This is part 2 of my short series on “What’s the ROI?”.  The series is written in 4 parts, Analyzing Cashflow, Principal Reduction, Appreciation, and finally the ROI Calculation. If you have not already read part 1, I suggest doing so.

Principal Reduction is one of the most commonly overlooked areas of profit, though arguably it is just as important as cashflow or appreciation.  Principal Reduction comes from the portion of your mortgage payments that is not eaten up by interest.  For the first few years this will only make up a small portion of your payments.  As you pay down the mortgage, the principal of the mortgage shrinks.  What is left is called Equity.  This is something that adds to your overall net worth, and should be used in any calculations of the same (including loan applications and such).

The biggest difference between the equity you gain from Principal Reduction, and Cashflow, is that equity is a lot more difficult to either spend or leverage.  Most usually only benefit from their equity when selling a property, and using it to ‘trade up’.  You’ve probably done this yourself, when you moved into a bigger house.  There are some ways that one can leverage this equity without selling, though we will leave those for another time.  Read more... (420 words, 1 image, estimated 1:41 mins reading time)

If you’re interested in the Return on Investment on a rental property in Canada, you’re not alone.  Many people are interested in the ’secret’ to analyzing a proforma, or a properties income statement.  Knowing how to do this effectively will probably be a key factor in your success or failure in the Real Estate market.  In my ‘What’s the ROI’ mini-series I will teach you the basics of making accurate, informed buying decisions.  Decisions that will be easily accepted when the bank does their own analysis on your viability when you apply for a mortgage (be it commercial or residential).  At the core of this analysis are the 3 pillars of income in the Real Estate rental investment market;  The series will be written in 4 parts, Analyzing Cashflow, Principal Reduction, Appreciation, and finally the ROI Calculation.

Analyzing Cashflow

I consider cashflow the most important pillar of income.  Many will argue with me on this point, indicating that most money is made in the Appreciation area.  While this may be true – it’s actually extremely hard for you to control, and predict.  Consider the markets in the US.  For decades people have been investing with the assumption that property values always increase, and never loses value.  Huge amounts of money were being made on this, lots of areas were averaging 10%+ a year. It was insane to expect that to go on forever.  Those who bought at the top, who were left holding the bag, paid the price for all that unfettered growth.  Read more... (890 words, 3 images, estimated 3:34 mins reading time)

A lot of people have asked me the question: “How do I know when I’ve found a good deal?”

Usually they aren’t 100% sure they trust their Real Estate agent, or they aren’t using one.  In either situation, probably the best advice for most people would be to either get an agent, or a new agent.  That’s not who I am talking to today.  Today I’m speaking to the people who are genuinely interested in being more self reliant, and expanding their context.

The first rule: Information is Power.

I don’t think I have to back that up with any empirical evidence, no one will argue that point.  The real question is, what information?  And how do I gather it?  These are the questions that need to be answered.  In order to make good deals happen, you need to be confident in your position.  You need to know, better than your opposition what a particular property is worth to the market, the seller, and even the agents involved.

What information is needed?  Read more... (656 words, 1 image, estimated 2:37 mins reading time)