December 7, 2021

Why Capital Appreciation Should be the Primary Focus to Build Wealth, NOT Cash Flow

Chris Hamm

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Investing in real estate is not difficult when you have the right advisors behind you, directing you towards profitable investment opportunities. The right advisors will be able to identify the best opportunities in the marketplace that will bring you the best possible cash flow and capital appreciation to reach your investing goals.

One of the most common questions new investors ask me is how they can really maximize their returns in order to grow a profitable real estate portfolio that brings serious, generational wealth. Tied to this topic of wealth generation through real estate investing, is the question of which metric to focus on: cash flow or capital appreciation? I will answer this question very quickly, capital appreciation is the primary metric to focus on if your goal is to build a real estate portfolio and generate serious wealth.

Why Cash Flow is NOT the answer

Some of the most asked questions I receive from new investors are; What is the cash flow situation? Is the property cash flow positive?

While these are valid questions, and as investors we do like to see cash in our pocket, the reality of the situation is if a property is cash flow positive, it will typically be by a small margin equivalent to a few cups of Starbucks at the end of each month. As an example, a property that is $1,000 cash flow positive for the year boils down to less than $100 in your pocket on a monthly basis...and Starbucks adds up.

I am not discounting the importance of cash flow, because at the end of the day the rental income taken in is what will help pay down the mortgage on the property, allowing you to own an asset that is being paid for by someone else. Rather, what I want to emphasize is that cash flow, while great to have, will not lead to generational wealth, and this is every investor's true end goal.

Capital Appreciation is THE key property acquisition and wealth generation

If you are investing in real estate with the goal of growing your portfolio to include multiple properties, capital appreciation should be your main focus as this will allow you to turn one investment into multiple without dipping into your own personal savings. The best way to highlight the strength of appreciation is by providing you with hard numbers to show how different housing types have appreciated in the short term and then looking at overall appreciation witnessed over a 45 year period:

  • GTA pre-con 5-year average = 13% vs. 11.26% detached and 7.11% existing condos
  • Downtown pre-con 5-year average = 15% vs. 11.4% detached and 6.51% existing condos
  • 45 year TREB average = 6.66%'
  • $54,640 is the average salary in Canada.
  • Avg. GTA condo price is $624,886 + 13% = $81,235 in annual appreciation alone!!!

To really hammer home the point of why capital appreciation is the superior metric to focus on, when evaluating the viability of an investment opportunity, think about it this way: Using the example above of $81,235 in annual appreciation, and looking at a market that puts the property at -$2,000 in cash flow for the year. If this is your property, you the investor are only spending $166.66 a month in order to take home $81,235 in appreciation for the year!! I'd say that's an excellent tradeoff.

What does all of all of this really mean for you as an investor and how can you make this appreciation work for you? Simply put, buying a pre construction property will allow you to fully leverage your initial investment (typically 20%) and turn that initial property into multiple, by re-financing and taking out the built up appreciation on that property.

Capital appreciation is therefore the fuel that will allow you to grow your real estate portfolio from one, into many.

Contact Me And Let's Discuss Your Investment Strategy

Investing is not a one size fits all strategy, we need to set a plan specifically for you in order to target the right markets and developments that fit with your investing goals. Additionally, a real estate investment strategy will differ from market to market. In one market a studio may be a great investment opportunity, whereas in another 2-bedrooms may be more in demand and therefore provide you with a better return. It's important to know these details and I'd be happy to set up a time with you to discuss pre construction investing further.

Chris Hamm

(647) 375 2787

Sales Representative

Keller Williams Referred Urban Connect Realty, Brokerage

624 King St W, Toronto ON, M5V 1M7

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