Episode 6: The Three Silver Bullets of Real Estate Investing

Jon Orr: Welcome to the Canadian Wealth Secrets Podcast with Kyle Pearce, Matt Biggley and Jon Orr. Get ready to be taught as we share our successes and failures encountered during our real life lessons, learning how to build generational wealth from the ground up.

Kyle Pearce: Welcome invested students to another episode of the Canadian Wealth Secrets Podcast.

Jon Orr: Well, gentlemen. Well, gentlemen, welcome back. Welcome back, and welcome back to you, listener, and we're excited that you are back here joining us for our six episode of The Canadian Wealth Secrets Podcast. We're excited to chat with you in this episode about one of our favorite ways of investing, and I think our go-to strategy to build our own wealth. I think we all got started in this strategy last episode.
If you had listened to the last series, actually we had a three-part episode on the Building Your Wealth Blueprint where we outline five strategies to get started in investing and how to kind of capture some more money around your home and how to think about your budgets, moving into how to get started with investing and what investments to look at. Then kind of supercharging some of your investment, thinking about other people's money and different ways to kind of build that up over time.
In this episode though, we are going to talk about our favorite and our go-to strategy, which is about real estate investing. Gentlemen, let's dive in because there are three. This is one of the things that you blew my mind with when we are investing and talking about real estate investing because a lot of other investments, asset classes that we've mentioned on the podcast before, talk about appreciation or growth, but real estate has three ways to blow your investment out or blow your wealth out of the water here. Let's talk about those three ways, guys. Let's get to it.

Kyle Pearce: Awesome, awesome stuff. Yes, Jon, I vividly remember this moment. I was on a vacation and you guys know I don't sit still for very long. The one day that I was sort of sitting on, it was by a pool in Florida and I had this book about real estate and actually it isn't Rich Dad, Poor Dad. It isn't some of the other ones from our book list that you can find over on investedteacher.com/books.
This was just some random book that I sort of picked up at the airport. It just caught my attention. It was about real estate investing. I started reading it and I was blown away by this idea that you could buy property and actually potentially make some money. I remember that as this first moment where I sort of went, "Huh." At the time, this would've been probably just after I started teaching, so probably back in 2007 or so, and I let it go.
I remember thinking about it and thinking, "Man, I need to get deeper into this. I need to look into this." I just never did like the vacation. After that morning at the pool, I put the book down, I remember thinking about it, but then life went on. Then fast forward to about 2010 and I started digging down this rabbit hole again and I read Rich Dad, Poor Dad. This is where I started to change my thinking.
At the time, you know from previous episodes, I was paying down my mortgage more aggressively than say the minimum payments. I was just thinking, "Hey, if I could get this mortgage down to zero, it'd be like this extra mortgage payment going into my bank account every single month." I thought that was pretty awesome at the time. Again, we're not advocating that you blow that money, but over time I started to realize, wait a second, that debt equity in my house, I could take it. I could then get a property, borrow against this property and potentially put money in my pocket.
But I didn't realize that there were actually three different ways. A lot of people look at real estate and they think it's just going to go up in value, and that's how you're going to make your money.

Jon Orr: That's like buy my house or buy a house. All right, I'm going to get that house. Then all of a sudden it's like a stock. I'm just going to wait for it to rise in value and then maybe I can sell it because the market increased and now I can just sell it and take that equity.

Kyle Pearce: Totally. I think that's what a lot of people sort of like, that's what attracts people to real estate and they just think it always goes up, which is not true. There are different dips in the markets and all kinds of things can happen like that. But the bonuses is the other hidden bullets, these silver bullets. Matt, what else? Appreciation is great, this idea. We will talk more about appreciation. We'll maybe talk about what appreciations look like over the past couple of years in a lot of places, including here locally where we are in Windsor, Essex County, but also across many places around the world.
But I would argue that's that cherry on top. That should not be the goal for buying real estate. What is one of the other pieces that we're really looking for when we're searching for a potential investment property?

Matt Biggley: Yeah, I loved your story, Kyle, about remembering when you learn this and when you're this aha because I mean, this is such an epiphany. I'm not a math guy. You guys are number crunchers, hardcore math guys. For me, it was like this was one of those concepts that what took me a second to really understand the power behind the numbers, but the concept was just so incredible, so awesome.
Beyond appreciation, the second big one is mortgage paid out. This is this concept that when you're collecting rent and this rent is going to pay the mortgage off, you of course want to have more rent coming in than it's costing you to have your mortgage, your insurance, and all those other expenses that we'll talk about in other episodes. But just this idea that someone else is paying the mortgage on a property you own, which conceivably means that one day you'll own this property outright and if never actually paid the mortgage yourself.

Jon Orr: That is-

Matt Biggley: How many people's heads just exploded? Oh, my gosh.

Jon Orr: Because mortgage paydown. You think like, "Okay, well yeah, somebody's got to pay the mortgage here. Why not the renter?" But I think why that's great with appreciation because it's not the same as appreciation. The appreciation, the value of the home is going up because the market or the area is going up through no fault of anybody else. That's just happening in the background.
Whereas you could either actively pay your mortgage down or not. The renter is paying the mortgage, therefore you as the owner are gaining equity on that home every time because a big chunk, especially early in the days, of your mortgage payment is going to pay down the interest portion of your mortgage, but then a little bit, especially at the early days and then a lot later on pays down the principle. And so then you are gaining that equity every time that principle gets paid.
And so that's two different pieces. That's appreciation is going up because the markets are going up. That's because values prices are going up. That's not the value of that. You own the portion of your own home that you, or the portion of this home that you own, that value is going up because the mortgage is getting paid down by someone other than you.

Matt Biggley: Jon, what I think is so cool is that this is going to really appeal to those people that are actually fearful of mortgages. I think what holds a lot of people back from getting an investment property saying, "We're all obsessed with paying mortgages." Now, we've talked about this in past episodes, this is one of the things that prevents people from getting into investing at all.
The idea of taking on a second mortgage, that's going to be incredibly stressful. I think for those people, this should actually counterintuitively calm them down and maybe be something that we can help frame in this way that someone else is paying your mortgage, someone else is paying your mortgage. Again, over time, over amortization of that mortgage, they are conceivably paying it off entirely for you.
I think that can't be emphasized enough, especially for those that might just be fearful of like, "Oh my god, I'm already stressed out about my own mortgage or not stressed out about it, but I feel strongly about paying it down." What could be even better than paying it down? Someone else paying it down.

Kyle Pearce: I know I love it, I love it. I think also it's in your head. You have to get yourself in a position where, okay, if you're going to consider doing something like this, you want to make sure that you're putting yourself in a position where you feel good about it. What I mean by that is what I did back when I started with my first investment property is I actually picked a property that I was able to essentially buy outright.
Now, this was now going back all the way to 2011 when I purchased this property in the US. There was a big dip in the housing market for a little bit because people were buying properties left, right and center all based on appreciation. Remember, we're saying we do not want to buy properties with the assumption that they're just going to double in value over the next couple of years. That's not the goal. That's a bonus if and when that potentially happens.
But back then, that was happening quite a bit and they actually had such easy mortgage rules to get mortgages in the US that people could go in and basically say, "I have a job," and they would give you a mortgage. They didn't ask for any sort of qualifying documents or anything. You could put 0% down.
Think about that for a second. If you could put nothing down, it's like you have absolutely no risk, at least upfront. Your credit score is at risk, of course, if you default on that mortgage. But here in Canada, we had much more strict policies and therefore, we didn't experience the same downturn that the US experienced back in 2008, 2009, and in the years afterwards.
For me, what I wanted to do when I first got in, I wanted to put myself in a position where I essentially restructured my own home. I actually did the opposite. Like you said, Matt, I basically went from this guy who wanted to go from a 25-year mortgage down to nothing really fast. That was my goal, and I did the opposite. I actually stretched it back out what I owed all the way like 25 years so that my payment went down and I pulled money out so that I basically had two small mortgage payments so that I could feel comfortable with it.
It was like me just getting my toes wet. I was like, "All right, let's see. Is this going to be okay?" I was like, "I know that even if," and this is a fear that people have right away. Actually, I was talking to Paul, I'm not going to say his last name just for privacy reasons. But Jon, you know Paul, great math consultant from only a couple hours up the road, and he was sort of mentioning this idea, a fear he had is like, "What if you can't rent the property?"
Well, I had that same fear and I wanted to make sure that even if no one went and rented my other house, that I was going to be okay. I wasn't going to lose my shirt. I would recommend for anybody who's thinking about this that you're kind of like, you start thinking along these lines.
Now, I later realized and I realized how silly it is to think that there would be no one to rent my home because the reality is everyone needs a place to live. Actually, there are more and more renters because the price of homes continues to rise and it's actually becoming out of reach, especially for our younger generation.
This is obviously not a good thing. I don't wish that on anyone, but that fact alone essentially guarantees that you'll be able to rent your property. Maybe you might have to adjust rent down a little bit if maybe your projections were maybe a little bit too ambitious. But the reality is that you're going to have someone who's going to want to rent your home. We have never experienced a situation where we haven't been able to fill a unit within a couple of months given a reasonable rent prices, right?

Matt Biggley: We calculate for that too, don't we, Kyle? We calculate for that. We include a vacancy calculation. Everything we do is incredibly conservative. We ensure a big safety, margin of safety. If it doesn't get rented out for a month, we've accounted for that in our calculation. I want to share that as well. There's almost redundancy in the safety here. This is incredibly safe.

Jon Orr: I'm glad you brought that up, Matt, because I was going to add that as well if you didn't add that. I think what's important is when we think about all these kind of reasons why we shouldn't do it, that is a big one about saying what happens if I don't bring in my money? What happens if I don't bring in a renter?
I think what we wanted to make sure you take the mindset when you do enter into this investment in asset class and kind of take the real estate plunge is you treat it like a business. You treat it like a business in the sense that you have to account for all these expenses. What are those expenses that you're going to cover? Are you going to make sure that your vacancy rate is taken care of? How much are you setting aside each month just in case? What percentage should we be putting aside there?
You're talking about making sure that the mortgage is covered. You're talking about making sure that the insurance is covered. Maybe you're setting aside kind of like a pot. I know you guys do this. You set aside a little bit of money every month from that renter's payment to make sure that if something happens in the property, we can fix it and it's not a big deal. We've already accounted for all of these things.
Thinking about as a business is important. I think that helped me thinking about it as saying like, "Look, there's money coming in. That's a revenue. We've got expenses and we've got to account for those expenses and we budget for those expenses." Setting up a little budget for that, and I think we'll have the future episode about what are all the actual expenses that we need to go in? How do we calculate all these values? How do we analyze a deal? We're going to be probably going into that for sure.
But I think what also, when we were thinking about that budget, you get this third benefit. You have to plan for this third benefit. We've mentioned the two different benefits being the appreciation. We're hoping for appreciation as the cherry on the top, and then we've got our mortgage paydown, which are acting differently. But then the third benefit, this is where I think most asset classes do not have three benefits. This one has the third benefit, which is monthly cash flow. This is money in your pocket, this is your profit from your business.
Your business has revenue, which is your rent. Your business has expenses, which are all those other things that take down that revenue. Then you've got money in your pocket, the profit from this business, which is called cash flow from your rental property. That is the third benefit.
Now, cash flow is great because that can help offset some of the worries that could be putting towards any loan maybe you've incurred to buy that property, like even just to get the down payment. It could be, "Hey, you know what, I'm going to put that in a reservoir over here just in case fund." Or it might be like, "I'm going to use this monthly cash flow because I've already accounted for all the other expenses to put towards my car payment." Or I'm all of a sudden this is a pot of money you get now because of the work that you've done, the deal you've analyzed.

Kyle Pearce: I love how you brought that up because, Jon, something that we've done, and in particular Matt and I when we began this journey together, and Jon, you've recently sort of jumped in this journey as well, is that cash flow, deciding what you're going to do with that cash flow and how you handle it I think is really important. For me, from day one, when I bought my first investment property, every dollar that didn't have to go back into the expenses or into the mortgage or into any of those things, anything that was left over, I would take that and I would have that money continue to do what I was doing before, which is paying down the money I owed on my own house.
I did it in a slightly different way though because what I did, and I know Jon, we had suggested that you may be considered the same thing. We never tell people what to do. You have to decide what's best for you. But basically, rather than rolling it straight into our home mortgage, we opened that home equity line of credit that we discussed in the blueprint episodes. I had this home equity line of credit where I took the down payment and the closing costs for that first home. I borrowed against that almost for two reasons.
One was almost like an accounting piece where I wanted to see what was part of the investment and what did I personally owe on my house so I could kind of see those side by side. Another reason is it's actually beneficial from a tax perspective because here in Canada, those who are in the US, you can actually write off the interest on a mortgage on your primary residence, whereas here in Canada, we cannot. You can only write off the interest on investment properties, not on your primary residence.
By splitting the two, I now have this sort of bucket over here where I go, okay, this I'm borrowing and I could write off the interest on my income taxes. And then when I take the cash flow rather than that cash flow being income, it's actually just paying me back. It's like paying this loan off and now I'm not having an actual tax. I'm not going to have as much or as high of a tax hit on my personal income taxes.
I take this cash flow over here, I put it on the line of credit, and then the beauty is, and this is the part for me, it took a little while to feel safe doing this, but that line of credit, because I have more room on the line of credit, I know that if something goes wrong, so I'm paying down what I owe on the line of credit, but that can still be reborrowed if and when necessary.
For me, that's the safety net that I personally needed is that I'm like, okay, I could take all this extra cash. I'm not going to use it to get a better car. I'm not going to use it to go on more vacations. That is not what I wanted. I wanted to just start generating this wealth opportunity. I take it, I pay off as much of that home equity line of credit as I can. It's slowly coming down.
If something goes wrong with the investment property, rather than me having all this money just sitting in a bank account doing nothing and just waiting for the furnace to go or the roof to need fixing or any of those things, I know that basically I'm going to save on interest over here and I have the room to borrow if a big expense were to arise.
For me, that was my safety net. I wanted to make sure that I could cover payments myself without having to give up a massive amount of my lifestyle. I wanted that, but then I also wanted the safety net of I wouldn't be in a jam. I wouldn't have to go to family or friends and say, "Hey, I need some extra cash to get me through these next couple of months," because I know that I have this extra room here.
I guess sort of a hidden message here is don't max out your line of credit or all of the equity you have. You want to be smart about it so that you still have that safety net just in case things don't go as planned because life happens and it's impossible to predict exactly what will happen or how it's going to happen. For me, knock on wood, it has worked really well. There still have been surprises, but that safety net was there so that we could get through and ride through that and continue with this investment.
Because again, the other bullet, those silver bullets that appreciation and mortgage paydown were taking over. They're still happening even when the furnace goes. When that happens, I still have two other ways that I'm making money this month, even though it felt like I lost some money when I had to go and pay for that unexpected expense.

Matt Biggley: Kyle, I think this is why it's so important for people to not buy an investment property without cash flow. I know it sounds crazy. Why would you buy an investment property that doesn't cash flow? We heard about this in a lot of bigger markets, places like all over the GTA, all over Toronto. People were banking solely on appreciation.
Listen, I've run the numbers on appreciation. The past nine years in Windsor, Essex County, the appreciations have been 12.4%. Now we calculated at 3%, right? We calculated at 3%. But cash flow is arguably, maybe I'll argue that this is the most important. Without that monthly cash flow, you're going to be a sinking ship quick.
One of the things I love about investment properties compared to buying your own home is that there's no emotion for me in an investment property. I mean probably excitement, but it's really about the fundamentals. We run down our checklist. Are there separate utilities? Are the rents at market or the vacant unit? We'll talk about this in future episodes. Have the major systems of the house been upgraded or updated? But it's an unemotional experience.
And so we make sure that these properties cash flow. A lot of times selling agents don't actually include all of the things we're suggesting we include in our figures because they want to beef up those numbers. And so when we go through, I just had this conversation with a listing agent the other day. I said, "Hey, you didn't include any vacancy in here. You didn't include management costs in here. You didn't include maintenance in here as well." I said, "This property actually doesn't cash flow." We had a good discussion about it.
I know they're just doing their job, but my point is do not buy a property that doesn't cash flow. That's the quickest way to get yourself into a terrible, terrible situation.

Kyle Pearce: Now I'm going to add sort of a bit of just a slight, slight detail for people to think about because there is a case, and I still think your rule of thumb here, Matt-

Jon Orr: I hear it like competing. You're competing theories right now.

Kyle Pearce: Let the debate speak begin. What I want people to think about though is oftentimes what happens is when you're not cash flowing, what is happening is typically the mortgage payment is too high. That's really the thing that's out of whack typically. Basically, you won't want to pull out as much equity in the home or you don't want to borrow as much as you can against that home. But you might be somebody sitting there, maybe you're listening, maybe you're in a profession that pays pretty well.
Let's say you're in the medical field, you're a doctor or you're someone who has a decent chunk of money there. You can make a property that might seem like it's not cash flowing. You can make it cash flow by putting more down. Now is that to us, we want to maximize every dollar we put into a property, but you might be the type-

Matt Biggley: We talked about leverage before, this idea of leverage-

Kyle Pearce: Absolutely.

Matt Biggley: ... least amount down so you can leverage the bank's money to the extent possible.

Kyle Pearce: Absolutely. Absolutely. In that case though, if you're a person that's going, "Well, I have enough over here and I just want to get a cash flowing asset and I'm not going to get as much advantage of, let's say that mortgage paydown," or whatever, that's still something you can do. Again, it still aligns with what Matt's saying because you do want it to cash flow.
You don't want to walk into a deal where you already are in the red, which means basically you're like, "I'm going to take this chunk of money, I'm going to put it down, I'm going to buy this property, and then I'm basically committing some of my hard-earned money that I'm going to work for every single month to put into this property assuming everything else goes perfectly." It's almost like you're almost guaranteeing that you're going to be worse off than you're even projecting.
In the end, sure, now maybe you have appreciation which bonus, that's great. Maybe you have some principle paydown. But the problem is that you've been putting in your own cash and that's just more and more of your own hard-earned money going towards an asset that maybe had you held up or had you waited or had you found a better deal, you could have maximized that opportunity and minimize the chances that you're going to have to put money out of your pocket each month.
That's an awesome point there, Matt. It's something that we just don't do. We just walk away from those deals or we negotiate. If we can't get it to be cash flowing, if we can't be creative enough to do that, it's just not a deal for us because we are unwilling to take that chance. However, there's other people out there that are willing to take on that risk and sometimes it works out, but oftentimes it just simply doesn't.

Jon Orr: Sounds like you guys are very cautious in this and being a good thing, especially for first time investors, first time real estate investors and trying to get into this. Matt, you had mentioned something that I wanted to comment on or ask you a little bit more about. You said you make sure that there is no emotion. And I think if I'm a beginner, if I'm getting my feet wet, if I want to dabble into trying something here, what are the steps you want to tell our listener about when something that feels emotional will happen?
For example, you own a property, Christmas Eve, the water tank breaks and it leaks all the way down the floor. All of a sudden, somebody's getting a call at midnight on Christmas Eve to come fix this thing. As a homeowner or as a rental property owner, how did you guys not get emotional in a scenario kind of like that?

Kyle Pearce: Great question.

Matt Biggley: I think, Jon, it's really about having a good team in place, and I think one of our future episodes is going to be talking about real estate investing as a team sport. I love partnerships, I love teams. And so in a case like that, clearly a stressful situation for that tenant and something we would never wish upon any tenant, especially on Christmas Eve, but at no time at all.
The great thing about that is that our experience has taught us to have a system in place to cover ourselves off so that we're not worried about emergencies like that, stressful situations like that. In that case, it was our property management company that got the call that responded and that dealt with it. Actually, I don't think we found out about it until the next day, which is amazing, because that was the first time we've ever had that happened.
That's the proverbial scary landlord story. Christmas Eve, a water heater burst. You can't be at home with your family because you're there with a mop and a bucket, like horror stories. This is the thing that makes people run for the hills. And so it's really about having that system in place. We're big believers in our management partners, and we'll talk about that in the future.
We self-managed for our first, what, four, four and a half years, Kyle, so we've brought management on relatively recently. But that was about us taking another step away, making this even more passive than it was already.

Kyle Pearce: Yeah, for sure. And I think something that is really important that we did do was that first four, five years where we were trying to gain a better understanding of what does the system look like, which meant sometimes some scenarios that we probably would've preferred to not have been involved in. However, now that we've had that experience, we have an understanding of how that works, and our systems are set up so that we aren't really involved in that.
To be honest, because we've been so cautious and I suppose conservative in our projections, when we see something like that happen, we just sort of go, "Darn, that sucks, but we got it. We got this covered." It's not going to be something that we're going to emotionally run away from.
Something else too, and this is where I thought you were going to go with this, Jon, was about the emotion is oftentimes too when you're buying your own home that you are going to live in, that you want for your family and you want to come home to every day, it's a completely different situation when it comes to a rental property because you're not the one that's going to be living there.
Now we want to make sure it's safe, clean, and affordable. That's something that we believe in. But at the end of the day, it's like the color isn't my choice and the way the house is designed is not my ... None of those things are a factor. It's how safe, clean, and affordable is this property going to be, and is it going to offer us an opportunity so that we aren't put in a position where we feel like, hey, if something goes wrong that we're feeling stress, anxiety or any sort of remorse.
That's something that we simply do not want. We want this to be something that we feel excited for, that we know is going to have some ups and downs to it. Ultimately at the end of the day, as long as you're planning for it, I think at the end of the day you're going to feel great about having done the work because at the end, the payoff is so big.

Matt Biggley: At the end of the day, Kyle, this is about getting wealthy over time. These blips are going to happen, these challenges are going to happen. Real estate investing is not a get rich quick strategy. Certainly, there's the Instagram influencers out there with the crazy cars and the blingy watches, but-

Kyle Pearce: Guys on treadmills say-

Matt Biggley: Guys on treadmills. This is truly about getting wealthy over time. I remember some conversations I had with my dad early on in our real estate investing journey, and my dad was someone who flipped houses and did that. To me, flips are too stressful, too cash intensive, too risky. That's for me personally.
I said, "Dad invest it in rentals." He said, "Oh, I'm too old. I'm too old to see the benefits of that." We have now built a multi-million dollar portfolio over the past, what, six and a half years. Of course, we had no idea what would come. This is about the long-term journey to building that wealth. You're not going to be rich next month or even next year, but this is truly building something big and powerful.

Jon Orr: Amazing. And then I'm glad you answered that question because I think there's lots of questions I think still lingering about how to get started. And then I think just kind of thinking about when this kind of things happen, people don't want to have to deal with them. That scares a lot of people off.
I think you guys have answered that by saying, we have built that into our business. You're running it as a business. You've got these scenarios that can happen. You've planned for these. You've got property managers built into the deal and built into your expenses, and it's still generating cash flow.
Why don't we kind of pivot away from some of the theory and look at an example here so that people can kind of see hard numbers on what this might look like for return on investment and thinking about that. Let's say, we're just going to stay with easy numbers and then percentage wise, they can scale from there just to keep things nice and easy.
Let's say we were shopping around and we analyzed deals, and also just say that let's say we analyzed 50 deals before we found one that was good. We analyzed deals, we analyzed deals, we analyzed deals. That's how we get better at picking the right deal is by analyzing as many as we can, setting a goal. I'm going to analyze three deals this week, or I'm going to analyze a deal this week just so we get good at it.
Let's say we found a deal that we like, and let's say that the purchase price of this house is, we're going with easy numbers, is a hundred thousand dollars.

Matt Biggley: Great realtor. You really negotiated, great realtor.

Jon Orr: I know. Exactly.

Kyle Pearce: Hey, I love it. It could be, listen, but I remember it was not that long ago, at least here in Windsor, Essex County where a hundred thousand dollars per door was expensive. Now we've gone through this COVID bubble and all the asset prices have gone up and things are ... Definitely a harder, harder thing to find.
But I will say my first rental property, when I bought that property in Florida, it was $95,000. I look at that and go, had I known what I known now and I ran the numbers and I was conservative with the numbers, I'm like, wow. I'm like, I should have backed up the truck and bought as many of those as I possibly could.

Matt Biggley: That's a truism of real estate though. Everyone in the moment, I say this to my clients every single day, you're always going to feel like you paid too much in the moment. A few years down the road, you're going to be bragging, bragging about what a real estate genius you were. When we look back we're like, "I was a genius." At the moment we're like, "Oh my god, I overpaid, I overpaid." So, that is a truism.

Kyle Pearce: Absolutely, except you remember what I was saying throughout this last couple years, the COVID thing where people were pent up and then all of a sudden it seemed like at least everywhere here in Ontario, and I know it happened in a lot of places where all of these houses were going to bidding wars. I remember me and Matt talking about this specifically, but Jon, you and I had these conversations as well because you wanted to get in on another property.
I remember saying this and it was like we had to remind ourselves of it. I said, "Listen, if there's like 10 bids on this property," there's 10 bids on this property and you win the property, I said, "How do you feel?" And a lot of people would say, they feel great, they want it. I'm like, "Well, to me, I feel like I was the biggest sucker," because if I got that, if I was the 10th bidder on that property, especially for an investment property, when it's a primary residence, it's different.
I got to say it. It's like if that's the house that you really want, absolutely. I'm like, "Hey, you do you," and that might be a massive win. But when it came to rental properties, investment properties, I kept saying, I'm like, "So what that means is that we thought out of these 10 other, 9 other investors that this property was worth this amount and none of them thought it was worth that amount." Essentially, what it meant at the time was that nobody else thought it was worth the same amount as it did to us.
Now, on the other hand, now that things are calming down, and I'm sure a lot of people are seeing that happen, we're not seeing the bidding wars anymore, and we're actually seeing a lot of people are kind of going into hiding. It's almost like they're now too scared to get in on a property.
This is the time where we look and we go, okay, we see this property. Let's say, Jon, your example of a hundred thousand dollars property is there, and we're like, "Let's have a look at it," I'm immediately thinking. I go, okay, well, I want to put hopefully depending on your situation, but hopefully you're able to put only 20% down. It's an investment property. If you're looking to buy a primary residence, typically like 5% down here in Ontario is something you can do if it's your first home. But for a rental, you're going to be looking at 20% down or more depending on your situation.
I'm like, for this hundred thousand dollar property, I'm like, I got to put $20,000 out of my pocket. I've got some closing costs. Let's say I'm going to push this number up a little higher than it probably would be, but let's say it ends up being $25,000 out the door that I have-

Matt Biggley: Deposit and closing costs, $25,000.

Kyle Pearce: $25,000 total. And so that's like what I've got to come up with. That's like my home equity line of credit, or maybe I have this savings nest egg that I've just been accumulating and I didn't know what to do with it. This could be what you use that for. Now, I've got this $80,000 mortgage.
Immediately, what I want to know is that if over 25 years at a current interest rate as of this recording, probably 5.69% to 6% here in Ontario is kind of around where we're at right now, a little higher, much higher than it was just a year ago. I look at how much that will be and I go, okay, my mortgage payments are around 500 bucks. I go, how much rent can I pull in?
If that property can sustain that mortgage payment as well as my property tax, my insurance, if I'm paying the utilities, we always want the tenant to be paying utilities if and when possible. Basically any little bit, we usually keep that 10% for your vacancy and your maintenance and all of those things. You want to make sure all of those things are all factored in.
With this particular property, if let's say you could pull in $900 of rent and you've got a $500 mortgage, that leaves you with $400 to take care of your property tax, of your insurance, property insurance. You have to make sure that in case of a fire or any other type of emergency, that it's covered and any of these other expenses.
If let's say that's around $300, you have $200 left in your pocket. This is only an example. If you can find me this deal right now, I will show up with an inspector tomorrow and check it out with you. But ultimately it's like, wow, I have taken care of all of those expenses. That principal is getting paid down, so that's that hidden bonus that you're getting there.
We have the appreciation that hopefully is going to continue working for us as well, and I have a couple hundred dollars of money in my pocket. I could take that $200 each month and put it onto my home equity line of credit or whatever I need to do with it. Just make sure that I have that extra money sitting around just in case something doesn't happen.
Ultimately, I want you to think about this for a second. The growth on this property between those three silver bullets we talked about, our cash flow, our appreciation, and the mortgage paydown. When we look at the benefit of that over time and you realize that it's not being divided by a hundred thousand dollars when you try to figure out your rate of return, that you're actually only dividing it by the $25,000 that you had to pay, what we realize is the power of leverage, just like Matt has been talking about. He mentioned it earlier in this episode and you mentioned it in some of the blueprint episodes, you're looking at a massive awesome return on your investments.
If we were to look at 3% annual appreciation on a hundred thousand dollars, that's like $3,000. We're making an assumption that it's 3%. Maybe it's zero next year, who knows? Maybe it's 12% like it was over these past few years, as Matt had mentioned. We don't know what that is, but if we assume 3% which is sort of our number that we typically use regardless of the market, that's a $3,000 increase in the value of the property.
If we look at the cash flow on that property, we're looking at about, well, if we set around $200 a month, that's going to be, well, that would be $2,400.

Jon Orr: He's a math teacher, folks.

Kyle Pearce: Yeah, $2,400.

Matt Biggley: He's showing off. He's showing off.

Kyle Pearce: Now you're looking at over $5,000 of profit.
Now, if I look at $5,000 of profit and I only put $25,000 out of my pocket, holy smokes, that is 20% return on my money, which to me is mind blowing. That's with us. Again, we want to make sure that we're using conservative numbers here. We don't want to be looking at best case scenario when we're running these numbers. You want to look at conservative returns and you want to make sure that it doesn't have to be a 20% return. Maybe your numbers show a 12% return. That might be a ...
That's great too, as long as you're not lying to yourself. That's the one thing that you want to make sure, is that you're not lying to yourself. If the numbers are ridiculously high, then you might want to start asking yourself, what neighborhood is this property in? Am I happy with that neighborhood? Is the rent higher but the actual neighborhood isn't as safe or isn't as welcoming to families, or whatever that might be. All of those other factors go into it as well.
Sometimes, you might want to sacrifice some of that return for maybe a property that is a little more expensive because you like that particular neighbor or neighborhood for whatever that reason may be. But ultimately at the end of the day, the benefit here is that you're getting three ways to earn and you're earning on only a fraction of the total value of the property, which to us is just such a win-win-win.

Jon Orr: Yeah. That's a big return for sure. And I think by setting up a system in place and having a team, you can make this feel like it's not as risky as you might think it is, or time consuming as you might think it is, or as tedious and management as you think it is. It's a little bit easier than probably what you have imagined.
Now, I do want to bring up one more kind of benefit here that sometimes happens, not all the time, but I know that you guys have talked to me about this kind of benefit after a certain amount of time because of the property appreciating. This is the goal of always wanting. I think if you want to hold this property for a very long time, then what happens after, let's say here in Canada, you get to set your term for your mortgage and let's say five years is up.
If you look at your home, you might pause there for a second and go, "Hey, look, my rental property has increased in value. It's appreciated." We're not saying it always appreciates, but maybe it did. Maybe it appreciated and valued over those five years and your mortgage is up for renewal. It might be a situation where you want to go back and use more leverage. I'm going to go back to the bank and go, "Hey, bank, this rental property I have is increased in value. I'd like to renegotiate the mortgage. But I want to renegotiate the current value of the home."
What will happen, guys? What happens at that point, the bank's going to go, "Okay, wait, your house appreciated," let's say, 10% of the value. All of a sudden now it's worth $110,000. They're going to say, "Okay, we're going to give you $110,000 on this property or up to a certain percentage of it, and you get to bring that money back into your equity." Also what's happened, the renters paid down the mortgage over that time. You've built up your equity, it's appreciated in value, and all of a sudden you've just unlocked more equity in this home.
Sometimes, it's possible that the amount that the bank is going to give you back in cash outweighs how much you put down on that house to begin with. All of a sudden, you've got all your money back and now you own the home for free.

Kyle Pearce: There's too many bombs in this episode. Now we're talking a free house. You've taken all your money out of a property. Again, I'm not a math teacher, but that sounds like an infinite return for me, right? That's crazy.

Jon Orr: Yeah, you have $0 of your own in this house because it went up in value, and you can renegotiate that mortgage and you take that cash and start a new mortgage. But you now have that equity that you get to just paid back yourself, your loan that you may have used or pay back your $25,000. Now you're sitting pretty with your $25,000 in pocket to go buy another home with that $25,000 and maybe a little bit more and you keep this rolling.

Matt Biggley: That's exactly what Kyle and I have done a number of times. All of our seed money, all of our initial investment, again borrowed from our HELOCs, we were able to take out with a refi. We'll talk about refis more. We wanted to make sure we refied at a number where we could still continue to cash flow because of course, when you refinance, your mortgage goes up, in some cases substantially.
We were able to take out our entire investment, which it's just so mind blowing and crazy. It's actually hard to even comprehend that we own properties without actually having any of our own money in them.

Kyle Pearce: And this will happen over different periods of time. And those who are on YouTube right now, I just want to show if you're not subscribed to Canadian Wealth Secrets on YouTube, definitely make sure you do. But if you see on the screen, I've got this a hundred thousand and let's say it's 3%, it's appreciating in each year. If I was to just, after one year, that means the house would be worth $103,000, not a ton of money to get back out.
But then we go to the next year. Now it's like $106,000 and change because remember, we're compounding on the previous year. If I just keep dragging this down, by year five, we're looking at $115,000, $116,000. Remember that initial investment was, do you guys remember how much about we said we had put in of our own money into that-

Matt Biggley: $25,000.

Kyle Pearce: $25,000. This property is now worth more than half. It's increased in value by more than half the amount that we actually put in. That's just appreciation. We're not accounting for the cash flow and we're not accounting for the mortgage paydown. At year five, it's possible. It's possible that I might be able to go to the bank and say, "Hey, now give me 80% of that amount."
If I go over here and say like, "Take this amount. Give me 80% of that," they're going to give me like $92,000, $93,000. If that mortgage has been paid down by a good chunk of change, I might be close to maybe $20,000 mark and almost have all my money out. That's at that 3% appreciation rate. If you keep going by year 10, you're looking at $134,000. You are now going to be like well in the clear of having your money out, still owning the property, still getting mortgage paydown, still getting appreciation into the future.
Now again, we're using that 3%. There's no guarantees here. In some years, you're going to be lucky maybe the last couple of years where people saw double digit appreciation. In other years, maybe you might have maybe even like a decrease. We've been lucky enough to not have that happen to us yet, but it doesn't mean it can't happen in the future.
But the one thing I do know is that my investment is safe in this physical asset, which is going to continue generating that cash flow. Remember Matt said positive cash flow, so that positive cash flow is going to be helping and my principal's going to be paid down. If that appreciation's not working out for me in this year or the next year, the reality is those two other pieces are going to be picking up the pieces for me, and that appreciation will be coming back because real estate is always going to be one of those really scarce resources and assets. Therefore, over the long run, you will stand to benefit for sure.

Jon Orr: Awesome stuff there, Kyle. I think that's a great place for us to tie this up with a bow. We hope in this episode you got those three silver bullets of real estate investing, property value increase with appreciation, the mortgage paydown from the renters, and then also the cash flow which is our profit from our business. Three ways to build your wealth with real estate investing.
If you would like to learn more, you can head on over to investedteacher.com. We have some reading there. We have our blueprint. If you have not got that already, you can click get our blueprint button right on the website. We also have a few links there if you are interested in taking the next step. If you want to take the next step in that investing, you can reach out to us and learn a little bit more on what you could do on that next step.

Matt Biggley: Jon, I said that investing is supposed to be emotionless, but I'm all excited here. I'm all worked up because this topic is really, really exciting. This is just like rocket fuel for your wealth. I'm all stirred up here. Listen, we want you to leave us a five-star rating and review. We'd love those reviews and we appreciate those ratings so much. Share this podcast with your friends and family. Investing is better together. Make sure you hit the subscribe button on all of our social media platforms. We're @InvestedTeacher, YouTube, Twitter, Instagram, Facebook, and TikTok.

Kyle Pearce: I love it. I love it. Yeah, Matt, I get so excited before we're going to record these episodes. I'm excited now and I hope that you listening are excited listening at home. Make sure you share this with your friends, family, colleagues. Any support is helpful. Guess what? We've been on some of the top 100 charts for business podcasts, and we want to keep that going and we can't do it without you. That five-star rating review is so important for us.
If you don't know how to do that, then guess what? Just flip it to someone so that they know that this podcast does exist. For all links to resources, transcripts, and all of our other goodies to help you get going with your Canadian Wealth Secrets journey, head on over to investedteacher.com/episodesix. That is investedteacher.com/episodesix.

Jon Orr: Again, if you are looking for that next step or how to get invested or what's your first moves here, head on over to investedteacher.com/blueprint, and you can download our PDF blueprint to how you can get started. Again, that's investedteacher.com/blueprint. All right, invested students, class dismissed.

Kyle Pearce: Just a quick reminder, there is no investment advice. This is for entertainment purposes only. The content is for you to get some information here, and you should not construe any such information or other material as legal, tax, investment, financial, or other advice.