At the Castle Quest Investment Real Estate brokerage we work principally with investors in their quest to buy and sell income producing properties in Hamilton & across the Niagara Region. Our focus on residential and commercial income property has led to extensive experience & expertise in negotiating the purchase and sale of apartment buildings, student rental housing, mixed-use income properties & multi-unit commercial properties (including office buildings, retail plazas & industrial buildings).
To learn more, click on the links above or at the left margin.
Hamilton -- Income Property Investing:
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Real Estate Investing Creates Wealth
According to many studies, investing in income producing real estate (such as apartment buildings, multi-unit commercial & mixed-use buildings) has produced more millionaires worldwide than any other type of investing. Although this is widely known and acknowledged... it is suprising that less than two percent (2%) of adults in North America own income property.
For the majority of us, purchasing a home is the single largest investment we will ever make. While providing a safe and secure place to live and raise our families, our homes also represent the lion’s share of our net worth upon retirement, thanks to property value appreciation over time. For this same reason it makes sense to add income real estate to your investments. Stocks and bonds, while possessing some advantages, are highly inflation-sensitive and depend on principal appreciation and/or low dividend/interest rates to generate gains. Real estate provides a more multi-faceted source of returns and adds a robust wealth-generating dimension to your portfolio. In the long term, real estate adds diversity and equity growth to your portfolio while providing financial security and a safe hedge against inflation. In the short term, real estate can provide an ongoing source of income by generating positive cash flow.
Real estate investing is easier than you might expect.Using proprietary research and expert experience, we can help you grow your real estate holdings to build more long-term equity growth and security into your financial future. To start moving in that direction,simply click here and fill out the form on our Weekly Updates page.
Multiple Profit Centers
Real estate investing has built-in defenses against fluctuating economic cycles that many other investment vehicles do not. Because of these unique advantages, real estate can generate multiple income streams making it an attractive investment.
Real estate is one of the few investments that keeps pace with -- or even exceeds -- inflation. Over the long term (and sometimes the short term) rental properties will appreciate in value due to inflation and market demand. These gains form a solid basis for building on and preserving wealth by building equity that can be later accessed (through refinancing) to reinvest towards additional real estate investments. What did you pay for your home 20 years ago and what is it worth today?
Tenants Pay For Your Mortgage
For a small down payment, the bank effectively “purchases” your property for you by providing a mortgage that covers the majority of the purchase. Your tenants then “pay off” the mortgage for you via monthly rental payments. With the right property this relationship can extend over the term of the mortgage, eventually resulting in a mortgage-free asset that required minimal outlay on your part. Few investments can claim this unique structure.
Tax Advantages of Real Estate Investments
Real estate offers exceptional tax advantages for investors including those listed below:
With real estate, you can cash out a portion of your profits without incurring taxes if you refinance the property with a new mortgage and then reinvest the proceeds. This way the profits are put to work for you.
Real estate profits are not taxed until you sell your investment property. For example, if you purchase an income property for $200,000 and it appreciates to $250,000, the $50,000 gain is protected from taxes until you sell the property. This allows your investment to grow tax-free year over year, further compounding its worth.
Capital Gains Tax Treatment
Because real estate appreciation profits are treated as capital gains, only 50% of your gains are taxed when you sell an investment property. In contrast, interest earnings from bonds and GICs are taxed on the full amount of the gain.
Tax-Free Cash Flow
For tax purposes, positive cash flow generated in excess of your expenses can be offset by capital cost allowance (CCA). CCA is an accounting term for depreciation due to the building’s physical wear and tear. By employing CCA write-offs, your positive cash flow can remain tax free until you sell your property. The ability to defer taxes on this profit center is a significant advantage for real estate investors.
Financing and operating costs such as mortgage interest, property management fees, property taxes and repair & maintenance can all be claimed as deductions against rental income, further reducing the tax burden.
Other Benefits of Real Estate Investing
Direct Ownership & Control
Real estate investment gives you the security of direct title to a tangible asset, just like your own home. You have complete control of the property and can sell, hold, improve or re-finance the property as needed.
Not only does real estate add diversification to your portfolio mix, but diversification among your real estate assets, by property type & size or by region, further fortifies your wealth-building potential.
In real estate, time is not only money but also freedom. Real estate investments provide their best results over time and the wealth they create frees you up for the things that are truly important to you.
Cash Flow For A Lifetime
The difference between rental income and property expenses represents your cash flow. Over the life of your mortgage, as rental income is continually upwardly adjusted for inflation, the spread between the revenue and expenses widens, resulting in higher and higher cash flow over time. Once the mortgage is paid off, you are left with a clear title to a property that will continue to generate income for you.
Increasing Profits Through Leverage
Leverage greatly augments the income-earning potential of your available finances. For example, instead of buying one property for $100,000, you can leverage that same $100,000 by using it to finance down payments on three properties (or one much larger property worth $400,000 or $500,000). Because appreciation is measured by the full value of the properties, and not by how much or little you’ve actually put down on them, leverage multiplies your returns substantially. Further, as the mortgage is amortized – paid down – your equity increases, creating more funds to invest in other properties (through re-financing over time), which in turn increases your leverage and your returns.
Five Ways To Build Equity & Wealth Through Residential Real Estate Investing
There are at least five ways to build equity & wealth through real estate investing in the Niagara Region:
1) Inception Equity
Buying a property somewhat below market value. Note: this is possible for only about 10% to 15% of purchases currently (ask for details).
2) Sweat Equity
Doing some work to improve your investment property... to increase value.
3) Positive Cashflow
Often referred to as a cash-on-cash return. Positive cashflow can often account for a 5% to 15% rate of return (ROI) on your down payment money, while property appreciation (see below) typically will account for an additional 15% to 20% ROI, and principal recapture (see below) will account for an additional 5% to 15% ROI (for a typical ROI of 25% to 50% on your down payment money).
4) Principal Recapture (Mortgage Paydown)
This is the equity that you build each year simply by having the rental income pay down the principal amount owing on your mortgage for your investment property. If your purchase price is $240,000 and you have a standard $200,000 mortgage at 3.5% interest with a 25 year amortization schedule (for example), your principal recapture in the first year will be $5,113.92 which results in a 12.78% rate of return on your $40,000 down payment money (but if you include land transfer taxes and typical closing costs your true rate of return through principal recapture would be about 11.5% on your total upfront investment of about $44,500)... still a very healthy ROI.
5) Property Appreciation
The typical natural appreciation rate in Hamilton & the Niagara Region for the past 20 years, according to our observations, is approximately 4% appreciation per year (on average). What this means to you is that when you buy an investment property for $240,000 (for example) with a total upfront investment of $44,500 (including your 20% down payment plus land transfer tax and closing costs), if the property appreciates by 4% in the first year (brining the value up to $249,600)... your return through the increased value of $9,600 on your upfront investment of $44,500 equals a 21.5% rate of return from this one equity building source alone (much better than most mutual fund annual returns!!!).
There are several factors leading to the natural appreciation rate in our local area (including general inflation, supply exceeding demand, etc.), but much of your appreciation rate on your own building can be controlled by you through the following:
1) Raising your rents for existing tenants every 12 months... The annual rent increase allowed in Ontario in 2012 was 3.1% and the increase allowed for 2013 is 2.5% for existing tenants. For example, if your annual rental income on your $240,000 investment property from the example above is $31,200 (assuming it is a 4-plex with 4 apartments each renting for $650 per month), and you raise your rents by 2.5% through an annual rent increase to your tenants, your rental income will increase by $780 per year which translates into an increase in the value of your building of $9,750 (at an 8% cap. rate). Combined with the extra $780 in positive cashflow, you will be about $10,530 better off simply by giving a small annual rent increase to your tenants in this simple example!
2) Making improvements to a vacant unit and increasing the rentto a higher current market rent for your new incoming tenant. Quite often, by investing on average about $1,500 in new paint, light fixtures, and cosmetic improvements to a vacant unit, we can increase the rent for that apartment unit by about $50 to $70 per month which translates into an extra $600 to $840 per year which further translates into an increase in value to the building of $7,500 to $10,500 (assuming a very conservative 8% capitalization rate). Whenever we can invest $1,500 in improvements in order to increase our equity by $7,500 to $10,500 we are very happy investors! Also, making improvements to the exterior landscaping and the common areas of your rental property will also typically allow you to increase the market rent to new incoming tenants by an amount that also makes such improvements much more than worthwhile.
3) Reducing the operating expenses at your investment propertycan also dramatically increase the value of your property and your equity in it. For example, if after purchasing your 4-plex (to continue the above example), you invest $500 to upgrade the shower heads and faucet aerators and toilet tank parts (to save water); and you install compact fluorescent light bulbs and light fixtures with time activators or motion sensors in common areas (to save on hydro costs); and, you install new caulking and weather-stripping around entrance doors and windows and install programmable thermostats (to save on heating costs)... you may be able to save a total of about $800 per year (or more) on your utility costs (including hydro, gas and water). This small $500 investment will result in increased equity (and value) of about $10,000 (again, using a very conservative capitalisation rate of 8% on the $800 of new net income resulting from your decreased expenses). We refer to these types of improvements as "forced appreciation". In this way, we can dramatically and quickly increase our equity simply by finding efficiencies in the operating costs of our properties.
With the tax advantages offered to real estate investors in Canada combined with the multi-faceted source of returns and multiple ways to build equity through income properties, and other benefits of real estate investing described above, it is easy to see why more and more people are turning away from investing in stocks, bonds, GICs, mutual funds and RRSPs, and instead are turning toward more stable & much more advantageous real estate investments in the Niagara Region to fulfill their retirement plans, to build wealth, and to create the lifestyle they desire.