What comes to mind when you think of financial independence? Do you think of retirement or do you think of a big bank account? What about no longer having to grind it out at a 9 to 5 job? Or do you think that financial independence means having the freedom to spend freely, save easily, invest wisely, and be in control of your finances?
Now, what clichés come to mind when you think about money? Money is the route of all evil. Money doesn’t grow on trees. Money doesn’t buy happiness. Money is private and shouldn’t be talked about and lastly, you can’t take money with you when you die.
Maybe money wasn’t spoken about freely in your home, it was seen as something private. Perhaps money was discussed openly but not positively and you were taught by your parents you need to save, save, save. We are all taught about money differently therefore, we all treat it differently.
So why is a realtor writing an article about financial independence?
Once you’ve bought your home and have been living in it for 10 years, what would the roll of the realtor be? Just like your accountant and financial advisor, the roll of your realtor is to bring you new opportunities, to help you plan your future, align you with your goals, and to collaborate with your other consultants on an ongoing basis.
Everyone should have a Board of Directors. Professionals in their lives that give them advice. An accountant, a financial advisor, a realtor, a mortgage specialist, and of course a lawyer. These are your go to people. Regardless of where you are in your life and at what stage, at some point you will need the services of one of these people. These professionals will work together to guide you to make the best decisions. Over time, they will know your tolerance for risk, your threshold for doing things “outside the box” and above all, they will get to know you and build strong relationships with you.
Back to the topic, financial independence. Just saying these words sounds exciting! A goal we all strive for in some shape or form. Keeping that in mind, how can your realtor help you achieve financial independence? Our go to sugestion for our clients and ourselves, and the one I will focus on is, buying a revenue property.
Buying a revenue property, in my humble opinion, should be part of your retirement plan. It should be considered when speaking to your financial advisor and to your accountant when planning for your future.
A second property which generates you an income 3 different ways.
Firstly, it can generate you profits on a monthly basis just from the rent alone. If the total expenses are less than the amount of rent received.
Secondly, the property increases in market value year after year. When the time comes to sell, the profits from the sale will be greater than that of the purchase price.
And the third way a revenue property generates an income for you, and my personal favorite: re-financing the property. As the mortgage on this property is paid monthly, the available equity rises. This equity then becomes available at the end of your mortgage term. Depending on the length of the term you have signed, 3 years, 4 years, etc.… the key to refinancing is to keep the mortgage balance as high as possible. Yes, as high as possible! The difference of what was left after the term and what is being signed for, is money that is given to you. The real kicker is that that money is tax free and can easily be invested to purchase another property or used to pay down the mortgage on your primary residence. Heck, you can go on a vacation with it, it’s your money!
Imagine now, holding onto a small condo for 10-15 years and refinancing every 3 years. The property increases in value over time and the rents make a surplus every month. When the day finally comes to retire, you have 2 options: sell the condo in the latter part of your retirement years to increase your retirement fund exponentially (of course consider capital gains and taxes when you sell, that’s the roll of your accountant), or you can move into it. Sell your primary residence, with no tax implications and move into the condo. Then, when the time comes, sell the condo after living in it for a year or two and avoid paying capital gains, because it became your primary residence.
If retirement is far into your future, a great use of the equity is to use it for the down payment on the 2nd revenue property. Then the equity available between those two can help buy the 3rd that much sooner. If you start early enough, you can own a number of condos which then can be leveraged to buy a multi-plex or a vacation rental. Before you know it, your initial investment has turned into a real estate empire!
If you’ve followed these steps, now you have a 3-tier money-making machine. Of course, there are many layers to this and this is a theory behind it and only one way to build wealth. Considering the initial investment is 20 percent (or less) of the property value to purchase the property, the returns far surpass that of a typical mutual fund, stock portfolio, RRSP or TFSA account.
Your realtor, financial advisor, and accountant can build you a budget, a realistic timeline, identify a winning property and finally, work all together to make sure you’re comfortable and understand this opportunity. Financial independence is a goal we all strive for, and this is a reasonable, affordable, and manageable way to achieve it.
Richard Sholzberg