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Meet Jim and Margie. They grew up in Oakville and they are in their early twenties. They go out with a great realtor and purchase their first home with a minimum down payment. Their parents have wisely taught them to be intolerant of debt so they start to accelerate their mortgage payments immediately after moving into their home. Both of them have pension plans at work so they leave their retirement in the hands of their employers. They live a great middle class lifestyle and diligently focus on paying off their mortgage faster.
One day, a faithful friend recommends that they meet with a financial planner to set up a retirement plan for themselves. They are relieved about the plan since their retirement was starting to worry them a little. However, because they are so uncomfortable with debt they decide to pay off the mortgage faster so that they can be mortgage free in their late forties. One day in their late forties they pay off their mortgage, become the envy of their friends and pay another visit to their financial planner. At the visit to the planner they realize they have just more than 15 years to contribute to their retirement plans.
For the next 15 years Jim and Margie apply all of their resources to getting their three children through university and bolstering up their retirement plans. Unfortunately, Jim and Margie are forced to retire at the age of 65 when they have reached only 70% of the retirement savings goals. For the next fifteen plus years they live off their savings until they reach their late eighties when they run out of funds and have to look to the equity in their home to provide for themselves in the late years of their retirement. The only way they can have access to the equity in their home is through a mortgage; the very thing they wanted to get rid of in their early years.
This tale plays out too often in Oakville and that is why the fastest growing mortgage sector in Canada is for borrowers over 65 years old. This comes as a surprise, if not a shock, to many, but this typically happens because of two reasons:
- The borrowers did not follow a plan to pay off their mortgage within a pre-determined timeframe.
- They did not save enough and have had to get a reverse mortgage to fund their retirement lives
Both of the above problems can be remedied when we do the following:
- Established a budget and stick to it
- Establish a workable pan to pay off our debts without ruining our financial future.
- Establish a retirement plan early in life to get on the right side of compound interest.
In future articles we are going to explore each of the three points above so we can bring financial peace into our homes. We will provide practical handles for each one.
A rental property can be a great enhancement to your financial portfolio.
After all, it is a very tangible asset that you can manage yourself and the world’s richest people all own real estate. While real estate has been increasing over time it is not fair, nor wise, to assume that real estate investment beyond your principal residence is for everyone. Is a rental property for you?
Before you decide to purchase an investment property first ask the following questions:
Do you understand real estate?
Real estate has cycles and not all real estate is the same. A four plex should be more profitable than a single family home and condos in an elevated market are almost never profitable based on opportunity costs.
Are you handy?
To own an investment property, you either need to be handy so that you can fix problems that your tenants report or you will need to hire a property manager.
Do you know how to qualify tenants?
Your peace for your tenant’s term depends on the kind of tenant that you allow to rent from you. A good tenant will make your life a pleasure and your property will have a better chance to be profitable, while the wrong tenant will cause you nightmares and they can cause damage that will cost you a small fortune. There are tried and tested things that you can do to assure yourself good tenants.
Do you have a network of capable professionals?
You will need a network of professionals that can assist you with the closing of your investment property, but also beyond that. You will need the following professionals:
- Mortgage Broker – One who specializes in investment properties and can make suggestions about ownership structures etc.
- Real Estate Agent – An experienced realtor who understands investment properties.
- A lawyer – To close the purchase, but also to assist you in potential future tenant disputes.
- Accountant – Get a professional involved when it comes to taxes. After all, you are now running a business.
- Contractor – A trusted professional for property repairs or renovations
- Property Manager – In case you want someone else to manage the property and tenants for you.
Do you have sufficient resources?
Do you have enough resources to assist you in case of vacancy, property repairs etc. You should not have to go into debt to fund deficits or costs associated with the property.
Do you understand the geography of the property?
The geography of the property will determine the appreciation of the property and what kind of tenants you will get. The further the property is from you, the more difficult it would be for you to manage the property.
Do you have a real estate strategy?
What is the purpose for wanting to own an investment property? Will you own the investment property or will you own it through a holding company? To reverse the wrong strategy will be costly.
Do you understand your rights as a landlord and those of your future tenants?
Ontario has a very clear tenant act and you cannot just simply evict a tenant or increase the rent whenever you wish to. Research and know the law so that you can manage your tents effectively, fairly and you can be profitable.
What makes for a good investment property?
Do you know what a healthy property investment portfolio should look like? When do you you become too high a risk for banks to deal with? When will a property truly be profitable? Should you be purchasing a single family home or a 4 plex, etc.
Do you have the stomach to own an investment property?
Are you OK with coffee stains on the carpets, weeds growing in the front yard, rent cheques being paid too late and calls from your tenants at strange times of the day? Some people are not and it can ruin the investment property experience.
It takes an entrepreneurial spirit to own an investment property, because owning an investment property means you own a business. Ask the questions so that you are empowered before you start owning investment real estate. We can help prepare you and we would love to have a conversation with you about your next property. Get in touch today!