Most baby boomer clients I’ve spoken with lately are feeling very frustrated.
They are frustrated because financial planners have been telling them the same thing for years—they’ll need a couple of million dollars saved to comfortably enjoy retirement.
Based on the returns offered by most financial products out there, that assessment is unfortunately quite accurate.
Right now, the majority of boomers have their net worths tied up in low-yield savings accounts and expensive primary residences that yield almost no cash flow. To top things off, inflation is roaring and increasing the price of almost everything.
But the good news is, there’s a way to protect yourself going forward.
After years of steady price growth in Canadian cities, there’s never been a more advantageous time to cash in your primary residence, downsize your footprint and experience the freedom of exiting the rat race in style.
If you get it right, you’ll earn passive income for life and watch your net worth continue to grow well into your retirement years.
Worry no more
Worried about the legacy you’re leaving behind for your kids and grandkids? Concerned about getting off the straight and narrow path with only a fraction of what you’ve been told you need to retire?
I’m going to show you how a $500,000 investment—with 25 years of runway and conservative growth expectations—can produce enough income to make your “elegant exit” and grow into a sum of money significant enough to create multi-generational wealth.
The 2022 exit strategy
I have had the pleasure of consulting with a fair number of boomers who wanted to strategically invest their nest eggs into British Columbia real estate and live off of the cash returns.
I’m going to share a few different examples of how I’ve helped individuals and couples use real estate investment strategies to fund their retirement, beat inflation, and set something aside for their loved ones.
Each of these successful game plans took less than six months to a year to execute – with no investment expertise or MBA required on their part.
Case study 1: Tom
This is a real-life story about a frustrated investor who, for the sake of privacy, we’ll call Tom.
Tom was always a risk averse person, which allowed him to save up a handsome nest egg of about $500,000. Half was saved in a Registered Retirement Savings Plan (RRSP) and half in low-risk stocks, bonds and GICs.
He was about thee years away from retiring from his $75K per year job with a great credit record. Following the “conventional wisdom", Tom diligently paid down his mortgage and only had $100,000 left outstanding to own his home, which was now worth a cool $1.2 million.
By most people's standards, Tom had made it. He secured a safe future for himself and his family.
The only thing keeping Tom up at night was the fact that he worked hard his entire life but was now facing the impending reality of living on the returns of a low-risk portfolio that could only generate $30,000 per year for the next 20 to 40 years. (Based on a $500,000 portfolio with a 4% annual return ($20,000), plus his $10,000 annual pension).
Tom and his wife still wanted to travel, check items off of their bucket lists and spoil their grandkids from time to time. Tom needed a way to change the outcome of his golden years.
After reading a few of my articles, he came into my office and asked if I had any bright ideas to help him meet his financial goals. He was afraid his fixed income wouldn’t be adequate to enjoy life in Kelowna, let alone travel the world.
As a risk-averse investor, he had always been afraid of buying rental property. He heard the horror stories of tenants doing the midnight dash and leaving the property in bad shape. And he didn’t have the time to be running ads, screening tenants, handling maintenance or chasing down rent payments.
What he did like about his current investment portfolio was it offered a passive, hands-off income.
We spent the next hour or so going over his finances, and I outlined an investment vehicle we’ve used at Vantage West Realty to generate completely passive returns, while eliminating the biggest risks associated with owning a rental property.
Tom asked me to sketch up a personalized plan and present it to him and his wife. I welcomed the challenge.
Tom had around $250,000 invested in non-registered funds that were earning a very modest return. We discussed an opportunity in a limited partnership called Cashoffer LP that would offer a rate of return five times higher than his current portfolio.
The Cash Offer LP fund strategy is quite simple:
1. Sophisticated investors like Tom pool together their capital then make discounted cash offers on homes (at least 10% off of market value) to highly motivated sellers.
2. The partnership improves each property with cosmetic improvements that increase the property value.
3. The home is either resold at a profit or offered as a rent-to-own opportunity to the many Canadian buyers who do not yet qualify for a mortgage.
Tom liked this concept for a few reasons:
• He wouldn’t have to take on new debt
• He didn’t have to offer a personal guarantee the partnership has its own lending arrangement
• It’s a hands off investment managed by real estate professionals who live and breathe housing (and have major skin in the game)
Now he is invested into a diverse portfolio of more than a dozen properties, Tom sleeps well, knowing he’s earning an 8% annual cash flow and expects to double his capital in three to five years.
The combination of buying at a discount with an instant cash offer, then selling at a premium with creative buyer terms creates an exceptional return for our investors at Cash Offer LP.
Unlocking Tom’s home equity
Most of Tom’s saved equity was essentially frozen into his largest asset, his primary residence which was worth $1.2 million. By accessing a line of credit for less than $8,000 per year, Tom could draw on around $880,000 in home equity. We decided not to over leverage and only re-advanced up to 50% of his home’s value, freeing up a $500,000 line of credit.
The plan was to invest this equity into a long-term multi-family holding property. I showed him one he could buy for $2 million, with a $500,000 down payment.
After covering for expenses, including the interest on his line of credit, the property would produce an annual net revenue of $25,000.
Unlocking the RRSP
The last piece of the puzzle in Tom's quest to move from non-existing returns into the land of double was to put his RRSPs on steroids.
I showed Tom how he could invest his RRSPs into a self-directed account and essentially become his own bank. That means he would be free to allocate funds into real estate investments and earn a handsome annual return.
There are many successful Real Estate Investment Trusts that will pay an 8% dividend and allow you to be totally hands off. With Tom's new plan, he can expect to earn $20,000 per year on his $250,000 of registered funds.
So now let's take a look at what Tom will have three years down the road when he decides to pull the plug on work and set his sights on that bucket list.
CashOffer LP Investment—$40,000 (16% annualized return)
Multi-family property—$30,000 (6% annualized return)
RRSPs in a well-managed REIT—$20,000 (8% annualized return on $250,000)
Canada Pension Plan—$14,445
Tom's pre-tax earnings—$104,445 per year
A dream retirement
With a six-figure income, Tom had almost doubled his working salary and he didn’t have to trade his free time to earn it.
With $1.1 million of his cash in the real estate market earning him his dream income, all of his hard-earned equity now does the heavy lifting. To replicate those returns with traditional investments, he would have needed to save close to $4 million.
In addition to this amazing cash-flow, Tom's apartment building is now going up in price, further increasing his return on investment.
The best part of this entire process was helping Tom see what's truly possible in his retirement years. As this 55-year-old investor approaches 75 years of age and looks towards succession planning, he will have a debt-free portfolio worth nearly $4 million producing an income of around $250,000 per year.
Now you’ve seen what’s possible with a solid real estate investment strategy, here are some final thoughts to consider.
Let’s assume you can sell your present home at a profit of $500,000. Investing this amount with a successful REIT can return 8% per year and yield a $40,000 annual income. With a conservative housing price growth estimate of 3.5%, the investor could see a $56,350 capital gain in the first year alone.
• REIT Income: $40,000 per year
• Capital gain: $56,350 per year
• Net return: $96,350 on $500,000 (19.3% ROI)
Now, assuming the 55-year-old investor is playing the long game with these properties, let’s explore the amazing potential of compound growth over a long timeframe. After 25 years of 3.5% growth—as our retired investor approaches 80 years young—he will have a debt-free portfolio worth approx. $3,200,000 producing an income of $250,000 per year.
• Long-term win: $250,000 per year and a $3,200,000 portfolio.
How’s that for a legacy?
If you want to learn more about syndicated real estate investments like Cash Offer LP, and other ways to generate double-digit returns in real estate, contact me directly. Book a virtual coffee with me or email me at: [email protected] or call or text me at (250) 864-6433.
If you would like to do a 30-minute strategy call to discuss your unique situation, click here.
A.J. Hazzi is the founder of Vantage West Realty.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.