Real estate is a wonderful avenue to create and build wealth if it’s done properly and strategically.
From an investment standpoint there are 4 ways in which you can realize a return on your investment in real estate.
Cash Flow
When I was a young realtor just starting out, I was fortunate to have a client with a wealth of life experience and a few successful investments under his belt. He offered me some of the best advice I’ve ever received: always ensure that your real estate is paying you.
How can you create cash flow? Can you rent out a second bedroom in a condo? Can you put in a basement suite (which, by the way, is THE best way to increase the value of your asset)? Can you buy it and rent out the entire place?
To calculate your cash flow, start by determining your property's annual earnings and subtracting the operating expenses. These expenses include your mortgage payment, property taxes, insurance, condo fees, and utilities.
How can you create cash flow? Can you rent out a second bedroom in a condo? Can you put in a basement suite (which, by the way, is THE best way to increase the value of your asset)? Can you buy it and rent out the entire place?
To calculate your cash flow, start by determining your property's annual earnings and subtracting the operating expenses. These expenses include your mortgage payment, property taxes, insurance, condo fees, and utilities.
It's also wise to set aside about 5% of your projected income as a contingency reserve for any unexpected repairs or maintenance. Additionally, it’s prudent to include another 5% as an expense to cover potential vacancy or credit loss, in case a tenant doesn’t pay their rent.
Once you’ve determined your cash flow you can calculate your return on investment (ROI) by dividing the cash flow by the cash invested (your down payment, property transfer tax, legal fees and any other up front expenses incurred to secure the property).
Passive Appreciation
This by far is the easiest way to build wealth. By virtue of the market appreciating on an annual basis your property value is going up and you’re creating equity. Equity is the difference between the current market value of your home and the balance owing on your mortgage.
To calculate your return on investment in this case you simply divide the increased value of your home by the amount of cash invested.
Principle Recapture
To calculate your return on investment in this case you simply divide the increased value of your home by the amount of cash invested.
Principle Recapture
This improves over time as it’s based on the amount of principal you repay on your mortgage each year. When you take out a mortgage, the interest is calculated upfront and added to the total amount you're borrowing. In the first few years, most of your payment goes toward the interest, but as time passes, this begins to balance out. By around year 10, you’ll find that more of your payment is going toward the principal than the interest.
You can calculate your annual ROI by diving the total amount of all 12 principle payments by the amount of cash invested.
Active Appreciation
If you come across a property that needs some fixing up or updating, it’s a fantastic opportunity to enhance the value of your home.
Obviously this takes some careful research prior to purchasing the property to ensure that you have a budget and timelines in place. If you are using borrowed money to pay for these repairs the interest can add up quickly and add to your expenses to be sure to have your contractors lined up in advance and written quotes on file.
And be sure to determine what level of renovations are within your comfort zone. A quick coat of paint and some new hardware on kitchen doors is an easy and relatively inexpensive way to give the home a little boost.
A full kitchen reno on the other hand is a much bigger and more disruptive undertaking.
Adding a secondary suite is the number one best way to increase the value of your real estate!
To figure out the ROI for this you would determine the after repair value (ARV) -normally done by having the property appraised and subtract the purchase price and the cost of the renovations and divide that by the initial cash invested.
The great thing about real estate is that a relatively small initial investment gives you an asset that you can leverage to create even more wealth-building opportunities.
Real estate as an investment also offers significant tax benefits. These can include deductions for mortgage interest, property taxes, and depreciation, which can reduce your taxable income. These tax advantages can enhance your overall return on investment, making real estate an even more powerful tool for building wealth.
All in all, it's a beautiful thing!
Are you ready to start looking for a home and creating wealth for yourself through real estate?
Start with connecting with a REALTOR® and lean on them to guide you through the process and help you navigate the complexities of the market.
