Retiring early with real estate

Let your portfolio work for you: One investor gives his tips to become completely financially independent at any age.

By Sve Pavic, fulltime investor

Millennials have it tough financially- we’ve been told if we go to a respected University, study hard and get good grades we will land a great paying job. The reality? You graduate with loads of debt with no assistance or prospects of getting a great job and you return for more schooling thinking it will solve the problem. To add salt to the wound, house prices and rent keep increasing beyond reasonable affordability. As a millennial, I’m here to tell you that you can create your own financial freedom and you don’t need to settle and live in your parent’s basement into your 30s. In fact, I’m here to show you how we purchased our first house at 24, live for free by “house-hacking” and create passive cash flow for life.

What is house-hacking? The concept is simple yet powerful: purchase a house, create an income suite (e.g. basement apartment) and rent it out for passive income. The rental income from the apartment can either pay for the majority of your mortgage and living expenses, or you could even get paid to live for free. If you live in the main/ upstairs unit and rent out the basement, you can have the majority of your mortgage covered. If you go one step further and live in the basement/lower unit, you could not only live mortgage free but you could also have profit leftover in your pocket.

The first hurdle millennials and most people have to overcome is coming up with the downpayment. In our case, we lived below our means in order to save for a 5% downpayment. Another strategy is to borrow money from family, friends or private lenders. If required for financing, you could also ask them to act as a guarantor / co-signer.

Once we had the downpayment and financing confirmed, we purchased a detached fixer upper bungalow in the GTA which met all of the requirements for a potential basement apartment (e.g. ceiling height, separate entrance, zoning, parking, etc.). The house walkouts to a large backyard and backs on to ravine which is a major selling point for tenants. We built an open-concept legal 2 bedroom basement apartment with high-end looking finishes. We ensured we made the space look modern, bright and open so that it didn’t feel like a typical, dungy basement apartment. We started off by charging $1,250/mo (non-inclusive) with many applicants. Now we rent the unit for $1,450/mo (non-inclusive) and live mortgage-free.

Since then, we have refinanced the house based on the built-in equity and purchased another property which will be converted into a duplex. We are using this same strategy, except creating a 3-bedroom basement apartment and renting both units individually by room. The property is expected to cash flow more than $1,000/mo after all expenses. Once this duplex is complete, we will be refinancing and finding another property to expand our portfolio.

Rinse and Repeat until you reach your goals of financial freedom.

Related stories:
Make every weekend a long weekend and retire rich
Time to invest in tourism?

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

Read more

The Easy Way to Create a Real Estate Empire (and … – Fool Canada

Many Canadians are attracted to the world of real estate.

There are countless stories of savvy investors who, after a few decades of hard work, now live on the rent generated by a nice portfolio of investment properties. These investors have ridden the bull market in virtually every Canadian market to handsome price gains as well.

Many investors who want to duplicate this path to wealth are out buying rental properties as we speak. But unfortunately, it’s unlikely they’ll see the level of success as the last generation did. Cap rates are much lower than before–a consequence of low interest rates–and it’s unlikely they’ll see the kind of capital appreciation enjoyed by their parents.

There’s a better solution. It offers the potential for better returns going forward, and investors don’t have to worry about any of the day-to-day operations.

Leverage REITs

You can probably tell where I’m going with this. I’m convinced Canada’s largest REITs are a better choice than a traditional rental property for many reasons. Often, the distributions are taxed at a better rate than straight rent received from a rental property. You get the benefit of professional management at a great price because of economies of scale. And REITs give retail investors access to areas of the market they normally wouldn’t be able to participate in, like commercial or industrial property.

There’s one advantage to buying physical rental property over REITs though, and that’s the ability to leverage. It’s possible–although usually not recommended–for an investor to purchase a rental for just 5% down. That kind of debt can lead to a succulent return on the original invested capital if done right, but it also adds significant risk. If underlying property values fall 5%, it would represent a 100% loss on the original investment.

It’s for this reason why most real estate investors put down 20%. That amount allows them to avoid expensive mortgage default insurance, and it builds in a little margin of safety. It’s still enough leverage that investors can capture the positive aspects of borrowing as well.

Investors can use leverage to buy REITs, and pretty easily, too. Most Canadian REITs are eligible for what brokers call reduced margin, which means you only have to maintain 30% of the stock price as equity in your account.

An investor could then supplement that by borrowing outside of their account. Say you had $50,000 in cash and the ability to borrow another $50,000 via a home equity line of credit for 3% annually. You could then take that $100,000 and easily use it to buy $200,000 worth of REITs. At a 50% debt-to-equity ratio, you wouldn’t have to worry so much about margin calls either. And depending on your broker, the cost to borrow could be as low as prime.

Of course, there’s a big risk factor. If the value of the underlying REITs falls significantly, you’ll either be forced to come up with more cash or sell at a loss.

An example

Let’s look at a real-life example of how an investor could do this using two of Canada’s largest REITs, H&R Real Estate Investment Trust (TSX:HR.UN) and RioCan Real Estate Investment Trust (TSX:REI.UN). H&R yields 6.9%, while RioCan pays 5.6%. Assuming equal amounts of the two, an investor would be looking at a 6.25% yield.

On a $200,000 investment (with $150,000 borrowed at an average rate of 3%), an investor would collect $12,500 per year in dividends, while paying out $4,500 in interest. Unlike with physical real estate, there are no other expenses. Gross profit would be $7,000, while net profit would be $7,000 minus taxes.

That’s a very attractive 14% return on the original $50,000 investment.

I picked H&R and RioCan because they’re two of the more solid REITs out there. Both have good management teams, diverse portfolios, reasonable balance sheets, and attractive payout ratios. If an investor wanted to take on more risk, there are others out there that could easily bump the total yield for the portfolio up to 8%.

And the best part? If you buy REITs, you’ll never have to fix a toilet again. Nice potential returns with no work? Sounds good to me.

Like REITs? Then you can’t afford to miss this!

We’d all love to have a steady stream of extra income, but who wants the hassle (and expense!) of buying and managing property and dealing with tenants? We have a much better option: real estate investment trusts (REITs) allow investors like us to purchase shares in a diversified portfolio of properties and earn a share of the profits!

Want to know more? Our just-released report, “Earn $6,000 Per Year in Rental Income Without Becoming a Landlord” has all the details. Just click here now to find out how to get your FREE copy today!

Fool contributor Nelson Smith owns shares of H&R Real Estate Investment Trust.

Many Canadians are attracted to the world of real estate.

There are countless stories of savvy investors who, after a few decades of hard work, now live on the rent generated by a nice portfolio of investment properties. These investors have ridden the bull market in virtually every Canadian market to handsome price gains as well.

Many investors who want to duplicate this path to wealth are out buying rental properties as we speak. But unfortunately, it’s unlikely they’ll see the level of success as the last generation did. Cap rates are much lower than before–a consequence of low interest rates–and…

Read more