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From the volatility of the stock market
(Nortel, Enron, Worldcom, etc.) to the
low, slow and safe bet on Canada Savings
Bonds, T-Bills, GIC’s, etc. where can
you maximize your return on investment?
Maximum growth and security have always
been at the opposite ends of the
investment scale…unless you consider
real estate. In today’s market, with so
many different places to put your money,
why does real estate still stand out as
the single most effective way to
generate a healthy return on your
investment? There are four main reasons
why more people make their fortunes in
real estate than any other type of
investment.
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Cash Flow is whatever income you receive
over and above your monthly expenses.
Real estate is one of the few types of
investment that can not only carry
whatever debts might be incurred by
originally securing it, it can often be
set up to generate a positive monthly
cash flow. This creates monthly income
for the investor. It can also improve
the ability to borrow money for
additional investments in the future. |
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To the experienced real estate investor,
the word Leverage usually means one of 2
things: |
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1. The maximum mortgage amount
you can put on a property and still
receive positive cash flow.
It is important to realize that by
minimizing the use of your own
investment capital, you can maximize
your returns through the acquisition
of more properties. By putting less
money down on one property, you’ll
have more money available to put
towards your next property. As long
as each property generates a
positive cash flow after all
expenses, your investments can
appreciate over time without you
having to supplement them.
2. Having a tenant pay off your
mortgage for you.
Here, the term leverage refers not
only to the ability to own a
property with as little of your own
money as possible, but also having
somebody else pay off the loan or
mortgage for you. While its true you
can usually borrow money to invest
in a business or the stock market,
how many places can you invest
somebody else’s money (the bank’s)
and have a third person (the tenant)
actually pay off your loan for you? |
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Appreciation refers to the increase in
property value over a period of time.
This growth is compounded, so if we used
an example of $100,000 Real Estate
investment back in 1980 at an average
annual growth of 6.4% (Toronto’s
average), in 2003 that property would be
worth $416,541. It is important to keep
in mind that there are peaks and valleys
within the years recorded. The 6.4%
growth is an average of the results over
the time measured. Below is a table of
data that Canadian Real Estate
Association has provided us with to show
the growth over 23 years in various
Canadian cities. Another observation is
that larger cities tend to have higher
growth rate: this is as a result of
supply and demand. |
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A mortgage or principal is the amount of
money you actually borrow from a
financial institution to bridge the gap
between your purchase price and your
down payment. Your principal borrowed is
then paid off over a number of years; 25
years is an amortization commonly used.
Having your principal paid down is
considered your Principal Reduction. Why
is that important? Because underlying
all the benefits of Cash Flow, Leverage
and Appreciation, there is one fact
about real estate that makes it more
reliable than any other type of
investment, and that is, as long as your
mortgage is being paid every month, then
every month your equity is increasing.
Why? Because the principal amount of
your mortgage is slowly being reduced to
zero, and when you have no mortgage, you
and your family can enjoy positive cash
flow and further property appreciation
for generations to come. |
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End of
Year |
Outstanding Principal |
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Interest Rate 6.00%
Amortization 25 years
Purchase Price:
Down Payment:
Mortgage Amount:
Annual Payments:
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$120,000.00
$30,000.00
$90,000.00
$6,909.96 |
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1. |
$ 88,380 |
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2. |
$ 86,701 |
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3. |
$ 84,880 |
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4. |
$ 82,928 |
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5. |
$ 80,855 |
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6. |
$ 78,672 |
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7. |
$ 76,390 |
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8. |
$ 73,946 |
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9. |
$ 71,357 |
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10. |
$ 68,575 |
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11. |
$ 65,626 |
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12. |
$ 62,673 |
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13. |
$ 59,727 |
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14. |
$ 56,562 |
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15. |
$ 53,224 |
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16. |
$ 49,712 |
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17. |
$ 45,934 |
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18. |
$ 41,937 |
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19. |
$ 37,702 |
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20. |
$ 33,215 |
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21. |
$ 28,465 |
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22. |
$ 23,427 |
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23. |
$ 18,086 |
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24. |
$ 12,407 |
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25. |
$ 6,389 |
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Real estate
offers a variety
of tax
deductions and
write-offs
unavailable with
other
investments.
Please discuss
with your tax
advisor. |
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