Rental Real Estate Funds Comfortable Retirement

Norma Walton

Retirement requires passive income

• Old Age Pension benefitskick in between 60 and 65years of age

• CPP Pension benefits do thesame assuming you haveaccumulated them in your working life

• Some people have work pensions as well• The challenge is that typically for people to live

comfortably, they need more income than what is provided by their pensions

What are some options to supplement pension income?

• Some people have accumulated RRSPs and monies that they have placed in investments in the stock market, bond market, government-backed securities or have sitting in cash

• To diversify the sourceof income frominvestments, sometimesa good use of part of thatmoney is to considerpurchasing or creating an income property

What is an income property?It is a type of property, be it:• a house• a condominium• an apartment building• a retail building• a commercial property• vacant land

It provides rental income• You rent out all or part of the property to tenants• Those tenants pay you rent

What is Leverage

• It is possible to obtain mortgage financing for the purchase of a rental property

• By using leverage, provided theinterest rate is affordable, youare able to buy and/or renovatesomething worth much morethan the total of your savings

• This provides leverage which can be very useful in creating wealth and income

How does leverage help you?

• If you have $50,000 in savings and you qualify for a mortgage for $150,000, you can purchase a property worth $200,000, being four times the total of your savings

• If that property goes upin value by 10% or $20,000,you have just turned$50,000 into $70,000

• That is the benefit ofleverage

Someone else pays off your mortgage• Another benefit of leverage with a rental property is that typically your

tenants provide you with sufficient rent to pay your mortgage• Hence you have invested $50,000 for a $200,000 property with a

$150,000 mortgage, and each month your tenants’ rent funds your payment of the mortgage

• In 25 years the mortgage will be paid off from your tenants’ rent and your asset will be worth the full $200,000 plus whatever increase in value has been created over that 25 year time frame

Income Tax Benefits of Rental Property

• The tax treatment of rental income is designed to promote home ownership

• Typically in Canada you are able to expense depreciation and amortization expenses to offset rental income, reducing the tax you pay on that income

• You are only taxed on the gain in value of your rental property when you sell it

Criteria to Consider when Purchasing a Rental Property

• Can you purchase the property for an affordable price?• Can you arrange a mortgage on the property at an attractive

interest rate?• Will the property be cash flow positive?• Is the property location one that will enjoy appreciation over

the years because the community in which it is located is growing or for other reasons?

• Can you impact the value of the property by doing some work on it, creating sweat equity?

• Are you prepared to manage your tenants and maintain your property or do you wish to hire someone to do that for you?

SummaryIf you can meet your retirement income

objectives by purchasing a rental property now and paying it off in time for your retirement, it

will help you fund a more comfortable retirement