“Don’t wait to buy real estate, buy real estate and wait” – Robert G Allen
Real estate investing is a powerful way to reach financial freedom and to create passive income. A real estate portfolio can be a key piece in your retirement, but it is important to understand how real estate investing works.
Why Invest In Real Estate?
Imagine… it’s rent day, you go online to check your bank account… a monthly ritual. Its different than when you were younger. Back then you were handing over the cheques, now you are the one collecting the rent and you know that every month gets you closer to financial freedom.
What are the benefits?
Tax advantages and write offs – Mortgage interest, property management, insurance, property taxes, maintenance costs and utility bills can be written off against the income of the property. Profit from the sale of the property may be a capital gain (reduced taxes) as well.
- Passive Income – Every month you collect income from the property and the mortgage balance is reduced when you make your payment.
- Appreciation — over time property values generally rise.
- Leverage – You provide part of the money to purchase an investment property, the bank provides the rest. This reduces the amount of capital required per property and can allow you to keep some of your funds as a safety net.
- Time – With skilled property management and the right team investment properties can be managed remotely with very little time.
What are the main ways you make money in real estate?
A foreword – Leverage
Typically, most investors will put 20% down when purchasing an investment property. This means they have 5 – 1 leverage on their investment. It is crucial to understand how leverage affects the returns on your investment or ROI.
If a property you purchased for $100,000 increased in value by $1000 (1%) and you put $20,000 down what would your ROI be? You would have earned $1000 on a $20,000 investment or a 5% ROI.
Cash Flow – the appetizer
Cash flow is the number you are left with every month after paying for expenses and budgeting for vacancy and maintenance. You can think of cash flow like your insurance policy when building a real estate portfolio. You should look to earn a 1-4% return on your investment from cashflow when putting 20% down.
Principle Paydown – the main course
Every time you make a mortgage payment some of the payment goes towards interest and the remainder goes towards paying down your mortgage, this is known as “principle paydown”. When it comes to cash flowing investment properties the most consistent part of your profit comes from the principle paydown. You will typically earn 7-8% return on your investment from the principle paydown.
Appreciation – the dessert
When it comes to real estate investing appreciation is the cherry on top. It is often what investors talk about most but should not be the primary goal of real estate investing. (Purchasing properties for appreciation is called speculating)
When it comes to appreciation there is no “typical”. Some markets may climb 5-15% year after year (think Vancouver), while other markets may be flat for over a decade (think Nova Scotia).
Many investors expect a property’s appreciation to average 3% per year or a 15% ROI per year.
What to look for in a Mortgage Broker
Rental property mortgages are significantly more complicated than most owner-occupied mortgages, working with a skilled investment focused mortgage broker will save you money and time.
Your mortgage broker should be able to answer any questions you have about real estate investing, assist with the planning of your real estate portfolio and be able to provide tools to help you with evaluating investment properties.
Here are a few questions we suggest you ask a mortgage broker before working with them.
What experience do you have with real estate investing? Do you own any investment properties yourself?
How many rental property mortgages have you worked on in your career? (The process and requirements for financing investment properties differs greatly from owner occupied financing).
What additional training and courses have you taken for real estate investing and financings?