It was a pleasant surprise to be back in Toronto after a sun filled vacation with temperatures of 28 degrees almost daily to see that the entire week has positive temperatures. A perfect way to transition back into the cold!
It is the start of a new year, which means we hit the ground running with lots of exciting projects planned. To start, I am working on my first major renovation of the year, a new legal basement apartment. As part of the legalization process, the first step is to get all my drawings finalized and submitted to the City for approval.
This is fun (at least for me). I get to be creative and work with my designer to ensure an open, functional layout – one of the most important steps in the process. Although designers can help guide me and do the drawings, they have never actually built anything. So that is why I need to step in and change things to make it look awesome.
The project is expected to start in February and I am confident it will turn out great. Not only that, I will be able to charge premium rents for this house (3 bedroom upstairs and 2 bedroom down) and create instant equity by adding a secondary suite. This is not an easy process, I am sure I will have many challenges ahead but after 4 months, it will be a money generating machine.
I know it’s only January but we are getting ready for tax season. It is timely that all our year end mortgage statements are coming in the mail, so we can know exactly how much principal and interest we have paid towards each of our properties.
I have meetings with people all the time who are primarily interested in cash flowing real estate. I totally understand the sentiment, but I will admit that it is becoming increasingly difficult to get high cash flow numbers with the rapidly increasing prices of real estate in many of the areas we invest in.
But I like to look at Cash Flow as the appetizer – yes it great to have, but not absolutely necessary.
The main course – well that is your mortgage pay down. And with the low interest rates we have been experiencing, my main course has been especially meaty.
This is a mortgage statement for one of the properties we own. It is a single family freehold townhouse straight rental we bought few years ago.
If you look at the highlighted number, that is my mortgage (principal) pay down. I know it isn’t physical cashflow (as in money in the bank), but it is almost like a forced savings account Now imagine owning, 2, 3, 5, 10 rental properties – you do the math
Keep in mind that the higher the property value (bigger the loan amount), more than 50% of your monthly mortgage payment is going towards principal. Also, another great part is that every year your principal paydown increases because your loan balance is decreasing. So next year, the principal paydown on this same property will be more.
And then the end of a meal – desert. Again, not necessary (you certainly won’t go hungry without it) but always wonderful to have. I like to compare this to appreciation. Lucky for us, we have been seeing record setting numbers here. I shared in my blog post few weeks ago some figures for growth in many of the areas around the GTA – they were close to 20% in 2016.
I did a video post on this some time ago, with the ‘3 Ways To Make Money In Real Estate‘
But even if you are extremely conservative and look at the historical figures, it is safe and conservative to say that appreciation figures are on average 5% per year. Even then, year over year this ads to your wealth building significantly.
So think about it – you buy a property in a good area, with strong economic fundamentals and you let your tenants pay down your mortgage year after year while the market will continue to appreciate steadily. I say it’s a no brainer!
So until next time, happy Canadian Real Estate Investing.
Jose Jafferji, REIA