Updated: Jan 1, 2021
There are multiple revenue streams when investing in real estate that most people are not aware of which is why we decided to cover this topic. Our strategy consists of “buy-renovate-rent-refinance-repeat” and we hold our properties for the long term. Depending on the strategy that you chose some of the below revenue streams might change but the overall fundamentals will remain the same.
For buy and hold investors this is one of the most important revenue streams. Generally, its all your rental revenue minus all your expenses. The remainder is your cashflow. Unlike some of the other income streams that we will cover next – cashflow is money in your pocket at the end of each month. Therefore, there is a lot of emphasis on cashflow among real estate investors [that concentrate on buy and hold]. As your portfolio grows cashflow can become your primary source of income – it really depends on your goals. It is the foundation that helps us build a sustainable business. If you want to learn more about cash flow and how to calculate it – we cover it in detail in one of our blogs: https://www.steeltowntitovs.com/post/how-to-calculate-cash-flow
Mortgage Pay Down
Each month your tenants are paying off your mortgage. A part of that payment goes to principal. Below is a simple example of payments [Principal + Interest] from a $500k purchase price with 20% down. If you notice - every single year as the owing amount gets paid off the principal payments will increase over time. This is because your amount owing is decreasing. Now you cannot really use this money unless you refinance or sell the home. Depending on the goals you have – a strategy can be built using either one or a combination of both. There are tax implications with selling the home however at times its needed to scale and grow your portfolio. There are pros and cons to both but one thing for sure your net worth is increasing with every payment and every month.
Inflation [Debt Decrease]
To simplify this example, lets imagine the bank today said you do not have to pay any more of your mortgage. What will happen to the amount owing? Every year we experience inflation. This makes your money worth less, including your debts. Owing $500k mortgage today will not feel or have the same value in 5, 10 or 30 years from now. Look at the chart below – we applied a Canadian historical inflation of 2%. You can see how the value of the owing amount decreases over time. The $500k will still be $500k owing if you are not paying off the mortgage but in 30 years because of inflation it will feel like $272,742 in today’s dollars. The buying power would have decreased by 45%. Now imagine we couple this with mortgage payments – your net worth will increase dramatically by simply letting your money work for you.
There are certain tax advantages when owing real estate. For one, your expenses are a write off. This can include but not limited to your utility bills, taxes, interest on mortgage, and different services required for maintenance. Depending on your Real Estate investment strategy, you can also take advantage of the tax deferral options like Cost of Capital Allowance. This enables you to depreciate your asset [home not including land]. This is helpful during high earning years but be careful once you sell you the property the amount that was deferred will be treated as income that year. Its important that you do a break-even analysis to find out what works best for you. Depending on your investment strategy – there are a variety of ways to save during tax season. Its important that you talk to an accountant to understand the pro and cons of different strategies.
Natural – Market Conditions and Inflation
Each year the value of your home will either increase or decrease based on market conditions. Things like employment, population growth, and affordability all play a big role in market prices. There are several different inputs but it all boils down to supply and demand. Below is an example of single-family home prices [seasonality adjusted] in the Hamilton-Burlington area. You can see that 14 years ago – the average single-family home in the area was only $234k vs the $757k going price as of September 2020; that is a 215% increase. Now keep in mind that is not adjusted for inflation – however the chart below really highlights the ongoing short supply and high demand of housing in the Hamilton Area. This is the ongoing theme across GTHA as housing in Toronto becomes less affordable.
You might be familiar with popular HGTV shows like “Flip or Flop”, “Fixer Upper”, and/or “Property Brothers”. They highlight flipping homes and making them more appealing to the public. Essentially that is what we call forced appreciation; in this scenario [if done properly] we will lift the price of the house by remodeling and renovating it into a desirable living space that adheres to today’s living standards. You typically make money on the buy – if you purchase a house that is less desirable most likely you will not be competing with other buyers [but that really depends on the market]. In addition, there is a premium when sellers are shopping around for a turnkey property. There is a bit of an upside on the renovation – there is a premium for the sweat equity [its not a 1 to 1 comparison]. In a neutral market, the forced appreciation will build quite a bit of equity within the first 3-6 months. This is another unique way that we can make money in real estate.
If you notice – we have listed 6 different ways that we are building wealth with each property. At face value a lot of people just think of appreciation and cash flow – but its important to look at other ways that we not only create revenue streams but also protect ourselves from taxes and market inflation.
If you’re interested in finding out more information on how you can invest with us on our next deal –reach out to us directly at 289-242-6294 or firstname.lastname@example.org.
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The information provided in this blog is for entertainment purposes only and is not intended to be a source of advice with respect to the material presented. The information contained in this blog do not represent legal or financial advice and should never be used without first consulting with a financial professional to determine what is in your best interest to meet your individual needs.
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