BY: JAY BRIJPAUL
Buying residential real estate for profit is more of an art. Here is a guide to building wealth in real estate. The following has been tested over time and is guaranteed to work.
The Lever Principle:
A leaver is an instrument that is used to lift heavy loads with the least amount of effort. The longer the leaver, the greater the lifting power. Similarly, you can own a large investment with little money. Your assets represent your lever; the more assets you have, the longer your real estate leaver. Let’s assume that you purchase a property for $100,000 and you invested 10% of your own money. Your initial investment is, therefore, $10,000. If the property increases by 10% in one year, your gain is $10,000. You used a $10,000 lever to control a $100,000 load. In this example, your initial investment doubles! You invest $10,000 and make $10,000.
Imagine a pool of water. If you throw a pebble in the center, the first ripple is the highest and subsequent ripples become smaller until they smooth off toward the end. Let’s look at a city the same way. The circle at the center represents the downtown core and the circle toward the end represents the suburbs. Like the rippling effect, there is more activity in the downtown core because of jobs and transportation. For this reason, homes downtown are more expensive than ones in the suburbs. In a good market, homes in the center appreciate faster and in a recession, homes in the outer circle depreciate faster. Concentric circle principle also applies to the smaller area where the economic hub repents the center.
Progression and Regression
The principle of progression states that in an upscale neighbourhood, the smallest home on the block will increase substantially in value because of the surrounding area. The principle of regression is when the value of the biggest home on the block decreases because of the smaller homes. Buying a home is like a three-level cake. The base is the most valuable part of the cake, it’s the location, then the size and lastly the upgrades. We can always upgrade a larger home but we cannot always expand a smaller home.
Imagine two homes, side by side, each with a well. The first owner spent $20,000 to install the well but the next-door neighbour had to dig deeper and his well cost him $30,000. Their costs are different but the value of the homes is the same- both taps have water. Value is a function of what you get out of a property and not what you put into it. An owner can easily spend thousands of dollars to modernize and if the size did not change, then the function did not change and the value will not change. Most owners upgrade a home because of enjoyment and not because of resale value.
The Water Falls
Think of real estate as a waterfall. When prices are high in one area, the overflow will go to the next area that is lower in price. For example, prices in Mississauga are higher than Brampton and the spillover effect will happen. It is best to invest in good residential homes in the next city where the prices are cheaper. There is more room for growth.
Most people do not plan to fail but they simply fail to plan. When you are buying a property, follow the guide and watch your investment blossom.