However, I didn’t invest in real estate just to quiet the naysayers and prove them wrong. I did it to create the life I wanted to live, and it’s working because of the POWER of real estate in real-lifecasting.
Here is a real life example of the POWER of real estate investing.
1. Positive Cashflow (Rent – Expenses = Cashflow): I purchased a cute war home in 2008, renovated it and rented it out to a young professional couple. The rent coming in paid for all of the expenses, including property taxes, mortgage, insurance, and maintenance and still made $100+ of positive cash per month. After seven years of holding it, I netted over $11,000 in cash flow, even with three months of vacancy and maintenance expenses.
2. Appreciation (Increase to property values): The cute war home increased in property value over time, averaging 5% annually! I forced appreciation by “blinging” it up, i.e. renovations and landscaping. The house was also located in a nice area adjacent to a very desirable high-end neighbourhood. I bought the house originally for $226K and it was appraised at $345K in 2015.
3. Mortgage Loan Pay down: After seven years of holding this property with tenants primarily paying down the mortgage, I’ve locked in $50,000 dollars in forced savings. Now, I am holding this house for my kids. I plan to keep this property for a long time to pay for my kids education; however, if I sold it now, I would have an easy extra $50,000 dollars in my pocket that was mostly paid down by my tenants. I initially invested $43k, which has already doubled over the 8 year period. By the end of 22 years, due to mortgage paydown, I will own the property outright, increasing my equity from $43k to full $226,000 (assuming no price appreciation).
5. Tax Write-Offs: There are loads of tax advantages to having a reducerental income. Expenses like mortgage interest and maintenance costs are tax deductible. So, in a way, you can think of the savings in taxes as if your expenses were paid partially by the government. This reduces taxes that you would have paid annually to the government, which means more money in your pocket.
Expenses like mortgage interest, insurance, maintenance expenses and depreciation of the property reduces the taxes you pay annually to the government. Although I gained $17k in gross rent, I also had $10k dollars in expenses that are write-offs. From the remaining income, I can deduct capital depreciation to write off all of my rental income on this property and save myself paying taxes 🙂
5. Power of Leverage: I bought this cute home with a down payment that was leveraged by borrowing money from the bank, i.e. a mortgage. While the tenants paid for my mortgage, I benefited from the growth of both my down payment AND the borrowed money from the bank. After eight years of holding it, I’ve made over 320% return on my capital investment, including the benefits of positive cash flow, equity growth and appreciation.
This is why real estate investing makes you wealthy.
Adding up all these factors, at the time this article was written, this property had grown to a $153K return and continues to grow.
What’s even more amazing is that this is not an extraordinary property.
In fact, it’s less than ideal property because it only has two bedrooms and one bathroom. Despite its flaws, the house is still making money and matures with time.
A Simple Formula for Choosing a Rental Property that Makes you Wealthy and Keeps you Smiling
Buy a rental property that aligns to your LIFESTYLE:
Location:
Is the property located in a desirable and safe neighbourhood, near shopping centres, major transit routes, near major employment centres (ex: hospitals, medical centres, government buildings), adjacent to parks and close to downtown? The more checkmarks you get here, the more desirable property is for renting and selling, the higher the quality of the rental pool you can draw from and the higher the rent you can potentially charge.
Improvement potential:
Does the property have the potential for simple cosmetic upgrades to increase rental income? Is it sitting on a piece of land that could be used for development? And does the property have the potential for mixed-use (residential and commercial)? The more uses a property has, the better for renting and liquidity because you are attracting a bigger pool of future renters and buyers.
Finances:
Do the property’s numbers all crunch out – meaning that the rental income covers all expenses (mortgage, property taxes, insurance, property management, maintenance) and leaves you an income? If you are planning to self-manageIt the property, you should still check if the numbers crunch out with property management because in the future you might go that route.
Easy:
Is the property low maintenance? Is it easy to manage because the property is within close driving distance? Can you charge rent that is within a reasonable range in the area? And does the property sell itself (ex: nice large kitchen, open concept, etc.) so it is easy to show and rent out?
Starter home:
Is it an entry-level home? Starter homes attract a wider pool of tenants (those who are upgrading to a place of their own or those who are downsizing) and have the most liquidity.
Trending neighbourhood:
Is the home located in an area that is changing over from old homes to new homes? And Look for pockets of infills, additions, exterior changes to homes in the neighbourhood – proof that people take pride in their homes and the area is changing over. These areas have the greatest potential for property appreciation.
You:
Does the home meet your “why“? If you were to buy it, does it get you closer to your vision? This may mean accelerating your path to financial independence to have more options in life, pay for your kids’ education fund or provide you with the financial courage to quit your job and become your own boss.
Low price:
Is the property’s sticker price ‘low’ in comparison to the average price in the neighbourhood? Try to find a deal and make money when you buy. We focus on homes that are lower priced with good bones and require simple cosmetic changes.
Economic Factors:
Buy a home in a city (or part of town) where there are excellent market fundamentals. Market fundamentals include a growing population, rising average salaries, good incomes with lots of employment opportunities, a growing job force, major infrastructure projects (new skytrains, subways, highways etc.), stable rental rates, and low historical vacancies.
By buying properties that meet your ‘LIFESTYLE’, you can make a pretty penny and be a happy landlord.
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Here is a 2015 rental income report for my 8-year-old rental.
We collected $16,860 gross rent.
We paid $9,998 in expenses (mortgage interest, insurance, property taxes, vent cleaning fee and general cleaning). The tenants pay for utilities, in addition to monthly rent. We collected $1454 in annual cash flow plus $5600 in principle mortgage payments – otherwise known as a forced savings account.
The property gained at least $10,000 in appreciation in 2015 only.
We spent a total of 16 hours on this property including 7 showings to prospective tenants during a two-week period. Those hours are more than normal and we self-manage this simple starter home.
Calculating how much we made per hour; approximately $1000 dollars.
Annual Cash-on-Cash Return = Annual net income (incl. mortgage principle payment)/total amount invested = (1454+5600)/$43k = 16%
A 1-year snapshot of performance doesn’t mean anything when you hold a property for years and years. There are ups and downs along the way. But if you are patient, you can easily double your money even with ups and downs. That’s why I wanted to show you the total performance to date on this property.
Total Performance to Date during the 8-year period:
Original Purchase Price: $226,000
Current Appraised Value: $345,000
Mortgage Balance: $172,354
Total Invested: $43,000
Cash Investment: $43k (includes one year of us paying down equity while living there, down payment, renovations, legal fees, land transfer taxes, and two months of expenses as funds). Renovations included removing a load-bearing 7-year wall, overhauling a kitchen, changing hardware, landscaping and painting.
Cashflow Income: $11,000 (after paying for a furnace repair – $800, tree crowning – $500, vent cleaning $350, replacing a broken faucet – $100, porch repair – $700 all during a 7 year rental period)
Total Return = (11,000 + 345,000 – 172,354-$43,000)/43,000 = 320% (before taxes)
Equations used for calculating returns are simply:
In Summary:
Your investment model may deviate from mine; maybe you want to attract students, short term tenants or families. The key is to be clear on what you want and make sure it aligns to your LIFESTYLE (whether you follow my model or not). The clearer you are, the better you will be in making the right decisions in building your wealth and staying happy during your journey.
What investment models/formulas have you used to buying your rental property? What do you think about the LIFESTYLE model (good and bad)?
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