Have you been thinking lately about retirement? Are you worried
about whether CPP will support you in your old age? Are you finding
it difficult to set aside money for RRSPs? To own a home just may
be the RRSP of the future.
The ability to have disposable cash has always been a problem.
In order to buy an investment, we must have either the cash savings, or
the ability to support the payments on a loan to provide the cash.
No matter where you are in the ladder of life, the easiest way of finding
the cash flow (disposable cash) is to first own a house, then payoff the
mortgage on that house. It seems really easy to say, but when you
stop to think about it, eventually the mortgage will be paid on that house.
It might take you 25 years to do it, but sooner or later the mortgage will
be paid, then automatically, you now have the cashflow to invest.
Yesterday you were paying $1000/month on the mortgage, today the mortgage
is paid. If you continue paying rent, the chances are slim that you
can ever find the cash flow.
You might say that it takes too long to payoff the mortgage on the
house. You might say that beginning your investment life only
after you payoff the house is too late to start. You might say that
tightening the belt now is a better way to go. It is my opinion that
starting to invest as early as possible is important, but maintaining lifestyle
is equally as important. Living standards need not be compromised
if you first payoff the mortgage on your home, or refinance your home to
draw equity and yet maintain the payments where they were originally.
Once you have the disposable cash, where to invest is the next question.
Of late, investment real estate may be the way to go.
Real estate no longer appreciates at double digits, and some mutual
funds do indeed seem to grow at 10-12% per year, so why real estate?
If you have a good financial advisor who monitors mutual funds day in,
day out, you may be better served with the latter investment, but most
of us novices can see, taste, and feel real estate. People will always
need a roof over their heads. There are ways of purchasing multi-unit buildings
that won't cost you a penny to run, and may even make money from the beginning.
Let's look at a recent client. Fred is 48 years old. He
has a good stable job with a paper company here in Ottawa. He and
his wife have just recently (June 1,1998) paid off their home mortgage
that was costing them $1010 per month principal and interest in Orleans.
Since the mortgage is now paid, they automatically have $1010 per month
that they can invest elsewhere without giving up lifestyle. Fred
wants to retire in 12 years. They could start setting that money
aside every month to invest in mutual funds, or they could remortgage their
house with a 12 year amortization and new payments of $1010 per month.
That would generate $100,000 of new money. The new money could go
into mutual funds, but Fred decided to buy two duplexes (four housing units)
instead and use the money as down payment and closing costs. The
deal looks something like the following:
Purchase price of each duplex $135,000
Down payment necessary on each duplex $ 40,000
Amount of mortgage required on each duplex $ 95,000
Closing costs on each duplex (including new appliances, repairs, reserves)
$ 5,000
Monthly cash flow on the new venture would looks like this:
Property
Mortgage + Taxes Maintenance
Rental Income Cash Flow
A |
$850 |
$150 |
$1300 |
$300 |
B |
$895 |
$150 |
$1425 |
$380 |
Fred now owns four rental units that not only carry themselves but
actually make money every month. The excess money will go into
a bank account in case there are surprises during the year (vacant units,
insurance, repairs etc). The money left over in the bank at the end
of each year will go to pay down the debt on the investment units.
In 12 years, when Fred retires, his house will again be mortgage free.
These two duplexes will be down to 50% of their original mortgage so he
could sell one and keep one, mortgage free. The rental income
can now be an additional pension cheque. A well thought of plan that
quite frankly would not have worked unless Fred had owned a house and had
paid off the mortgage. Your turn to plan!