The Wealth Building Guy

That’s the question I found myself asking after completing a quick analysis I did for a client looking to invest some equity in the Kitchener Waterloo Real Estate market. 

With an initial $30,000 to invest, coming from non-performing equity ("dead money") in their principal residence, we have a few options.  Naturally, we want to pick the option that maximizes return while minimizing capital risk (i.e. we want to make money while preserving the capital we’ve investing)

My client wanted to know what effect different down payment amounts would have on the growth of his family’s equity.  Should he put more down, or less? 

Good question!

I explored two scenarios for what real estate property he could acquire with that initial investment: 

Scenario 1 had the client acquire 2 condominiums in Kitchener Waterloo for around $130,000 each, with a 10% downpayment.  Accounting for closing costs, we’re going to say the initial investment in each condominium is $15,000, which lets us acquire two units with the initial $30,000 equity.

Scenario 2 has the client use the same $30,000 to acquire 1 condominium in Kitchener Waterloo, with a more traditional 20% downpayment - $26,000 + closing costs.

Scenario 1: $260,000 in property.  Scenario 2: $130,000 in property

In Scenario 1, you’re looking at between $20-50 a month negative pre tax cash flow per unit; Scenario 2 yields about $50 a month positive pre tax cash flow, after accounting for condo fees, tax, and mortgage payments (which are a bit higher in Scenario 1 since you’re borrowing more, and are likely incurring mortgage insurance premiums). 

In the grand scheme of this client’s family income & tax considerations, $50 either way doesn’t make a big difference each month.

Fast forward a couple of years.  Say the value for these condominiums have risen 10%, not an unreasonable assumption given the past performance, and prospects for growth in the Kitchener Waterloo real estate market.  What do the two scenarios look like?

Scenario 1: 2 condominium units, each worth $143,000 ($130,000 initial price plus 10% appreciation, or $13,000)

$23,600 returned on initial $30,000 investment, for a 79% ROI 

Scenario 2: 1 investment condo worth $143,000

$14,200 returned on initial $30,000 investment, for a 47% total ROI

Even after accounting for the positive cash flow from Scenario 2, and the negative cash flow from Scenario 1, Scenario 1 - acquiring the condominiums with 10% down to maximize the growth of capital - yields a significantly higher ROI - return on investment.

My client can acquire twice as much real estate investment property with the same amount of equity, and significantly increase his capital growth rate.

Most people don’t realize how much money they’re leaving on the table by not ‘optimizing’ the growth rate of their equity.  Many people just don’t know what they don’t know.  By educating yourself before you acquire your first investment property, or before you buy your next rental home, you will dramatically increase your returns and the rate at which you build your family’s wealth.

Don’t be like most people - be like my client: have your equity working hard for you.

Sign up now for my FREE Millionaire Real Estate Investment workshop, February 7th @ 7pm and learn proven strategies and models to acquire a Millionaire’s real estate investment portfolio.

–

Kitchener Waterloo’s Favourite Real Estate Agent* wants to show you how Real Estate Investing can make you wealthy. Benjamin works with people from across Ontario and Canada helping them build wealth through smart real estate investments.

Benjamin is a Sales Representative with Keller Williams Golden Triangle Realty in Kitchener Waterloo and would love to answer any questions about buying or selling a rental, income or investment property.

You can reach Benjamin at Benjamin(AT)BenjaminBach.com or call him at 519 570 4447

*Gold Award, Kitchener Waterloo Record Readers Select Awards 2007 - 2008