There are myriad ways a person can make a million dollars in real estate. Over the years in CREW, I’ve covered everything from renovating multi-family apartment buildings to buying a series of single-family homes to using a lease option strategy.
The two things these strategies all have in common is that they are battle-tested and they take work on the part of the investor. This time, however, I’m going to share a simple strategy that will get you to a million dollars in net worth with almost no work on your part.
What and how to buy
The key is buying the right kind of property at the outset. For two reasons, I suggest you grab something as close to new as possible. First and foremost, it will limit the amount of repair and maintenance you will incur over your 10-year holding period. Second, it will improve your tenant profile substantially.
For this example, let’s assume an initial investment of approximately $150,000 in cash, which, once leveraged, will allow you to control $750,000 in real estate. There are a few options here, but the target revenue is the same in all cases: $5,000 per month, which will give you an annual revenue of $60,000. You might choose:
- A duplex with two nicely appointed three- or four-bedroom units that will rent for $2,500 per side.
- A nice three-bedroom vacation rental property in a market that attracts upscale vacationers. Something with a proven track record of $2,500 a week in the summertime will get you to the amount you’re hoping to hit.
Now for the magic of velocity banking. With $60,000 per year in revenue, you’re able to have some fun with your mortgage amortization schedule. You’ll want to make sure you select a mortgage without prepayment restrictions, as the name of the game is to invest all of the cash flow from the property into aggressive mortgage pay-down.
Assuming a 3% interest rate with a bi- weekly payment of $1,261, you can afford to do a bi-weekly mortgage top-up of $600. In doing so, you’ll be cutting your 30-year mortgage nearly in half – 15 years and six months, to be exact. Your total payments to the bank will be $48,407. Expect to spend another $10,000 per year between tax, insurance and some contingencies.
A decade down the line
Delaying the real gratification until the 10-year point is going to require some discipline. When your investment property is generating $1,200 per month in positive cash flow, it’s tempting to want to take that money and use it instead of paying it all to the bank. Realistically, though, most of us would absorb that $1,200 a month into our daily existence and barely change our lifestyle, let alone improve it in any noticeable way.
In the chart below, you can see that investing $1,200 a month over 10 years into accelerating the mortgage ends up going fairly well. The total interest saved is nearly $120,000, and a difference of just over $180,000 opens up between the two mortgage balances at the 10-year mark.
The advanced, and more disciplined, version of this would be to take the $1,200 a month and invest it in paper assets. Assuming an 8% return over 10 years, you could stand to do even better and end up with more than $240,000 in your trading account.
In either case, the actual real estate asset will have also been appreciating over the 10-year period. Assuming a conservative 5% per year compounded growth rate, the value of your $750,000 investment should be over $1.22 million, leaving approximately a $1 million equity position in the property.
You have some choices now. Do you draw out your equity, tax-free, using a home equity line of credit? Do you sell the property, pay some capital gains and move on? Or do you simply finish paying off the home in another five and a half years and enjoy the $60,000 per year in net cash flow for your retirement? Any way you slice it, you’re a happy camper.
AJ Hazzi is a Kelowna based investor and broker/ owner of Vantage West Realty, a boutique agency specializing in serving investors with quality acquisitions and investorfocused property management. Contact him at [email protected] or 778-765-0377, or visit vantagewestrealty.com.
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