There are a number of ways to invest your hard earned cash, including stocks, bonds, and mutual funds and they all come with their own benefits and drawbacks. The similarity between each investment option is the potential to provide a return on your money if you stick with it over the long term. The same theory goes for real estate. Investing in real estate is not a “get rich quick scheme,” it’s more like a “get rich slow scheme.” You must always look at real estate investing with a long-term outlook if your goal is to create wealth. Once you can identify what makes a good investment, then generating wealth through condo investing comes down to understanding the following 3 aspects.
Let’s look at the first wealth creation aspect of condo investing.
CASH FLOW
What is “Cash Flow?”
Cash Flow is the money left over every month after you pay your expenses (Mortgage payment, condo fees, property taxes, insurance, etc.). Cash flow can be both positive and negative and is calculated monthly or yearly.
When investing in condos you want to make sure that every property you own is cash flow positive or very close to it. In other words, try to make sure that the monthly rent you charge is greater than your monthly expenses. As mentioned earlier, for this to happen in todays marketplace, you will most likely need to put down a minimum of 30-35%.
In today’s marketplace, the reality is, condo prices are at an all-time high. If you purchased a condo 10 years ago, then consider yourself lucky because you are probably seeing a considerable return on your investment, but if you are just now getting your foot in the door, the likelihood of finding a cash flow positive investment property is tough unless you have a considerable down payment. Gone are the days of putting down 20% and expecting rental income to cover all your carrying expenses.
The reason condo investing is an investment best suited for long-term wealth creation is simply because cash flow, by itself, will not get you rich.
When you purchase condos for investment, your tenant is charged a monthly rent that hopefully covers all your expenses and provides you with positive cash flow. That’s why owning one condo property that is cash flow positive is great, but owning five to ten is better!
The second wealth generation aspect of condo investing is the ability to “Pay Down Your Principal”
PAY DOWN YOUR PRINCIPAL
As a condo investor, your tenants are making your monthly mortgage payments for you and each month part of that payment goes towards paying down your principal, which in turn, builds your net worth through equity.
By renting your properties for the long term this allows your tenant to pay off your mortgage. Mortgages are typically paid off over a 25 year period, or amortization period. By holding a property for 25 years or more, and by leasing the property to tenants, an investor ends up with a fully owned property courtesy of their tenants.
THE WORST CASE SCENARIO IS A FULLY OWNED PROPERTY AFTER 25 YEARS.
The longer you hold a property, the more you can take advantage of having someone else pay down your principal and grow your net worth through equity.
The third aspect of wealth generation through condo investing is
APPRECIATION
Long-term investing minimizes the need to worry about market cycles. Every year we hear talk about “bubbles” and “crashes” but the truth is as long as you have a cash flow producing investment condo you won’t have to worry if property values have gone up or down because your mortgage is covered either way.
If you ignore the impulse to buy low and sell high year after year then what you’ll find is that generating real wealth will come over time. Just look at the chart above. If you purchased a home in 1988 for $250,000 and decided to sell in 1989 for $275,000, yes you would be making a bit of profit, but if you had just held onto that property and decided to sell in 2009, it’s likely that the price would have been up to around $450,000!
The general theory is real estate values tend to go up over time and there is a no better example than the city of Toronto where the average sales price has gone up 6.5% per year since 1982.
Buy low, then sell high after 25 years!
It all starts with purchasing your first one.
Do you have any questions about creating wealth through condo investing? Call, text, or email me anytime!
