INVESTMENT PROPERTIES

I've never believed in advising or serving clients in the pursuit of something I haven't done myself, and so my wife and I have in recent years purchased, and now manage, our own cash-flowing (yes, even at today's rates!) leveraged investment properties in various markets of northern BC. Soon after my own forays started, I began helping interested clients, with some now owning multiple properties that I have captured for them at this point.

How does it work?

*CAVEAT: there is of course much more to leveraged real estate investing than the below 'back of the napkin' explanations. I feel this is a very 'learnable', digestible and much more approachable way to build wealth than most folks believe, so my aim here is to demystify perhaps, and to encourage. I can suggest a whole library of books or resources for you to self-educate yourself with if you wish, just ask.

In a nutshell (IMO), you are using a bit of your own capital plus leveraged funds to secure a very large and most likely appreciating asset (the property) that contains within it a profitable housing business (the rental or rentals), where the profit, in turn, more than covers the cost of the leveraging (mortgage interest) plus any principal paid back. IE, the rental income minus all the expenses leaves more than enough left over to cover the mortgage payment AND leave you with some positive cash flow each month (cash in your pocket to either spend or re-invest).  

NOTE: THE "INVESTMENT" IS NOT THE PURCHASE PRICE OF THE PROPERTY; THE INVESTMENT IS THE 'CASH UP FRONT', IE DOWNPAYMENT PLUS CLOSING COSTS PLUS ANY IMMEDIATE IMPROVEMENT/REPAIR COSTS. THIS IS THE AMOUNT WHOSE PERFORMANCE IS BEING MEASURED!

Your returns are earned and measured three different ways, two of which are reasonably reliable and forecastable (cash flow, loan repayment), and one of which is somewhat speculative (appreciation).  Here's a further breakdown, based on a reasonable 'real world example' presuming a $350,000 property that earns $2,500/mo in rental income; typically, the investment here would be about $80,000 (20% down plus closing) plus leverage in the form of an 80% mortgage ($280,000, in this example);

1) Principal paydown: a mortgage payment is comprised of both interest and principal. So, if the payment is $1,500/mo (5% on a fixed rate with 30yr amortization against a starting principal of $280,000) and roughly $400 of this is going to principal, this example would result in roughly $4,800 of gain over a year.

2) Positive cash flow: presuming the monthly rental income is greater than the sum of the expenses plus the mortgage payment, you will have money left over. So, if the rental income is $2,500/mo and the expenses are $800/mo (items such as management, 1/12th of taxes, insurance, maintenance) and the mortgage payment is $1,500/mo, than $2,500 - $800 - $1,500 = $200/mo of positive cash flow, or a further approximately $2,400 of gain over a year.

3) Appreciation: this is the much more speculative portion of your return. If the market can reasonably, based on history and future indications, be forecasted to rise at roughly 3.5%/yr and the property was valued at $350,000, you will likely gain over $10,000/yr. IT IS VERY IMPORTANT TO NOTE that this is $10,000 earned, NOT on the property's value, but on your INVESTMENT, which is the downpayment and closing costs. EG, for this property if presuming downpayment was $70,000 (20% of $350,000) and closing costs were $10,000, the 'investment' that you're measuring the performance of is $80,000. Appreciation is the LEAST reliable source of profit... however, in the long run, it quite often ends up having been the most profitable.

So, let's summarize the above reasonable scenario; this opportunity, with an investment of just under $80,000, in a year earns roughly $4,800 in principal paydown, $2,400 in positive cashflow, and $9,000 in appreciation, resulting in approximate overall investment growth of around $16,000 (if NOT selling the property in this particular year we are 'measuring'). In this scenario, the overall rate of return (vis-a-vis stocks) would float around 14-16+% presuming a roughly 5-10yr hold, and your investment would double around the 5-year mark.

The Role of Leverage in Real Estate Investing

Leverage—in other words, using a lender’s money—is the key to making each dollar work harder. Banks use this principle every day: they pay us a small return to “hold” our money, then lend it out or invest it elsewhere for higher gains. They are leveraging our money.

In real estate, leverage refers to borrowing funds (typically through a mortgage) to finance a property purchase. This allows an investor to control a much larger asset with a relatively small initial capital outlay. The returns are then earned on the total property value, not just the investor’s down payment. If the property appreciates, the gains relative to the initial investment can be substantial.

However, leverage amplifies both upside and downside. Just as it can magnify profits, it also heightens risk since the investor must repay the debt with interest regardless of how the market performs.

A Key Perspective: Focus on the Business Inside the Asset

In my opinion, it’s just as important—if not more important—to examine the cash-generating business inside the asset (e.g., rental operations) rather than betting predominantly on speculative appreciation. If the property’s rental income is reliably profitable, the investor is far less exposed to short-term swings in the real estate market.

Conservative vs. Leveraged Approaches

• Conservative (100% Capital, No Debt):Owning a property outright eliminates debt obligations and maximizes cash flow after expenses. This lower-risk approach often produces returns of 6–11% per year in the markets I operate in—steady and secure, though modest in comparison to leveraged returns.

• Leveraged (20% Capital, 80% Debt):By combining 20% investor capital with 80% financing, it’s possible to achieve returns in the 13–20% range (and higher) under the same market conditions. The tradeoff, of course, is increased risk exposure: rising interest rates, or being forced to sell in a downturn, can significantly erode returns.

The Benefits of Leverage

1. Enhanced Returns on EquityConsider two investors:

   • Mr. C (Cash) invests $100 cash into a market appreciating at 5% annually. After one year, he earns $5, a 5% return.

   • Mr. L (Leverage) invests $20 of his own money, borrows $80 at an interest cost of $2, and buys the same $100 property. After one year, he also gains $5 in appreciation. But after interest, his net gain is $3 on $20—yielding a 15% return, triple what Mr. C earned, while still preserving $80 for other investments.

2. Portfolio MultiplicationWith $500,000 in capital:

   • A cash investor might own one $500,000 property.

   • A leveraged investor might own five $500,000 properties (20% down each), holding a $2.5M portfolio and generating income from five separate rental businesses.

3. DiversificationLeverage allows investors to spread capital across multiple properties and markets. This reduces exposure to any single asset or location.

The Risks of Leverage

1. Market Volatility & Value Declines: If property values fall, leveraged investors absorb heavier losses. Returning to Mr. L and Mr. C:

   • If the market drops from $100 to $70 and both must sell:

     • Mr. C loses $30 of his $100.

     • Mr. L loses his $20 equity plus still owes $10 on the loan, along with $2 in interest. This dramatically worsens his position.

   • This is why income stability matters—strong rental returns allow investors to ride out downturns without being forced to sell. Personally, I prefer newer, more appealing properties that tend to remain tenanted even in weaker markets, despite their higher acquisition costs.
   
   

2. Interest Rate Risk: Borrowed money exposes investors to financing costs. Rising rates can reduce profitability, strain cash flow, and make refinancing difficult. Prudent investors manage this by carefully selecting mortgage products—sometimes accepting slightly lower current cash flow in exchange for the security of longer-term, fixed-rate loans.

Conclusion

Leverage is a powerful tool in real estate investing, but it cuts both ways. It enables investors to multiply returns, scale portfolios, and diversify holdings—but it also magnifies risk through debt obligations, market volatility, and interest rate exposure. The key to using leverage effectively lies in balancing these risks and, critically, ensuring that the rental business inside the asset generates dependable income. That business strength is what allows leveraged investors to remain profitable even when markets soften.

If you've read the above sections and are still with me, there are some main metrics and language that, if you're not already familiar with, you'll want to be as you start evaluating opportunities yourself or having a professional (such as yours truly!) present to you...

● Cap Rate: in a nutshell, how much does the property earn relative to the purchase price. Drier version... 

Cap Rate, short for Capitalization Rate, is a common financial metric used in real estate investment to assess the potential return on investment. It is calculated by dividing the Net Operating Income (NOI) of a property by its current market value or purchase price. The resulting percentage represents the expected annual return on the property's investment value.

The formula to calculate Cap Rate is as follows:

Cap Rate = (Net Operating Income / Property Value) x 100

The Net Operating Income is the property's annual income generated from operations (rental income, minus operating expenses like property taxes, insurance, maintenance, and management fees). The property value represents the current market value or purchase price of the property.

Cap Rate serves as a tool to compare different investment opportunities and assess the relative attractiveness of a property. Generally, a higher Cap Rate implies a higher potential return on investment, as a larger portion of the property's value is expected to generate income. However, it's essential to consider other factors like market conditions, property type, location, and potential risks before making investment decisions solely based on Cap Rate.

Cap Rate is commonly used in commercial real estate, but it can also be applied to residential properties or other real estate investment types. It helps investors evaluate the income-generating potential and relative risk of an investment property, aiding in the decision-making process.

● Cash on Cash: in a nutshell, how much does the property earn relative to the cash up front (downpayment+closing+immediate repairs/renos). Drier version...

Cash on Cash (CoC) is a financial metric used in real estate investment to assess the cash flow generated in relation to the amount of cash invested. It measures the return on the actual cash invested, rather than the overall property value.

To calculate CoC, divide the annual pre-tax cash flow by the total cash investment (down payment and any additional expenses):

CoC = (Annual Pre-tax Cash Flow / Total Cash Investment) x 100

The resulting percentage represents the annual return on the invested cash.

CoC is a useful metric as it provides a straightforward way to evaluate the profitability of an investment and compare different properties or investment opportunities. It allows investors to assess the income generated from rental properties or other real estate investments in relation to the cash they have put into the investment. Higher CoC percentages indicate a higher return on the invested cash.

It's important to note that CoC does not consider factors such as property appreciation or tax implications, which are relevant for a comprehensive analysis of investment returns. Therefore, it should be used in conjunction with other metrics and considerations when evaluating real estate investment opportunities.

● IRR or Internal Rate of Return: in a nutshell, if looking for an all-encompassing metric to most directly relate stock market predicted or ongoing performance to investment property predicted or ongoing performance (IE, how should each dollar perform 'day to day'), this is the one. More nebulous than CapRate or CoC, but fully inclusive of all factors. It measures the annualized rate of return an investor can expect to earn on their invested capital (their 'cash up front') by considering NOI, projected appreciation, projected inflation and income appreciation, and more. 

● ROI (Return on Investment): in a nutshell, if you sold in 'x' years, how much more $$ would you have than when you started. Drier version...

ROI, or Return on Investment, is a financial metric used to evaluate the profitability of an investment property relative to the amount of capital invested, at a specific point in time (typically upon sale). In the context of leveraged residential real estate investment, ROI measures the return earned on the total invested capital at time of asset capture (the "cash up front.")

To calculate ROI in leveraged residential real estate investment, the formula typically used is:

ROI = (Net Profit / Total Investment) x 100

The net profit will be measured as sale price plus all income generated from the investment, minus operating expenses, mortgage INTEREST, remaining principal, and any other relevant costs (renos, repairs, etc.) up to the time at which the ROI is being measured (IE, upon sale). The total investment includes the investor's down payment, closing costs, and any other expenses incurred to acquire the property initially.