How to Turn $15,000 Into $150,000 in Today's Real Estate Market

Not your average, why you should buy now,because I'm in sales post.  A real world example of buying real estate for retirement wealth.

For example, we shall use a first time home buyer that buys a home for $300,000.  Are there some properties in that price range?  You bet there are.

At 5% down, you will need $15,000 for a minimum down payment.  Chances are the mortgage rate you can get is 3%.  Possibly even lower.  That's why you should talk to a Mortgage Specialist like this guy:  http://scottbourke.ca/ 

The strategy I am suggesting is buy now, and don't sell for at least 10 years.  With that in mind, if I were to take the same amount  ($15,000) and invest in the stock market I would need  an annual return of 25 to 26% every year for the next 10 years to grow that $15,000 to $150,000.  Do you know a stock or a fund that can do that?.  (see chart below).

Lump Sum Investment $15,000  
     
Growth rate:   26.00%
  $15,000  
Year 1 $18,900  
Year 2 $23,814  
Year 3 $30,006  
year 4 $37,807  
Year 5 $47,637  
Year 6 $60,023  
Year 7 $75,628  
Year 8 $95,292  
Year 9 $120,068  
Year 10 $151,285  

How about real estate?

I take my down payment, and buy a $300,000 house.  My principal mortgage will be $285,000.  (**not including CMHC Fees**). According to our friendly mortgage guy http://scottbourke.ca/  our options for rates may look like this:

Note the above estimate includes CMHC Fees.  

Whoa... Hold it, you said $15,000.  A mortgage has monthly fees!!  Well do you have to live somewhere?  If you're not paying a mortgage then I would presume you are paying rent. Stick with me on the monthly payment...

Now, buying a house for $300,000, getting a $285,000 Mortgage + CMHC fees= mortgage amount of $295,000 +/- as noted above.  If you make ALL the monthly payments your principal will be paid down so that balance owing the bank is $209,211.

$300,000 - $209,211 = $90,789.  $90,000 of home equity is not to shabby, but we're not at $150,000 yet are we.  Where does the other $60,000 come from?

Well, it may be hard to imaging real estate prices growing in the current short term, but over the long haul would you be comfortable with Cost of Living increases in value of roughly 2% every year?  Slow, modest growth.  I know, you'd like more, but 2% is realistic in my humble opinion.  Back to our Purchase...

Our $300,000 house, it may go up, it may go down, but over the long haul (10 years) let's pretend we agree that your house will increase by 2% every year.  What would that look like, and what would be the value when you plan on selling?

Lump Sum Investment $300,000  
     
Growth rate:   2.00%
  $300,000  
Year 1 $306,000  
Year 2 $312,120  
Year 3 $318,362  
year 4 $324,730  
Year 5 $331,224  
Year 6 $337,849  
Year 7 $344,606  
Year 8 $351,498  
Year 9 $358,528  
Year 10 $365,698  

Looks like we might expect $65,000 in capital growth, combined with Principle decline a.k.a Equity Growth of $90,000.  By living in the same house, for 10 years, you've turned that $15,000 into..... $155,000.

That is the power of leverage, and why you should buy real estate NOW.  

"Yeah, but what if I invested that same monthly payment into my mutual fund?"  

Sure, perhaps you're already mortgage free, or live in mom & dad's basement... That same monthly $1528 every month, added to our $15,000 lump sump initial investment?  What would that look like?  Well it might just look like this:

Lump Sum Investment $15,000   Annual Payment
  $1,528 X12 months $18,336
Growth rate:   10.00%  
  $15,000 total:  
Year 1 $18,336 $36,670  
Year 2 $36,670 $40,339  
Year 3 $40,339 $60,506  
year 4 $60,506 $64,543  
Year 5 $64,543 $86,726  
Year 6 $86,726 $91,167  
Year 7 $91,167 $115,569  
Year 8 $115,569 $120,453  
Year 9 $120,453 $147,295  
Year 10 $147,295 $152,668  

Can you get a 10% return every year, year after year in a stock portfolio?  Possibly.  That's what you would need to turn $15,000 into $150,000 while making $18,336 annual payments.  Perhaps buying a home is much easier.

Your Friend in Real Estate,

Patrick

 

 

 

 

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Patrick Galesloot

Patrick Galesloot

Broker/Owner
CENTURY 21 Advantage
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