Quit Your Day Job

I work in the financial services business with a very unique approach to wealth and retirement planning. Everyday I actively support my clients in owning income properties in order to retire earlier with greater income security. So, I gladly accepted CREW’s QUIT YOUR DAY JOB challenge to provide a $95K income solution with a strategy I actively engage in personally as well as with my clients. The Y2K Solution.

Correct … it’s 2020 and I am still preaching about Y2K Solution and how it will be the end of the world as you know it. However, in my world, Y2K stands for YES … 2 KITCHENS! And the end of the world as you know is financial freedom and the power to QUIT YOUR DAY JOB!

What type of property

My approach is to find properties in the $330K to $400K range where I can add a legal secondary suite. Personally, I recommend bungalows in the 2 to 8-year age range where the main level floor is modern with an updated look. This tends to allow me to push the rents I charge to the upper limit and reduces my risk of a vacancy as my properties show very well. In addition, maintenance and repair costs should be much lower. This reflects in my numbers. The typical 60’s bungalow is another option but I find I am competing with so many other investors and renovators in that arena. I lower my renovation budget and time lines when only the lower unit needs work.

Where to buy?

In Ontario, you can still find great properties ranging from $330K to $375K in areas such as Niagara Falls, St. Catherine’s, Orillia, Lindsay, Peterborough, & Cobourg. And rents from $1,100 to $1,500 can be found all day long in these towns – especially for units that show well. The price points in towns closer to metropolitan areas are higher and if your goal is cash flow, you need to go further out. You might be pleasantly surprised to find that rents in Cobourg are actually higher than Oshawa for example, even though property values and taxes are lower. And while you are likely to get greater appreciation in properties closer to major cities, you don’t get the cash flow.

Why the additional unit solution?

The argument to renovate and add a legal secondary suite versus purchasing the ready-made solution is compelling. You add value when you convert a property to its best and highest use. Generally speaking the after-renovation value increase will be more than the cost of the renovations. There are a lot more single-family homes available than legal 2-unit dwellings so you’ll have greater choice and more bargaining power. And most will be owner occupied which means you are not left with undesirable tenants or occupants that are paying well below market rents.

Who to go to for help?

Are you more handsome than handy? This strategy is not as difficult as you might first believe. Consulting firms like www.suiteadditions.com focus on legal secondary suite conversions and will work with the town on any issues that might come up during the process. But a word of caution – not all single-family homes can have a legal secondary suite added. Municipal by-laws and fire code come into play and things like ceiling height, egress windows, and parking restrictions are all factors. You’ll want to work with realtors that are investment property savvy. www.smarthomechoice.ca, www.durhamhome.ca, & www.rockstarbrokerage.com are some great Ontario choices.

Always use a mortgage broker who has extensive experience with income properties. Let her (or him) know what your property number and cash flow goals are. Only a properly structured mortgage portfolio plan will allow you to qualify for the number of properties you’ll need. All lenders will be looking at debt service ratios to qualify. But some lenders tap out at a specific number of properties with them and some with a specific number in total. So, the order in which you bring on certain lenders is important.

It goes without saying you need to find a financial planner that is supportive of your strategy. This can be harder to find but this is a financial plan after all.

Financing is Key

All the numbers are important but financing is the key factor at play when we are looking at cash flow. Not all mortgages are alike and believe me when I say rates are the least important factor.

Firstly, you’ll want to have a mortgage that can grow with the increased value so you can recapture back some of your renovation costs. This might be a purchase plus improvement mortgage, or one in which you can add a line of credit after the renovation is complete for the improved value. Another option is to refinance so make sure your penalty to refinance are included in your numbers.

Secondly, in order for the strategy to work you’ll need a readvanceable mortgage. Readvanceable means that for every dollar of principal you pay down, the same dollar of line of credit room becomes available. So, in this way we are paying down as little principal as possible in order to maximize cash flow. Mortgage rules stipulate that only 65% of the value of the property can be readvanceable so the balance of 15% must be a more traditional principal plus interest payment. You’ll see this reflected in the break down on financing numbers. In order to maximize cash flow on this portion you should have the longest amortization period possible. 30 years is used in the example below.

The remaining 20% is your equity in the property. If you have available cash on hand you can certainly use it … but in most cases you will want to use an available line of credit, generally one secured on your principal residence. Again, mortgages like the Manuone Mortgage from Manulife Bank for your principal residence are great in these scenarios because they have a sub account system that easily tracks the interest you can deduct by property.

Let’s look at some numbers.

Not all income is created equal

Keep in mind that 95K of rental income is a lot more lucrative than 95K of employment income. You don’t contribute to CPP or EI from rental income. And you can pay a lot less tax on this income (possibly none) if you depreciate the property. Depreciation is an expense that you can use to offset the rental income. It’s likely, however, the property will actually appreciate and all that income will be taxable when you sell – but for cash flow – depreciation is an excellent tool. It’s always advisable to speak to a tax accountant on your specific situation.

Using the above scenario, you’ll have to have 10 Y2K Properties in order to QUIT YOUR DAY JOB! And you’ll have to have approximately $680K in either savings or line of credit room as well. Prices, renovations, and rents will vary but if you focus on achieving cash flow of around 9K a year it can be done. Don’t be afraid to withdrawal from RSP savings in order to achieve this dream. After all, the money is for retirement right. And paying the tax now in order to retire years earlier with lower ongoing taxes seems like a plan to me!