If you’ve watched my video before, of course you know I’ll probably dive into an example with some numbers to help you visualize how actual risks, cash flows are returns might differ. To keep things simple, let’s assume that we have the same $500,000 to invest in for all investor types. To narrow the scope down even more, let’s zero in on investing in houses.

Our conservative investors have the lowest risk tolerance, need the highest liquidity and cash flows, and so the search usually lands with properties that see the lowest price fluctuations out there. In this case, we’re going to go with buying a house not in Toronto, for $500,000 with cash to remove the higher risk of leverage. The cap rate, in other words, the net rent yield, on this house is very good sitting at 5%, which is higher than what we typically see in Toronto houses at around 3.5 to 4%. On the other hand, average appreciation is much lower than Toronto, sitting at just close to inflation at 3%. So in the most average case, our conservative investor’s annual return is 8%.

But remember, these investors’ main goal is cash flows, wealth preservation, and liquidity, and the main benefit of this house is that prices are very stable. So if there’s a downturn, we might see appreciation dip down to 1%, which means the principal is still protected and the total return isn’t far off at 6%. On the other hand, if there’s a market rally, appreciation might go up to 5%, which takes total returns up to a better 10%. You’ll soon see that the range in returns on this sample property is lowest, only fluctuating between 6 to 10% in any given year. Based on a $500K investment, we have a monthly cash flow of around $2,000 and an annual return of between $35,000 to $45,000.

Let’s take a look at our balanced investor. Remember, this the one with a better balance of appreciation, rental income and leverage. In this case, the cap rate is a bit lower at 4.5% but appreciation makes up for it at a higher 4%. So if you look at the total returns before leverage at 8.5%, it’s better than the conservative investment at 8%. These balanced investors are also okay with taking on some leverage. So in this sample property, our balanced investor will use 50% of borrowed money at an interest rate of 2.5% to buy a $1M property. Because they have to pay for the mortgage payments, cash flows drop to 1.3% of the purchase price each month.

The benefit with choosing a more balanced investment is that you have better returns before leverage, and it gets better with leverage. After two times leverage, you’re looking at an annual ROI of 14.5%. Just note that appreciation does fluctuate more in any given year. This means that if you need to cash out in the short term, you might end up making less on the sale compared to the conservative investor. 

For example, if you end up having to cash out in the first year and it turns out it’s a downturn, then you might be faced to no appreciation for the balanced investors, whereas the conservative investors might still see a 1% appreciation. The good thing is that if you are able to hang onto it for a longer period of time, your average returns are likely much better at 14.5% per year instead of 8% per year. Based on the same $500,000 investment, you’d see monthly cash flows on this sample property of around $1,000 and the annual return might vary between $32,500, which is lower than the conservative investor, to $112,500, which is much higher than the conservative investor.

Next, let’s look at a sample property for our growth investors. These investors take on better growth opportunities. So, in our sample property, you might see cap rates closer to 4% and appreciation better at 5%, which offers better average returns before leverage compared to the balanced investor. Growth investors typically also take on more leverage for even better returns. Based on a 35% downpayment, we’d see cash flows closer to break even, and total average returns after leverage of 21%, which is better than the conservative and balanced investors. 

This property has bigger price fluctuations, so in the short terms it’s possible to sell for less than what you paid for. Once you factor in higher leverage, you see bigger swings in your annual ROI. This property is sitting higher on the risk ladder. With $500,000 of investment capital, you can expect your returns to swing drastically from $16,000 to $195,000 in any given year.

Finally, let’s look at a sample investment property for our aggressive investors, who choose the best growth potential and highest leverage. These properties might see the lower cap rates of 3.5% but better average appreciation of 6%. In other words, this sample property has the best returns before leverage. This investor maximizes leverage with a 20% downpayment, so after paying for operating expenses and the mortgage, the aggressive investor sees around -$1,000 of cash flows each month in this example. 

Now, we said this property has the best appreciation but also the biggest swings in price. On a downturn, perhaps we might see a 3% drop in price so these types of higher risk investments make sense if you can hang onto them for the long haul. In the long run, average returns are the best at 37.5% or 187,500 per year, but can also range drastically going from negative returns to high double digit returns in any given year.