The art of transforming a basic house into a profitable investment property.

Alchemy, is an art in chemistry of converting base metals into gold. Similarly, “Alchemy in Real-Estate” can be regarded as the ability to locate a troubled property, usually undervalued, and through skill and work expose its hidden value and transform it into a profitable investment property. While the art of ‘Real-Estate Alchemy” may require years of experience to master, the basic principals can be simply explained as uncovering value every step of a real-estate investment project.

Right off the bat when searching for properties, zoom on the “days on the market” (DOM) figure, or look for a “power of sale” clause to understand how motivated or desperate the seller is. You may gain a nice bonus of buying yourself into a profit before even getting the keys. Secondly, get as much information as you can, from a tenant, the listing agent, or a nosy neighbour. Inquire about the house, about the landlord and about the area. This information may come in handy when making a move to purchase or when assessing the upside. For example, a landlord who isn’t involved may have been mismanaging the property, suggesting higher rent income potential for you. Or an LCBO store planned to be built around the corner, is certain to refresh the retail environment nearby.

Look for trouble. Yes, in this scenario finding trouble is good, because you, as a smart investor know how to deal with trouble. In a nutshell, where there is headache, there is potential, because the typical buyer would shy away from trouble, leaving the field open for more capable investors like yourself. A flooded basement can be water proofed and a pest infected kitchen, can be treated. These are simple to price and remedy. However, don’t go over board, a leaky roof or an old disintegrating pipe system will result in a serious migraine rather than a simple headache. Consulting with a home inspector is always advisable.

When making an offer, before taking possession, have a detailed plan on how to renovate the property in a cost effective way and improve its living space. If building out a legal second and third unit is possible, plenty of value will be realized. If a tenant reshuffle is possible, then more income may be accumulated fairly quickly.

Once you take possession, implement your diligent plan in the most efficient and cost aware way possible. Overtime figure out ways to appreciate the value of the property by reducing expenses like, hydro, insurance, garbage removal or gardening. Do you really need that grass lawn or will a paved entrance do? Keep a close eye on income and a closer eye on expenses, because both play into your Net Operating Income (NOI) which banks and other investors look at to make decisions.

Finally, some time later, once your NOI is positive and stable and depending on your investment strategy, present your investment to the the bank for a refinance transaction. Your goal would be to keep this property but release the initial investment (equity) and move on to the next one. Or simply, put your profitable investment property on the market and cash in on your skilled Real-Estate Alchemy work.

Broker of Record, Schichter Realty Inc.
zvi@schichterrealty.ca
647-294-2285