These days, many people are interested in real estate as an investment. The idea is to arrange a mortgage, buy a house and rent it out. Over time, the rent is supposed to pay off the mortgage. The rental income continues on and acts much like a pension for life.
Of course owning an income property is never that simple. Typically an individual would need 25% as a down payment. Repairs, maintenance, property taxes and shortfalls have to be paid. Finally, tenants have to be found who will pay their rent on time and respect the property.
The real estate industry reports that unleveraged real estate has appreciated at slightly less than the rate of inflation over the last 50 years (4%). The net rental income is the gross rental income less property taxes, repairs and maintenance which averages out to 2.5%. Total return for real estate averages 6.5%. If the house is financed, the interest cost is tax deductible.
A simpler and more reliable program to create a Personal Pension Plan that funds itself
In most cases one can borrow 100% of the money required to buy an income portfolio that pays off the loan in fourteen years without any out of pocket cost to the investor. From there on the portfolio continues to pay out an income much like a pension plan.
What kind of rate of return can one expect from this type of investment?
The history of Canadian equity markets document returns averaging 10% over the last 50 years. Dividends have made up 4% of this figure while capital appreciation makes up the other 6%. This is a significantly higher return historically than is provided by real estate income property.
This type of portfolio acts very much like an income property and has further advantages. It is professionally managed and is diversified with at least thirty investments. As such, this is much safer than a one or two income property approach.
Unlike an income property, there are no property taxes, maintenance or tenants that need to be managed. However, like an income property there may be times when one has to add funds to ensure the success of this program.
How this works
We can help arrange 100% of the financing for the investments. The investments themselves are the collateral.
Assume that one borrows $100,000 at 5%. The interest cost of $5,000 is tax deductible. At a marginal tax rate of 40%, the out of pocket cost would be $3,000. Assuming the funds generate 10% ($10,000) of income with no income taxes, the net income would be $7,000 per year ($10,000 – $3,000). This would pay off the loan in fourteen years.
This is a bold and innovative program that has significant advantages over a real estate approach. Although the program has internal checks and balances, regular reviews with us are essential for peace of mind and a profitable experience. To see if this is appropriate for your situation, speak to us.