Mr. A bought a 20-unit apartment 25 years ago for $200000. He borrowed $160000 and invested $40000 in the down payment. The mortgage payment was fixed for a 25 year term and consisted of about $14000 per year, payable in monthly installments of $1166.67. Over the term of the loan (25 years) he has paid $370480 in payments, around $210480 of which was interest, the balance was principal.

The first year of his ownership Mr. A pocketed about $6000 in cash flow after making all payments for operation and debt. This was about 15% annual return on his $40000 investment.

Over the years the monthly rent kept pace with the cost of living and what began as a 150 per month is currently $550 per month. Gross rent increased from $36000 per year to $132000 per year. The annual operational expenses also rose, keeping pace with the cost of living, averaging 40-45% of gross revenue. Current net operating income is $72600.

If Mr. A had purchased this property using 100% cash, his return would have been 10% of his investment from day one. The increase in income and the increase in expenses would have kept pace with the rise in the value of the building so that at any given time the property would have been giving him a return of only 10%, and not the 15% bonus he had.

Because Mr. A had borrowed $160000 to purchase the property he benefitted in two ways over an all-cash buyer. First he was able to buy a property he might not have been able to afford otherwise. Second, he let his tenants pay off the $160000 so that at the end of the 25th year he now has a property that is worth over $700000! His investment never changed. The yield on that $40000 grew each year until presently with a $72000 net operating income, and zero mortgage payments, the yield on cash invested (with no other things taken into account) is 180%. Now that’s how to make money over the long term.

All that being said, this strategy is not easy. It requires commitment over the long term and dedication to being a hardworking landlord. This is not a get-rich-quick scheme. In particular, the obstable today is even harder because of the high property price. If Mr. B tries to emulate Mr. A, Mr. B may have to endure slight negative cashflow in the first few years of ownership. However, the inflation mechanism will still work the same way as in the past.