When you invest in a multi-unit building, the money you invest works in several ways. In fact, there are four levers that allow you to enrich yourself.
To illustrate these 4 methods, I took care to illustrate, through an easy example, how the 4 enrichment levers work with multi-housing. My example assumes you buy your first building this year, in this case a triplex, and then repeat the transaction every year for 10 years. At the end of this decade, you will therefore find yourself with 10 buildings. Do you doubt this is possible? Let me convince you of that.
This first building was therefore purchased at a cost of $300,000, thanks to a down payment of 20% of the purchase price, or $60,000. (If you don’t have that much money, don’t worry; here’s an article that demonstrates some creative techniques for investing without money. )
Let’s take an arbitrary interest rate of 3% and an annual inflation rate of 2%. Also, each multi-dwelling unit will be purchased at a price 10% below the market value. So the first building will be acquired at a cost of $270,000 ($300,000 – 10%). Finally, each triplex will bring in monthly cash flow of $75 per door per month. (Gross income – expenses – financing = $75/door/month). Obviously, this figure does not take into account tax, which will eat into part of it.
Now let’s see how the 4 levers work.
1- Liquidity
Also called « cash flow », liquidity represents the net profit you obtain, once you have accounted for the expenses of the building as well as the payment of the mortgage. In other words, it’s what’s left in your pocket at the end of the month. Personally, I recommend aiming for a liquidity of $75 per door per month. (One door equals one dwelling.)
The following formula allows you to calculate liquidity:
Gross income – expenses – financing = liquidity.
Above all, we must not make the mistake that many people who choose to invest in real estate make: they buy any multiple dwelling without making real profitability calculations, then find themselves not with monthly passive income, but rather with monthly passive expenses.
Let’s return to my example given at the beginning of the article. The first year, we obtain monthly liquidity of $225 ($75 x3). In other words, once all building expenses have been paid, you get $225 in your pocket every month. The following year, we add another $225, and so on, to obtain in the tenth year a monthly net income of $2,250 once all expenses have been paid. After 10 years, the liquidity of your building will have allowed you to become richer by $148,500.
2- Capitalization
Capitalization is the act of accumulating capital by repaying your loan. For example, if you own a home, you accumulate a certain amount of equity with all your mortgage payments.
But in the case of a rental property, your wonderful tenants are the ones paying your mortgage. If you purchased in order to have a profitable building, it will be your tenants who, at the end of your mortgage (for example 25 years), will have paid for the building in full. Isn’t that wonderful?
Now let’s return to our example. From one year to the next, you will pay a little more for your buildings, given the increase in prices. 2% per year in this case. However, in this example, we are purchasing at a price that is 10% below market value. So instead of paying $300,000 for your first building, you pay $270,000 for it.
Each year, you will pay the mortgage on your buildings. Or rather, you will use the rent money to do it. After 10 years, this technique will have allowed you to accumulate $377,029.
3- Added value
We can divide it into two: market surplus value and “forced” surplus value. Market appreciation represents the annual increase in value of the real estate market. From year to year and region to region, the market grows by 1%, 2%, 3%, 4%, etc. As for forced capital gains, the idea is to undertake actions yourself that will increase the value of your building. For example, you can make renovations, change the purpose of the building or even offer additional services to your tenants, such as adding a laundry room.
4- Profit on purchase
The trick is to negotiate to buy below the seller’s asking price. My example takes into account the fact that we purchased at 10% below market value. Since we assume that these 10 triplexes are all identical, we can predict that after 10 years they will all have the same market value, i.e. $358,527. This method therefore allows us to make a profit of $628,853 after 10 years.
Millionaire in 10 years?
Will you be a millionaire at the end of these ten years? If we take into account each of the 4 methods, yes! If we take into account the cash flow, capitalization, increase in value and profit on purchase, you will have enriched yourself by $1,154,382 simply by purchasing buildings, all with a single down payment initial of $54,000.
Now, I would like to draw your attention to one detail: in the example I just gave you, we are only buying triplexes. Would you like to embark on this type of approach? It’s tempting, isn’t it? Wait, there’s better.
The #1 secret to going faster
I’ll tell you a secret: triplexes are not the most profitable buildings. In fact, a general rule of real estate is the following: The more housing units there are in a building, the more profitable the building is.
In other words, an apartment in a multi-unit apartment of eight units will bring you a better monthly income than the same accommodation located in the neighboring triplex, for the same type of tenants, of course.
So I’ll let you imagine what would happen if, instead of investing in a triplex as your first building, you dared to acquire a building with more or less 10 housing units, or even more. Would you be a millionaire after 10 years? Probably well before, and after 10 years, it is likely that you will become a multi-millionaire.
“Woooh minute Ghislain. Are you saying that with little or no experience, no money and no knowledge, it would be a good idea to risk everything and go for the purchase of a bigger building? Isn’t that a bit of a stretch for you? »
A lot of people say this kind of thing to me when I tell them this secret. Are they right to be afraid? I’m not saying a triplex is a bad investment. I’m saying that a larger multi-family unit will be a much better investment. Why be afraid?
It’s not just because you’re starting out in real estate that you have to limit yourself to small buildings. Aim small and you’ll get somewhere. Aim big and you’ll go far.
Secret #2 to go faster
Get accompanied! Learn from those who have already made mistakes. You will go faster and further. Personally, I invest around $25,000 out of my own pocket each year to follow various training courses. In my opinion, knowledge is the best investment.
With my team at Immofacile, I have created several training programs that have been designed to support you, no matter where you are in your journey. If you are at the very beginning of your journey and want to acquire your first building, I advise you to follow my 100% online program The Secrets of Real Estate , which explains all the steps to take to acquire your first profitable building. . If you want to become a millionaire in 10 years (or less), now is the time to start!
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