If you haven’t heard yet, we are getting divorced! Yes, again. This time, and perhaps ironically, in the “Honeymoon Capital of the World” of all places.
Well our latest investment property is getting divorced that is.
Corinne and I decided to start of the New Year by buying the perfect property to flip, with one very BIG and important difference.
You see, unlike those “flip” shows you may have seen on TV we actually have absolutely no desire to “Flip This House”.
The little known yet simple investment strategy we are using on this property will generate much higher returns than simply renovating and flipping it, but that’s not even the best part.
So what is this little known strategy that on the surface looks like a flip but is actually no flip at all?
Read on, as I am about to reveal one of the best kept secret real estate investment strategies available today that you too can take advantage of to make some absolutely MASSIVE returns.
It’s called the “Buy, Fix, Rent and Refinance” strategy.
This is one of the most profitable real estate investment strategies that is simple to understand and with the right knowledge simple to implement and profit from as well.
This strategy is superior to many other real estate investment strategies on the market today for several reasons.
Imagine a strategy that combines:
All the benefits of a traditional flip:
The Buy, Fix, Rent and Refinance strategy has all the benefits of your traditional flip in that you get to create equity in the home above and beyond what you would spend on those renovations.
However, the big difference is that you get to generate even higher returns. Better still is that instead of having to sell the property to generate those returns you actually end up keeping it.
Since a substantial portion of the property is being renovated, you should also expect to benefit from less repairs and maintenance in the short to mid-terms as well using the “Buy, Fix, Rent and Refinance” strategy.
I should also mention that this strategy when properly implemented can enable you to recoup a large portion, if not all of your initial investment, in a matter of only a few short weeks or months, instead of years! How cool is that?
All the profit with lower risk and higher returns than a traditional flipHere is the secret of how the “Buy, Fix, Rent and Refinance” strategy returns really blow most traditional flip properties out of the water.
As you have likely seen on TV, the traditional flip strategy end game is to ultimately sell the renovated flip property for more than what was paid to purchase and renovate it.
What most of these TV programs fail to elaborate on most of the time are the other often hidden, but very real, costs associated with selling those properties.
Costs to stage the home, real estate commissions and legal fees to sell the home, early mortgage cancellation penalties can easily eat away several thousands of dollars from your flip profits. These are blatantly obvious but seldom taken into account on those highly popular flip TV shows.
What is less obvious are some of the other ongoing costs. If you were to continue flipping properties you would end up incurring the same expenses over and over again.
Things like Ontario Land Transfer Tax, and in cities like Toronto, Municipal Land Transfer Tax as well, home inspection fees, legal fees to first buy the property and once again when selling each property, mortgage cancellation penalties, real estate commissions, etc.
These can easily add up to 10% of the property value, or about $30,000 for a $300,000 flip property. That’s like losing an entire property for every ten flips.
Less taxing than a traditional flipThe less obvious, but even more costly 800 lb gorilla that I have never heard talked about in any of the TV flip shows are income taxes payable on the sale of those properties. Yet it should really come as no surprise that the CRA would be looking for their pound of flesh as soon as you sell that flip property.
Worse, most people don’t realize that unlike traditional “Buy and Hold” properties, flip properties are not typically viewed by CRA as capital assets. Instead they are viewed as inventory.
What this means in a nutshell, is that profits generated on flip properties are NOT considered by CRA to be capital gains, which enjoy lower tax rates since only 50% of a capital gain is deemed taxable.
Instead flip profits are deemed to be income, 100% of which is taxable, as these profits are generated in the interest of trade. This is because flippers are in effect selling inventory and not capital assets. That is, most flippers intent is to sell their flip properties as soon as renovations are completed.
Yet with the “Buy, Fix, Rent and Refinance” strategy you get to generate superior returns and pull these out of the property, and in many instances, without having to pay taxes.
The reason for this is simple. CRA requires you to pay taxes when you sell or dispose of the property.
However, using the “Buy, Fix, Rent and Refinance” strategy there is no sale. Instead you are merely refinancing the property and therefore have the potential to pull out as much as 80% of the post renovation value of the property and quite possibly tax free at that!
In fact, you may not have to pay taxes on those returns until the property is actually sold possibly years or even decades later.
Caution: You should always seek guidance from professional accountant or tax specialist who are knowledgeable about real estate investments in respect to all matters concerning this or any other investment strategy discussed in this article. Speaking to a tax specialist on all such matters is highly advised.
All the benefits of a traditional “Buy and Hold” property strategy:
Like the traditional “Buy and Hold” strategy, you get to keep and rent out the property, your tenants end up paying for your property by paying off your mortgage over several years.
In addition, like the “Buy and Hold” strategy, you get to benefit from any increases in your property values as your property appreciates over time.
As an added bonus, real estate assets are hard assets and the rental income that they generate are both inflation adjusted automatically over time when utilizing the “Buy and Hold” strategy. As such both the real estate assets and the income they generate are a great way to hedge against inflation risk.
All the superior cash flow of a multi-unit home:
Like a properly implemented “Buy and Hold” strategy, your property should generate positive monthly cash flow.The “Buy, Fix, Rent and Refinance” strategy can certainly be used on all types of properties, from single family homes to multi-tenant and even commercial properties.
However, some of the most profitable ways to utilize this strategy is by changing the existing use of a property into one that is able to generate even more monthly income and cash flow.
This is why for both new, intermediate and even advanced investors this strategy works especially well when converting a single family home into a multi-unit home.
Buy don’t just take my word for it: Buy The Numbers!
Here’s an example to further illustrate why the “Buy, Fix, Rent and Refinance” strategy is typically superior to flipping houses.
Say you bought a property for $200,000 and spent $50,000 renovating it and now the property is valued at $350,000.
Now to buy the property at 20% down, you would have required $40,000 down plus about $5,000 for Land Transfer Tax, legal and other closing costs. You would also need the additional $50,000 to renovate the property. So your initial out of pocket investment is $95,000.
Should you flip by selling or…
Option 1: Flip that House!
The flip TV shows typically indicate a whopping $100,000 potential profit if the property is sold for a $350,000 asking price.
What the shows fail to indicate are the nearly $24,000 in real estate commissions, legal fees and mortgage cancellation penalties.
So now you are down to only $78,000, but wait… CRA is knocking on your door for their cut as well. Say your applicable income tax bracket is 40%. This means that CRA’s cut is about $31,000, leaving you with an after tax profit of $45,000, which is not bad, but a far cry from the original $100,000 indicated above.
By flipping the property, you walk away with your initial investment of $95,000 plus an after tax profit of $45,000 for a total of $140,000.
Option 2: Buy, Fix, Rent and Refinance
Under this strategy you would do exactly the same renovations as if you were flipping the house and once again the home valued at $350,000.
Then you go back to the bank to cancel your existing $160,000 mortgage and refinance the property at 80% of its current value of $350,000.
After paying a mortgage penalty of $2,000 your bank hands you a cheque for $118,000 tax free. After reimbursing yourself for the $50,000 in renovation costs plus your entire initial investment of $45,000, you are left with a FREE house PLUS $23,000 in cash PLUS $70,000 in additional equity (20% of $350,000) for a total profit of $93,000 tax free!
That’s more than double the flip profit!
And it gets even better from there…
Bonus #1:
Remember, instead of selling the house, you decide to rent it out the entire house to a nice family for $1,800 per month. This should generate about $200 monthly or $2,400 per year in positive cash flow.
Bonus #2:
Once the mortgage on the property is paid off by your tenants over several years, you also have a $350,000 inflation adjusted property and that’s even if the property never goes up in value over the next 25-30 years, which is highly unlikely!
Bonus #3:
Once the mortgage is paid off by your tenants, you also expect that positive cash flow to rise to $14,400 per year adjusted to inflation, which by the way is more than the maximum amount you can hope to receive from your Canada Pension Plan at retirement even if you worked for 45 years!
Better still, if instead of maintaining this home as a single family property you were to convert it into a legal 2 unit, the cash flow is expected to be significantly higher.
In fact, once we see this strategy through to the end there is a very real possibility that we will end up not only recouping our entire initial investment plus all our renovations costs, we would also end up owning the fully renovated home, that is expected to generate over $8,000 annually in positive cash flow today and $22,400 at retirement and all of it absolutely for FREE!
Imagine what you could do with that extra cash each and every single year both today, tomorrow and quite possibly forever!
So that pretty much means that our rate of return on this investment is ultimately expected to be infinite.
Now you know why I am such a big fan of the “Buy, Fix, Rent and Refinance” strategy and why we have decided that our house in Niagara Falls needed to get divorced.
Of course, if you have been reading my blogs for any length of time, you already know that I do not only deal in theory. I personally use myself as the test subject to test any real estate investment strategy to ensure they absolutely work for me and I am confident, that when properly employed, they will work for you as well.
More importantly, unlike the vast majority of other real estate agents and financial advisors, I actually put my money where my mouth is. I have personally learned first-hand what works and what does not, so that you can avoid making the same mistakes and potentially save yourself thousands of dollars in the process.
True to form, this is not my first kick at the can utilizing this awesome strategy. In fact, less than a year ago I utilized the exact the same strategy on one of my Hamilton properties, as highlighted in my article: OUR HOUSE IS GETTING DIVORCED!!!, that you can check out HERE.
I will continue to post my updates as well as before and after photos of our latest project and ongoing renovations on my Cloud9Life.ca Facebook page over the next few weeks as our renovations progress along with any challenges encountered and solutions as well, so that you too can benefit from both my knowledge and lessons learned along the way.
If you are interested in checking these out and have not done so already, you can join my Cloud9Life.ca Facebook page HERE. Enjoy!
If you are interested in exploring the “Buy, Fix, Rent and Refinance” strategy or any other real estate investment strategy further or require guidance on your journey to financial freedom through real estate investing or simply wish to connect with me drop me a line at felix@cloud9life.ca.
