Real Estate Investment in Canada
The Power of "Set It & Forget It"
It's amazing how quickly we forget things. Even though we discuss real estate investment in Canada around here almost every single day, we still manage to forget some of the powerful "basics." What do I mean?
Let me explain...
When we started investing we focused almost exclusively on the monthly cash flow a property generated.
So for a typical real estate investment in Canada, if the mortgage + the property taxes + the insurance cost us $1,909 and we rented out the property for $2,250/month, then we had $341 in cash flow. And even though each month the mortgage was being paid down and every year a little appreciation would occur we basically ignored that stuff.
Not intentionally, it just happened. We couldn't touch and feel the mortgage reduction on a regular basis (we just got an annual statement, and those are often quickly filed away) and appreciation just slowly sort of happens with little irregular spurts.
We have one real estate investment in Canada that we sort of "wrote off" for a little while because we had to refinance it about 5 years ago to pull out equity for some renovations. So in our minds, I think we felt there wasn't much equity left in the property. And that feeling just kinda stuck.
On top of that, we had a feeling since day 1 on that property that we kinda overpaid for it by about 5%. So we really felt it would be a very long time before there was any sort of value in the property other than the monthly cash flow. Well, it was a pleasant surprise this week when we found out that comparables for this real estate investment in Canada were selling for $150,000 more than we purchased our property for. AND Over the past five years, the mortgage has been paid down about $35,000. So, we now have approximately $170,000 of equity in the property. We don't have the full $185,000 ($150,000 + $35,000) because of the refinance mentioned earlier. Needless to say, we're pretty happy about it. The property is cash flowing nicely and has been for years, and now we have a chunk of equity in it.
This realization reminded me that the reason real estate is so great is because of the "set it and forget it" factor.
Once you have a real estate investment in Canada with tenants in it, you can get your hands on the monthly cash flow, but you can't regularly touch the mortgage reduction or the appreciation.
You're forced into long-term investing.
It's great.
In the past with other investments I've had in the stock market, it's been easy for me to get at profits. And that's always made it tempting to withdraw and spend them. And I'm definitely guilty of that!
With real estate after you accumulate a little portfolio of properties, the power of the "set it and forget" approach really begins to snowball.
For example, let's say you have 4 properties worth $500,000 each. Each one cash flows at $300 per month. You have $1,200 per month in profits to play with. But after 5 years if the market appreciates at only 2% a year you've picked up $208,161 in equity on those properties. And if your mortgage was being reduced by $10,000 a year, then you've gained another $50,000 on each for a total of $408,161 in gains. And you didn't really do anything "extra" yourself to gain that. And if the market continued gaining 2% for another 5 years, you've gained a total of $437,989 in equity in that property. And the mortgage would have been paid down another $50,000 on each (I'm being conservative here) for a total mortgage reduction of $400,000. That would mean you have a total of $837,989 in equity. And don't forget about the cash flow you've been earning over those years. Nice eh? And 2% a year isn't really a stretch. Mild inflation would carry most properties along at that rate. If you're a bit more daring and believe you may get an annual average of 5% appreciation on your 4 properties over 10 years, then you're looking at $1,257,789 in equity gains plus the mortgage reduction of $400,000 for a total gain of $1,657,789. And if you put 20% on those properties that would mean you invested $400,000 and got back $1,657,789 over 10 years. Not bad at all. Imagine you had 8 properties instead of 4? The numbers get big fast. And none of this is including the cash flow from the properties.
Anyway, if you're reading this, I'm likely preaching to the converted here.
But we can all use a reminder a little once in a while.
Especially when too often you only have the "negative" to focus on. Like cleaning carpets after one tenant moves out and spending your Saturday mornings trying to fill a property with someone else.
It can all seem futile but treat this as a friendly little reminder that there are big paydays ahead of you for any real estate investment in Canada that you may have.
Slow and steady often wins the race.
And all of this reminds me of a mortgage broker 5 years ago swearing up and down about building wealth faster using "condo conversions" instead of rental properties.
Rentals were "too slow" for her.
Well, this week, the same week that we're realizing we have unexpected equity in one of our properties, I get a phone call.
It was an investor looking for some advice...
When the market was roaring forward a few years back the condo conversion business was roaring too.
But this investor on the phone now had $100,000 tied up in a condo conversion that they have, having serious problems getting back because of slowing appreciation and project mismanagement. That $100,000 represented some profits from previous projects and their initial capital investment.
Looks like they are running the risk of losing their entire real estate investment in Canada.
I'm not saying we've never made bad investments. We have.
It's just interesting that almost every single time someone pitches us with "easy/quick/fast money" investing that a story like this pops up sooner or later.
We're all guilty of going after "easy money". We have in the past. Who hasn't?
But, yet again, this week we were reminded of the power of steady, proven growth as the best approach for any real estate investment in Canada. And hopefully, this reminder keeps us and you on the straight and narrow.
You need these "slow and steady" growth reminders pounded over your head sometimes don't you? It's so easy to get off track.
Ron Papiel, the kitchen gadget infomercial king, had a great catchphrase for his Ronco Rotisserie that applies directly to real estate investing....
"Set it and Forget it!"
We think he was bang on.
Until next time ... be a Renegade!
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