Written by Mallory Papineau   |   Posted on   |   383 views

Investment Strategy Pros and Cons

So you’re ready to invest in real estate but you don’t know which investment strategy is going to give you the result that aligns best with your goals. We get it. That’s why we’re here to help you make the best informed decision so your investment works with you and not against you.

Each investment strategy has its own Pros and Cons and we’re going to lay them all out for you.

BRRR – Buy, Renovate, Rent, Refinance

This type of investment is what we like to call the rinse and repeat method. For a successful BRRR to happen, you are typically buying a distressed or rundown property that needs rehabilitation.

  1. First, you buy the home and renovate it to force the appreciation of the property to a much higher value.
  2. Next, you rent out the property to start helping with paying down the mortgage.
  3. Lastly, you refinance with the goal of extracting all your capital back out of the property so you can now invest it into another property.

Pros: 

  • Infinite return on investment: little to no cash left in your property
  • Scalability: You can scale relatively quickly which increases both the number of investments in your portfolio, but also increases the overall value of your portfolio
  • Equity: Instant built equity after you refinance
  • Passive appreciation long term
  • Debt pay down along with monthly/annual cash flow tends to be higher

Cons: 

  • The numbers rely heavily on a strict timeline; delays in completion can result in lead to large interest repayments
  • Initial capital investment is high
  • A bad appraisal that doesn’t align with your estimated after-repair-value can result in an inability to refinance, or cause difficulties in paying back lender
  • Difficulty in renting after renovation can affect budget
  • Requires extensive renovations to force appreciation and extract all capital

Buy and Hold

This is for investors that are looking for passive income over a longer period of time.

These properties tend to be turnkey and/or need minor cosmetic repairs.

This type of investment recoups its equity over a longer period, rather than immediately through forced appreciation. 

Pros: 

  • Little to no renovation required; typically considered a turn key investment
  • A long term hold results in passive income and increased property value
  • High return on investment
  • Tenants are doing the debt pay down including your mortgage and operating expenses

Cons:

  • Nominal cash flow, if any
  • Longer term hold in order to see equity growth
  • Rental vacancies can be costly 

Flipping a Home

This type of investment involves purchasing a property listed below market value because of its distressed condition.

The property is restored/renovated to drastically increase the after-repair value.

The home is held only for the period it is undergoing renovations and then listed back on the market. When done correctly, this is an investment strategy where you see the quickest return on investment. 

Pros: 

  • Quick turn around on investment
  • Avoids ongoing difficulty of finding tenants and maintaining the property
  • Faster return on your money, focused on active income and not long term passive income
  • Capital is at risk for a minimal amount of time

Cons:

  • Fluctuations in the real estate market make it a higher risk investment
  • Could cost you a hefty tax bill
  • Cost of investment (renovation, carrying costs, closing costs etc), can significantly affect profits

Rent to Own 

This type of investment is a legally documented transaction where a tenant pays monthly rent for an agreed upon amount of time with the option to purchase the property at any given time before the lease ends.

This allows a portion of the rental price to go towards having equity in the home without having to come up with a large down payment ahead of time.

Pros: 

  • Monthly cash flow in the form of rent and money towards purchase price
  • Large lump sum when renter is ready to buy
  • Seller/landlord is not usually responsible for maintenance and repairs

Cons:

  • If given an option to purchase agreement, tenants can terminate a contract at any time
  • If property price is locked in to the agreement and the housing market increases, you are losing the passive appreciation value
  • Seller must still make the mortgage payments, even if tenant is in default of rent

*All information provided by the Brantford Regional Real Estate Association (BRREA) for the highest sales volume and highest number of completed transactions since January 1, 2015. All Brantford MLS® House Listings come from the various systems operated by Real Estate Boards and Associations across Canada. The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA. Used underlicense. The trademarks MLS®, Multiple Listing Service®, and the associated logos are owned by The Canadian Real Estate Association (CREA) and identify the quality of services provided by real estate professionals who are members of CREA. Used under license.

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