I’m an airline mechanic – have a good job, late 40’s, married with no kids. I own my own home and recently bought a condo for investment. I want to continue to buy more investment property however, I’m wondering if I’m in over my head already? Thanks - John
  John has a stable income and has been employed with the same company for over 10 years. He has RRSP’s, TFSA’s, owns his own home with a small mortgage and lives within his means. He purchased a pre-construction condo, which is set to close in approximately one year. With the condo market softening, John is concerned about his condo investment.
  Couple, married, no children
  Unsure about recent condo purchase 
  Examine his current financial situation, see what his investment goals are and help with an investment direction.
  An investment plan.
  Household income $90K/yr, $60K in RRSP’s, $60K in TFSA’s, $35K in savings, $0 credit card debt.
  Principal Residence: $425K value w/ $215K mrtg = $1,240/mo Condo: $330K value w/ $240K approved mrtg @ $1,198/mo, potential rent $1,900/mo
  John bought the condo as an investment without any sort of plan or goal in mind. He liked the idea of a condo since it required very little maintenance as he works long hours. However, without a plan or goal, he really is unclear about whether his purchase was the right thing to do.

First we had to understand what John was trying to accomplish. Ideally he wants real estate to replace his income in retirement, which is 16 years away. He would like to have a home in a warmer location outside of Canada that he can use during retirement. John mentioned that the US looks like and attractive opportunity right now – however he is unsure about whether he should invest there now, or wait until retirement. He has no plans of moving from his current primary residence any time soon.

John’s cost of living is just under $5K per month, which is more than covered by his income. Once he is retired and assuming the mortgage on his primary residence will be paid off when he retires, he will need approximately $3,200/mo to maintain his current standard of living. His CPP will be approximately $550/mo when he retires leaving $2,450/mo difference.

Unlike other speculators who bought pre-construction condos in the hopes that they could assign their contract to a future buyer for a higher price, John’s plan was to buy it, furnish it and rent it out long term. John made sure that he could collect enough rent to cover all his expenses and bought in a desirable location with a reputable developer.

The developer restricted the number of investors who could actually purchase in the building in order to attract more owner occupant. This will help stabilize the building values. Plus the reserve fund was adequately funded and the maintenance fees were set so that the maintenance fees would not increase in the first three years.

Even though the condo market has softened recently, John won’t be scrambling like other investors who bought in developments with a high percentage of investors counting on flipping their condos at a higher value. Plus John has the financial resources to weather some vacancies.

He will have to watch that any significant increase in rental inventory will not affect his rental income in the future. A prudent move would be to place a higher cash buffer in his reserve account to allow for higher vacancies and/or rental incentives.

With his interest in the US, yet not an immediate desire to move until retirement, we suggested he purchase small residential multi-family property since the cash flow is higher than a single family. Then use the extra cash flow to pay off the property and when ready to retire - sell one of the multi family properties and purchase the home he likes.

This also gives him the flexibility to try out different locations to see where he would eventually like to have his retirement home. While figuring out where he would eventually like to settle, he’s taking advantage of the current market now.

Here’s how John could accomplish his goals.

If he refinanced his current home to 80% LTV and used the refinance money along with his $60K in TFSA’s, he will have enough to purchase approximately three $120K duplexes in good US neighbourhoods. At these prices, his gross rents will be approximately $1,900 per duplex and his cash flow after all expenses will be approximately $500/mo per duplex.

Since John does not need the cash flow now, he could apply the extra cashflow each month towards the mortgage principal. If he did this, he will have all three duplexes paid off in 12 years.  At that point, each property will provide $960/mo per duplex, not including any rent increases.

At year 12, he could apply the extra cash flow from these 3 duplexes and pay off the remaining balance on his principal residence mortgage.

The mortgage balance on his condo investment would be around $111,000 at this point. He could either sell the condo, refinance it, or hang on to it. If he kept it, it would be paid off in another 5 years. Or at that point, John may want to sell his primary residence and move into his condo since he would be spending more time travelling to his home in the US and other destinations.

If he moved his RRSP’s into private 2nd mortgages now and earned 10% interest, he would earn $500/mo inside his RRSP account. His RRSP would grow to $150K in 16 years and be earning $1,250/mo - just in time for John to start using it.

Including the income from his RRSP’s ($1,250/mo) plus the positive cash flow from his US rentals ($2,880/mo) plus $550/mo from CPP, he would have a total income of $4,680/mo in retirement. This does not factor any increases in property taxes or insurance. It also does not factor any rent increases either, which typically offset each other.

In addition to his monthly passive income, he would also have $1.45M in equity. This equity position is based on 3.5% appreciation per year on his US properties and 0% appreciation per year on his Canadian properties.

This conservative plan gives John a clear path and direction in order to achieve all his financial goals. It also gives him the flexibility to take advantage of the US market now, without having to commit to a final retirement destination.

He also has two different property types in Canada, which gives him the flexibility to choose the lifestyle he desires in Canada. John will have the best of both worlds and be in a very good position for retirement with a clear plan on how to get there.

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