4 Ways To Boost Your Real Estate Investment Returns
With a variety of properties on the market, there’s many opportunities for improvement. We’re here to show you how to spot for these opportunities, then act on them to transform properties that have lower rates of return to higher rates of return.
A big benefit of real estate investments is that you can perform value-added work to upgrade your property. Here’s a before and after photo of an upgraded kitchen in one of our investment properties:
Now, let’s assume there are two similar properties in the same neighbourhood. The difference between the two properties is that one needs to be upgraded and the second is already upgraded. In this example, an upgraded property on the market reaps a total first year return of 6%. If you manage the upgrades yourself, you’ll reap a high first year return because you gain value from your renovations on top of annual appreciation. After the first year, your returns grow more steadily at market rates.
The extra value you gain in the first year though actively manage these upgrades come from:
- The carrying cost to do the renovations instead of collecting rent on day 1.
- The effort to manage the project.
- The risk of hiring contractors with undetermined results.
- The risk that the project doesn’t get completed as projected.
- The risk of going over budget.
With our team, we help you minimize these risks:
- We have a great network of reliable contractors.
- We know what needs to be done to generate the highest returns with the lowest risk.
- We provide accurate time and cost projections for your upgrades.
- We provide future cash flow projections to show you returns will be post-renovations.
Appreciation by neighbourhood can vary. An area that is in the process of gentrification can get much higher rates of appreciation compared to the rest of the city.
When the city changes the use of an area, it gives way to new development opportunities by private sectors. New developments attract more demand in the area, causing other things like transit, schools, hospitals, and other infrastructure to improve. Ultimately, this boosts the value of the neighbouring properties.
Similar to upgrades, properties in a gentrification area are subject to risks:
- If these plans change or get delayed, this increasing carrying costs and can dilute your returns.
- While the area is gentrifying, disruptions are generally less attractive and can affect tenant quality.
The property’s price point can also affect your rate of return. Let’s look at returns based on the type of property.
Condos offer the lowest rate of return. With the same amount of risk, you would be able to get a higher rate of return with a house. Similarly, commercial units generate the highest real estate investment rate of return.
Because condos is the lowest point of entry for real estate investments, it attracts more demand than other properties – this drives up prices and reduces overall return. With bigger and more units, rents are multiplied but expenses don’t increase at the same rate. Ultimately, a higher budget can get you a better valued property with higher cash flows, so your total rate of return is higher.
If a tenant stays in your property for a long period of time, there will be a big difference between the rent you receive compared to market rent. So, this reduces a real estate investor’s rate of return and may motivate the investor to sell the property. Because the property is not getting market rent, the property tends to sell at lower than market price.
One strategy is to purchase this property at a discount. Yes, you will earn lower cash flow with existing tenants. However, once the existing tenants leave and market rents get realized, you will get a big bump in total returns from higher cash flows and a higher property price.
How We Can Help
If you’re a first time investor, we understand how scary these risks can seem. Don’t worry, we’re here to guide you throughout the entire process:
- We take time to learn about your risk tolerance, budget, and preferences.
- Based on your profile, we’ll show you properties that can offer good rates of return.
- We provide valuation reports that show current returns, and projected costs and returns based on our recommendations.
- We provide contacts to reliable contractors to help you get the work done on budget and on time.
- Our expert team will be around to help you work through any issues that arise.