How an investment formula worked

In the down market of real estate, all the articles out there are about how you can get caught investing in real estate. Thinking back on what we did; we used a formula that had worked for us. Of course, you can no longer find any properties that fit this formula any more in Montreal, but maybe in some other cities in North America.

We were only looking at rental market. Our goal was to make 5 – 10% a year from the down payment of a mortgage and let the rent taking care of mortgage and other expenses. Therefore, even if the property did not appreciate over time (which is very unlikely, property will appreciate over a span of 25 years, at least to the amount to offset inflation), one still makes money owning it.

Between 1998 to 2002, you could find quite a few triplexes (3 x 3 bedroom apartments) in the not so hot neighborhood in Montreal for about $160,000 (this number is picked just for easy calculation). 25% down payment comes to $40,000. Monthly payment of a mortgage at 6.5% for $120,000 for 25 years is $804 (yearly at $9,648). Cost of property tax, insurance, maintenance (minimum amount) is about $6,000 yearly. Let’s say rent is about $600 per month at the time of purchase (now is more or less between $850 and $1,200), which gives you $21,600 a year rental income. All said and done, you can make 15% for your $40,000 down payment with this property.

$5,952 = $21,600 (rent) – $9648 (mortgage) - $6,000 (expenses)

Now if you worked very hard and spent very little and saved an additional $105,783 (which is the balance of what you owe after 5 years) when mortgage was due in 5 years and you paid off this property 100%. Rent by then had increased to $800 a month and you moved into one of the apartment. You would then be able to live rent free with an income of $13,200 ($800x2x12 - $6,000) yearly. If you live in a city like Montreal without a car, you embrace simple life style, and you do not have to pay rent, surely $13,200 is enough to get you essentials to live on.

If you pay rent to yourself, with an investment of $160,000, you are making 14% a year (14% = ($800*3*12-$6000)/$160,000).

All you had to do was 10 years of hard working and saving. In my own case, I did 7 years of working and saving.

Of course, if you sold your property between 2006 and 2007, you would have made $190,000 before tax and expenses, as by then triplexes like that sold for about $350,000.

People can call this speculative. It just happened that we and some of our friends have lived through this period and experienced the benefit of it. So if you pay attention, you can always find mis-priced things. It may not be in properties, it could be stocks. I personally believe there are a quite a few mis-priced stocks around in today’s market. I have yet to find a way to screen out all the noises and find value.