why creating a real estate investing strategy is important:
- Provides direction: A strategy helps you to identify your objectives and set a clear path towards achieving them. It provides a framework for decision-making and helps to ensure that your investments align with your overall financial goals.
- Minimizes risk: Investing in real estate can be risky, but a well-developed strategy can help you to minimize those risks. By conducting thorough research and analysis, you can identify potential pitfalls and develop contingency plans to mitigate potential losses.
- Maximizes returns: By developing a strategy that takes into account your risk tolerance, investment goals, and other factors, you can identify the most profitable investment opportunities and allocate your resources accordingly.
- Helps with decision-making: A strategy can help you to make more informed investment decisions by providing a framework for evaluating potential opportunities. By setting clear criteria and benchmarks for success, you can avoid making impulsive decisions and focus on investments that are likely to provide the best returns.
Overall, creating a real estate investing strategy is an essential step in building a successful real estate portfolio. It helps you to minimize risk, maximize returns, and stay focused on your investment goals.
The effects of real-estate investment
Real estate investment can have various impacts on equity, depreciation, negative gearing, and positive cash flow:
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Equity:
Equity refers to the value of an asset that is owned by an individual or entity. When someone invests in real estate, they have the potential to increase their equity in the property over time through mortgage payments, appreciation, and improvements.
This can result in a larger percentage of ownership in the property, which can provide a higher return on investment when it is sold.
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Depreciation:
Depreciation is the reduction in the value of an asset over time due to wear and tear or obsolescence. In real estate investment, depreciation can be used as a tax deduction by the owner of the property, which can help reduce their taxable income.
However, it’s important to note that depreciation is a non-cash expense, meaning it doesn’t actually require cash outlay but it reduces taxable income which can positively affect cash flow.
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Negative gearing:
Negative gearing is a strategy in real estate investment where the cost of owning and managing a property (such as mortgage interest, property taxes, maintenance, etc.) exceeds the income generated from renting it out.
The investor may be able to claim the loss as a tax deduction, which can offset their taxable income from other sources. While negative gearing may result in a loss in the short-term, it can potentially lead to long-term gains through capital growth, rental increases and tax benefits.
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Positive cash flow:
Positive cash flow occurs when the income generated from renting out a property exceeds the expenses associated with owning and managing it.
This can be achieved through careful selection of the property, setting rent rates that exceed expenses, and minimizing costs. Positive cash flow can provide a steady income stream for the investor and can be used to reinvest in other properties, pay off debt or for personal expenses.
Overall, real estate investment can have significant impacts on equity, depreciation, negative gearing, and positive cash flow. Investors should carefully evaluate their goals, risk tolerance, and available resources before deciding to invest in real estate.
Top real-estate investing strategies
Real estate investing enables portfolio diversification and the creation of passive income. Real estate investing is something you can start as a beginner and excel at. You are capable of completing all of your desired financial goals. You would, however, need to be familiar with some real-estate investment strategies. The year 2023 appears to be one that will be advantageous for real estate market investments.
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Try the Live-In-Flip approach
The Live-In-Flip involves purchasing a home, relocating there, making improvements, and then holding onto the property for a predetermined amount of time before reselling it for a profit.
A new anti-flipping law was introduced as of January 1st, 2023 as one of the measures to cool down the hot real estate market in the Greater Toronto Area. Profits from the sale of a property that has been owned for less than a year will be subject to business income tax under the new anti-flipping regulation. Remember that exceptions might apply if you sell due to a change in circumstances and explain this to CRA.
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The strategy of House hacking
The term “house hacking” refers to residing in a home that also generates income. The home or property may have two, three, or four stories, as well as an additional livable corner like a guest house, a basement, or additional bedrooms.
Hacking your home is a great way to learn about the rental market while still living there. Additionally, after a while of residing here, you are free to move out or convert the home into a long-term rental.
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Mend and make
Finding homes that need work, making the required repairs, and then selling the properties for top dollar are all part of the fix-and-flip business model. You must go for this tactic if you are a novice real estate investor.
Because this model offers you a means of setting aside money for the future. The beautifully finished homes and the sporadic large sums of money, despite the fact that it’s not that simple and easy, are quite satisfying.
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Real Estate Investment Trusts (REITs)
These are privately held or publicly traded companies that invest in various types of real estate. The following investments might be made:
- commercial property
- specialised structures, such as data centres
- amenities for cold storage
- divisions for “build-to-rent” homes
Similarities between mutual funds and REITs abound. Instead of allowing you to own a stake in numerous stocks, REITs allow you to develop a variety of commercial assets. Once you master this technique, it really does become automatic.
The shareholders of REITs must receive at least 90% of their income. Expanding an investment portfolio may be helpful if you want to profit from real estate without owning any property.
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The BRRRR model
BRRRR investing stands for Buy-Remodel-Rent-Refinance-Repeat. It’s yet another smart way to start your investment career with a rental property without running out of money when done correctly.
In essence, you can find homes that need work or finishing that are less expensive to buy if you search for them. You use relatively quick cash when buying a property and pay it back with a long-term loan once it has been fixed and stabilized.
If everything goes according to plan, you can withdraw most or all of your starting capital for the subsequent trade.
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Long-Term & Short-Term Rental Strategy
Long-Term Buy and Hold Rentals refer to owning a property with the intention of keeping it for a long time. This methodical, highly effective approach has a number of benefits, including: rental revenue, repayment of a mortgage, amortisation protected from taxes, and price increases.
The short-term strategy entails making short-term, perhaps one- to five-year, investments in rental properties. The primary objective of this strategy is frequently to increase property value (Add Value) through improvements, cost savings, rising rents, or any combination of these.
For turnaround operations involving numerous apartment buildings, the short-term buy-and-hold strategy works best. Additionally, it works well in developing areas with low income generation and rentals that are inexpensive.
To conclude
Remember, real estate investing carries risks, so it is important to do your due diligence and carefully assess your investment opportunities before making any decisions. It may also be helpful to consult with a financial advisor or real estate professional to help you make informed investment decisions.
