A convo I’m having this morning with a colleague, I thought I would share. Should you invest in your RRSP to save taxes now or your TFSA; saving no taxes now but increasing your compounding power over the next several years? Take a look…
Let’s take look at a chart that shows the impact of investing $100,000 by age 30 vs. investing $200,000 by age 45 (assuming 8% average return each year). As you can see, even though the second individual invested an additional $100,000, they will have nearly $600,000 less at the age of 65… that’s a breathtaking difference!
But what if you haven’t had the luxury of starting to invest early? What do you do then?
Alternately, would new modern cabinetry with a standard countertop at a tenth of the price have been sufficient?
What about that $30,000 pool install? Did it need to be installed in-ground? Did you also need to replace your patio and extend it with high-end interlocking stone?
Alternately would an above ground pool that was a tenth the price have been sufficient?
Do these “luxurious” upgrades really bring you increased sustainable happiness or are you a victim to consumerism, short-term lust for higher-end physical possessions and, of course, trying to keep up with the Joneses.
“Oh my gosh, your life must be so stressful. Dealing with collecting rent, evicting tenants, doing repairs, showing apartments. You must never get a break!”. These are some of the most common reactions I get from people when I mention that I invest in real estate.
Now let’s discuss how “stressful” it really is.
I’ve been investing in real estate since 2010, a total of ~60 months. During this period I’ve had to evict two tenants, one which left amicably and the other which took a 2 month process to evict. I’ve also performed mostly routine repairs every couple of months. The one non-routine emergency repair that I’ve experienced was a unit that experienced frozen pipes two winters in a row and required a few dozen hours to fix properly. Oh and I’ve also had to purchase a spray foam insulation kit and spray the basement walls in one of my units which had excessively cold floors above during the winter months.
Today you have your annual physical at the doctor’s office. You wake up and enjoy a hearty breakfast and then head out for your appointment. All looks well and you’re sent for the typical tests that accompany your annual physical and then your appointment is done and you’re off to work. One week later you get a call from your doctor’s office asking you to come in to discuss your physical. You oblige and head in as instructed.
The receptionist calls you in and you sit down on the patient bed. The doctor walks in and closes the door. He flips through his notes, looks at you and slowly mutters the words “I’m afraid I have some bad news.” Your heart skips a beat as you hear him mutter some words about results and re-focus long enough to hear the dreaded words “I’m afraid you only have one month to live”.
Perspective is a major factor in everyone’s happiness. Two people can live the exact same scenario yet somehow they will almost always interpret them entirely differently. Let’s take a look at a similar scenario described by two different people. Which perspective do you want to frame your mindset with?
- Home expansion / renovation (~500-750 sq. feet)
- Luxury car & costs for 5 years (insurance, gas, maintenance, etc.)
- Camping trailer, insurance & lot for 5 years
What can $100,000 earn you?
Alternately, if you deposited the $10,000 saved each year over the duration of 10 years instead of spending on one of the luxuries above and then earn an average return of 7.8% each year for the next 30 years you would own investments valued at $694,763.08.
- Low barrier to entry
- Easy to learn as you go along
- Most decisions are common sense (e.g. a tenant doesn’t pay -> evict; repairs needed -> perform repairs; vacancy -> advertise, etc.)
- Allows you to leverage other people’s time (e.g. property managers, lawyers, accountants, real estate agents, etc.) & money (the bank, private lenders, etc.)
But before you consider investing in real estate it is vital that you invest some time to learn the basics.
It’s important to be organized when you acquire new investment real estate because there’s a list of documents that are required for each and every deal. When you have a few weeks to obtain financing approval, the last thing you want to be doing is stressing because you’ll need time for inspection, closing, auditing leases, etc. Here’s a list of documents you should have ready:
- Purchase offer (including all counter offers), dated, signed and accepted
- Proof of down payment
- Updated and signed net worth statements of all co-owners / primary shareholders if purchased through a company
- Tax reports & appendices on income and expenses of each rental property
- If purchased through a company, financial statements of the company for the last 3 fiscal years
- Detailed income list for all rental properties you own
- Current copies of all current leases (along with documentation supporting rental increases that have happened over the years for longer-term tenants)
- Detailed mortgage financial statements for all properties
- Detailed financial statements of all investments held (stock, real estate, etc.)
If you purchase real estate a few times a year take the time to organize and update these every few months. These documents are the lifeline to growing your portfolio.