Successful Real Estate Investing is About Simple EconomicsSep 19, 2023
Are you beginning your journey into the world of real estate investing? The journey begins with a number of crucial questions, and the answers will help form the basis of your real estate investment strategy.
- What type of property should you invest in?
- What kind of financing can you qualify for to complete the transaction?
- How quickly can you generate income from your investment?
- At what point can you purchase additional property and build your own empire?
Answers to every one of those questions are important to build your real estate investment strategy. However, as you ask these questions and mull over the possible answers, here’s a little tip to keep in mind as you build a successful real estate investment business.
Successful real estate investing is about simple economics
The goal of any investment strategy is to make as much money as possible from your real estate assets. Buy low, sell high, manage costs, and reap the rewards are all apt strategic messages for any rising investment superstar.
As you set about trying to achieve those strategic goals, develop an investment plan that’s grounded in the principles of simple economics. In a nutshell, this means don’t take on too much overhead. Higher overhead drives up your costs and reduces your profitability.
So how do you build your real estate empire by using the principles of simple economics? Follow these recommendations as you begin your real estate investment journey. Once you establish your business, you can expand and scale up the number of properties you acquire.
Prioritize acquiring multifamily properties to begin your investment journey
If you’re a new investor, you might assume that a single detached property is the easiest acquisition to start your journey. You may also feel a duplex or triplex is manageable as a first-time investor.
However, you’re robbing yourself of profitability by confining your investments to such small properties. The fact is that multifamily investments, large apartment complexes, condo buildings, or commercial office spaces are far more lucrative and economical.
Boil the comparison down to the simple economics. A single detached home, a duplex, or a triplex mean only a handful of tenants pay you money every month. It’s a steady stream of income, and it can help pay off the mortgage; there’s no questioning that. But it’s not enough income to help you prepare for the next stage of building your real estate empire.
On the other hand, multifamily properties have dozens, or in some cases hundreds of tenants that pay rent every month. Acquiring multifamily properties is a large upfront investment, and you’ll likely need to qualify for financing to help pay for the purchase.
Once the deal is closed, and you start collecting rental cheques, a much larger stream of passive income flows into your bank account every month. That’s why multifamily investments are winning strategies for investors.
Smaller properties are cheaper to buy but expensive to manage
Let’s fully acknowledge that list prices for smaller properties like single detached homes, duplexes, or triplexes are more affordable than large multifamily properties. If you look at your options solely through that lens, it makes a lot of sense to stick with smaller properties.
Additionally, let’s acknowledge another little caveat. If your intention is to buy one or two small properties, and you don’t want to build a more lucrative real estate empire, then this is a strategy that can work for you.
Your investment plan is no longer feasible if you intend to build up a much larger real estate portfolio. Bringing it back to simple economics, buying multiple small properties is a very short-sighted and expensive strategy for investors with high aspirations.
Here’s why it’s more costly to go down this road. The cost per unit that you own decreases when you own more units on a piece of land. Look at it this way.
- Example #1: You own five single detached properties
In this scenario, let’s assume you’ve purchased five single detached properties in different communities. Each one of those properties has overhead costs that directly eat into the revenue and profitability you earn from your investments.
- Every property has a driveway
- Every property has a hot water tank
- Every property has a furnace
- Every property has a roof
These are all necessary amenities to maintain the value of each residence. But as the owner of every property, the cost to maintain each one of those amenities is your responsibility. They all add up, and it increases how much you spend simply to retain market value on your investment.
- Example #2: You own one apartment complex with dozens of units
In this scenario, you’ve acquired one multifamily property with dozens of available units to rent. You lease each unit to a paying tenant and collect monthly payments from each tenant.
The difference with this scenario is that the building itself has only one driveway, one hot water tank, one furnace, and one roof. Your maintenance costs are far more affordable and manageable compared to buying several small properties with individual amenities.
Look at the options from the mindset of a disciplined investor. In those examples, which scenario seems more profitable to you?
Rising demand for multifamily properties makes them easier to buy and flip
Finally, the best way to build an investment strategy based on simple economics is to analyze the demand for different types of properties. Economics is all about the balance between supply and demand. Strategically, you can pull the right levers to capitalize on demand by supplying the most valuable products.
Following a brief lull during the pandemic, investments in multifamily properties bounced back with a renewed confidence. In a breakdown of the types of real estate sales across Canada, multifamily properties reported the second highest volume of transactions nationwide over an 18 month period that culminated in June 2022. Only sales of industrial office space exceeded the volume of sales in the multifamily residential space. This is due to the fact that so many people started working from home that it no longer made financial sense for a business to pay for an office building for only a small number of workers.
Sales numbers prove that other investors want to purchase multifamily properties. If you own one of these properties, that gives you leverage when the time comes for you to flip the property to someone else.
You can invest in simple repairs like new paint jobs, flooring, and other minor improvements to improve the physical appearance of your property. A property that looks like a premium investment opportunity can be listed for a higher selling price. Once it sells, you recoup the money you spend to make those repairs, plus a sizable rate of return on your initial investment.
Join the ultimate real estate investment community to learn more about the economics of investing
Successful real estate investors understand that simple economics dictates strategic decision making when it comes to making investments. They use this strategy to build up a valuable portfolio and generate profitable returns from those savvy investments.
Want to learn how to use simple economics to your advantage as a real estate investor? We encourage you to join the ultimate real estate investment platform and become an active member of our community.
You’ll receive invaluable coaching and mentorship from some of Canada’s most successful real estate investors. You can also learn from fellow new investors and share tips and insights from your respective ventures into the real estate market. Most importantly, you’ll have a network of people who will help you establish a winning mindset to turn today’s investments into tomorrow’s wealthy returns.
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