WHY I PICKED FINANCIAL PLANNING: Im not the sharpest tool in the shed, that I learned real quick as I began talking to people. Being in Sales showed me really quick just how stupid I was, that said, Ive spent years now trying to catch up. So Id like to pass on a little wisdom I picked up along the way, this came from a 55 years old electrician I met, he must have liked me cause he took me off to the side and let me in on a little secret he had. Heres the just of his wisdom. It starts with: “What do I want to be when I grow up?” Weve all pondered that question & some of us still do. Easy – you grow up, you find a job or start a career, then, after a few years of working the next question comes: “When can I quit this crap, I really dont like working that much?!” It doesnt matter how old you are right now, odds are, retirement has crossed your mind at some point. Maybe in passing, maybe in-depth… But really, what does your retirement actually look like? How do you actually achieve it with interest rates at like 2 to 4%? We need no risk in those golden years, do we? If youre like most people, the answer to the first question is easy: “I want enough money to retire comfortably & I’d like to pass along something, maybe a little wealth to those I love, maybe even give something to my family members.” Those are wonderful goals, ones that I share. However, I often find that most people don’t really know how much they need to retire comfortably OR how theyll achieve it. Are you putting money away every month? Do you have a pension or maybe you dont, if you do, do you plan to rely on it? Is the government going to take care of you or will you ever be able to quit working? “OK CHRIS, I get it, so what’s your point?” Well, I get this question a lot: Okay smarty pants, what the special sauce, how do I solve that problem in this economic environment? With interest rates at near century lows, Id need like 2 to 3 million if I intended to rely on bonds or mortgages, maybe I could get 7 to 9 percent out of 2nd mortgages, but those can get risky, especially in retirement. What do I do to solve this dilemma, to them I respond Real Estate! That said; “How much property would I need to own to build my own retirement fund?” THIS brings me to a Personal Real Estate Retirement Plan. So how much real estate do you need to buy today to live comfortably tomorrow without relying on the government? First, let’s go over some quick assumptions: 1) Income - Don’t know what kind of income you need? Let’s look at what Ontario teachers receive in retirement (considered a solid pension fund). If a teacher retires tomorrow and makes an average of $85,000/year in their best 5 years and has 30 years of service, their annual pensionable earnings [APE] will be 60% of that average – meaning $51,000 per year upon retirement (otpp) – so lets make $51K our goal for future income, that keeps it simple. 2) Inflation - But that’s $51K in the future – how can I compare this with real estate?” Easy – Real estate over the long term is what’s called an INFLATION ADJUSTED ASSET, meaning that it rises with inflation. WOO HOO, Nice! This allows us to work in today’s dollars since we know that both rents & property values go up over the long term, at least matching inflation. Well match inflation, nothing more, nothing less. So even though your income 25 years from now will be greater, were assuming the buying power will be the same as in 2014, because it will. 3) Break Even - We will assume that your real estate investment will simply break even and that you hold it for a standard 25 year mortgage length. No positive cash flow. “But what if I don’t have 25 years until retirement? What if I want to retire sooner?” Thats fine, but let’s use this as a starting point. You can always adjust the model to account for your desired timelines, which is simple math. 4) Investment property – Keeping it generic, well assume youre buying a pretty standard up/down duplex for $300,000 in Anytown, Canada. Going to the U.S.A. is what I did, there I just bought 22 units for $340,000 [$75,000 in renos puts it at $415,000 all in for 22 units, these generate $150,000 in gross rents a year, leaving just under $60,000 in net income.] in Fort Worth, Texas. [this includes your mortgage payment, property manager, etc, in 25 years you can eliminate the mortgage payment. You simply add the $2,000/month [$24,000/year] spent on the mortgage to the $60,000 in income stream. The awesome aspect, tenants pay off your mortgage leaving you a property free and clear]. So with a purchase price of $340,000 + 75,000 in renos = $415,000, you would receive an income of $60000 from this property today, annually, in 25 years from now just simply use add 3 percent per year on a compound basis. Ill let you figure that one out, its very cool, in both rental income & equity growth. Now for the magic. How many properties do you need to buy to meet or beat that $51,000 annual pension? You need one multiplex. Call it 22 units and youve created a $60,000/year retirement income. You might be shocked that it’s not 50 or 100 properties. But with only 22 average performing properties that break even, and a long-term strategy to support it, you’ve built a healthy retirement income. NOW, let’s not forget one huge point – yes, you’ve created the income you need to match a pension, but you’re also left with 22 units free & clear. Assuming no increase in value over 25 years, your properties are still worth $415,000, which means you are sitting on $415,000 of equity & theyve been paid off! Assuming no price increase and no income increase, youve created over $60,000 in annual income AND $415,000 in equity that is all yours. Sell one or two & get some cash, keep the other 20 & leave them to loved ones or family … or sell them all and travel the world…or buy more & really grow your wealth! Let’s recap the original goals: 1) To have enough income to retire comfortably (no government reliance) – check! 2) Wealth (the property value) to pass along to your family – double check! I don’t claim that real estate is always easy, but it is definitely simple. Why leave your future in someone else’s hands? Discover how you can create your own retirement portfolio today.
Posted on: Wed, 05 Mar 2014 23:14:50 +0000
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