“Ninety percent of all millionaires become so through real estate.”
6 Ways to Build Wealth With Real Estate
1. Mortgage Pay Down
Imagine that you purchase a single property today for $700,000 with a 20% down payment in a solid market with strong local economics (which is an integral part of our “A+ Purchasing Model” of buying) and the property does absolutely nothing more than break even every month. It has no positive or negative cash flow – it simply breaks even.
Then imagine that the market stays flat for the next 25 years (i.e., all the inevitable ups and downs in the market average out to a completely flat market) and your house is still worth $700,000 in 25 years from now. At InvestInStudentRentals.com we would never be happy with a property that just broke even like the example above, but if we look into the math, it turns out that the mortgage pay down of this property would amount to slightly over $975 a month on average over 25 years. Not much you say? But in reality it amounts to an $975/month savings plan that someone else will pay for! You won’t have to go to your office to earn it, nor will you have to sacrifice other purchases in order to amass it. It will simply grow month after month regardless of the market conditions.
2. Cash Flow
In the example above, the property broke even over 25 years without any positive cash flow at all (cash flow is the money that is left over from the rental income after all the expenses have been paid). But most real estate investors want their investment to perform better than break-even (especially us at InvestInStudentRentals.com where our “A + Purchasing Model” of buying means we only buy houses that have strong monthly cash flow). Although there are many different factors involved, a conservative cash flow in one of our student rentals is $500 per month. You might say – $500/month doesn’t seem like a lot of money either, but the chart below shows the ROI you can expect on your initial investment of $130,000 when you add cash flow into the mix with mortgage pay down.
We never buy based exclusively appreciation – because it is speculative, but appreciation can end up being the ‘icing on the cake’ in wealth building with real estate.
Imagine your $650,000 house appreciates at a very conservative pace of 2% a year. In 10 years, that same house will would be worth $792,346 and in 25 years it would be worth $1.06 million!
If you increase appreciation by a mere 1% to 3% each year, the house would be worth $873,545 in 10 years and $1.36 million in 25 years.
When appreciation is added to mortgage pay down and cash flow, it is easy to see why real estate is such a powerful tool in wealth creation.
4. Instant Equity
Many real estate investors will tell you that “money is made on the purchase of the home”. While it can be hard to find discounted deals, (especially when shopping on MLS), getting connected, telling people what you are looking for, finding out the motivations of the seller, and having a savvy realtor will all you help find and negotiate the best possible prices up front and give you some instant equity.
Smart leverage is a beautiful thing.
If you had $100K and invested it in stocks, you would be able to purchase exactly $100K worth of stocks.
In real estate, the bank will match your money somewhere between 3 and 5 times for every dollar you put in. So, $100K won’t just buy you $100K worth of property, it allows you to get as much as $500K worth of investment properties.
If appreciation occurs, it is calculated on the entire property value, not just the $100K you put in! So, a conservative 3% appreciation on a $500K worth of properties in one year = $15K in growth.
You’d have to have a 15% return on your $100K in stocks to accomplish the same gain of 3% in real estate.
Real estate investing has many accounting benefits for investors. One of them is depreciation. Accountants can create a “loss on paper” by depreciating the value of your home, which serves to reduce or eliminate the taxes payable today. Yes, this paper loss does eventually get “recaptured” by the government when you ultimately sell your home, but a dollar in your pocket today is always worth more than a dollar in 10 or 15 year from now.
Check out this great inflation calculator from the Bank of Canada and see for yourself how the value of money declines year over year,