Strategic planning increasingly means looking to real estate for the solution – specifically, investing to build up a portfolio that pays out for many years to come. With a dizzying number of choices – from single-family homes to multi-family properties to a select number of commercial investments either here or in the States – even the most savvy investor can lose his or her way.
That’s why we’ve asked Canada’s leading experts in real estate investment to put together blueprints designed to get you retirement-ready.
Could you live on $1,038 a month? That’s the maximum amount the Canada Pension Plan paid out monthly in 2014. Scary, isn’t it? It’s even more terrifying when you hear that the average Canadian over 65 collected closer to $600 a month. That’s simply not enough money to live comfortably on, even if you love eating baked beans and Kraft Dinner. So what can you do to retire richer?
The answer to this question depends largely on how long you have until you reach your ideal retirement age. The more time you have, the better position you’ll be in to retire richer, thanks to buying and holding single-family real estate. Follow this simple plan, and you will retire with three mortgage-free residential rental properties.
You’re in your mid-40s with around 20 years until retirement. Your aim is to amass a portfolio that provides you with at least $50,000 per annum in your retirement years.
Step 1: Turn your current home into a rental property
You purchased your home five years ago for $300,000. If you were to rent that house out, chances are you’d get around $1,800 a month, depending on the market you’re in.
You have two choices: You can stay in the property and add a basement suite to boost its income, or you can sell the property and replace it with one that will work for this first step. The intention in the second option is that you’re already turning your home into a rental property, and moving into a new property that will become a rental property in three to five years.
Step 2: Rent out your last home and save for the next
Since you have now moved into your second home with just a 5% down payment, you can afford to rent out your first single-family home. Even if the property doesn’t appreciate by 4% every year (which has historically been the average), you’ll still be paying down the mortgage by hundreds of dollars every month.
Step 3: Buy your next investment property
At the start of the fourth year, buy another $350,000 property that has a suite or can easily accommodate a suite addition. Now you have three properties.
Step 4: Rent out your last home
The next step is to rent out your last home (the one you lived in that had a suite) and move into the new one with 5% down. Now you’ll have your first home as a rental, your second home plus suite as a rental, and you’ll be living in the third home and renting out the basement.
Step 5: Buy another property for $400,000
At the start of the seventh year, buy another property for $400,000 (assumes appreciation of 2.5% annually since first bought) that again has a suite or can easily have a suited added in.
Step 6: Rent out the third home
Rent out your third property and move into the new one with a 5% down payment. You now have four properties, and you’ll be living in the fourth home, again with a suite in it.
Step 7: Let time and tenants do their job for 14 years
During this time, do not refinance or pull equity out of any of the properties. Excess cash flow should be saved to pay for maintenance and repairs over the years.
Step 8: Retire in Year 20
Assuming you live in one of the properties you’ve purchased in those past 20 years, you’ll have a total of four properties at a market value of $2,227,455, with a net income of $3,307 per month, or $39,684 annually.
Of course, a plan like this makes a lot of assumptions. But it really is as simple as holding a few properties while time and your tenants take care of the rest to ensure you have a lot more comfort in retirement than Canada’s Pension Plan will be able to offer you.
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Canada’s current retirement age is 65, but the Conservative government revealed in its 2012 budget that it intends to raise the eligibility age for Old Age Security to 67 by the year 2023. With individuals typically living longer and the prevalence of final salary pension plans rapidly decreasing, how can Canadians build up enough savings to enjoy their retirement years?