Increased ROI (by “OPM”) Estate vs Stocks Cash Flow Appreciation Mortgage Reduction “OPM” -> Leverage O.P.M or Other People’s Money refers to Leverage. One of the most powerful tools in achieving wealth is the use of leverage. Leverage is using other people’s resources such as money in the form of a mortgage, someone’s labour or knowledge. In real estate you can obtain greater leverage than other forms of investing. This is achieved through using the bank’s money to pay for a portion of the property purchase in the form of a mortgage. In the current climate, you are required to have a down payment of 20% of the purchase price. Since the bank will lend you the other 80% this effectively means that you are leveraging $4 for every $1 you have. Why is this so important? When you consider the return on investment (ROI) for your money, leverage is the key to wealth building. Any appreciation the property has over the years is keep by you and the bank receives no appreciation for their portion of the funds used for the purchase. This can increase your ROI a multiple of 4 times. Let’s assume that you have $200,000 to invest in real estate and look at 2 scenarios. Scenario A: If you purchase a property with $200,000 (all cash and no bank financing) you have no leverage. If that house appreciated $50,000 over 5 years your ROI per year would be 5%. Not terrible, but not terrific either. Scenario B: Now suppose you purchased the same house with a 20% down payment and 80% from the bank. With the same $50,000 appreciation increase over 5 years you now have a ROI of 25% per year. That is a huge difference. I sense you may be thinking it is still a $50,000 profit either way so is there really any benefit? Yes! Since you only put down 20% and borrowed 80% from the bank you still have $160,000 left of the original $200,000. With that remaining $160,000 you can now go out and buy 4 more houses worth $200,000 since the bank will lend you the other 80%. So, going back to the $50,000 in appreciation over 5 years your profit now goes from $50,000 to $250,000 and it was all achieved with the same $200,000 to start with. Now you can see how transformative the power of leverage can be and the impact it can have on achieving your wealth goals much earlier. Real Estate vs. Stocks We’ve heard the debate many times between the benefits of real estate verses stocks. Often stock investors (and banking institution employees) state that they can make 10% returns on investment (ROI) per year and real estate earns a much lower percentage. Is that the full story? At Ontario Assets we are aware of ALL of the benefits of investing in real estate. On the surface the stock market may get a 10% return and real estate only 3-5% appreciation but that comparison is based on assumed market values not actual money invested. The big advantage for real estate is the leverage mentioned earlier. Since you leverage a high portion (typically 80%) of the money used to purchase an investment property, you need to calculate your ROI on your actual cash outlay into your investment and not only the appreciation on the investment. For added clarity on this, let’s look at a stock portfolio worth $200,000 and an investment property valued at $200,000. The math for the stock portfolio is simple. A portfolio of $200,000 produces a ROI of $20,000. For the real estate investment we need to determine the value increase on the $200,000 first then use that figure with our actual money invested. Let’s assume the property increased by 3% (appreciation) which is $6,000 for the year. We invested 20% of the purchase price to invest, which is $40,000. If we divide the $6,000 by $40,000 we get 0.15 which is 15% (ROI). Already we have a greater ROI than the stocks and this hasn’t even included the high possibility cash flow and mortgage reduction amounts, both of which can greatly increase your ROI. So what are the actual results? When you consider that your investment in real estate is getting 15% compared to 10% in the stock market, your investment is performing 50% better the stock investor’s portfolio. Don’t forget that there is a very high chance that you will also create passive cashflow and increased equity through mortgage pay down. We use the Buy, Renovate, Re-finance and Rent strategy to further increase our ROI above the stock market. Using this strategy, we force even more appreciation into our properties by making repairs, then we are able to remove a large portion of our original investment to increase our leverage, using the bank’s standard refinancing. Remember, Increase the leverage you increase the ROI! Cash Flow What is cash flow? It is the amount of money remaining each month from an investment property after paying all the monthly expenses from the rental income. Why is it so important? It is important because, remember this is a rental property, so the tenants are covering the monthly expenses! Cash flow is what allows you to achieve your goals and the lifestyle you desire, while offering even lower risk. Of course, it is nice to have asset appreciation in the form of housing values going up, however if the property isn’t cash flowing you are not going to enjoy the investing process. One of the great things about investing in real estate is creating income from using other people’s money. This is achieved by creating a source of cash flow from your investments. This cash flow can give you extra income to enhance your lifestyle, pay off other debts or even retire early. Ontario Assets uses the fix, re-finance and rent strategy to not only achieve both forced and market appreciation but to maximize the cash flow for the property. This way there is no need to worry about trying to carry a negative cash flowing property while waiting for values to increase. Asset Appreciation + Mortgage Reduction Both are constantly occuring through long-term economic growth and structured payments into your investment properties by tenants. News + Updates! We are determined investors who are passionate about all things Real Estate. Stay in the know of all opportunities, market news and upcoming events. We look forward to connecting in the future! Name * Email *
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