Retire With a Handsome Nest Egg

Article from May 2011 Canadian Real Estate Magazine

By Gord Lemon

How many people 50 years or older who are looking ahead at retirement are creating the means to retire comfortably?  Statistics show that fewer people than ever are planning adequately for this inevitability, yet there is a safe and secure solution available to generate great passive income and a 7 figure nest egg.

This real estate investment program has been designed as two processes working simultaneously, cashflow and equity building. The best part of the plan is that it is simple and you can do it part time, meaning you only have to purchase one income property per year for the next 5 years.

To clearly explain this program, we will use easy numbers that will remain consistent for each property.

Strategy Part 1

In this example we will consider the purchase of a duplex (2 unit house) at the purchase price of $266,000. We will consider a down payment of 25% LTV (investor deal) making a mortgage amount of roughly $200,000 and rental income of $2300 per month.

Expenses are property taxes of $250/ month; property insurance of $100/month; heating (gas) of $325/month; water/sewer of $35/month. Let’s say the tenants pay for hydro/electricity. We will also consider a 5% vacancy allowance of $115 per month. We now have a working expense total of $825.00. The mortgage is at a fixed rate of 5% with a 30 year amortization creating monthly payment of $ 1,067. When we add the mortgage amount to the expenses we get a total of $1892. Subtracting this from our rental income we have a $408 positive cash flow (passive income).

Building Equity

The biggest expense we pay in our real estate careers is an expense the banks want us to ignore because this is where they make huge profits. This expense of course is mortgage interest. At the beginning of any mortgage, the interest portion far outweighs the principle portion. If you are an investor with the thought of holding on to your property for a number of years, you can increase your profits on the property by paying the mortgage off as fast as possible. In our example, interest expense is $9,830 in the first year or $819 per month on average. You’ll notice the bank is making twice your profit!

The average mortgage interest on a typical residential house that runs the entire amortization ends up being as much or more than the original price paid for the property! This expense is exacerbated by people jumping around to different lenders every time their term comes up for renewal which results in the mortgage amortization beginning again at the highest interest cost. Knowing how the banks make profits on your property and how to minimize it can end up saving you tens or even hundreds of thousands of dollars.

The Plan

Year 1

Purchase: $266,000

25% Down payment: $66,000

Mortgage amount: $200,000

Income: $2300

Expenses: $825                  Mortgage Pmt: $1067                    Net cashflow: $408

Summary: $1067+ $408 = $1475 to mortgage 1

We will maintain this for the first year until we purchase Property 2 in year 2. We will then combine the cash flow from Property 2, add it to the cash flow from Property 1 and pay the extra principal payment to Property 1’s mortgage every month.

Year 2

Purchase: $266,000

25% Down payment: $66,000

Mortgage amount: $200,000

Income: $2300

Expenses: $825                  Mortgage Pmt: $1067                    Net cashflow: $408

Summary: $1475+$408 = $1883 to mortgage 1 ($816 extra toward principal)

In year 3, we purchase our third property; add the cash flow to Property 1 and 2 which goes as a principal payment towards the mortgage of Property 1.

Year 3

Purchase: $266,000

25% Down payment: $66,000

Mortgage amount: $200,000

Income: $2300

Expenses: $825                  Mortgage Pmt: $1067                    Net cashflow: $408

Summary: $1883+$408 = $2291 to mortgage 1 ($1224 extra toward principal)

This continues for 2 more years until you have got 5 properties and the cash flow from all 5 targeting the principal of Property 1. You will continue to pay the regular mortgage payment on the other 4 properties until Property 1 gets paid off…that’s where the fun begins!

Read “Retire Wealthy” Part 2 and find out how this really kicks into gear.

If you would like more information
email me at info@propertyprohets.ca.

#propertyprophs
#realestateapprentice
#canadianrealestate.