The Math Behind Real Estate: How Doing Nothing Costs You Big (Part 2)
Tuesday, January 14, 2025
This is a true story!
Today I’ll break down the math for the properties in my Canadian portfolio.
For those who haven’t yet read my earlier articles, I highly recommend checking them out:
The Price of Inaction: Here's What You’re Losing by Avoiding Real Estate Investment
The Math Behind Real Estate: How Doing Nothing Costs You Big (Part 1)
Reading those articles will provide you with a clearer understanding of the points I’m going to discuss in this article.
As I mentioned before, I started investing in real estate in 2014. In March of that year, I purchased my first investment property— a duplex in Atlanta, Georgia. I was so excited with the purchase that I soon began planning to buy more properties in Atlanta. However, as always, the usual obstacle surfaced— the lack of money. I needed to either earn more, borrow more, or find a money partner to bring my ambitious plans to life and achieve financial freedom.
To address this, I actively promoted and organized seminars about real estate investment. It wasn't long before people started to come to me for guidance. However, many of them wanted to invest in their own 'backyard' (a common instinct for new investors), focusing more on location than on the data and metrics that truly matter: population growth markets, economic fundamentals, landlord-friendly communities, price-to-income ratio, price-to-rent ratio, gross rental yield, capitalization rate, ROI, and the king of all metrics—cash flow.
This made me consider the Canadian market, as several people were willing to be money partners with me. They would contribute the funds, and I would contribute my expertise— a fair deal.
Finding the Right Strategy in Canada
Finding the Right Strategy in Canada
I began researching the Greater Toronto Area (GTA) market, seeking an area with high rental demand, but, most importantly, I was focused on the numbers. My U.S. duplex had a gross rental yield of 48%, and I struggled to find anything comparable in Canada. But finally, I found a strategy that worked: student rental properties in Hamilton, ON, near a college, where the numbers made sense.
We decided to purchase two properties and convert them into student rentals, totaling 18 rental units. The gross rental yield we projected was an impressive 70%—even higher than in the U.S.! However, the calculation method was different.
Instead of calculating the yield based only on the property purchase price, we factored in the total investment, which included the down payment, closing costs, and renovation expenses. I used this method to compare yields because, for the U.S. property, the total investment was simply the purchase price, as the property was bought without a mortgage.
Breaking Down the Numbers
Breaking Down the Numbers
We purchased two houses near each other for $280,000 and $350,000, closing the deals in December 2014 and January 2015, just two months apart. We arranged mortgages with 20% down and converted the houses into student rentals by adding rooms and washrooms. In total, we invested $151,000, including renovation costs, making it a “no money down project” for me— my money partners provided the funds.
This is the house that we bought for $280,000
$280K house
$350K house
Let’s take the larger house with 10 rooms ($350K house) to walk through the numbers:
- Purchase price: $350,000
- Investment: $83,000 (including the down payment, closing costs, and renovation expenses)
- Gross rental income: $4,925 per month, or $59,100 annually (8 rooms at $500 each, 1 room at $475, and 1 room at $450)
- Gross Rental Yield: $59,100 / $83,000 x 100 = 71.2%. This is calculated as a percentage of the total investment.
- Gross Rental Yield Traditional: $59,100 / $350,000 x 100 = 16.89%. This represents the rental yield as a percentage of the property's purchase price. Traditionally, a good gross rental yield falls between 5% and 8%. In our case, the yield of 16.89% was more than double that range.
- Cash on Cash Return: $24,000 / $83,000 x 100 = 28.9% (where $24,000 represents the Annual Pre-tax Cash Flow). Generally, experts consider a cash on cash return between 8-12% to be good. In our case, the cash on cash return of 28.9% is more than double that range.
The Cash on Cash Return metric measures the annual return on your out-of-pocket investment and is widely used to evaluate rental property profitability.
In our case, the property was generating approximately $2,000 in monthly cash flow (Annual Pre-tax Cash Flow: $24,000) after covering all expenses ($4,925 minus operating costs), and we couldn’t have been more pleased with the results!
$2,000 in monthly cash flow!
That’s from just one property, guys! And this is purely rental income—it didn't even factor in property appreciation or mortgage principal paydown by tenants.
What Happened Next
What Happened Next
Four years later, in 2018, my money partners decided to cash out, so we sold both properties— one for $480,000 and the other for $648,000. For reference, you can view the images above, along with the MLS screenshot of one of the properties below.
Now it gets really interesting:
- Sale Price: $480,000 for the first property, $648,000 for the second property. Total: $1,128,000.
- Total Gain: $651,600 (including capital gains and rental income) over four years.
- Initial Investment: $151,000
- Return on Investment (ROI): 431.60% over 4 years.
- Compound Annual Growth Rate: 51.83%
Wow, we could hardly believe it when we saw the results – a mind-blowing 431.85% return on investment! We started with $151,000, and just four years later, we were looking at a remarkable pile of $802,600. Every single penny of our initial investment came back to us, and we walked away with an incredible $651,600 in profit (before taxes).
The journey has been nothing short of extraordinary!
Note: The actual numbers after the sale were different, as monthly cash flow was distributed among joint venture partners during the four years of ownership and we also allocated some funds for cosmetic renovations before the sale.
What If We Hadn’t Sold? Or The Real Cost of Selling Too Soon
What If We Hadn’t Sold? Or The Real Cost of Selling Too Soon
Let me demonstrate the power of long-term thinking. From my perspective, selling those properties was a mistake. What if we had kept them until January 2025?
Let’s consider a critical lesson from this story. As of January 2025, the market value of those properties has almost tripled, reaching $750,000 and $1,000,000, respectively.
If we had sold today:
- Total investment: Still $151,000.
- Total Gain: $1,430,000 over 10 years.
- ROI: 946%
Had we kept those properties, the return would have been astronomical. We would be $1.43 million wealthier today (before taxes).
That’s the price of skepticism, inaction, and short-term thinking.
The Skeptic's Dilemma
The Skeptic's Dilemma
Such extraordinary returns often raise eyebrows, and many people find it hard to believe. When they hear these numbers, they question, “If it’s this good, why isn’t everyone doing it?”
And believe me, I hear this question every single time I talk about real estate investment.
It’s that mix of disbelief and curiosity that tells me just how transformative this opportunity truly is!
So, here’s the paradox: Most people don’t believe in the potential of real estate investing precisely because it works so well! Instead of learning and trying, they keep asking “why” and “how come,” and never taking action.
The truth is, very few people actually believe in these kinds of returns. This explains why so many remain skeptical, overlooking real estate investing and often taking advice from those who have never invested themselves but are full of cautionary tales.
As Earl Nightingale famously said, “Whatever the majority of people are doing, under any given circumstances, if you do the exact opposite, you will probably never make another mistake as long as you live.” This is the key difference between those who build wealth and those who stay stuck.
Conclusion
Conclusion
This, dear readers, is the true cost of inaction, skepticism, and short-term thinking. If you’re skeptical about real estate, it may be time to rethink your stance.
Stay with me, because in my next article, we’ll explore: Turning $196,000 into $2,000,000 in 10 Years—Reality or Fantasy?
In the meantime, begin your journey today by exploring investment opportunities with our partner, SIH.
If you're interested in owning a vacation home in beautiful Florida, check out co-ownership options with our partner Pacaso. You can enjoy your piece of paradise without breaking the bank, the high carrying costs, or management hassles.
Read my book, From Dream to Reality: Your Path to Affordable Luxury Living in Florida for Canadians. This guide could be your key to unlocking your Florida paradise—whether you're in Canada or the U.S. It's packed with expert tips and strategies to help make your second-home dreams a reality, and it's available to you for free!
Claim your complimentary copy now and receive a $200 Hotel Savings Card.
Unlock exclusive bonuses at FloridianHome.ca!
Learn How
Co-Ownership Can Forever Change The Way You Vacation
Learn How
Co-Ownership Can Forever Change The Way You Vacation
Hi, I'm Eugene
Founder of FloridianHome.ca
Hi, I'm Eugene
Founder of FloridianHome.ca
My partners and I have come up with smart strategies that can enhance your second home ownership experience and open up possibilities you may not have considered before.
If you're curious to learn more, grab my Book, which includes
FREE bonuses and a $200 Hotel Savings Gift Card. Don't miss out!
All Rights Reserved 2024 | Terms & Conditions | 7131 Bathurst Street, Unit 306, Thornhill, ON L4J 7Z1 | FloridianHome.ca