Most of us know someone close to us who has created a lot of wealth through real estate. Often, we attribute their success to the fact that there is something “different” about them, or they got lucky. The truth is, there is something “different” about them, and luck has very little to do with it. The difference is that they understand that more millionaires have been created by real estate than by any other means. They focus on the opportunity at hand, not on excuses for not investing.
The problem is that when most people think of owning an investment property, they think of all of the hassles involved. They ask themselves: How would I know where to buy? Where would I find a tenant? What happens if my property needs repairs? Who would manage it?
When most successful real estate investors think of owning an investment property, they think of the potential returns. There are three components for potential returns in long-term real estate investments; appreciation, mortgage pay down, and positive cashflow. Let’s look at the potential returns for a moment.
Appreciation:
The first component of potential returns comes from appreciation of your home. Let’s look at a couple of examples of the potential returns from appreciation:
If you bought a $200,000 property with a 25% down payment, that would require you to put down $50,000. If that property went up by 10% next year, that’s a gain of $20,000, or a 40% gain on the $50,000 you put down. If that property went up by 5% next year, that would be a gain of 20%.
Over history, homes in Canada have appreciated over 5% annually on average, with some areas experiencing even much higher growth.
Mortgage Paydown:
Another component of potential returns is in having your renter, or tenant, pay down your mortgage. Using the same example above with a $200,000 property and a $50,000 down payment, your mortgage would be $150,000. If you had an interest rate of $3.5% (which is very achievable now) and had an amortization of 30 years, your tenant would pay off $2,891 in principal towards your mortgage in the first year, meaning the your new mortgage balance would be $147,109. This $2,891, or 5.8% on your original $50,000, can be added to your returns as added equity in your home. This 5.8% of course is on top of any gains coming from appreciation.
Positive Cashflow:
If you have chosen a good property in a good market, it should have positive cashflow. Positive cashflow is the money left over from rent after all of your expenses associated with the property are paid. Your $200,000 property from the examples above may generate a monthly positive cashflow of $250, brining you $3,000 for the year ($250 x 12). This would add a further 6% returns on your investment on top of any gains coming from mortgage pay down or appreciation.
The Final Tally:
If your property appreciates by 5% (which is a 20% return on your $50,000 investment), you have a mortgage paydown of 5.8%, and your cashflow adds 6%, your total return would be 31.8% in the first year. If all of the numbers were the same, except the property appreciated by 10% as opposed to 5%, your total return would be 51.8% in the first year.
It is also important to note that returns can even be further enhanced as appreciation will grow on a compounded basis (e.g. 5% appreciation on the $200,000 property in year one will be less than the 5% appreciation on the property that is worth $210,000 on year two) and rents can be increased, increasing cash flow.
The Conclusion:
So what is standing between you and being one of the “Millionaires”? Likely, it is the six inches of real estate between your ears. If you buy in the right areas where you get a positive cash flow, you will wake up in 20 or 30 years with a property where someone else has paid off your mortgage and you end up with a solid income stream every month.
There are a lot of hassles to owning Investment Properties and there are also tremendous returns. What are you focused on? Working with a team to manage the process and generating returns or passing because it’s too much hassle?
When you invest with Western Canadian Properties Group (WCPG), we show you how to set up a plan that manages the hassles so you can focus on analyzing the returns. Please contact us if you want to learn more about the systems that we have in place to help you succeed.