HOPE FOR EARLY RETIREMENT PART 3: A SIMPLER AND BETTER IDEA

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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A Simpler Way

In part one and two of this mini series (this is the third and concluding post) I used numbers and math to show people how they can retire using traditional methods of thinking about saving and investing.Today I would like to present something so much simpler than the above methods. I will still give some numbers, but want to present an option that most people simply don't know. My desire is to educate as many people as possible to make their futures exciting rather than scary.

One More 25 Year Plan

In my former examples I stated you would need to be saving and investing from $15,000-$40,000 each year for 25 years in order to retire well. Here is a way to invest less and yet have more at the end of the 25 years.

In the first year I would recommend using $15,000 to purchase a $300,000 bungalow with a basement suite. This can easily be done in Calgary (although you won't be living in the wealthiest of neighborhoods). You could live in this house for 4 years and rent out the other suite (which would make it much easier to save up money for the next 4 years). In this scenario, you would simply have to save another $4,000 each year and at the end of 4 years you could purchase another property with 5% down and move in. I'm skipping a step here to make things simple... but for those who understand newer CMHC rules this can still be done quite easily, trust me.

Now, if you repeated the process and did this a total of 4 times you would own 4 suited properties and be living in one of them. You would now be 12 years in the future and each property would have some debt in the form of mortgages. At this point you would stop saving up $4,000 each year and simply use the extra money from the rent of the other 7 suites to pay off the mortgages quicker for the next 13 years.

What Would You Have at The End of 25 Years?

-You have own 4 properties with no debt!
-These properties would be worth (in normal markets) around $2.5 million! Which is way more than you had saved in either previous scenario
-These properties would be bringing in the equivalent of around $7,000 each month in rent after all of your expenses are paid! This means you could work your job for one more year, purchase another house for yourself with no suite, and then make $8,000/month for the rest of your life which totals almost $100,000 each year. This is a much higher number than either scenario as well.
-This is not the last point. But it is the last I will make today. You will also not have to pay full taxes on the $100,000 you make each year which means you would be able to keep much more of it and continue to invest or simply enjoy the money for the rest of your life!

Summary

If you want the same retirement as those around you, do the same things they are doing. That means that if you want to work at Walmart as a greeter, don't think about your retirement at all. If you want to scrape by and make ends meet with the help of family members, invest in RRSPs and hope in CPP, OAS, and your company's pension plan. If, however, you want to retire well and enjoy the rest of your life... start doing things that others don't. Know that the above scenario would take discipline and sacrifice! So did the other scenarios! Do something to take action and take charge of your future today!



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

HOPE FOR EARLY RETIREMENT PART 2: HOW YOUR FINANCIAL ADVISOR MAY 'ADVISE YOU'

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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What Are You Most Likely to be Told?

I've written about financial advisors before and will give a brief summary here. Basically, I believe that, like every other field on the planet, most financial advisors do an ok job, some do a terrible job, and a few do a fantastic job and actually advise you on financial matters in your best interest. Here is what my experience has been with financial advisors (my experience hasn't been good).

If your experience with a financial advisor is like mine you will most likely be asked for the amount of money you want to retire on, then will need to figure out how much you will need to save every year in order to meet that goal. Let's use an example. Let's say you would like to retire on $50,000 each year for the rest of your life in retirement, you are now 35 years old, and you want to retire when you are 60 years old (doesn't sound like early retirement, does it). You will have to decide on how much interest you will likely achieve each year in your retirement. The going wisdom right now is that you would make about 4-6% in safe investments (that's actually high for going wisdom, but let's play along). Let's use 5% for this example. You will need to save $1,000,000 before the age of 60 in order to retire on $50,000 each year at 5%. You have 25 years to save $1,000,000. That means you will need to save an average of $40,000 each year to have $1,000,000 by the age of 60. Some may argue that you don't have to actually save this much because you can invest it, but even at an average annual return of 9.25% (including the cost of money managers for mutual funds and inflation of 3%) you will need to save $25,000 each and every year until you retire. If you want an actual early retirement, you will need to invest $48,000 each year with the same returns to retire by the age of 50.

Problems With This Scenario

The most you can invest in an RRSP for 2015 is right around $25,000, but in order to be able to put that much away, you would need to make $140,000 (you can only contribute up to 18% of your annual income).

Mutual funds require you to pay the money manager before you take out any money. The average tends to be around 1.25% of your portfolio. That means for every $1,000,000 saved you will be paying the money manager around $12,500 even if your portfolio losses money that year. If your portfolio makes 5%, then after your payment to the money manager AND the erosion of your money to inflation (let's say 3%), you will have made only 0.75% on your money. The reality is that you will need to make much better returns than you think you will need to. In retirement you may actually need to make about 9.25% in order to have the $50,000 each year you originally wanted.

You are taxed fully on each dollar you 'make' in retirement. So, under this year's tax requirements you would lose about $9,350 to taxes if you live in Alberta. That means you only have just over $40,000 left to live on.

Inflation eats away your money's worth each year. What this means is that in 25 years you will need more than $100,000 each year to equal the amount $50,000 buys you this year.

The average financial advisor makes money only if you invest in certain mutual funds. This makes it difficult to make the best decision for yourself because you have limited options.

Summary

While this post isn't that much different than my first in this mini series, it illustrates how difficult it is to retire early for most Canadians. In my next post I will give an alternative where you have to invest less and you will retire with more than either of these first two posts.



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

HOPE FOR EARLY RETIREMENT PART 1: A SIMPLE WAY TO RETIRE IN 24 YEARS (or less)

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

Remember: Please share this article if it helped

Is it Realistic to Retire at 35?

Yes and no. While it is completely possible for the average person to retire in her/his mid-30s, it is not easy. Having said that, it is actually quite simple and not too difficult to retire in 24 years. Today's post is dedicated to show how you could realize early retirement whether that is 24 years from now or 20 or even 10. This is the first post in a mini series focusing on educating people on how to understand some basic rules of planning for retirement. If you want examples without all the math, then just skip to the bottom of this post where it says "For Those Who Hate Math".

The Rule of 72

There is a rule of thumb for making it simple to understand about how long it takes money to double. It is called the 'rule of 72' and work like this: if you want to know how long it will take money to double when invested at an interest rate of 10%, you simply divide 10 by 72. The answer is that it will take about 7.2, or 7 years and just over two months, to double. Another way to do this is by figuring out how long you want your money to double in. For example, if you want your money to double in 12 years, you can divide 72 by 12 and know that you will need to make an average 6% return over that time in order to reach your goal in 12 years.

Note: The rule of 72 really works best when using interest rates between  6-10%. Higher interest rates will become less and less accurate. Keep in mind this is simply a help to do quick calculations in your head. If you want to use a more accurate rule for lower percentages, try the rule of 69.3. While still not perfect, this will give you a number so close to perfect that you don't have to spend a load of time setting up a spreadsheet to know how long it will take to double your money.

Some Assumptions (this gets a little technical)

I am assuming certain things in the numbers I will be using in today's post. The first is that these numbers will allow you to retire with the same amount of income you are making right now. The second assumption is that the interest you receive on your investments are calculated annually. If you are able to receive interest payments at 3% every 6 months it will speed the process. If you receive a flat 6% at the end of the 24 years, it will take much longer to reach your goal. I won't go into details about how this works right now. Third, I assume that you are comfortable with a base retirement income the same as your income at 20 years old (if this isn't the case... as it isn't me, then you can simply increase the interest rate, the amount you invest, or wait a little longer). Fourth, I am not adding in taxes right now. While they are an important part of every retirement plan, I will explain how to not worry as much about taxes in a later part of this mini series. Fifth, I am assuming that there is no deflation, which is ridiculous on many levels... Again, I'm simply attempting to make a point that helps people understand a basic concept. Lastly, I am assuming you begin when you are young and have a lot of disposable income. The older you get, the more you get used to a certain lifestyle and the more difficult it is to put money away into an investment account rather than spend it. At 20 years of age, it should not be difficult to invest 25% of what you make each year, but it will be really difficult to invest 25% of your income if you are maxing out your income at 35 years old with a partner and a couple of kids! I will present a few options to help explain other ways to do this based on your ability and willingness to invest money.

How it Works (this gets even more technical)

Example 1: At 20 years old, you begin to invest 25% of your income each year. If you realize a return of 6% on that money it will double in 12 years and then double again in another 12 years (total of 24 years). What this will provide is an annual retirement income the same as when you were 20. Not only that, if you continue to invest 25% of your income in retirement you will continue to have the same income forever!

Maybe you say: That's great Mark, but I want to retire in less than 24 years or I want to retire with more than 75% of what I was making at 20 years old or I want to invest less than 25% of my income each year. Fair enough... I'll give a couple more examples.

Example 2: If you want to retire in less than 24 years you have two options. The first is to invest more each year, the second is to increase your ROI (return on your investment). I'm assuming here the first option isn't exciting, so I'll work with the latter option. If your investments make 8% each year instead of 6% you will now retire on your current income in 18 years (72/8=9 years to double, then double again in another 9 years). This also fixes the problem of wanting to retire with more money. If you wait 24 years at 8% returns you will retire with 160% of what your income was at 20 years of age. For example, if you are making $45,000 (and living on 75% of that; $33,750) at 20 years of age, you can then retire on a lot more money for two reasons: your money has increased faster and you you don't have to invest as much each year in retirement. In 24 years you would have $71,100 each year. With that money you would only have to invest 16% of your income ($11,376) for the rest of your life to maintain an annual spending income of almost $60,000 ($59,724 to be precise) which sounds a lot better than living on the $33,750 you were living on before. Another factor here is that you will most likely increase your income over your working years and this extra income you could simply enjoy spending on your family or whatever else you have as a priority and still enjoy the $60k in retirement for the rest of your life.

Example 3: If you want to retire in 24 years, but you want to invest less than 25%, this is easy to figure out. Do you want to invest only 15%? Then you will need to realize consistent returns of at around 8.5% rather than 6%. If you want to retire in 24 years while investing 10% of your income, you will need to realize a ROI of just over 10%.

For Those Who Hate Math

I will give some simple summaries for those who hate all the numbers above:

If you want to retire in 24 years on your current income... invest 25% of your income each year at 6%.

If you want to retire in 18 years on your current income... invest 25% of your income each year at 8%.

If you want to retire in 24 years at almost twice your current income... invest 25% of your income at 8% and know that after 24 years you can retire and only need to invest 16% for the rest of your life.

If you want to retire in 24 years and don't want to invest 25% of your income, you can invest 15% of your income at 8.5% and still reach your goal. Or you can invest 10% of your income at 10% and reach your goal.

Final Comments

Maybe you have looked at these numbers and you believe making 8% or even 6% is unrealistic. If you believe this, it is a dead giveaway that your only education about finances and investments comes from banks and very average financial planners. I encourage you to seek out better help in understanding how to invest in ways that make more than the returns banks and poor financial planners suggest. To begin on this journey please start by reading my other posts in this blog or, at the very least, wait until next week and read my second part of this series on retiring earlier than you believe possible.




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

WHY AREN'T YOU CASH FLOWING?

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

Remember: Please share this article if it helped

Moving from a 'mom and pop' mindset to an investor mindset

If your day job is paying in any way for your properties after the initial down payment, you are doing something wrong... and very dangerous. You are putting your family at risk. I have discussed this in previous posts, but for today I would like to take a look at 4 reasons the average buy and hold investor is not cash flowing.

1. Your purchase price was too high

Always remember that if you pay more money for a property, it doesn't necessarily mean you will make more from that property in rent. I talk to relatives who consistently purchase expensive properties, don't make a lot from rent, and then complain about the market or properties in general. Here is a quick understanding of how I think about the purchase price of a property vs. the rent. While the purchase price of a property can very widely, rents typically do not in any market. I'll give you an example. In my city of Calgary a purchase price for a single family detached home can range from about 250k to 10 million dollars. Rent, however, hits a low around $700/month and a high of around $5,000/month (furnished). There are vacation rentals as well, but for our purpose today these numbers will suffice.

If you purchase a property for 300k, suite it, and then rent out both top and bottom for around 2,800 total, you will most likely cash flow. If you purchase a 'nicer' property for 500k, suite it, and then rent out both top and bottom for around 3,500, you will probably not cash flow (after all expenses). Always keep both your potential rental income as well as all of your expenses in mind before purchasing a property. Some areas rent for more than others, but generally speaking it is best to purchase smaller and less expensive properties and enjoy the fact that there is a basement to rental prices and that you will not make less than the low everywhere else.

For more on this it is good to learn about and run a quick "Rent to Value" ratio. This is equivalent to the 'earnings-price ratio' of publicly traded companies. You add up ho much rent you make in a year, and divide by the purchase price of the property (or property value if you already own it). This number should give you a basis from which you can quickly see where value is in the buy and hold market.

2. Lack of equity in your property

If you debt ratio is too high, you will also be in danger of going cash flow negative. Maybe you purchased a property at a great deal and own it for 20 years, but now you pull out as much equity as possible for other purchases or investments and you no longer cash flow. Keep in mind that if you are wanting to purchase properties with 20% down payments, you may be tight or not cash flow at all. This is where you will need to purchase a less expensive house (get a good deal by speaking to a wholesaler in your neighborhood). If, however, you refinance you may want to be careful about how much you pull out of the property. Is it ok to sit with 35% equity as long as everything is cash flowing? Absolutely!

3. Your turnover is too high

If you charge the absolute highest possible rent or don't take care of your tenants (slumlords), you may have a high turnover rate. This can often kill cash flow because each time tenants turn over you have to clean the property, fix at least something even if it's just holes in the wall, or redo flooring and paint. Unless your tenants are consistently ideal or you are doing all this work yourself (not ideal), these costs will add up and crush your cash flow. Another expense when rehabbing your property is that it may sit empty for a month. Now, there are ways around all these problems, but this is what I see from investors who don't understand how to make their money work for them.

My hint: Always take care of your tenants and it can often pay quite a lot to have one family stay in a property for 3-5 years even if you make $50 less in rent each month. Something to think about.

4. You may be spending too much or too little on maintenance

There is a balance to wise maintenance of a property. If you always wait for something to go wrong or break you will be paying professionals to fix these problems and it will be more expensive than regular cleaning and maintenance of your property. Even worse, you may have one problem that goes unnoticed, life a roof problem, that leads to massive problems, like an unnoticed leak for 3 months.

On the other hand, if you always only install marble counter tops and hardwood flooring in your properties, you will eventually have big maintenance costs because tenants typically don't treat your property as well as you would yourself (unless you are a slumlord... I hate slumlords!).

Summary

I will keep this summary VERY short. If you aren't cash flowing it means YOU are doing something wrong. Please don't blame others or real estate investing in general... simply change what you need to in order to cash flow. These are simple fixes. If you want more information join an investing club in your city or community and ask questions. You will be surprised how many people are willing to give you really great advice and tips when it comes to planning your retirement through investing in real estate.



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