funding retirement with rental income?

[chloev]

Hi everyone,



I'm wondering what everyone's thought on their post-work finances. I know some people prefer saving up a lump sum but I am personally leaning towards buying a couple of condos and rent them out? I like the idea of receiving monthly income even after I retire. Any thoughts and comments on this?



Thank you

 

[Rickson9]

Terrible.

 

[Thomas Beyer]

To create cash-flow one needs assets.



The financial industry loves to sell you mutual funds or manage your money charging a 1-2% annual fee.



I prefer REAL assets, such as apartment buildings or its less efficient, yet still good condos or small houses or townhouses with 3 profit centers, like a three course meal: cash flow (appetizer), mortgage paydown (main course) and equity upside (dessert).



Absolutely, a good idea to own a few (or many) REAL assets and live off the cash-flow !!



Look at the below three scenarios: what is a better investment of $1M: a $4M building with $1M invested or a similar $2M asset with the same $1M invested, but only 50% levered, or a mortgage free asset at $1M ?



Assumptions: 6% CAP rate, 4% interest on the mortgage with 25 years amortization, 0.5% annual overhead costs and 1% annual investment into the asset for minor upgrades/repairs.



ÃScenario 1:
Ã$1M invested, $4M asset, 6% CAP (yield), 75% LTV mortgage at $3M at 4%
Ã$240,000 NOI minus
Ã$180,000 mortgage payment (of which $60,000 is principal and $120,000 interest)
Ã$60,000 `cash-flow` in theory .. Some of which will be asset management fees, annual accounting, tax filing costs, overhead (say $20,000) and rest upgrades (say $40,000) .. Thus NO CASH FLOW
Ã20% value growth in 5 year to $4.8M due to inflation and upgrades/rental upside (4%/year on average)


Ã>Equity in 5 years: $800,000 gain plus $300,000 mortgage paydown = $1.1M =
Ã
Ã110% ROI in 5 years ..



But no cash-flow !!




ÃScenario 2:
Ã$1M invested, $2M asset, 6% CAP (yield), 50% LTV mortgage for $1M at 4%
Ã$120,000 NOI minus
Ã$60,000 mortgage payment (of which $20,000 is principal and $40,000 interest)
Ã$60,000 `cash-flow` in theory .. Let`s assume some of which will be asset management fees, annual accounting, tax filing costs, overhead and rest upgrades .. Say $30,000 - same ratio as scenario 1 .. So $30,000 cash flow (3% on the $1M invested)


Ã20% value growth in 5 year to $2.4M - same as scenario 1


Ãl; color: black;">Equity in 5 years: $400,000 gain plus $100,000 mortgage paydown plus $150,000 in cash flow = $1.65M =
Ã
Ã65% ROI in 5 years ..



With some very modest



3% cash-flow !!








ÃScenario 3:
Ã$1M invested, $1M asset, 6% CAP (yield), no mortgage


Ã$60,000 NOI


Ã


Ã$60,000
`cash-flow` in theory .. Let`s assume some of which will be asset
management fees, annual accounting, tax filing costs, overhead and rest
upgrades .. Say $15,000 .. So $45,000 cash flow (4.5% on the $1M invested)


Ã20% value growth in 5 year to $1.2M
Ã"font-size: 16pt; font-family: arial; color: black;">Equity in 5 years: $200,000 gain plus $225,000 in cash flow = $1.425M =
Ã
Ã42.5% ROI in 5 years ..



With some decent



4.5% cash-flow !!




ÃWhat is better: Scenario 1 ..



Or Scenario 2 ..



Or Scenario 3 ??

 

[housingrental]

See discussion in:



http://myreinspace.com/public_forums/Real_Estate_Discussion/62-26733-131938-What_is_better_cash-flow_like_a_REIT__or_less_cash_invested_with_little_or_no_cash-flow_plus_more_equity_upside_.html#131938

 

[chrisnorris1]

Seems to be a very good plan. I will consider about it more when my time will come.

 

[chloev]

Yes, I do prefer having real assets. I've been reading a lot of articles online and came across this one: http://bestofourmarket.com/2012/11/turn-your-home-into-a-money-maker/ I thought was interesting. Not sure if you have to subscribe to read or not but if u're interested in alternative ways to make extra income, you might like this article! If anyone know interesting monthly newsletters about property investment, please share with me too!

 

[TangoWhiskey]

Whenever I read a post like this I always feel like people are missing what to me is the most important thing to understand when choosing what to invest in. If its less than 5 or 6 units, you and your job are the security. When its 20 units, or just 6, its the building. When the building becomes the asset, the banks get a little more motivated to understand the deal. Its essentially adding a nearly free level of professional due diligence. The risk to uninformed investors - which many on these boards can be - is WAY higher buying a couple of small condos usually guided by people who have no real understanding of investment properties. You want to get above 6 units and right now believe me the banks are under lots of pressure from CMHC not to screw up their underwriting. Its the single biggest overlooked benefit of getting above 6 units. You're spending 200K anyway on 3 rental condos probably, better to just dump it into a single transaction that generates economies of scale.



But at least you're getting started so I guess that's the main thing.

 

[Thomas Beyer]

[quote user=TangoWhiskey]

But at least you're getting started so I guess that's the main thing.
When I started 15 years ago I did not have $250,000+ to invest to buy a building, so I started with rental pooled condos. They are usually professionally managed, or if not, can be with a change of management by caring condo owners.



Later I bought buildings, first 15, then 20, then 24- suiters .. but indeed it takes more money and the asset qualifies for the mortgage, not you personally.



Starting small is what one usually does, and learns along the way. Only people who have inherited money or are fortunate enough to have saved 6 digits or more can start with a decent sized multi-family asset.



An average 20 suiter today in Edmonton, for example, is $2M with $500,000 to $600,000 cash required. Some people have that kind of cash - most don't.



So, start small, learn, don't screw up so big you lose it all [ and believe I did screw it up sometimes], grow, re-fi or sell, repeat .. a great retirement strategy !

 

[chloev]

Exactly. I want to at least start planning my retirement. Starting with something small. I'm definitely a risk adverse investor because I've been saving up pretty much all my life and I don't want to see my money going down the drain! I am, though, interested in investing in multi-family condo in a smaller town. I find big cities too expensive for me and I'm banking on the rapid growth of rural areas. I'm actually interested in a small town called Chestermere right now. It's 20mins away from Calgary. Has anyone invested in condos there before?