How to make a million from real estate property? Case Study

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How to make a million from real estate? One million dollars. Here we go again, another clickbait title. Making a million dollars from real estate sounds like a cliche at this point. One million is just a number that resonates with many people, but the number is entirely arbitrary. In this case study, I want to highlight the realistic expectations on achieving this number without taking on massive amounts of risk. This should help you set realistic expectations for your scenario, whatever your goals might be. Your number could be much smaller or way bigger. It also greatly depends on the market you are in and the average real estate prices in your area.

The number is not essential; it is the math and approach that hopefully, you can easily replicate.

A few necessary clarifications:

  1. One million dollars is a number that I picked for ease of illustration.
  2. By one million dollars in real estate, I mean one million dollars of equity. Meaning that if you decide to sell all of your real estate in this hypothetical scenario, you will receive $1,000,000 in pre-tax Cash.
  3. This is just one of many ways that you can achieve these results.
  4. This case study showcases a slow method of achieving these results.

Get rich schemes from many famous real estate gurus are just that, schemes. They make way more money from selling courses than actually investing money. That is why they mostly talk about “mindsets” and other motivational nonsense, so it seems like you are getting value for your money. Not all of them are like that, but as I have mentioned many times before, you should get most of the information for free.*

Step One: Go out and buy a rental property

Step one in our plan is to go out and buy our first rental property. I currently live in Canada so I will be using Canadian market as an example. Prices of real estate obviously depend on location so you have to adjust your numbers accordingly.

What are we looking for?

  1. Duplex or Triplex. Why? I want diversify my rental property income stream. If one unit fails to pay rent, I have others to rely on. This mitigates my chances of earning $0 in a given month and having to pay the mortgage on the property entirely out of my pocket.
  2. Property that is in a decent structural condition but that we can quickly improve.

Specifically, I am looking for:

  1. Bad floors
  2. Poor or old paint job
  3. Kitchen cabinets in lousy condition
  4. Old appliances
  5. Old light fixtures
  6. Landscape with potential for improvement
  7. Property must earn enough rental income to be cashflow positive and earn $200-$300 per unit after all the expenses. Expenses include all typical property expenses, plus maintenance reserves, utilities, taxes, management fees (if any), insurance, and other miscellaneous expenses.

After I know what I am looking for, I go to my favorite listing site and start searching. I also contact local wholesalers to see what deals they might have going on.

Generally I am looking for something like this:

Kitchen in bad condition

Floors that look like this:

Floors in bad condition

Lawns that looks like this:

Lawn in bad condition

Is something like this hard to find? Yes, definitely. The process can take many months especially if you live in a hot market.

Browsing around, I found a few Duplexes that fit my description, far away from the major city but close to the major highway for $500,000. Again, your market could be much more expensive or much cheaper than this. Where I live, houses in poor condition go for $500,000 to $1,000,000+ depending on the driving distance to the city. For this example I am going for the farthest location and the cheapest house.

Cash Needed

For a $500,000 house with 20% down payment, this the breakdown of cash that I will need upfront.

Down Payment: $100,000

Land Transfer Tax: $5,000

Title Insurance: $500

Home Inspection Fee: $500

Lawyer Fees: $1,500

Total Cash Needed Upfront: $107,500

Loan Amount needed from the bank: $400,000

Monthly Expenses

Mortgage Payment: $1,400

Property Tax: $300

Utilities: $300

Property Insurance: $50

Maintenance Reserve: $100

Item Replacement Reserve: $100

Total Monthly Expense: $2,250

Monthly Rent

This is a Duplex so there are two separate units. There are tenants who rent the basement unit for $1,200 and the upstairs unit for $1,600. That brings the revenue from the property to $2,800/month.

I will assume that 5% of the time the property will be empty (Vacancy Rate), which brings my Gross Operating Monthly Income to $2,660

That puts me in a positive cashflow of $2,660 – $2,250 = $410/month

Calculating Capitalization Rate and ROI

Using my trusty Cash on Cash Return Calculator I input this information and see what the ROI comes out to be.

Here is the output:

Real estate property deal Capitalization rate and ROI

Capitalization rate above 3% – Check.

$5,000+/year in positive cashflow – Check.

ROI over 5% – Check.

Renovation

So far, I like the property. Before the closing date, I get all the contractors in order and good to go right away so I can speed up the process and finish in just a few weeks. I will paint the whole house and replace the floors myself, and contractors will do the kitchens & bathrooms. I will paint everything white and install greyish vinyl floors.

Why these colors?

“White upon white is the new style that is emerging,” she stated — both for the kitchen and bathroom — in terms of cabinets and countertops, as well as gray on white.”

(Source: https://nahbnow.com/2019/02/what-home-buyers-want-in-2019/ )

Estimated time: 2-3 weeks.

Estimated cost: $30,000

I have to work very fast and save as much money as possible.

Renovated houses in the same area sell for $560,000 – $580,000. Therefore, spending $30,000 on renovation will improve the house value by $60,000 – $80,000. Assuming the lowest number, that is 12% appreciation in value.

Year One: What do I have?

A year goes by, here is what I have.

Mortgage amortization graph

Loan Amount Remaining: $389,664

Cash flow saved: $5,500

Houses appreciated 3% thanks to the natural price appreciation plus an additional 12% from the renovation.

House value: $576,800

Equity: $576,800 – $389,664 = $187,136

Year two

Loan Amount Remaining: $379,152

Cash flow saved total: $11,000

Houses appreciated another 3%

House value: $594,104

Equity: $594,104 – $379,152 = $214,952

Year Five

Loan Amount Remaining: $346,534

Cash flow saved total: $27,500

Houses appreciated another 3% in year three and four.

House value: $649,193 rounded to $650,000 for easy math

Equity: $650,000 – $346,534 = $303,466

Refinancing and buying another property

After year five, it is time to refinance and invest in another property. For the sake of simplicity, I will assume that interest rates have not moved up over the five years. However, that is a dangerous assumption to make looking at historical interest rates.

U.S 30 Year Mortgage Rate

30 Year Mortgage Rate US

Canada Mortgage Rates

Canada 5 year fixed mortgage lending rate

Prices have appreciated over the five years so now I need to spend more money to buy similar property. $27,500 saved up from excess cashflows but not renovated houses now cost $580,000 in the same area.

The $27,500 plus get another $88,500 from equity position to use as a downpayment for the second property. I spent another $30,000 on renovations and improved the value by 12%.

Year Six

After six years, I have two properties. This is what the numbers look like.

Property #1:

Loan Amount: $423,791 because I added another $88,500 to the mortgage to use as a downpayment for the second property.

House Value: $670,000

Equity: $670,000 – $423,791 = $246,209

Property #2:

Loan Amount: $452,010

House Value: $580,000 * 1.12 (12% renovation appreciation) * 1.03 (3% market appreciation) = $670,000

Equity: $670,000 – $452,010 = $217,990

Combined

Money saved from excess cashflows: $11,000

Year Ten

Property #1:

Loan Amount: $372,632

House Value: $755,000

Equity: $744,000 – $423,791 = $382,368

Property #2:

Loan Amount: $401,980

House Value: $755,000

Equity: $755,000 – $401,980 = $353,020

Combined

Money saved from excess cashflows total: $55,000

Total Equity and Cash = $790,388

Beginning of Year Eleven

It is time to refinance both properties again. I have $55,000 saved up from cashflows and I can take some equity from both properties to use as a downpayment for Property #3.

Not renovated properties similar to the ones I already own cost $680,000. That means I will need $136,000 for a downpayment. I spend another $30,000 on the renovations and increase the value to $762,000.

What do I have in Total?

Loan Amount for three properties: $372,632 (Property #1) + $401,980 (Property #2) + $81,000 (Equity taken out for downpayment on property #3) + $544,000 = $1,399,612

Property Values combined: $755,000 * 2 + 762,000 = $2,272,000

Total Equity = $872,388

Okay, I am very close. Now that I have three properties the process will speed up quite a bit. In fact, I need one more year of cashflows and appreciation to almost get to $1,000,000.

Year Twelve

Loan Amount Total: $1,365,012

Property Values: 2,340,160

Cash Flow saved: $16,500

Total Equity + Cash = $991,648

What can I do to speed up the process?

So after twelve years of hard work, three house purchases, and three renovations I finally built up enough equity to almost call myself a millionaire. That is a lot of work and a long time. Is there anything I could have done to speed up the process?

Finding Better Deals

Perhaps using local wholesalers and spending more time searching and being extra vigilant could have helped me find deals where I could have bought a house at below market value.

Is this possible? Yes, but it is quite hard to do. The idea is that there are people who need to sell their house quickly and don’t want to deal with showings and review offers, so they sell the house for cheap to the wholesaler. Through these deals, it is possible to find a house that sells for 10-20% below market value.

For my initial purchase of $500,000 if that was the case, I would pay $450,00 for a house and after renovation I would have $110,000 in equity right away.

Buying cheaper properties further away

I could have also bought Triplexes for the same price but further away from the city, potentially yielding better results and higher ROI. The problem with location however, is that if the property is too far away, I need to hire somebody to manage it. That adds the additional management fee to my monthly expense.

Sell instead of refinancing

In order to get the downpayment for the next property, I refinanced and took a portion of the equity out to do that. What I could have done is sell one of the properties, get all of the equity out and use all of it as a downpayment for a much bigger property. That means higher risk, of course.

After first five years I had around $300,000 in equity on the first property. I Suppose I sold it and reinvested the whole $300,000 I could have potentially bought a $1.5MM property. That could be a fourplex or an apartment building.

At that level, however, I will definitely need a management company to help out. I will not be able to do renovations on my own at that scale so renovations costs would also be much higher.

How realistic is this?

Some things like the economy, interest rates and market appreciation are out of our control. I made the assumption that in general real estate grows at a rate of 3% a year. That has been far from the truth in my particular market. The number is much, much higher than that.

Source: TRREB – Home

But it is much better to be more conservative than assume 10% appreciation and rely on that number. Appreciation is a nice added bonus but we should never rely on it as a source of income.

We make money by offering a service (a place to live) and we can take appreciation into our own hands by improving the value proposition through renovation.

Your market will be different. Future will not be like the past so we can’t expect the same. It might take you three years to achieve the same results or it might take you twenty.

The purpose of the case study is to present a realistic roadmap that you can follow. It also serves as a reminder that building wealth takes time and effort. Folks on Youtube and fake real estate gurus love to sell on the dream that you can achieve these goals in record time, and you very well might achieve them in record times given the right market conditions. But I strongly believe it is detrimental to our financial and emotional well-being to expect easy money and quick results. Results take time, work, and patience. Quicker results, just like market appreciation, are a blessing.

Happy Investing!

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