Real Estate Investing: Rental Properties

“If you don’t own a home, buy one. If you own a home, buy another one. If you own two homes, buy a third. And, lend your relatives the money to buy a home.” - Billionaire John Paulson

Real estate investing has long been touted as one of the most efficient ways to build wealth, with many of the world’s richest people declaring it as the first step towards financial freedom. Saving up for your first home usually takes years of hard work, planning, and budgeting, and even then there are no guarantees. Moving into your first home is one of the most exciting moments in a person’s life, and witnessing that with our clients is the most rewarding part of our job.

The thing about buying one property is it makes you want more. You can see your friends, families, coworkers, or whoever it may be, investing in real estate and decide it’s something you want to get in to. There are lots of ways to invest your hard-earned money, so it’s worth researching what the returns on your investments can be in each scenario. There are different strategies even when just looking at real estate investing, and it’s up to each investor to decide which strategy they want to pursue. Let’s take a look at what these can look like for condos and townhomes, since they’re the most common type of real estate investment in Vancouver:

Rental Properties for Cash Flow

Investing in real estate in Vancouver often means the property won’t be cash flow positive each month if your plan is to put 20% down. They do come up, but the higher prices in Vancouver mean that rent has to be even higher to cover the mortgage payments, as well as strata payments and property tax. If you’re able to put down 30-35% then there will be lots more options, or if you’re open to looking further out in areas like Abbotsford or Chilliwack, you’ll be more likely to be cash flow positive with smaller down payments.
Let’s take a look at a recent real-life scenario of what a cash flow positive property in Downtown Vancouver can look like. For these examples, we’ll ignore the likely long-term increases in the value of the property as well as rental increases:

In this example, the investor’s rental income can cover all of their expenses, and they still have $57 left each month to add to their beer budget. It’s not a huge amount, but this means that after their down payment and property transfer tax, they can relax knowing that their mortgage and other related expenses are covered. After 5 years they’ve built up an additional $61,167 (the principal portion of the mortgage payments over 5 years) in equity, bringing them to a total equity position of $189,167 (down payment of $128,000 + $61,167).
Even properties that are cash flow negative can still be fantastic investments. Let’s look at the numbers from another recent real-life scenario:

After the initial down payment and property transfer taxes in this case, the real estate investor would still need to pay $114 per month ($6,840 after 5 years) to cover outstanding costs. After the 5 year period, the total amount invested is $108,285 ($94,000 down payment + $7,400 property transfer tax + $6,840 monthly expenses), and the tenant has helped to pay down $49,919 in principal. This means the real estate investor’s equity position after 5 years is now $143,919 ($94,000 down payment + $49,919 mortgage principal paid), the investor has earned a return on their investment of almost 50% in 5 years! Notice how even though the investor is out of pocket each month, the actual return on their investment is greater in this scenario than in the first one.

Let’s say this particular investor bought the condo on Richards, and is planning for longer-term and wants to continue building their real estate portfolio. After another 5 years pass, the tenant will have paid down the mortgage by an additional $69,257, for a total of $130,424 (just the principal portion of the payments). The real estate investor has now earned a 94% return on their investment, and now has enough to buy another property after taking out some of their equity.

Each additional property makes it easier to buy the next one because it means there is an extra tenant paying the extra mortgage. Assuming similar returns on each property, it would only take 5 more years (instead of the initial 10), to buy a 3rd property, and the snowball effect continues.

“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined.” - Andrew Carnegie, billionaire industrialist.

If real estate investing is something you’d like to learn more about, reach out to us any time.