Retirement rescue 911

What you are about to read is a true story about a frustrated investor, who for the sake of privacy I will change his name to Tom.  Tom had always been very risk averse and being this way had allowed him to put together a nice nest egg of about $500,000. Half of this was in Registered Retirement funds (RRSPs) and the other half was in low risk stocks, bonds and GICs. He was about three years away from retirement from his job where he earned a nice salary of 75,000 per year and he had kept his credit clean. Following the conventional "wisdom" he had diligently paid off nearly his entire mortgage on his $500,000 home. He had only $100,000 still remaining.

By most people's standards, Tom had done it, he had secured a safe future for himself. The thing keeping Tom up at night was the fact that he had busted his hump his whole life to get to this point, but was now confronted with the reality of soon being on a fixed income of less than $30,000 per year...for the next 20-40 years! The $30,000 is a combination of his 4% return on his portfolio ($20,000 annually and his pension of $10,000). Tom and his wife want to travel, they want to spoil their grand kids and have the freedom to start crossing items off their bucket list. Tom wondered if there was anything he could do over the next three years that would change the outcome of his golden years.

Tom came into my office after reading various articles I'd written in this column and asked if I had any bright ideas that could help him on his quest to avoid his fear of being trapped inside a fixed income barely adequate to stay in Kelowna, let alone travel. He shared with me that he had always been afraid of buying rental property because of the risks. He had heard horror stories of tenants doing the midnight dash and leaving the property in bad shape. Also because Tom still works full time, he didn't have time to be running ads, screening tenants, handling maintenance items or chasing people for rent. What he did like about his current portfolio was that it was hands off.

We spent the next hour going over his finances and I explained an investment vehicle to him that we have been using that not only removes all of the risks associated with buying a rental property but actually gave Tom a totally hands off investment with a predictable rate of return more than five times what he was getting now. Tom asked me to sketch up a plan for him over the next couple of days and present it to him and his wife. I welcomed the challenge.

With Tom still working and earning his nice salary, banks like him. We will take advantage of this for the next three years while Tom still has the income to qualify for mortgages. With Tom's cash, the plan is to buy three properties through the Empowered Renter Program in the 350-400k range. This is using a rent to own strategy to maximize the cash-flow, eliminate management and mutually agree on a fair rate of appreciation for the property, in this example it's 4%.

Each of these properties will be positive cash-flow of $10,000 per year and each will have a pre-determined rate of appreciation of approximately $15,000 as well as a mortgage pay down of approximately $7,000 per year with each deal representing $32,000 per year in total upside.  When the properties sell he has to pay real estate fees that give him an annual return of 22% on the roughly $80k in each property.

Over the next six months we will execute the plan to invest the liquid portion of his portfolio into three properties that have a cash on cash return of 20-22%.  He now has his $250,000 spread out as down payments on his three properties; $400,000 x 20% = $80,000 (multiplied by 3 plus taxes).

This $250,000 is now earning $52,000 per year on the money that was returning $10,000 back when it was in a low risk stock portfolio. It is backed by real estate that he is the titled owner of - something he can see and touch. His tenant has provided a large deposit of fifteen to twenty thousand, and is caring for the home like it is their own. When these properties sell to the tenant buyer, Tom plans to empower other tenant buyers using the same strategy, and will continue to see 20-22% returns on his capital for another 3 year term.

The plan went beyond just the three rental properties. Tom conservatively has $250,000 in available equity in his existing home. He can have access to this on a line of credit for less than $8,000 per year. The plan with this equity is to purchase a long term multi-family holding property like an 8-plex. I showed him one he could buy for $930,000. He would need to invest his $232,500 for down payment and the property would return to him after all management cost and expenses, an annual net revenue of $25,000 including the interest on his credit line.

The last piece of the puzzle in Tom's quest to move from non existing returns into the land of double digits and possibility, is to put his RRSPs on steroids as well. I shared with Tom that he could invest his RRSPs into a self directed RRSP account and become his own bank. With this he would be free to lend his money against real estate and again expect a 10-12 percent ROI. There are many successful Real Estate Investment Trusts that will pay a 10% dividend and allow you to be totally hands off. With Tom's new plan, he can expect to earn $25,000 per year on his 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.

  • His Rent to Own investments produce $52,500
  • 8-plex from equity in his home makes $ 32,000
  • RRSP's in a well managed REIT makes $25,000
  • Canada Pension Plan max amount is $10,500

Tom's Total Earnings = $120,000 per year

This is more than Tom has ever made, and the best part of it is he doesn't have to trade his time to earn it. All of his hard earned equity that he worked so hard to get over the years is doing the heavy lifting. Each of those dollars has been given a healthy quota of returning an average of 14.6% per annum. He has $750,000 of his cash in the real estate market to earn him his dream income. To replicate that in what he was doing before, he would need close to three million dollars!

In addition to the amazing cash-flow, Tom's properties are appreciating further adding to his returns. The best part of this entire process was helping Tom see what's possible for his retirement years. He left my office filled with hope and excitement for the future. That was a good day for everyone involved.

For a Free E-book that illustrates in great detail each of the deals we did for Tom, explaining the Empowered Renter Program, Self Directed RRSP and Multi Family investment pro forma, just drop me a quick email to [email protected] and we will send it off.

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About the Author

AJ is the owner of Kelowna’s downtown boutique firm, Vantage West Realty. The firm takes pride in breaking the mould when it comes to how they practice real estate. With a well-deserved reputation as a real estate renegade, Hazzi has been shaking up the Kelowna real estate scene since 2002.

Having been a student of real estate through two market cycles, AJ has come to see an absence of truly qualified professionals specializing in investment real estate. This has become AJ’s role within the firm and the community: To educate clients on how to achieve financial freedom through real estate.

Arming his clients with knowledge on where to find positive cash-flow, how to renovate for profit, and other creative avenues that most agents completely ignore, Hazzi has carved out his niche as a real estate investment advisor (REIA), and loves nothing more than educating people on the right strategy to capitalize on both boom and bust years.  AJ is a firm believer that the Kelowna market is rich with opportunity, if one knows where to look.

If you are in search of an advisor who practices what they preach, consider that AJ has built his own real estate portfolio up to include multi and single family cash-flow rental properties, development property, resort property, fix and flips, and commercial properties. By sharing the lessons learned from his own experiences, his clients get the knowledge and confidence to invest without having to make the expensive mistakes he and many new investors have made along the way.

His goal is to impart on people, especially of the X and Y generation, that depending on RRSPs and Government Pension Plans to look after us down the road is risky business. Most people don't realize that as little as one or two properties added to your real estate portfolio now, can secure a comfortable, even lavish, retirement.

Bringing a consultant's approach rather than the tired, old-fashioned sales approach, AJ and his partners offer a world class service from finding, pre analyzing, and negotiating your next acquisition, to property management, all tailored to today’s busy investor.

To hear what AJ Hazzi's clients have to say about his service view the testimonials.

Contact Information

For more details or to reach AJ Hazzi, please visit www.vantagewestrealty.com

Email [email protected] Cell 250.864.6433

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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