How does today's 30 yr. old ensure he retires rich at 55?
After just turning 30 this summer I've had this overwhelming feeling that it's time to get serious about the future. Time for Dreams to become plans and plans into action. At the top of any 30 year olds list has got to be not only retiring rich but retiring young. Not that my dad would ever hear me admit this but 55 is still very young, especially these days with the advances in modern medicine. So how does one make sure they've got the means to enjoy the empty nest years? And what does it really take to ensure a comfortable retirement and nice legacy for our children?
It seems to me that 2 million dollars and 100k per year in passive income would tic both boxes by most peoples standards. OK but how does someone with no pension plan, zero faith in governed CPP and a shaky history with RRSP's put his vision of retirement not only in motion, but on auto pilot?
Well assuming for this example that life's most effective bank account draining creatures called kids appear in approx. 5 years, we've got a window to take this disposable income and put some of it to good use. This plan involves the investment in 3 rental properties at an average value of 250k that have positive cash flow purchased over a 5-year span. A person’s plan to have kids or not is not the crux of this plan; I just work better with a deadline! Thanks to a very handy app on my IPad that saved me hours of algebra and a solid understanding of market fundamentals, I was able to come up with the simplest formula to achieve the 2 million dollar portfolio with 100k income
Acquiring real estate holdings beyond the primary residence is something that many cultures seem to grasp a lot better than the average Canadian. I can't tell you how many elder Europeans and Asians I've encountered with massive portfolios of real estate worth millions despite their modest earnings their entire career. So what does it really take? What is the real commitment here? Simply put, it starts with 50k representing your 20 % down payment on your first quarter million dollar holding property. It also requires reasonable credit and reasonable income, nothing fancy.
After the first one, the clock starts. Sometime over the next 3 years it's your mission to generate or find the next 50 k down payment and once more in the following 2 years. For some it will be diligent saving by living within their means. For others it will require proceeds from property flips or some other successful venture. And for many it will be borrowed from their primary residence with a credit line, or any combination of the above. The bottom line is it’s not all that difficult. It starts with a decision; followed by seeking some help from professionals like realtors, mortgage brokers and financial planners to help you maximize your returns. There all kinds of nuances that can take this plan and ramp it up even further, but the nuts and bolts of it couldn't be simpler.
So now after all that I better explain the numbers and show the example in action. Some very conservative assumptions have been made for the purposes of this example the historic appreciation rate of real estate (5%) and the historic inflation rate of rents and expenses (3%) applied to a 25 year timeline for holding 3 investment properties bought at various stages of the first 5 years. Here are the highlights however the entire investment picture can be found in PDF by clicking here.
Total Portfolio value in 25 years $2,276,913
Annual net revenues from rent $ 102,844
25 year Return on Investment 2,055%
Skeptics may say this is pie in the sky; however I believe it is very conservative to expect the 250k house in Kelowna to be 750k after 2 complete market cycles. One look at what people pay over a million for only a 48 min flight away at this very moment and a glance at any real estate price index chart for the past 100 years and it would be tough to refute. If the growth we've had in the 25 years in Kelowna while I've been here is any indication of what's to come, the future is very bright indeed for our beautiful lake city.
This model applies whether you're 20 or starting at 50. The 30 to 55 illustration works because it fits the social norms but the reality is it’s never too soon or too late to implement an investment strategy like this. In fact I started this at 20 and I expect I will be doing it at 80. The moral to the story is a wise man doesn't wait to buy real estate; he buys real estate and then waits...