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Our Biggest Expense in Life!
I often ask people what the biggest expense in life is. I hear different answers, but the most frequent I hear is 'my mortgage'. While mortgages are significant, they pale in comparison to what the average person pays in taxes. I'd like to prove this to you really quickly and easily:
Say, for an example, that you earn the Canadian average of $74,540 (2012 numbers) each year and somehow you are able to find a way to save up enough on that income to purchase a house worth $409,708 (April 2014 numbers). Say you live in Alberta which is right around the middle of the pack for provincial taxes of all provinces (See below for the numbers I used). Each year from the age of 25 to retirement at 65 you would be paying $20,723.73 in taxes. In those 40 working years you would pay about $828,949.2 in taxes. In that same time, with a 25 year mortgage at 3% interest you would have paid a total of $553,721.28 to the bank. Even if interest rates rose and you paid an average of 5% over those 25 years, the total would still be only $682,606.97! I haven't even taken into account that the average person lives until they are 80-85 years old, which means there are another 15-20 years of taxes to think about (even more if you earned money before the age of 25). When including these extra years of paying taxes, the average person could easily pay more than $1 million dollars in taxes to the government, which is almost double what they may pay in mortgage payments.
Is It Even Possible To Become Wealthy?
It is, but not if you pay every dollar of tax to the government that you are able to. One major factor that allows people to become wealthy is by lowering the amount they pay in taxes. I have said many times to many people that real estate is the most tax advantaged investment class in North America offered to the average individual and I would like to prove that point. You can save money in taxes with real estate investments in at least 5 ways!
1. Depreciation: I've discussed this before and you can refer to that earlier post in order to learn more about this. This isn't the biggest way you save money, but you have the choice about when to use this advantage. You can use it early in your investment and use the savings to reinvest, or you can wait until retirement and save the taxes on the back end when you want more income in your pocket.
2. Increase in net worth: As the property you own increases in value over time (let's use an example of 30 years) you are not taxed on that increase in value! While this is an incredible way to build net worth... many other investments are similar (the stock market, mutual funds, precious metals)... You don't pay tax until you liquidate the invested money. The beauty, as I hope you will soon see, is that you never have to sell your real estate to use most of the money in it.
3. Throughout the time you are paying down the mortgage you can save money in taxes on the amount of interest you pay each year to the bank! Make sure you keep this in mind because it makes a big difference. On a $300,000 mortgage paid off over 25 years, you will pay at the very least around $127,000 in interest to the bank. If interest rates rise this number would be much higher. Can you imagine the difference that makes to your income? I will let you do the math on how much money you are saving by writing off that expense.
4. When you take money out of the property you can save taxes again... And this is where real estate can be so much better than other investments! If the income you receive from rent isn't enough to live on and you want more, you can take out a home equity line of credit (HELOC). When you do this the money you receive is absolutely tax free! In other words, if my real estate portfolio is worth $1 million, I would potentially take $650,000 out of it to live on or spend or reinvest or give to my favorite pet and I would not pay $1 of taxes on that $650,000 that year. Do you realize what this means for people? If this doesn't blow your mind you either already know this or I haven't explained just how incredible it is.
5. If you do take equity out of your property in the form of a HELOC you will be paying interest on that loan. This means that you can write off the interest you are paying on the $650,000 and save on taxes once again! I'm getting so excited writing this out that I'm bouncing! Every time I explain this I get this excited because of what it means to the average person who pays a ton of money to the government in taxes each and every year of life where you make money in almost any way.
6. Here is the bonus way to save on taxes... When you die and you pass the property you own to your children, they don't have to pay taxes on it either! I will most likely discuss this in a future blog post, but if the real estate is placed in a trust, that trust doesn't die with you... if lives on and therefore your children would not have to pay taxes on the real estate either (this is the time when some wealthy individuals lose the most... when they pass their inheritance to their children). I would advise you to talk to a lawyer specializing in retirements and finances if you want to look into this idea further.
Summary
Alright, so I've gone over the potential ways that any person who owns cash flowing property can save on taxes, but what difference does it make? I would like to provide one simple thought here. I live in Calgary where real estate has increased in value substantially over the last 12 years. What if the only difference all of the information I provide you with in this post gives you the ability to purchase just one more property for your portfolio? In Calgary, if someone has already paid off their mortgage, they should be making at least $2,000 in income each and every month with a normal suited house in an area where it makes sense to own real estate. What difference would $2,000 each month make to your retirement? What if you were able to purchase 2-3 rental properties with the information you just read? Dream big! Just 3 rental properties owned without any mortgage in retirement can easily outpace some of the best pension plans out there (and you could still use any equity in the property for anything else you want/need in retirement).
Last Comments
If you decide real estate is something you would like to invest in, please contact me through my website: www.akerahomes.com. I love teaching people how to become excited about their retirements and currently do not charge even $1 for the help I give people when I sit down with them and discuss their retirement goals. This may change if too many people start calling me, but as of now it is simply my passion to help more people retire the way they desire to after working for decades.
If you ever decide to invest in real estate I highly recommend you speak with a real estate investment lawyer and a real estate investment accountant. Both of these professionals should own a substantial amount of real estate themselves to be able to advise you with any wisdom. Most lawyers and accountants understand very little about real estate investing (even though many will understand some of the basics), which isn't a problem. You need to be aware that people who specialize in real estate investing will be able to help you in many more ways than someone who also helps people with divorces or suing their neighbor for whatever reason. Always work with a specialist!
* Residents of Alberta a flat 10% tax rate no matter how much they earn. Everyone in Canada also pays 15% on the first $44,701 and 22% on the next $44,700.
Here's to your future of risk-averse investing!
If you would like to learn more about investing in real estate please
contact me at the email address listed at the beginning of this article
or go to my website at: www.akerahomes.com/investing-in-real-estate.html
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