Today’s discussion will involve a lot of numbers.

Yay, Math! Yes, there will be some basic formulas to grasp.

Not to worry, I’ll be giving you a free BONUS by the end of this that’s definitely worth you sticking around.

So let me get right into the brass tacks here. The are four ways you can make money on an investment property.

What’s are the four ways?

I’ll get into them shortly, but I guarantee you this… They’ll make think twice about keeping your hard earned money sitting in a Savings Account or trusting the banks “Financial Advisor” to invest it wisely for you. The objective today is to demonstrate just how powerful a wealth building tool real estate is.

Before I move forward, I want you to know that there will be quite a bit of investment terminology thrown around, so jump down to my “Investor Glossary” section at the end of this blog if you’re unfamiliar with any of the terms I mention.  If you take the time to learn these terms I think you will be pleased at the engaging conversations you will have with other like-minded investors and real estate professionals.

Okay, so understanding real estate investment terminologies is one thing. The other is your approach. You can approach the rest of this discussion in two very different ways, and I encourage you to view it from the latter’s perspective.

Consumer Mindset:

• How much is it going to cost me?

• Can I afford to invest?

• What if it doesn’t work?

• I work hard for my money – I deserve to buy X, Y, or Z.

Investor Mindset:

• What’s the rate of return, or return on investment (ROI)?

• I can’t afford NOT to invest.

• How can I make it work?

• My money works for me – My investments’ profits will pay for X, Y, Z.

Investor Mindset:

Are you able to spot to the philosophical difference between these two mindsets? The first is an emotional way of thinking, while the second is calculated. This may sound like an oversimplification, but keep an open mind.

Stop and refer back to the investor mindset when you need a reminder to let the numbers do the talking and to keep emotions out of it.

With that out of the way, let me get into the four ways to make money with an investment property. I personally refer to them as the FOUR PILLARS of real estate investing. Why “PILLAR”? The pillars support my real estate investment decisions.

Here they are:

• PILLAR #1 Cash Flow: the monthly/yearly income producer.

• PILLAR #2 Principal pay down: the amount my mortgage and/or line of credit is being paid down by someone else.

• PILLAR #3 Market appreciation: the value of the property increasing over time by external market forces (ie: supply and demand, inflation, etc.).

• PILLAR #4 Forced appreciation: an increase in property value created by investor improvements (ie: renovations, adding a second unit, increasing rents, etc.).

The market moves fast… In order to keep up you need to analyze the performance of a property you’re interested in and/or compare the performance of other properties quickly. Using the FOUR PILLARS will help you determine which properties to put on your shortlist.

So, how do you know if an investment property is worth your consideration?

Buckle up.

I’m all about the benefits of creating second suites here. The value proposition that they bring directly impacts all FOUR PILLARS. So, let me break down with a real life example of a recently purchased property in Hamilton, ON to show how you make money.

Below is a description of the property, the money required to purchase the property, the investment strategy used, the return on money invested, and the exit strategy. All of these are important to know before calculating your earning potential.

And below on the right, I’ve extracted the important information from the left into a 10 step calculation of the 1st year Return on Investment. Stay with me on this and follow along. It’ll all make sense!

The Property – A 3 bed-2 bath 1 1/2-storey (plus 1 bed-1 bath in the basement) with approximately 2,750 sqft of finished living space (includes basement), and has a separate basement entrance. The property sold for $835,000.

The Upfront Investment – Estimated $180,523 of upfront cash is required to cover the 20% down payment, land transfer tax, legal fees, and home inspection. A separate HELOC will be used to cover the renovation budget of $115,000.

The Investment Strategy – Demolish the existing finished basement and add a 2 bed-1 Bath second suite of approximately 1,000 sqft that will generate a combined Gross Rental Income of $4,600/month between the upper and lower units, and increase the After Repair Value to $950,000; based on comparables.

The 1st Year Return on Investment – After expenses and debt repayment, the 1st year return on the Upfront Investment is 46.4% using the FOUR PILLARS.

Exit Plan – Long term buy and hold. Refinance the mortgage to recover a portion of the Upfront Investment when feasible and repeat process on a new property.

Alright, so now you know that the forecasted Return on Investment in the 1st year is 46.4% or $83,852 on your initial $180,523 Upfront Investment.

If you’re confused with the calculations or terms covered thus far, have a look at the sample Proforma and Glossary at the end of the Blog for a more visual stimulating breakdown of the numbers., and definitions

Let me know how that compares to your Savings Account or your Financial Advisors yearly returns by the way…

To clarify how I calculated the 46.4% using my FOUR PILLARS, I’ll break it down for you below.

• PILLAR #1 Cash Flow. $634/month x 12 months = $7,607.00 (4.2% on the Upfront Investment).

• PILLAR #2 Principal Paydown: $16,419 (1st Mortgage) + *$2,822 (HELOC) = $19,245 (10.7% on the Upfront Investment).
  Principal amount paid down based on the Amortization Schedule given by your financial institution.

• PILLAR #3 Market Appreciation: Forecasted market appreciation of 6% per year* in Southern Ontario = $57,000 (31.6% on the Upfront Investment).
  *6% is based on the historical average. Expect some years to be greater than others.

• PILLAR #4 Forced Appreciation: In this example the Purchase Price and Renovation Budget amount to the same as the After Repair Value, so it is a wash. (0% on the Upfront Investment).

Add all FOUR PILLERS up and you get 46.4% or $83,852. Oh, and don’t forget that this in only in the 1st year. You continue generating cash flow, paying down the mortgage/HELOC principal, and gaining market appreciation. Meaning, the total return on your upfront investment will continue to rise with each passing year.

This isn’t meant to be a sales pitch by any means. I said to stay focused on the numbers, remember? The numbers simply do not lie.

Real estate is an unbelievable wealth building tool that so many are overwhelmed by and talk themselves out of doing. Getting educated and/or partnering with an experienced investor is one way to conquer the emotional fear caused by the unknown.

Wrapping up; once you’ve found a property that you are interested in, it’s imperative that you understand how it’s going to make you money. By understanding the numbers, you will be in a great position to communicate the benefits and opportunities to other like-minded investors, partners and real estate professionals.

And you’ll be able to make an informed offer when you are ready to take that next step. Always remember, you didn’t wake up needing to buy a property today, but you now have the tools to know a good investment when you see one.

Do your best to keep the consumer mindset out of your decision making. Come prepared with the calculated investor mindset, let the numbers do the talking, and keep emotions out of it.

Thank you for reading this far!

If you found this information helpful, please recommend it to at least two other people in your network whom you think would find it helpful as well.

Now turn that consumer mindset into an investor mindset!

Until next time!

Investor Glossary

Mortgage Amount: Original or expected balance for your mortgage.

Interest Rate: The annual interest rate for your mortgage and/or line of credit.

Amortization: The number of years over which you will repay your mortgage and/or line of credit.

Mortgage Payment: Your principal and interest payment per payment period (ie: bi-weekly or monthly).

After Repair Value (ARV): The estimated future value of a property after it’s been improved through renovations. Determined by referencing nearby recently sold properties in similar condition, age, size, build, and style.

Gross Rental Income: The amount of income the property is projected or scheduled to earn based on comparable rental units and/or signed lease agreement.

Net Operating Expenses: The sum of all expenses associated with operating the property, excluding debt repayment

Net Operating Income: Is the Gross Rental Income less the Net Operating Expenses, and excluding Debt Repayments.

Debt Repayment: The payments made to service all debt on the property, including both principal and interest.

Return on Investment (ROI): A profitability metric used to evaluate how well an investment has performed relative to the investment’s cost.

Cash Flow: The amount of free cash available at the end of the month or year.

Principal Paydown: The portion of a debt payment allocated to principal balance.

Passive Appreciation: The increase in property value driven by external market forces.

Forced Appreciation: The increase in value driven by the property owner.