I was invited to a Financial Planning Firm’s project party a few months ago held at the Vancouver Fairmont Hotel. The speaker that evening asked the audience, “What’s the ONE THING the Richest People in the World have in common?” I thought to myself, would it be intelligence? A positive attitude? Driven? Hard-working? Perhaps being sociable, relatable or charismatic? There were many success personality traits going through my mind including, “they add value to people’s lives.” Surprisingly, I was wrong; The one thing the richest people in the world have in common has nothing to do with their personality.
According to Bloomberg Billionaires, 17 of the Top 20 Billionaires in the World use real estate as the vehicle to grow their wealth. Is that why we always hear of rags to riches stories of people making it big in real estate and quitting their full-time jobs? Hmmm… Could it be that these people learned the billionaire’s secrets and they took action on that knowledge?
What is it about real estate investing that’s so lucrative? The following reveals the top reasons how people can get rich from real estate investing.
How People Get Rich from Real Estate Investing
- CASH FLOW FROM RENTAL INCOME
If you analyse your subject property first before buying to determine if the rental income (greatly) exceeds all expenses of the property, the monthly profits can really add up, especially if you own more than one property.
- CAPITAL APPRECIATION
The remarkable thing about real estate is you don’t need to be smart to own. All you need to do is to hold the property for a number of years as historically real estate has doubled in value about every 20 years; so even the biggest dummy can make money doing nothing!
- MORTGAGE PAYDOWN
Once again, brains are not required here. Your tenants pay down YOUR mortgage. I’ll never forget Tim Johnson’s definition of a tenant, “Your tenant is a partner in business who will open up shop each morning and lock it up at night. They will look after security & inform you of potential problems in the business. They will cut the grass, rake the leaves, shovel the snow, and pay all the utilities. They will even pay all of your mortgage payments and taxes. Then, in the end, they will relinquish all monetary interest in the business and walk away, leaving you with the profits.” THESE are the reasons why I give my tenants such nice Christmas presents each year; they are the BEST business partners anyone can have!
- LEVERAGING OTHER PEOPLE’S MONEY
This is actually my favourite reason for investing in real estate. An example would be; if I buy a property for $300,000, the bank could give me a mortgage of $240,000, or up to 80% loan to value. I then use my home equity line of credit to finance the remaining 20% down payment. I have now effectively leveraged 100% of my property with other people’s money. I don’t know any other investment where the banks are willing and able to finance everything for me, so this is pretty sweet.
But the icing on the cake is this; if my investment property’s rental income covers the interest on my line of credit AND all of the operating expenses, it’s almost like having a license to print money. Knowing this, why would I let my money sit in my principal residence making ‘zero’ when I could have it making me double-digit annual returns? That’s like having an older teenager and allowing them to watch TV all day instead of going to work. It doesn’t make financial sense.
- BUYING BELOW MARKET VALUE
There are always motivated sellers in the events of a death, divorce, debt, re-location, or illness. These homeowners are desperate to get rid of their property and will likely sell below market value. Knowing how to seek out these people to help them out of their misery can make you allot of money because you get equity from day one.
- VALUE INCREASE THROUGH UPGRADES AND RENOVATIONS
Upgrading areas such as the kitchen and the bathrooms and giving the house a fresh coat of paint can do wonders in forcing appreciation on the property whether your strategy is to ‘buy, fix & hold’ or ‘fix & flip’.
- RE-PURPOSING THE PROPERTY
You have a 5-bedroom house that can be rented to a family for $2500 per month. Instead of renting the house entirely, why not rent per room to students for $650/month? The monthly gross rent become $3250, which is $750 more than if you rented the entire house to the family. Most houses have 2 living rooms, so why not turn that living area into two more bedrooms for an extra $1300 per month? But let’s not stop there and rent the covered garage for $100 to one of the tenants. By re-purposing this property as student housing, you make a killer monthly income of $4650, almost doubling the single family rental of $2500. Note: this can be illegal in some municipalities, so do your research before attempting this.
- CONVERT USE OF PROPERTY
Similar to re-purposing, an example of converting use of the property would be an apartment building with one title for the entire building. By remodelling, renovating and stratifying the building to condominiums and selling each unit individually, you are able to earn a much higher profit than renovating and selling the entire building.
- TAX WRITE-OFFS
Sometimes, it’s not how much money you make but rather how much money you get to keep. Investment real estate is considered a small business, therefore, all expenses incurred to run this business are tax deductible including property management, travel, insurance, property taxes and even meals with partners. What most people don’t know is that when you borrow money from a line of credit to finance an income-generating asset, CRA allows you to write off the interest paid thereby reducing your personal taxes. (I don’t claim to be an accountant, but this is what my accountants advised me.)
So now that you understand how the richest people in the world make their money, I expect to see you on Bloomberg’s Top Billionaires list in the next few years. : )
Teresa Leung is an Investments Realtor specializing in finding income rental properties in areas with outstanding economic fundamentals, and creating turn-key investments for people who prefer to invest passively. She’s a Mentor with UBC’s Sauder School of Business, Community Council Member of Salvation Army’s Kate Booth House, and former Director of Marketing & Investor Relations with Award-winning Real Estate Investment Firm, Alture Properties. You can find her on twitter @TeresaInvestor or www.pointbinvestment.ca. For more information, e-mail Teresa at teresa@pointbinvestment.ca.