March 14th 2021
If you’ve ever taken one of my “Money Machine” seminars, listened to the tapes, or read my newsletter articles, you’ll know I espouse a very simple plan. Buy one property a year for ten years, never amortize for more than 15 years and never sell. Do that and you’ll retire into prosperity with a comfortable pension of passive income.
But there are a lot of possibilities and options beyond that. I’d like to share one in particular, if you happen to have started quite young. Based on the plan, 25 years from the day you start, all your properties should be paid for. In fact, with rental increases along the way, you’ll probably achieve full financial freedom in about 20 years instead of 25.
And let’s suppose at that point you choose to keep working. You don’t have to, of course. The plan supplies you with lots of income. But if you choose to keep working and earning a salary, you find that your rentals are providing you with lots of income that you don’t really need in order to live. And suddenly you have lots of options.
By way of example, lets suppose after implementing the plan you end up with a portfolio worth about Five Million Dollars ($5,000,000). That would represent 10 properties with an average value of about $500,000 each. Of course, in all likelihood you didn’t pay anywhere near that for them. Just in the last 5 years properties in Niagara have appreciated about 120%. So, it could well be your actual acquisition cost was somewhere in the Two Million dollar range involving significantly less of your money as down payment. But regardless, based on a current value of Five Million dollars and a cap rate of 5% you would be receiving about $250,000 a year in passive income. Even after tax of 50% you still would have enough to cover the down payment on another purchase each year! And if it needs extensive renovations and repairs, you can use all of next years rental income to invest back into the property. Or to upgrade your existing rental fleet. And the nice thing with this type of remodeling, you can generally expense it out the year you do the work rather than capitalizing it. That means you can avoid tax and have the full $250,000 to work with.
Or, if you like, pay the tax, save the rest and buy another property for cash in about four years. The point is you are suddenly in a very enviable position cash wise to do a lot of exciting things in real estate.
And while this illustrates the potential available to you once you have achieved your plan, the fact is that you were really in a pretty good cash position along the way. Bear in mind that your first property was paid in full at year 15. The surplus cash started to become available then and increased every year thereafter. That cash, combined with the equity built up by the combination of property appreciation and mortgage reduction gave you the ability to access a lot of equity by re-finance. This delays the day when everything is paid but greatly enhances your portfolio.
By way of example, I purchased a tri-plex recently. I paid 20% down which came from my rental cash flow. Amortized the mortgage over 10 years and with the rental income servicing the debt plan to use the surplus rental cash to pre-pay the mortgage and retire the debt in 5 years.
The point is that you have options. Retirement income is the big pay off, but there are lots of possibilities along the way and if you enjoy the process of acquisition and renovation, it can be a lot of fun playing with the surplus money your portfolio provides.