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- Sep 14, 2007
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Here is another recent post on my Blog....enjoyBeing that we are coming up on the festive season I thought I would write a turkey dinner analogy for real estate! I had my first turkey dinner with friends just the other night and it could have been the best turkey I have ever had! I am sure that three or four more turkeys and I will be sick of them for another year but that first one is always sooooo savory. Anyway back to the topic at hand, how to consistently make money in real estate!
I like to think about it as a three part dinner:
1. The Meat - Mortgage Pay Down
2. The Potatoes - Monthly Cash Flow
3. The Gravy - Appreciation
The Meat. Monthly mortgage pay down is like a forced savings plan. Each month, with your mortgage payment, a portion goes towards your principal and over time builds up your equity. In a lot of cases, 25 years goes by and you have a home that you own outright. With this strategy alone you will triple your money after 25 years assuming no appreciation/depreciation or cash flow. I know many people who are using this strategy as a great way to pay for their children`s education and then some! Smart, effective and sure beats the heck out of putting $50 a month away for 18 years that would give you $17460.10 assuming you got 5% interest and didn`t pay any fees. Surprisingly this latter strategy is what most people do to pay for their children`s post secondary education. I guess it works if you are thinking your kids are not going to Harvard or the University of Calgary for that matter but I want my child to have all the options open to him and if he chooses Harvard.....then I want him to be able to go!
The Potatoes. A well purchased and managed property should yield monthly cash flow. Personally, I don`t invest in a property unless that property will provide a minimum of $500 each month of positive cash flow on average. This is what fills your bank account at the end of each month and why I call it the potatoes....its the filler food. To my amazement lots of people are happy buying property that takes money out of their pocket each month hoping for the big gains in appreciation. Unfortunately, when property values are not going up (this was a crazy and unheard of concept until a couple of years ago) that investment turns sour and soon you find yourself thinking that the real estate asset is more of a headache than it is worth. That is when I come along and buy it at a steep discount just because you are sick of dealing with it.
Always, always, always buy for positive cash flow. It is the part of the investment that is going to let you buy back your time. The rich have money. The wealthy have time and money.
The Gravy. Appreciation or property value growth is what I consider a bonus as it is something that I have little direct control over. Yes, I buy in areas that have great growth potential but there are so many external factors that this is really hard to predict. Run from anyone that tells you that they know what this years rate is going to be for any given area. The top experts in the country don`t have a solid answer so why does your taxi driver? The Canadian nation average for appreciation has been 8% for the longest time but I usually factor in a very conservative 3%. Again, with so many external factors I can not understand why people invest for this one aspect. It is truly speculation and not investing.
Combine all three of these together and you have one heck of an investment and you can see why we are very happy to place our money into real estate! On average we look to double the initial investment in 5 to 7 years. To see an example pro forma click here http://www.hgrei.com/component/rsform/?formId=4
Have a great festive season and may your investments do you better than your in-laws turkey dinner!
I like to think about it as a three part dinner:
1. The Meat - Mortgage Pay Down
2. The Potatoes - Monthly Cash Flow
3. The Gravy - Appreciation
The Meat. Monthly mortgage pay down is like a forced savings plan. Each month, with your mortgage payment, a portion goes towards your principal and over time builds up your equity. In a lot of cases, 25 years goes by and you have a home that you own outright. With this strategy alone you will triple your money after 25 years assuming no appreciation/depreciation or cash flow. I know many people who are using this strategy as a great way to pay for their children`s education and then some! Smart, effective and sure beats the heck out of putting $50 a month away for 18 years that would give you $17460.10 assuming you got 5% interest and didn`t pay any fees. Surprisingly this latter strategy is what most people do to pay for their children`s post secondary education. I guess it works if you are thinking your kids are not going to Harvard or the University of Calgary for that matter but I want my child to have all the options open to him and if he chooses Harvard.....then I want him to be able to go!
The Potatoes. A well purchased and managed property should yield monthly cash flow. Personally, I don`t invest in a property unless that property will provide a minimum of $500 each month of positive cash flow on average. This is what fills your bank account at the end of each month and why I call it the potatoes....its the filler food. To my amazement lots of people are happy buying property that takes money out of their pocket each month hoping for the big gains in appreciation. Unfortunately, when property values are not going up (this was a crazy and unheard of concept until a couple of years ago) that investment turns sour and soon you find yourself thinking that the real estate asset is more of a headache than it is worth. That is when I come along and buy it at a steep discount just because you are sick of dealing with it.
Always, always, always buy for positive cash flow. It is the part of the investment that is going to let you buy back your time. The rich have money. The wealthy have time and money.
The Gravy. Appreciation or property value growth is what I consider a bonus as it is something that I have little direct control over. Yes, I buy in areas that have great growth potential but there are so many external factors that this is really hard to predict. Run from anyone that tells you that they know what this years rate is going to be for any given area. The top experts in the country don`t have a solid answer so why does your taxi driver? The Canadian nation average for appreciation has been 8% for the longest time but I usually factor in a very conservative 3%. Again, with so many external factors I can not understand why people invest for this one aspect. It is truly speculation and not investing.
Combine all three of these together and you have one heck of an investment and you can see why we are very happy to place our money into real estate! On average we look to double the initial investment in 5 to 7 years. To see an example pro forma click here http://www.hgrei.com/component/rsform/?formId=4
Have a great festive season and may your investments do you better than your in-laws turkey dinner!
