Market Watch - December 2018 - Investments

Over the past many articles, we’ve been talking about investments.  More specifically real estate investments.  Our objective has been to increase wealth (our personal net worth) but what is more important to create an income stream which we could enjoy in our retirement.  A couple of issues back we introduced a Simple Plan, which if implemented would accomplish both those goals.  Wealth Accumulation and Cash Flow.   But the plan took time.  In fact in its simplest form it would take between 20 and 25 years from the time we started until our goals were fully realized.

Well that’s fine if we’ve got that kind of time.  If we happen to be 45 years old or younger when we initiate the plan.  No problem.  The money will be flowing nicely when we hit 65 and are ready to retire.  (or younger yet, the earlier we start)  But what if we haven’t yet begun a wealth accumulation plan for retirement and we happen to be older than 40 or 45?  Perhaps much older?  Is it too late for us now?  Probably not.

If you take stock of your situation you’ll see that you have certain resources that you didn’t possess when you were younger but which can work very much to your advantage.

(a)Your Income Level

The chances are today you are earning more money than you did when you were younger.  Perhaps a lot more.  Regardless of your profession, you’ve advanced, gotten more experience, gained seniority.  Maybe even been promoted once or twice.  You’re now at the top of your game.  Income wise you are probably being paid as much as you have ever been.

(b)Your Expense Level

At the same time, the chances are your regular living expenses are much lower than they were a few years ago.  Why?  Because when you were younger you were in the middle of raising a family.  That can be very expensive.  At the same time, as your lifestyle and family develop, you were no doubt in acquisition mode.  Furniture, appliances, home renovations.  All the things you had to struggle along for in the early days you have now acquired.  Those costs are behind you.

(c)Home Equity

Thirdly, and very significantly, you have probably by now amassed a great deal of equity in your home.  It may even be paid for by now.  The chances are over the years you moved once or twice.  Maybe more often.  As your family grew and your income increased, you sold and upgraded to a bigger house in a more expensive neighbourhood.  If you followed the pattern so many people do, through the years, you may well have a great deal of equity available to you in your home.

Alright, so now what do you do?  Well, I’ll explain.  But before I do, I want to say that taking the kind of step I’m going to outline will take some courage and dedication.  It may even seem like you are taking a step backwards.  You are not.  Here’s what you need to do.  Refinance your home to take out a significant amount of equity.  This is hard to do emotionally especially if your house is fully paid for.  But realize it’s not a debt.  It’s an investment.

Now take the money you’ve released from your home and use it to buy investment property.  You can do a lot with it.  For example, if you took out $200,000 as a mortgage against your home, then at 25% down you could buy $800,000 worth of investment property.  At 10% down you could acquire $2,000,000 in additional real estate.  

How much you buy will depend on a number of factors.  Your age, the minimum amortization period the rents will carry, etc.  It also helps to know ahead of time what your income target is for retirement and how much of that will be provided through real estate investment (perhaps all of it will be).  Based on an 6% return, for example, $800,000 worth of investment property will, once paid for, net you $48,000 a year.  So suppose you require $60,000 from your real estate investments.  If you conservatively expect a 6% return, you’ll need to buy $1,000,000 worth of real estate.

Pay close attention to two things.  What’s the maximum amount of time you have available before you retire?  How quickly can you retire the debt on your personal residence and are you prepared to carry some of that debt into retirement?  Work the numbers carefully.  Tighten your belt, keeping in mind it won’t be forever and the payoff will be significant.  And do yourself a favour by connecting with a good realtor.  The person sending you this newsletter is the person to call.  They know the market, mortgage financing and the art of the deal.  Explain your goals and work together.  A good realtor is worth their weight in gold.

Wayne Quirk, Author
“THE MONEY MACHINE”
wayneq@remax-gc.com