Many of you know that I have a fairly aggressive investing style when it comes to use of leverage to build a portfolio. Not everyone who reads this column wants to be a land baron, many just want a simple, bullet-proof plan that gets them to the coveted seven figures mark without taking any of their precious personal time or adding stress to their life. This article is for that person.
I want to illustrate a painless strategy for any person with access to a down payment and some bank financing to acquire one simple investment property, and, with the help of some mortgage magic, to own this asset outright in 15 years. We will let regular inflation take care of the rest.
Now you might think it odd to learn that I find playing with a mortgage calculator a source of amusement. But I’m just so fascinated by what happens to the amortization schedule with seemingly minuscule adjustments to payments. My investor clients know I always advocate a 30 year amortization. It's the best way to ensure you have options and flexibility with your investment. Then, with a few simple tweaks, you can cut that mortgage in half.
Strategy 1: Switch to a bi-weekly payment
This alone will chop nearly five years off, and you won't even feel it.
Strategy 2: Accelerate payments
This requires a little more discipline, but not the same kind of discipline you would need to walk by a plate of fresh cookies every day for the next 15 years without giving in. It’s just a set-it-and-forget-it decision to defer the benefit of all the glorious positive cash flow your duplex generates.
Yes, the cash flow would make the payment on a brand new Lexus, but to be a net worth millionaire on one lone investment in 15 short years, you will need to abstain. So, we increase the payment by just enough to cut the amortization down another 10 years. Unlike your minimum monthly mortgage payment that is split almost equally between principal and interest, these additional payments go straight to principal. Not only will they have you mortgage-free a decade sooner, they will save you nearly $60,000 in interest costs.
Now, let’s talk about the other side of this equation: Property appreciation. The historical rate of real estate appreciation is 5.4%. At that rate, real estate doubles every 12-15 years. Many people have heard my two cent’s worth, that we have entered a sustainable growth period in the Okanagan that will more or less follow this historic trend for the foreseeable future. Now I can hear the skeptics already, so let me show you ACTUAL sales data for a duplex in Rutland that I recently sold to an investor, as it conveniently changed ownership every 12-15 years.
1976 - $55,000 (Oh it hurts to even see this number.)
1991 - $130,000 (If only my parents had grabbed a couple.)
2004 - $260,000 (When I bought my first. Wish I had the capital to buy more.)
2015 - $500,000 (This is roughly where duplexes have been priced at for last 7 years, I bought most of my duplexes at this price point.)
I did so out of the firm belief that history will repeat itself, and by 2030 or sooner, the market value of any of my Rutland duplexes will be in excess of one million dollars.
Let me show you how the actual numbers shake out, and how this conservative plan will require almost no input from you as the owner.
Each side of your duplex rents for $1950/mo (4 bedroom 2 bath). This means that your gross revenue for the duplex is $46,800 in Year One.
With your accelerated mortgage payments you will invest $31,824 of that revenue. *Minimum Payments ($21,871 @ 3%)
A highly competent property manager is well worth the $4,680 annual investment, so that you don't have to lift a finger or field a single phone call from a tenant. This same manager will see to it that your $3800 property taxes get paid on time. The same manager sees to it that your $1800 annual insurance premium has you well covered in case the unexpected happens.
Now, when you add all that up, you will see that you still have about $5,000 per year in contingency money that will go towards preventative maintenance, coordinated by your manager, and will even cover a vacant month now and again, as is the case with holding property over the long term.
Your personal input can actually be reduced to an annual meeting with your manager to discuss your investment. Your only other job is to take a look at your monthly statements and send the annual report your manager prepares directly to your accountant. How’s that for painless?
If you want to see a proper analysis in black and white, including financial projections, of this exact example duplex, and multiple real world examples, email me and I’ll send a .pdf right over.
So, dream with me for a minute here. You’re about 50 years old today, and you have a $100,000 nest egg, or access to 100k in equity in your primary residence. This simple strategy gives you a million dollar asset, paid off by the time you're at retirement age. The coolest part about this is that you now have options. If you want access to your capital, you could sell your property, pay some capital gains and take your money and run.
Or, you could put a line of credit on the property for 80% of its new value, and take that $800,000 out tax free, reap the additional tax benefits of writing off the interest costs of the line of credit, and fund whatever passions you are now free to explore.
There’s one other very attractive option to consider:
The revenue that this asset is still producing. In Year One, we were getting $46,800. Now, 15 years later, it is $66,000 (based on 3% inflation), so maybe you keep collecting your cheques and travel the world? Heck, it could be a combination of the two. The possibilities are endless for those who do the uncommon.
All it takes is the decision to take matters into our own hands. 15 years from now, will we be laughing all the way to the bank to deposit our million dollar cheque, or will we be kicking ourselves thinking, “Why did I listen to the nay-sayers and give in to my fears?”
There’s no brilliance required to pull this off. You don't need to become an expert, or set up a complicated holding company. You just need to take the first step and call your realtor or mortgage broker. A duplex such as the one in the example is not particularly hard to come by but there aren’t usually more than a handful on the market at any given moment. Less than half a dozen change hands each month, will one of them be yours?
Again, for a .pdf analysis of one of these exact types of property that shows the performance of these duplex investments over time, just send me a quick email.