How to invest in appreciating assets to create your own financial freedom

7 years ago today, we took possession of a luxury 6-plex with 3 bedrooms / 2 bathrooms / underground indoor parking / central air for four of the units and the 2 bedrooms / 1 bathroom / central air for two of the units.

We acquired it for roughly $1 million after environmental fees ($965K + closing costs and fees) with ~$220K down. While most people assume this would be out of reach for nearly everyone, we borrowed the capital from the equity within our homes by using a home equity line of credit.

Many people take out home equity lines of credit to perform renovations, purchase trailers / luxury vehicles or to take luxury vacations. All of these purchases depreciate in value and/or eliminate wealth, so we chose to go against the norm and to transfer our equity into assets that appreciate instead.

In this timeframe of 7 years, having borrowed ~$220K from our home equity, we’ve paid interest of ~$42K on the loan (~$6K per year x 7 years). In that same timeframe the property has appreciated to a value of $1.5 million and our mortgage owed is now down around the ~$650K mark. Paying interest of $42K have earned us a return of $600K ($1.5 million value minus $650K mortgage minus $250K outstanding home equity line of credit). This investment has resulted in a whopping 1,300% return in just seven years!

Now, to acknowledge the unusual market conditions, we are acutely aware that this won’t always be the case; properties have appreciated at a ridiculous and unsustainable pace over the last several years; in fact our forecasts had us earning $300K less, which had that happened, it still would have been an incredible return. What were the assumptions we used to calculate our returns? We assumed historical averages of appreciation aligned w/ inflationary metrics.

I’m not sharing this to brag. I’m sharing it because I have family, friends, clients and investors that continue to be apprehensive to invest in their own financial future. If this helps even one person to take the first steps required to invest in their future selves, then this post was worth my time. Anyone could do this. It does require a bit of learning and some patient due diligence, but it is absolutely a worthwhile investment. The biggest barrier to us having ever taken this step was fear. Once we got over that, it’s been mostly smooth sailing.

The biggest lesson of all that we’ve learned on this journey is that if we had never taken these first steps to invest in our future selves, our net worth would be millions of dollars lower, we wouldn’t be in any position of financial independence and the only people who would have paid the cost of our inaction would have been ourselves.

If anyone takes anything out of this post today, stop procrastinating, write down your dreams, put a plan together and begin working towards it. Baby steps, one at a time, a little bit each day; believe me, if I can do it, so can anyone else. We’ve achieved our dreams, not because we did anything extraordinary, but because we took action, set our fears aside and moved forward a little bit at a time. Why wouldn’t you do the same? Your future situation depends on what you do today. Go get ’em tiger!

Luxury condo vs. multiplex – a comparison of the likely outcome

21902074-1-175187114[1]Scenario 1:
You can purchase a luxury 3 bed/2 bath condo for $600K (http://bit.ly/2Clh7J9) which would cost you $4,400 monthly excluding utilities ($3K mortgage + $600 property tax + $500 property maintenance + $300 insurance)

Scenario 2:9424169_1[1]

…or you could purchase a 6-plex (http://bit.ly/2MLDgVP) which earns you positive cashflow ($500-900 / month), appreciation ($1K-1.5K / month), equity via mortgage paydown ($1K-1.2K / month) and tax benefits via reducing tax basis due to depreciation ($2K / month).

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The quadfecta of building wealth in real estate investing

Real estate investment returnsIn 2015, we purchased this luxury 6-plex for $960K with indoor parking, central air, four 3 bedrooms/2 bathroom units and two 1 bedroom 1 bathroom units. Each year we’ve been close to cashflow neutral, earning absolutely no monies from positive cashflow. Many of my startup students ask in bewilderment, “Why bother?”

The reality is that many of my new startup students have walked away from investment opportunities simply because they don’t generate cashflow. Unfortunately, they have likely missed out on some pretty amazing opportunities. The reality is that positive cashflow isn’t the only way to build wealth in real estate investing; in fact it often isn’t even the typical way.

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Cottages Are Great Investments… Or Are They?

Buying a cottageLast year, my friend bought a cottage for $180K. His down payment was 25%, or $45K. This year he boasted to me that he had made $18K in a year off the cottage. It was recently appraised at $195K (+$15K equity) and he rented it out a few times this summer to earn $3K in additional cashflow. Not a bad return right? $18K total. If only it was true…

Here’s the reality…

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Preparing Your Net Worth Statement to Buy Investment Real Estate

checklist-628x363[1]In a previous blog (Get Organized Before Buying Investment Real Estate), I outlined a list of documents that anyone should have prepared before they seek financing for their real estate investment acquisitions.

One of the most important documents is your “Net Worth Statement”. In the last year I’ve had the pleasure of reviewing dozens of these and, as a result, it’s clear to me that many newbie investors have a challenging time filling it out properly. As a result they have reported having a challenging time obtaining financing approval within the time constraints of their deadlines.

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Financial freedom: Where Do I Begin?

Steps to Financial FreedomThe first step is to consider what area interests you the most; it’s always easier to choose something that you have some degree of interest in because you will be more likely to best absorb the materials and take action.

If you’re a beginner and not sure what area interests you most I recommend you read one of the following blogs I’ve written that are geared for beginners on these topics:

Blogs

Financial freedom

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How to Make Realtors Want to Work With You When Buying Investment Real Estate

Relationship with realtorTaking the time to inform a realtor that you will not bid on a real estate investment opportunity and presenting him / her with the reasons why is an important step in the communication process for a number of reasons.  It helps you to create a relationship with the realtor based on trust, transparency and shows a respect for his / her time.

Showing a realtor that you are experienced and have a set of investment guidelines that you follow while also informing that the property doesn’t cashflow provides the required information for him /her to discuss with the seller and assess their flexibility.

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Due Diligence: The Difference Between a Successful and Failed Investment

Performing your due diligence when considering a real estate investment opportunity is the single most important step to ensuring an investment that meets your expectations.Due diligence

Unfortunately most real estate investors that I’ve mentored have shared with me countless tales of errors and assumptions that have cost them severely. For this reason I am sharing an email that I sent this morning to help novice investors to learn.

The following email with attached cashflow analysis asks the questions required to ensure that I can make an informed decision without assumption. It also shows the realtor that I am serious, experienced and respectful of his time.

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How to Perform a Real Estate Cashflow Analysis

This is what a real estate cashflow analysis looks like. It informs you of your up-front costs, assesses cashflow positivity with current and potential future scenarios, budgets appropriately for vacancy/repair/contingency and accounts for overhead costs even if they may be unrealized (e.g. property management, accounting, bookkeeping, etc.). It is also vital to highlight any assumptions and verify them in writing, absolutely no exceptions.

real estate cashflow analysis

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How can I make money in real estate?

disorientedEarlier 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.”

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