Secrets of Building a Solid Nest Egg in Real Estate

They say you can do it, too, if you are prepared to be frugal, take some calculated risks and ride out periodic down markets.

For example, Dennis Nisbet paid $135,000 for his first investment property in 1982, only to watch its value fall back to about $120,000, before climbing to $200,000 by 1988.

In 1996, the Nisbets paid $625,000 for their waterfront home in Port Moody, and spent "a few tough years" wondering if they would have to sell it to keep their heads above water. Just nine years later, the home is valued at $1.4 million.

They advise clients to shun townhouses and condominiums in favour of pre-owned single-family homes with basements, preferably above-ground, that can be rented out.

The Nisbets say 25 per cent of the value should be in the structure, and 75 per cent should be land. "That's the perfect formula, because the land always increases and the structure decreases," Dennis Nisbet said.

When the buyers have built some equity, they can borrow against it to buy a second home, usually within three or four years, and then continue buying indefinitely.

Last week's Smart Money detailed a strategy to preserve retirement capital and provide income over 10 years, a period covering both a bull market and a bear market in financial securities. Over the same decade, the Lower Mainland saw a bear market in real estate, followed by the current bull market.

Dennis Nisbet says investing the same $100,000 in real estate over the same period -- as they did in Maple Ridge in 1994 -- would have put you streets ahead of investing in a Canadian balanced mutual fund.

Here's how it worked. Had you invested $100,000 to buy a $160,000 property, you would have needed a mortgage of $60,000. The rental income of $1,500 monthly would have paid all of your expenses, plus a management fee of $150 monthly, and paid you about $600, similar to the income from the mutual fund.

By 2005, the property was worth $340,000. Assuming the mortgage was still $60,000, your equity had increased to $280,000. Your rental income would have grown to about $1,800 monthly, which would pay you close to $900 monthly after expenses.

If you sold the property, you would receive your initial $100,000, plus a taxable gain of $180,000. During this time, your income, averaging $750 monthly, would have totalled $90,000. The same $100,000 invested in the average Canadian balanced fund would have paid you $7,700 in taxable gain and an income of $69,960.

The real estate advantage, Nisbet says, is $20,040 more income and $172,300 in additional wealth. And that's assuming you paid $18,000 to have someone else manage the property, something the Nisbets say you could probably do yourself.

So why do most people limit real estate investing to their own personal residence?

"We often find that first-time buyers, younger people, don't want to start off with tightening their belts," Debbie Nisbet says.

"They are used to having a new car, whether it is leased or bought new, and they want a brand new apartment or a newer house, and they want it in Vancouver or Burnaby or Coquitlam. When they can't do it, they don't do anything. They don't want to start at the bottom and work their way up."

Dennis Nisbet says their own children are all self-sufficient and talking about getting their first investment properties. "We are not at all enabling parents," he said.

(prepared by Michael Kane/Vancouver Sun)