Investing in real estate in Canada and most other countries has it benefits, but also carries risk. In the current higher interest rate environment with lower supply and growing population, different strategies need to be explored.
We all know about the direct ownership strategies such as buy and hold, fix and flip, BRRRR (Buy, renovate, rent, refinance, repeat) and indirect ownership such as REITs, Funds, Limited partnerships, etc., but what about understanding the strategies behind these?
I am talking about value investing, growth investing, and income investing.
Let’s talk about the differences between value investing, growth investing, and income investing strategies in real estate and why they are relevant now.
Value investing, growth investing, and income investing are three distinct strategies that real estate investors use to achieve their financial goals. Each strategy has its own focus and objectives.
Value investing in real estate is finding hidden gems. It involves researching the market and identifying those properties that are undervalued or underpriced relative to their intrinsic worth and have a strong potential for long-term growth.
The primary goal is to acquire properties at a discounted price, potentially due to factors such as poor condition, distressed sellers, or market inefficiencies.
The investor aims to generate returns by improving the property, increasing its value, and either hold on to the property for income and capital extraction purposes, or exiting and selling it at a higher price. Researching the market for rental demand, rental rates, path of progress, overall market trends and dynamics will go a long way to ensuring that the value investors are successful.
Often, they look for properties with potential for improvement in operations, renovation, repositioning, or redevelopment. In addition to looking for good long-term appreciation potential, value investors often prioritize cash flow potential to ensure sustainability, so having a realistic expense ratio and a healthy rental rate to purchase price ratio is essential.
To find examples of real estate markets that currently demonstrate opportunities for value investing look for those markets that may be more affordable, with greater inventory than present demand. Edmonton immediately comes to mind as one of the top markets for value investing.
Growth investing in real estate emphasizes properties with high growth potential. The primary objective is to achieve capital appreciation through the increase in property value rather than immediate income generation.
The focus is on identifying areas or property types that are expected to experience significant appreciation in value over time. Investors target properties in rapidly developing neighbourhoods, cities, regions with strong economic growth, or emerging markets.
Growth Investors aim to capitalize on increasing property values over time due to factors such as infrastructure development, demographic shifts, population growth, job creation, and gentrification. By carefully analyzing the market data and economic forecasts, the growth Investor can target those markets and neighbourhoods that present a strong and favourable long term economic outlook.
The primary objective is to achieve capital appreciation through the increase in property value rather than immediate income generation.
Growth investors generally have a long-term focus and so they may hold onto properties for an extended period to maximize returns. It is very much a buy and hold strategy that incorporates an underlying patience waiting for the market conditions to align with the growth investor’s expectations.
Before the rapid mortgage interest rate increases were introduced, Vancouver and Toronto demonstrated this but in a short-term scenario due to the massive demand, low inventory and geographical constraints.
Recently, even the comparatively affordable markets in the Atlantic region were experiencing rapid growth in property values due to demand by investors and new homeowners seeking affordable homes.
Income investing in real estate revolves around generating regular income streams. It involves seeking out properties with strong rental demand and either positive cash flow from day one or realistically favourable cash flow potential.
The goal is to have properties that can provide consistent rental income, covering all operating and financial expenses and providing a steady return on investment. Income investors typically prefer stable markets with reliable rental demand and low vacancy rates.
Understanding the current and future rental demand is critical for income investing, therefore researching and analyzing rental demand, vacancy rate, rental market trends and dynamics, population growth and demographics and finally the potential for rental growth is paramount.
One significant component to address when it comes to the sustainability of income investing is to know and understand the rent controls/regulations and the related potential impact on rental increases in relation to expense increases.
BC, Ontario, Manitoba, and Quebec have some of the highest levels of rental regulations that can act as deterrents for landlords to improve the properties, which in turn reduces the properties’ income potential over the long run.
I look for those markets that are more of a fair market approach so that the rental income increases or decreases as the market dictates. Alberta and Saskatchewan are two of those markets.
In order to be a successful real estate investor, creating a diversified portfolio of income-generating properties to achieve a reliable and steady income stream over time is going to be key.
Risk and Return
Each strategy carries different risk and return profiles. When it comes to risk and return, value and growth investing strategies generally involve higher risks but also have the potential for greater returns over the long term. Income investing, on the other hand, offers more stable cash flow but may have comparatively lower appreciation potential
The time horizon for value and growth investing strategies is typically long-term, aiming to maximize returns over several years or even decades. Income investing can be both short-term and long-term, depending on the investor’s goals.
It’s important to consider your own risk tolerance, investment objectives, and personal preferences when choosing a strategy. You can also combine elements from different strategies based on your goals and the market conditions.
Final Thoughts on These Real Estate Investing Strategies
It’s important to note that these strategies are not mutually exclusive, and investors may combine elements from different approaches based on their investment objectives and market conditions.
Additionally, each strategy requires thorough market research, financial analysis, and a sound understanding of real estate fundamentals to make informed investment decisions.
So, take your time, do your due diligence, and choose a strategy that aligns with your investment goals and suits your preferences.
I strongly believe based upon my experience and the exhaustive research I have conducted, Edmonton Alberta does currently provide a fertile ground for combining all three of these strategies. If you would like to understand more or are ready to investigate Edmonton for investment properties that demonstrate these strategies email me today.