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 investing.
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, 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 rental 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 borrowed 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 cashflow, 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:
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 a 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.
Does the property have 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 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.