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Ways to grow passive income for life

Retirement rescue plan

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’s plan

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.

In conclusion

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.

The precarious state of Kelowna real estate in 2022

Speculating or investing?

With a white-hot market and macro signals that point towards a market shift, what strategies and tactics can savvy real estate investors use to make it out on top and protect their newfound wealth?

First, we must draw a clear distinction between speculating and investing. Speculation is a gamble that property values will increase in the short-term. Investing is buying a property for the positive cash-flow, mortgage buy down, and tax advantages

In 2022, 30% annual price increases have made a lot of local real estate speculators feel like geniuses. Even if your cash flow situation is negative, the $200,000 in property appreciation totally eclipses a negative cash flow of $500 to $1,000/mo.

But after a few years of unsustainable growth, now might be the best time to capture your gains and get your portfolio ready for the next phase of the market.

Payments are as low as they are ever going to be right now. To help tackle price inflation, The Bank of Canada is expected to increase interest rates in the coming months, which has the potential to decimate some mortgage holders.

As we’ve shown, even a 1% increase in the prime rate will have a major impact on mortgage affordability. Combined with other economic factors, this could be the tipping point where certain investments don’t make economic sense to hold through a downturn.

To show you the hard reality, let's run the numbers on a common investment property in Kelowna.

The investment equation of a two-bedroom apartment in Kelowna

Right now, a median two-bed apartment in Kelowna will cost you about $525,000. Based on the Vantage West Market Rents Grid for Q1, a two-bedroom apartment in Kelowna will command $2,100/mo in rent payments.

Your mortgage payment, with 20% down and 30-year amortization at 2.5% interest will be around $1,650/mo, netting you $450/mo before any other expenses.

After paying strata fees around $350/mo and property taxes around $200/mo, you can see how this investment is already underwater by $100/mo.

It’s no big deal if the property’s value is increasing by 100x that per month. But what happens if you carry this mortgage into a recession brought on by rising interest rates?

If you stress test this apartment through a 20% drop in rent and a 1% increase in interest rates (while factoring in some vacancy, repairs, and maintenance allowances), you’ll arrive at a negative cash flow situation to the tune of minus $10K/year.

One could argue that if the mortgage is being paid off at approximately $10k/year, you’re technically offsetting that loss. The reality is that cash-flow in a recession is everything. Negative cash flow can be the kiss of death for many investors who lack the necessary staying power.

My advice to many of our investor clients is that they should consider selling any property that could become a cash flow drain in an economic recession.

Right now the market right now is likely as favourable as it’s going to be for the next decade. If your plan was to cash out sometime in the next decade, now is the time to act.

We recently conducted a survey of homeowners and found nearly everyone held an optimistic view about the housing market.

• 72% believe the market still has some runway left

• 20% believe that the market will level off this year

• Only 3% believe we’ve reached the top

In the U.S., Fannie May conducted a recent survey that asked people if they believed now was a good time to buy. Their results represent the lowest buyer sentiment in recorded history.

• 25% of Americans said that now was a good time to jump into the market

• 75% of Americans said no

Is there a clue here? Why would two different surveys ask the same question show inverse results with three-quarters of Canadians thinking now is a great time to buy, while nearly three-quarters of Americans believe now is a good time to pump the brakes? Something’s got to give.

If you are looking for a way to capitalize on what potentially little time we have left of this historical seller’s market.

You will find the appropriate strategies being discussed at the Free and informative Seller’s workshop March 7th. Register here

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

2021 predictions for city

As we look to 2021, I think a lot of people are excited to see 2020 in their rear-view mirror — the year that became a meme in and of itself for being wildly unpredictable and apocalyptic.  

The real estate market, however, started out strong, fell off a cliff during the first lockdown in the spring, then rallied back incredibly and finished a record year in many sectors. 2020 will be remembered by realtors fondly, I can assure you of that.

Luxury sales went through the roof as people fortified in anticipation of the next lockdown, and total sales jumped over 70% year over year. 

Now well into the fourth quarter, things are slowing as per the seasonal norm as the snow starts to fall. The question on everyone’s mind is, what does 2021 have in store for us? 

I was fairly bearish on the post-COVID market six months ago. I expected to see demand fall off once the bottleneck of buyers displaced from the spring lockdown had done their thing.

The market proved me wrong and continued to pick up steam. What hadn’t been predicted was the behavioural shift brought about by COVID-19 that would play right into the Kelowna real estate market’s hands.

Suddenly, workers became untethered from their offices, which caused many to completely rethink where they called home.

People who endured consecutive months in smaller living quarters began questioning their urban existence, and began the search for greener pastures. Buyers sought elbow room, a yard, ample space for home offices, gyms and at-home classrooms. 

Many homeowners living in the Lower Mainland made the decision to seek out a less populated area close by that offered relative affordability and the same four season lifestyle they were used to.

Kelowna became a focal point for so many seeking a change.

These behavioural shifts set in motion by a global pandemic will have a lasting impact on the buying decisions and will continue to funnel people into the Okanagan, so I see the demand remaining strong through 2021 and beyond.

This combined with record-low mortgage rates should generate enough sales activity to hold our inventory levels down in seller’s market territory in 2021.

The overall sales volume for the past two months was nearly $1 billion, this is unprecedented for our market when compared to last year at $470 million.  

This represents a lot of proceeds that find their way back into the local economy. There are dozens of ancillary businesses that benefit either directly or indirectly from this. Service providers, contractors, local retailers, you name it. 

This is good news.

Now, if you’re a buyer, you may not hear this as good news. If you have been on the sidelines for even just three months. you have watched the average single family home in Kelowna jump by nearly $40,000 and over $70,000 if you’ve been on the sidelines since before the pandemic.

Now, it's not all full steam ahead, the market will face some head winds. As single-family homes had the largest price jump, the entry-level property has been pushed out of reach for many first-time buyers.

This combined with a strict lending environment will keep many would-be homeowners on the sidelines in 2021.

The other challenge we face is a small business economy that is a little battered and bruised after lock downs and social distancing protocols put into effect. The impact on our local job market is still unknown, but this will likely play out in 2021.

This brings us to the potential foreclosure issue that may be brewing — 3.7 million borrowers in Canada are still in government and private-sector mortgage forbearance programs. That’s about seven per cent of all active mortgages, according to Black Knight, a mortgage technology and data firm.

Barring further government support, experts there predict serious delinquencies could be on the horizon.

Having said that, I doubt we will see many foreclosures, however, as people have gained so much equity that they would just sell their property prior to the buyer getting conduct of sale.

In conclusion, my prediction for 2021 is a robust year in Kelowna real estate with some excellent growth opportunities in the higher-end single-family homes, recreational property and agricultural land.

A very strong rental market with low vacancy indicates that positive cash-flow will still exist for investors and homeowners can look forward to another year with single-digit property appreciation.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.