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Buy and Hold Real Estate Investing

By |2018-08-17T14:47:23+00:00March 27th, 2018|Categories: Canadian Real Estate, Real Estate Investing|Tags: , |4 Comments

Video Transcript: Hi guys, Stefan Aarnio here. Now, we’re going to handle today real estate investing buy and hold. Now, I’m gonna actually draw over here, if you want to be rich, if you want to be wealthy, you’ve got to have three things. You need to have cash. That makes sense, money in the bank. You’ve got to have high yield investments. And the last thing you’ve got to have is some inventory. Now, this is stuff you sell. What I see all the time with people trying to get rich is they go right into this. They try to go into high yield investments, but they don’t have any cash, or they don’t have any inventory. And the old Jewish wisdom, as I spoke about in some other videos, the old Jewish wisdom is to have a third of your net worth in cash, a third in investing, and a third in high yield investments. I think this is actually really smart, really brilliant.

In my life, I’ve had too much equity in investments, and not enough cash, not enough inventory. I’ve had times where I’ve had too much inventory, not enough equity, not enough cash. I’ve had times where I’ve had just too much cash and none of the other ones. So, the best thing to do is have a blend so that you can weather the storm, or whatever happens. Now here’s the thing, cash, you know this is your income. This is a nice thing. You always want this going up. Income is good when it goes up. High yield investments, this is where you get your growth and your wealth over time, and wealth is important. Wealth does not equal cash. Cash is nice. It buys you time, but wealth is where you can stop working and just go live on the beach. That can be cool if you want to do that. I get bored of the beach. That’s why I do what I do.

Now over here, inventory, this is where you get really rich. Okay. I would even say ultra rich. This is your business. You’ve got to have all three of these opportunities happen. Coming over to buy and hold real estate, this is your high yield investment. So let’s say we have a property, and I’m just using easy numbers. Let’s say we have a property here. We have a house. Here’s our house. It’s worth, let’s say 100 grand, okay. Now we go, we buy this house $20,000 down. That’s our money that we use to buy this house. The bank gives us 80 grand as a mortgage, and we are gonna make money on this house over time. I’ve got year zero, year 25. This is how property works, buy and hold real estate. I’m gonna show you how people get rich with buy and hold real estate.

Equity on day one, here’s your six profits centers. I’ll just write here, “Six profit centers.” They are equity on day one, which is money in the buy. Appreciation, the property appreciates over time. Depreciation, which is your tax advantages. Then over here, you’ve got cash flow, which everybody wants. This is your passive income. Then we’ve got mortgage pay down. This is probably my favorite one. This is why I buy real estate actually out of everything. I want the mortgage pay down. And number six is leverage, which is you put in one dollar and the bank’s gonna give you at least four. Sometimes you can get one in 10 leverage. That’s nice leverage, too.

Check this out. We go and we buy a house here. This is our little house. 20 grand down, $80,000 mortgage. Did we get any equity on day one? No, let’s say we didn’t. Appreciation, it’s gonna appreciate. Let’s say it appreciates 3% a year, which is pretty conservative in most markets. Let’s say we’ve got some depreciation. We got our tax advantages, a little bit of cash flow. Now cash flow over time, usually with properties, guys, turns out to be, with all the problems in it, let’s just say it nets out to nothing over time. The money we made, we spent it maintaining this building because usually over 25 years, this building itself is a piece of junk. Let’s say we put all the cash flow back into the building to maintain it, to keep it from being a piece of junk. Mortgage pay down, this is the beauty of this whole game, and leverage, which is 20 grand down gets us 80 grand to invest.

Now watch this. If we hold this property for let’s say 25 years, let’s say it’s worth 100 grand. Now check out my numbers here. Worth 100 grand on day one, times .03 appreciation. One year after you own it, it’s worth 103. Two year, three years, four years, five years, six years, seven years, eight years, nine, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25. 25 years later, it’s worth 209,377. To draw that here on our graph, twice as valuable. 209,377. You’ve got to wait 25 years. Now our debt, our mortgage used to be, over here, $80,000 of debt. We used to have debt, but now we have no debt. The debt is paid off. Mortgage pay down. This paid off our debt. It’s now zero.

So what can we do? This is where people get really rich with real estate. This is how the rich get richer. I’m gonna write that here, “The rich get richer.” The rich get richer because now that they got this property paid off, they’re gonna go to the bank and borrow 80% of 200 grand. Now let’s just say that’s 160,000 for easy money. They borrow 160,000 against a 200,000 asset. This money comes out to them tax free. You might say, “Well why is it tax free? They’re evading taxes. That’s not right. The rich should pay their fair share.” You can say all that you want, but this is a loan ladies and gentlemen. It’s not earnings. It’s a loan. So they’re using accounting to get this money tax free.

Now imagine you take this money tax free, this $160,000, you take it back here and you reinvest in a new building. Now let’s say we take this 160 grand, we got a new bigger building. Here it is. And we put our 160 grand down, okay. Now let’s say we’re using 20% down and we’re using 80% debt. So, this is now gonna be a $640,000 building. The building’s now worth … This is the new building. This is building two that you’re buying for 25 years. Your 160 grand down you borrowed from building one. That’s your still cash flowing over here. You now go buy building number two, which is worth 640 grand. And then in 25 years this is paid off. You take your 640 and you go invest in something that’s like two million bucks.

So, in 50 years you put 20 grand down today. This is your starter investment, that 20 grand. Excuse my dropping my lid here. That 20 grand that you invest at the beginning, this little 20 grand, over 50 years turns into a $200,000 asset. This is 25 years, which gets reinvested into, now at the end of 50 years let’s say we don’t do anything. At the end of year 50, this is a $640,000 building paid off. This building now is paid off again, and it’s appreciated as well. Somebody with a small amount of money invested today, held over the longterm, this is real estate investing buy and hold. This is how very, very rich people get very, very more rich. You get more and more rich by doing this over and over again, and it only takes a small amount of money invested today to turn into a huge amount of money over time.

I’m Stefan Aarnio. That’s real estate investing buy and hold. Respect the grind. Like, share, comment, subscribe to my channel. I’ll see you on the next video.

4 Comments

  1. Norm Maes March 27, 2018 at 8:19 pm

    Stefan your getting warm. You got some of the nuts and bolts of the process, however there is more.

    The problem with your model is the time factor. I felt myself aging as you were speaking, lol. If I started this process at age 30 I would be 55 before I could take advantage of the first stage to get as you say “richer”.

    Hmm, I wonder, the rich getting richer must employ a time adjusted model.

    Anyway keep working at it, it’s a bit of a grind but with respect to that I know you will figure it out. Keep sharing your insights I’m rootin’ for ya.

    Norm M

  2. Rick Maher March 28, 2018 at 2:16 pm

    Read an interesting article by Grant Cardone where he suggested Millenials should take out a mortgage to buy a residence, then rent it out and go live somewhere else (and pay rent themselves). Still trying to get my head around the various implications of a strategy like that…

  3. Steve March 29, 2018 at 7:54 am

    Actually Stefan is completely right, and I have never met the man, however I have bought his books ! I am living proof that this is possible. What Stefan is showing you is a template. I have taken this exact model and on my own have bought a property approx. every 2 years over 25 years. Its usually referred to as stacking houses. The only thing that I may add is that I generally only buy at a discount usually 20-30 % which I believe Stefan does as well. These deals are found usually through private deals. Yes you do have to work for it to find them but they are available if you are willing to put the time in to find them. I have found a few through bank repos or family estate sales or just generally telling people I will buy their house when they are ready to sell.

    Yes it is a Grind. Yes it is a long haul. Yes it is work. Yes you don’t make any money at the beginning. Yes you are sacrificing personal time to work on your properties.

    Yes after 25 years the payoff is amazing cash flow and huge wealth.

    Good luck to all

    Steve

  4. Lindsay March 30, 2018 at 4:21 pm

    Stefan, fantastic article. I loved it. Time value in real estate is true wealth.
    Norm, sorry for you not getting this. Simple example. What are you comparing this too? Almost no money is invested and no work deployed, just time and mindset.

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