Can be smarter than stocks or bonds
Calgarians may be surprised to find out just how profitable revenue properties are in this city – even in consideration of claims housing prices are already overvalued.
In fact, annual returns of 17 per cent, or more, before factoring in appreciation or tax benefits are not uncommon. All you need to get started is a 20 per cent down payment, which can be as little as $30,000 – or $15,000 if you partner with someone – decent credit, and the ability to think long term.
If a $30,000 barrier to entry seems low, you might be surprised to learn that there are a number of condos throughout Calgary that are ideal revenue properties in the $150,000 price range. These low price-point properties are a great starting point for rookie real estate investors. With a relatively small mortgage, low maintenance fees and high rental demand in the right areas, they are, in many ways, a smarter investment than stocks or bonds.
Real estate investments are simple. You buy a house and rent it for the same or greater amount than it costs you to own it. It is real. You can touch it, drive by it and know exactly what is happening with it at any given moment. Furthermore, once it is rented, it is mostly a hands-off investment, aside from when it’s vacant or needs repairs.
It also makes complete financial sense. Over a 15- to 30-year period, a rental property will become free and clear – the renters having paid off the mortgage – and provide a steady flow of income for the remainder of the time that you own it.
At 17 per cent returns, it will also likely outperform the stock market. Those kind of returns may seem high, but they are out there. In fact, they are common.
For example, take an inner-city condo purchased for $190,000. After putting 20 per cent down, the mortgage is $152,000. And let’s say the homeowner chose a variable-rate mortgage (because the payout penalty will be lower if he/she decides to sell) with a 30-year amortization.
Then, let’s say the homeowner rented the property for $1,395. After maintenance costs, insurance and taxes, her/his monthly cash flow would $292 monthly, or $3,380 annually, which equates to a return of 8.64 per cent on the cash flow alone.
In addition to cash flow, the mortgage is also being paid down by $3,482 in the first year, which equates to another 8.9 per cent return, for a total return of 17.54 per cent. This is before adding appreciation and tax benefits, which could increase the annual returns by another five to 25 per cent.
The best thing about this example is it’s simple. It isn’t some crazy strategy from a late-night infomercial. In 15 to 30 years, this homeowner is going to turn a $38,000 investment into a condo that will be free and clear and worth at least $200,000, likely double that amount. All he or she had to do was a little bit of research today to be wealthy tomorrow. Imagine what would happen if he or she owned 10 of them?
If you would like to know more about investing in real estate, give us a call and ask about our Cash Flow Club.
Nolan Matthias holds a bachelor of arts in Economics, is the co-founder of Mortgage360 and the author of The Mortgaged Millionaire. Call Nolan at 403-615-6132 with your questions or to set up an appointment with an Accredited Mortgage Professional (AMP).