Financial Literacy in Real Estate and Saying Goodbye To Your 9-5 Job

The Holiday season is busy for everyone with holiday shopping, get-togethers for ‘Christmas Cheer’, and touching base with friends and family that haven’t made it into your schedule for the other 11 months of the year. 

Every holiday season, Phil and I visit someone that I call ‘my mentor’ and his family. He used to run his own company and was one of many that had faith in me to help him run that company with him. As time went on, I moved on and he eventually ‘sold’ out of the company. He is a successful business guru and someone that has always offered very sound business and life advice. Heck, he is even the reason why we grew our portfolio as fast as we did, by telling us that we needed to keep our money in the real estate market. 

During our visit, I was telling my mentor that I have been realizing that not everyone operates the same as I do. Which is great, because who needs a bunch of ‘Danielle’s’ in this world?! But what I mean by that, is there are two things that come very clearly to me: financial literacy and numbers. For instance, if someone asks me: “Danielle, I am thinking of buying this $550,000 condo in Vancouver and it is rented for $1,800 per month, do you think it’s cash flow positive?” It’s a very quick and easy “no”. I already know that the purchase price for a condo needs to be about $365,000 for a condo, if the rent is $1,800, in order for it to break even (after all of the carrying costs are factored in, and with your typical 20% down payment for investment properties). 

My astonishment and admittedly, a struggle that I have been facing, is when I tell someone: You can buy a duplex for $550,000, and it cash flows $1,300 per month…and that individual doesn’t sound impressed or ready to jump on board. I think to myself, “Did he just hear what I said? He can invest 20% of the purchase price, and essentially earn around  ⅕ of his monthly take home pay from a job, with passive income from owning an asset”. 

I started wondering to myself if the term ‘cash flow’ was unclear to many.

The cash flow from a property is calculated by taking the rental revenue and then subtracting all of the carrying costs, such as: mortgage, strata (if applicable), insurance, property taxes, and water/sewer.

Now, I mentioned that this person could make about ⅕ of his monthly pay from his job, just by owning this $1,300 cash flow positive investment. How did I get to ⅕? I’ll use real-life numbers to compare and contrast the income from your job, vs. the income from a rental property. If you have a job and earn $80,000 per year, your gross pay is $6,667 per month; after ‘taxes’ it is about $4,900 per month. We think of ‘taxes’ as everything deducted such as CPP, EI, provincial and federal taxes. When you have a rental property, provincial and federal taxes are deducted from the net income, but not CPP and EI, as it is not employment, rather, it is passive income. So, we do not factor in CPP and EI when we run the rental income after tax dollars, as we would when calculating a job. 

This is how my brain works…If you earn $58,800 in a year after taxes with a job, that is the equivalent of you owning 4.7 homes that cash flow $1,300 per month (4.7 homes @ $1,300 per month = $6,100 per month. $6,100 x 12 months of the year = $73,200, less taxes, equals $58,800) That means, you need to own less than 5 homes to replace your full-time job income that was $80,000. The after tax effect is approximately the same.*

Given that it would take less than 5 homes to replace the income of your 9-5 job, why don’t more people get excited about this opportunity?

Is it that it sounds too good to be true, or perhaps that buyers don’t understand how to get the money in order to buy 5 houses?  For the former, we bought 4 homes in the past 3 years, so I definitely practice what I preach and am using this exact same strategy for myself. For the latter, this is where refinancing your home’s equity comes in. 

I tell clients to get into the housing market and just own SOMETHING! Because as long as you’ve been in the market for long enough, you WILL make money. I have other articles that have demonstrated how much the housing market has gone up over a 5 year span. The market goes up and down, but in the long-run it always goes up. This is simple economics. 

My point is that if you’ve been in the real estate market long enough, you will have enough equity in your real estate to refinance it. Which is to take out the equity and then use that equity to purchase something else in addition to what you already own. For this, you need to know great bankers or mortgage brokers! They will be the ones completing the paperwork and helping you with the refinance. Contact me for a list of the best mortgage brokers.

If you have enough equity in your home to refinance to purchase another property, then it definitely makes sense to do it. At that point, you will have two homes (or more) which are building equity over the years, plus, generating positive cash flow.

As a Realtor, I specialize in investment properties and I will help you find a property that CASH FLOWS the most. As soon as you own enough properties, then you can say goodbye to needing to work your usual 9-5 job. 

Thanks for reading and Happy New Year!

*Please consult an Accountant. This is not meant to be legal or financial advice, only for illustrative purposes only. 

Originally posted to LinkedIn