Financial Advice for ER

[winpplui]

I am thinking on early retirement.

We immigrated to Canada from Argentina, and we were lucky (at least as today) to buy rental properties at low prices.

As today we can retire in five years, but we are not sure what to do with our rental properties. We have nice houses and duplex properties.

We think to keep houses that worth $200k each and they can provide $12k/year each one before paying income tax.

That is almost 6% ROI (again, before paying tax) with some work

My wife want to keep the house to inherit them to our kids

Does anyone has a similar experience?
Does anyone has something better ?

 

[ExFlyBoy5]

I am thinking on early retirement.

We immigrated to Canada from Argentina, and we were lucky (at least as today) to buy rental properties at low prices.

As today we can retire in five years, but we are not sure what to do with our rental properties. We have nice houses and duplex properties.

We think to keep houses that worth $200k each and they can provide $12k/year each one before paying income tax.

That is almost 6% ROI (again, before paying tax) with some work

My wife want to keep the house to inherit them to our kids

Does anyone has a similar experience?
Does anyone has something better ?

I can't opine one way or another with so little to go on. A 6% ROI would be good, but taxes and "some work" could REALLY bite into that.

I am personally of the mindset that rental properties can be good or bad...and I lean towards the BAD side. I personally haven't had too many issues, but my DW manages quite a few properties and there can be significant issues (such as a current wrongful death lawsuit of a tenant and the great MOLD epidemic that seems to be going around) so I am becoming a great fan of REITs when it comes to real estate. As a matter of fact, we are in the process of selling our rental property and I can't WAIT to be rid of it. I guess it boils down to what you can stomach.

 

[aja8888]

Rental real estate always looks good on paper.

 

[winpplui]

I can't opine one way or another with so little to go on. A 6% ROI would be good, but taxes and "some work" could REALLY bite into that.

I am personally of the mindset that rental properties can be good or bad...and I lean towards the BAD side. I personally haven't had too many issues, but my DW manages quite a few properties and there can be significant issues (such as a current wrongful death lawsuit of a tenant and the great MOLD epidemic that seems to be going around) so I am becoming a great fan of REITs when it comes to real estate. As a matter of fact, we are in the process of selling our rental property and I can't WAIT to be rid of it. I guess it boils down to what you can stomach.

Thanks for your reply

What ROI can i get with REIT?
Right now we are in our capitalization stage, having a ROI less than 8% after paying canadian taxes

 

[ExFlyBoy5]

Thanks for your reply

What ROI can i get with REIT?
Right now we are in our capitalization stage, having a ROI less than 8% after paying canadian taxes

Ah, gotcha. As far as ROI on a REIT, it just depends on which one (ones) you chose to invest in. But, like most other things, there are pros and cons to them. Some people like 'em and some hate 'em.

 

[FreeBear]

I guess a big part of the question is whether you want to keep doing "some work" on the properties when you get older, especially a lot older. What happens if your wife is stuck with the properties on her own? Can she cope and would she want to??

As the kids, are they directly involved in managing and maintaining the properties and would they really want to take over? The only inheritance we got was a life insurance policy. We're glad we didn't have to deal with rental properties and an estate.

Off topic aside: Have you read the Millionaire Next Door? Good treatment of immigrant families succeeding in their new adopted countries and the challenges of passing along values and wealth to their kids. There is a chapter devoted to passing wealth to kids and another one specifically addressing daughters.

 

[winpplui]

I guess a big part of the question is whether you want to keep doing "some work" on the properties when you get older, especially a lot older. What happens if your wife is stuck with the properties on her own? Can she cope and would she want to??

As the kids, are they directly involved in managing and maintaining the properties and would they really want to take over? The only inheritance we got was a life insurance policy. We're glad we didn't have to deal with rental properties and an estate.

Off topic aside: Have you read the Millionaire Next Door? Good treatment of immigrant families succeeding in their new adopted countries and the challenges of passing along values and wealth to their kids. There is a chapter devoted to passing wealth to kids and another one specifically addressing daughters.

Those rentals are almost problem free( as today, I have not being in those for 3 years literally)
My kids will not need my inheritance.
My daughter will be a medical doctor next year.
The other two are smart also.


I will take a look at your book.


The idea of this post is to open my mind and see if there are better options than mine

 

[Sunset]

Canadian rentals allow the landlord to take or not take depreciation, unlike the US where you better take it as you will pay it back later, that is an advantage CDN's have.

Some provinces in Canada have rent control, you are lucky Sask does not.
Dividend income in Canada is taxed less (by a weird method), the US method is simpler and taxed even less.
So dividend income will cost less in taxes than rental income which is taxed as normal income after deductions.

I do have one rental I'm selling right now, and will sell the other soon or in a few years. My plan is to invest the money in a couple of broad index ETF's that will generate 2% approximately in dividend and hopefully go up a few percent on avg each year.

In Canada, you have to watch out for super high MER (management expense rate) fees on the mutual funds (example 2.20%) per year.
You can however buy US ETF's directly on for example the NYSE via a Canadian brokerage (example TD).
There would probably be an exchange cost, so its a buy and hold idea, not a frequent trade type of investment.
My favorite US eft is: VTI (fee is 0.05% per year)

I also like a Canadian etf: XIU.TO (the TO means it trades on the Toronto stock exchange, so no exchange cost as it remains in CDN funds) its fee is 0.18%

Personally I'm going to get out of the landlord business, as too much money is concentrated in a few assets so there is a danger there.
While its true you can generate an income being a landlord, many years of profit go out the window the first time you have a really bad tenant.
If they sue you, and you are at fault (decided by a judge, not you), then you could lose Millions, yes your commercial insurance (you have some right?) will cover a lot of it, but maybe not all.
A rental does tie you down, and perhaps you can have your kids handle the rentals, if you ever decided to take a 2 month trip.

 

[Meadbh]

Some provinces in Canada have rent control, you are lucky Sask does not.

Point of geographical information: the OP is not in Saskatchewan. He lives in Winnipeg, Manitoba. The below link shows the rent controls in Manitoba.

Residential Tenancies Branch | Province of Manitoba

 

[Sunset]

Point of geographical information: the OP is not in Saskatchewan. He lives in Winnipeg, Manitoba. The below link shows the rent controls in Manitoba.

Residential Tenancies Branch | Province of Manitoba

Thanks for the correction.
I've never been in that part of Canada, actually never been West of Ontario, so my mistake I should have looked on a map.

This changes a lot, as those rentals are not so great after all as 2016 rent increases are limited to 1.1% for the OP.
The point is OP is not free to increase the rent as demand increases, but will have to drop the rent if demand decreases.

 

[Senator]

Rental real estate always looks good on paper.

Very true. The fixed costs, like taxes, insurance, utilities, mortgages, etc. are easy to account for.

The variable ones are more difficult. Some people forget to account for at least 10% of the rents for maintenance. Or 10% for management, even if you manage them yourself. Or vacancy, assume at least a 5% vacancy rate.

A 6% return is not enough in my opinion. My rentals return 15%+. Over they return way over $11K a month, after all expenses, including the above. Since I manage and maintain them myself, I can get another $2K-$3K per month out of them.

To the OP. Make sure your returns are what you think they are - over time, not just the current month. Could you do a $20K repair?

 

[Livefree]

My 2 paid for Rentals net 52k after all expenses. There are NO vacancies here in the Boston area. If someone leaves on the 31st it's filled on the 1st usually for higher rent due to the demand, unless renovations are needed.

I manage myself unless something I can't handle. In the last 2 years have had roofs, water heaters, and one of the Boilers replaced on all 3 properties (mine included) in anticipation of when I retire.

 

[kcowan]

My wife want to keep the house to inherit them to our kids?

Why not pay the kids to totally manage the asset? Collect rents, handle maintenance, re-rentals. You continue to carry liability insurance.

This will prove their value and its role as an inheritance. If you retire, you must pay them market rates. It might work in Winnipeg. Give it a try.

 

[Major Tom]

I owned 3 rental properties (3 bedroom family homes) for a total period of about 2 years in the early to mid 2000's. I was lucky enough to buy into a sharply rising market, and sold for a good profit. The initial plan was to keep them for life, and use them to help fund my retirement, but when I saw their value increase so much over such a short period, the temptation to sell became too strong to resist. (Their value increased about 65% in just 18 months.) In my particular case, the properties were located about 60 miles away, and looked after by a small management company. I daresay that had I performed all management and maintenance duties on the properties myself, the financial side would have looked more favorable over the long term. However, compared to taking a fast profit and investing the money in index funds, they began to look like potential liabilities.

We all have our personal reasons for liking particular investments but for me, my index funds combine very low (virtually no) maintenance with high liquidity. I find those to be very attractive qualities.

As for leaving the properties to your kids, that is fine, as long as they are comfortable with the responsibilities of owning real estate. If the inheritance would involve them sharing part ownership of any of the properties, then all is well as long as they get along well and have a sensible and mature attitude towards financial dealings. I'm not trying to persuade or dissuade you, but merely pointing out that leaving more liquid investments to kids (cash, stocks, bonds etc) creates a whole lot less work for them.

 

[winpplui]

Very true. The fixed costs, like taxes, insurance, utilities, mortgages, etc. are easy to account for.

The variable ones are more difficult. Some people forget to account for at least 10% of the rents for maintenance. Or 10% for management, even if you manage them yourself. Or vacancy, assume at least a 5% vacancy rate.

A 6% return is not enough in my opinion. My rentals return 15%+. Over they return way over $11K a month, after all expenses, including the above. Since I manage and maintain them myself, I can get another $2K-$3K per month out of them.

To the OP. Make sure your returns are what you think they are - over time, not just the current month. Could you do a $20K repair?

Math is easy.
The house cost 200k
Monthly rent is $1350
Prop tax is $2500
Insurance is $1500

I have several of those properties for 6 years, with no vacancy. Repair is nothing. We did some roof, hwt, but it neglectful in the big total.

My concern is that the investment is ok with 20 down (as we started) but now that I can pay the mortgages with the proceedings of selling other properties it does not look so atractive

6% return of investment with such a risk is something to evaluate.

I was looking REIT/bonds/stocks and nothing is warranted

If I can get 5% with anything but rentals I will look deeper on it

 

[Brat]

It will be very difficult to find an investment that yields 5% in today's market.

Personally I own "O" stock which is now yielding almost that much based on my original purchase price.

I was at Whistler over New Years and bumped into a Canadian who has a piece of Whistler Blackcomb Holdings Inc. That is yielding 3.6% at the moment and looks like a rock solid operation. One would want to research their history of dividend increases.

 

[Senator]

I have several of those properties for 6 years, with no vacancy. Repair is nothing.

At some point, you will have a vacancy. Then, lots of paint, carpet, repairs, etc. Along with a few months of vacancy.

 

[winpplui]

At some point, you will have a vacancy. Then, lots of paint, carpet, repairs, etc. Along with a few months of vacancy.

It might happen, and we are ready for that.

As other user stated, when one tenant leave we have another in a line, and we raise the rent to market value with no rent cap.

It is not free, it has work and time requirement, but I am doing that while we keep full time work.

 

[tmm99]

It will be very difficult to find an investment that yields 5% in today's market.

I agree. These are the best ones I have as for the yields myself (TO for Toronto Exchange)...

BCE.TO BCE Inc. 4.56%
TRP.TO TransCanada Corporation 4.56%
RY Royal Bank of Canada 4.12%


I moved to Canada last year, and I am finding that some of Canadian stocks have relatively high yields compared to the US counterparts IMO...

 

[VFK57]

A lot depend on rental market in area you have your rentals. If you have 6% return after all your expenses (including future repairs and periods of not occupied time), it is a good return (in my opinion).

 

[winpplui]

I agree. These are the best ones I have as for the yields myself (TO for Toronto Exchange)...

BCE.TO BCE Inc. 4.56%
TRP.TO TransCanada Corporation 4.56%
RY Royal Bank of Canada 4.12%


I moved to Canada last year, and I am finding that some of Canadian stocks have relatively high yields compared to the US counterparts IMO...

What percentage do you pay as income tax (rentals are 100% of tax bracket)

If a bond yields 4% (for example) and inflation is 2%, can I assume that real yield is only 2%?

My question is related to that rentals value might increase over time

 

[kcowan]

A lot depend on rental market in area you have your rentals. If you have 6% return after all your expenses (including future repairs and periods of not occupied time), it is a good return (in my opinion).

Yes and I am willing to bet that the 6% has no provision for future repairs and vacancy. Nor is there any allocation for the personal time (at market) factored in. This is a common fallacy for property owners.

 

[Senator]

A lot depend on rental market in area you have your rentals. If you have 6% return after all your expenses (including future repairs and periods of not occupied time), it is a good return (in my opinion).

Definitely not good enough for a property investor. It may be OK for an accidental landlord. The risk premium is not accounted for. Most investors require 12%+ returns for a rental, even then it's difficult. A flipper needs even higher.

But if it works for the OP, that's OK.

 

[winpplui]

Definitely not good enough for a property investor. It may be OK for an accidental landlord. The risk premium is not accounted for. Most investors require 12%+ returns for a rental, even then it's difficult. A flipper needs even higher.

But if it works for the OP, that's OK.

I got those returns five years ago (accounting principal paid and money in my pocket after tax), and i can still get those returns buying new properties with 20% down payment ( my math is around 12%)

House price= $200K

Down payment =$40K

Mortgage rate= 3%

Monthly Mortgage payments=757

Prop tax $1500 (year)

Insurance $1000 (year)



Monthly rent $1350



Money in the pocket before canadian tax $4613



Money in the pocket after canadian tax $1000 (tax is calculated over interest paid)

Equity=$4500 ($160k original minus balance after a year ($155.5K))



Total gain=$5.5K



Invested $40 as downpayment (plus lawyer/transfer fees), with a5.5K return that translates in a 14% ROI after paying all taxes.





My problem is that almost all of that gain comes from capitalization of the house with no much liquid money.

The only way to have liquid money is not owing to the bank, or with a line of credit and paying interest (that translates in smaller return)



That plan worked for me to increase my capital, but now that i am thinking in retire i am looking for other options

 

[kcowan]

Your leverage approach works as long as you have income to support it. Upon retirement, you need to achieve a balance with sufficient cash flow as the primary goal. Becoming rich on paper is only adequate if you can afford it!