Earlier this week I had a meeting with one of the local startups that I am mentoring. Over the last year his company’s bank account has been reaping the rewards of their hard work and so he has been considering his best option to invest the returns from his compounding successes.
Knowing that I am an active real estate investor he wanted to learn about how real estate makes money. He had performed a number of cashflow analyses, but, was failing to find lucrative returns. I could sense his frustration mounting in each additional word that he was saying. “The best cashflow I’ve been able to find is approximately 8% on a real estate investment and that’s just… well average”. He frowned. I smiled and excitedly said “That’s fantastic, you should put in an offer, do your due diligence and buy this property if everything checks out.”
He stopped what he was saying, looked up at me and said, “Clearly there’s something I’m missing.” I stopped him dead in his tracks, he went from exasperated to attentive almost instantly. He knew he was missing something. What he didn’t know was that what I was about to show him was going to change his point of view on real estate forever.
For those of you who know me and have met with me before, you know that I always carry around my real estate cashflow assessments in my leather binder. Today one of these was going to come in handy. I brought out a cashflow assessment for a property that I bought nearly 5 years ago that was very similar to the property he was considering and I proceeded to explain…
Currently I am in the 5th year of owning this property. My predictions were conservative so I’m happy to report that I’m ahead of schedule on this return on investment (ROI) plan. I paid $69,900 down to acquire this investment property and to date my property has increased in value by $81,200, the mortgage has been paid down by $23,950, I’ve enjoyed $23,329 of positive cashflow and I’ve received $12,500 in tax credits resulting in $140,979 in increased net worth as a result of my initial $69,900 of investment! To top this off the original down payment of $62,500 is still equity within the home since the mortgage started off less than the value of the real estate!
While it’s important to invest in properties that have sustainable cashflow, it’s important to realize that cashflow is a very small aspect of how real estate can help you to achieve financial freedom. Understanding all of the aspects of how a property’s appreciation, mortgage paydown and tax benefits affect your net worth makes a breathtaking difference in the end result! Sure the cashflow of $23,329 in the last ~5 years as a result of an initial investment of $69,900 is acceptable, but it’s certainly much less than the actual returns gained of $140,979.
My mentee’s eyes took turns gazing at the document then at me as if he wanted to say something but couldn’t find the words. His silence accompanied with a smirk turned into an outburst “I get it!!!” he exclaimed as he reached across the table and gave me a hug. “I can’t believe I’ve been convincing myself all this time that it couldn’t work. My eyes were closed this whole time. It really is that easy!” he exclaimed. I smiled and nodded “Yes, there is not smoke and mirrors. It really is this easy. Of course real estate investing is work and you need to manage your tenants. It’s not a get rich quick scheme, but it is one of the most solid investment opportunities in the world.”
I got through to him, he’s made the offer and it’s been accepted. Of course he’s got to do his due diligence to perform, but, now that he understands the impact that real estate can contribute to his financial freedom there’s no way he can go back to thinking how he did before. This is not something you can unlearn.
If you find yourself in a similar position as my mentee and you’re stuck in a state of inaction, or worse yet, in believing your own lies (a state that I myself was also stuck in nearly a decade ago) I suggest you print this blog. Read it, re-read it, try to debunk it. Once you can’t, embrace it. Do whatever it takes to get over your state of paralysis and take action. Find a way to achieve your own goals. It requires stepping outside your boundaries of comfort but that’s just another excuse. Get it done!
This is why I enjoy mentoring so much. This is what makes it so rewarding. If an hour of my time can change a life then it was an hour well invested. I hope you enjoyed this blog and it’s made a positive impact. Always remember this – once today is gone you can never get it back, so make every day count.
–
Brent Mondoux
Founding Partner, Amplified Investments
brent@amplifiedinvestments.com
Amplify Your Investments and Achieve Financial Freedom 
great article Brent!
Thanks Chris! Sincerely appreciate it.
This is assuming a 5% appreciation in property value YOY, which is not always the case.
Agreed, results may vary, this is an example to help individuals understand how money is made in real estate. With inflation sitting at approximately 3% and appreciation averages outpacing inflation the averages over the last few decades sits at approximately 5%, but more recently appreciation has been more volatile
References:
http://www.globalpropertyguide.com/North-America/Canada/Price-History
http://www.moneysense.ca/columns/real-estate-vs-the-stock-market
http://theeconomicanalyst.com/content/revisiting-most-important-graph-understanding-canadian-real-estate-market
Though I agree investing in real estate is definitely a good LONG TERM strategy, I caution showing data which is heavily weighted on the past 10-15 years and therefore a little misleading. Perhaps if you showed data from a time when house values actually depreciated yoy or when interest rates were double digits in order to give a more accurate picture of the risks as well as the potential gains. How about if your rental(s) sit vacant for an extended period of time which will effect your cash flow. Too many times have I heard from people that real estate is a “sure thing” but it really is a question of market timing, much like any other investment vehicle.
The averages include the major crash of 1989 as well as the interest rates soaring. Remember when a market crashes it takes several years to recover but then it soars past it’s previous point. My entire blog is focused on long-term creation of wealth, if someone wants a get rich quick scheme they will never find it here.
As for vacancy it is vital that individuals purchase real estate in areas of job growth, where values are reasonable (e.g. Toronto & Vancouver in Canada carry significantly higher risks) and economic stability. Buying mid-high end will avoid 80% of trouble tenants (but you’ll still have the odd one) and buying in areas that are convenient for public transit and/or getting to/from work will significantly reduce the vacancy times.
Obviously there is more intricacies than what my blog showcases. I’ve taken 9 years of courses and anyone who contacts me that wants to do it themselves are always urged to get educated. No investment is a sure thing, but with experience, real estate still remains one of the best investments with easy access to equity, stable cashflows and slow & steady appreciation/mortgage paydown/cashflow. This blogs intention is intended to break the fallacy that you talk of about real estate investing being a sure thing and showcasing the importance of assessing the other elements such as potential appreciation, mortgage paydown and always ensuring a safe cashflow. The second emotion gets into investing, risks climb dramatically; an investors approach in real estate should always be unemotional.
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