There are three kinds of real estate investors. What kind are you?
I get a lot of inquiries from potential investors, so many in fact that I have recently partnered with a colleague who specializes in investment real estate. With so much interest coming out of the Greater Toronto Area, we’ve hit a critical mass where it makes sense for us to build spreadsheets and put in the extra effort on behalf of our clients. They are coming. They are buying. Toronto is done, Kitchener Waterloo is the new frontier. It is manifest destiny for the 21st century.
When interviewing potential client investors, we’ve found that they fall into three main groups:
The three groups are looking for different things.
Flippers are looking for “deals”. They are looking for old, outdated homes in serious need of a makeover. There are different levels of flippers. There are those who will take out a single family house and build in its place a duplex. And there are flippers who will do very little construction but do a lot of cosmetic work. Even cosmetic work can cost $40,000 to $50,000 if you re doing floors, trim and windows.
Flippers can be contractors. They really need to know the numbers. They should know what they are doing in terms of: what they are looking for in a ‘down to the studs” property and dealing with permits and work crews.
The second group are ‘improvers’. They are looking for opportunities. Improvers are often looking for a long-term buy. They will buy, fix, rent and hold. They require a cash positive property that they can add value to over time as it pays the bills and a property in an neighbourhood that will appreciate at a better than average rate. Improvers come in at different levels too. Some are straight, buy and hold customers, hoping that with our local real estate appreciating at a good rate, their investment will be worth a lot more when they sell it (and that it can pay for itself along the way.) Others add value along the way, slowly improving the property as they lower their taxable income.
Key-turners, the third group is looking for condos and pre-construction projects. Key-turners are looking for turnkey investment vehicles. They like the promise that some condo developers give of the first two-years of rent guarantees and management of their investment. They are looking for a place to park their money and do nothing as it grows. They like the hands off approach to real estate investment.
Key-turners game is the end game. They are hoping that the promise of higher real estate selling prices in one or two years when the building is completed will be realized.
How they stack up and shake out
Of the three groups, flippers are the hardest to work with, hardest in terms of finding the right properties. There aren’t that many houses that hit the sweet spot with house flippers. The selling price has to be low enough that they can turn a profit after the work is put in.
Improvers are the most interesting to work with. They are the goldilocks of the real estate investment world – not too soft, not too hard, but just right.
Key-turners are the easiest. “Here, take my money”, they say. They are betting on the future. They are using historical and current knowledge to predict future value. Some of them do very well. The ones that do best have found the secrets to identifying and buying the right pre-construction project, or the right unit within the project.
All in all, as far as the real estate investment pool goes, the key-turners are the little fish and the flippers are the big fish and the improvers are somewhere in between. It is a food chain and there is a place for everyone.