A Smart Alternative
to Income Properties
A Personal Pension Plan that
Funds Itself
These days, many people are interested in real
estate as an investment. The concept is to arrange
a mortgage, buy a house and rent it out. Over
time, the rent is supposed to pay off the mortgage.
The rental income continues on and acts much like
a pension for life.
Of course owning an income property is never
that simple. Typically an individual would need
25% as a down payment. Repairs, maintenance, property
taxes and shortfalls have to be paid. Finally,
tenants have to be found who will pay their rent
on time and respect the property.
The real estate industry reports that unleveraged
real estate has appreciated at slightly less than
the rate of inflation over the last 50 years (4%).
The net rental income is the gross rental income
less property taxes, repairs and maintenance which
averages out to 2.5%. Total return for real estate
averages 6.5%. If the house is financed, the interest
cost is tax deductible.
A simpler and more reliable program to create
a Personal Pension Plan that funds itself
In most cases one can borrow 100% of the money
required to buy an income portfolio that pays
off the loan in fourteen years without any out
of pocket cost to the investor. From there on
the portfolio continues to pay out an income much
like a pension plan.
What kind of rate of return can one expect from
this type of investment?
The history of Canadian equity markets document
returns averaging 10% over the last 50 years.
Dividends have made up 4% of this figure while
capital appreciation makes up the other 6%. This
is a significantly higher return historically
than is provided by real estate income property.
This type of portolio acts very much like an
income property and has further advantages. It
is professionally managed and is diversified with
at least thirty investments. As such, this is
much safer than a one or two income property approach.
Unlike an income property, there are no property
taxes, maintenance or tenants that need to be
managed. However, like an income property there
may be times when one has to add funds to ensure
the success of this program.
How this works
Bick Financial can help arrange 100% of the financing
for the investments. The investments themselves
are the collateral.
Assume that one borrows $100,000 at 5%. The interest
cost of $5,000 is tax deductible. At a marginal
tax rate of 40%, the out of pocket cost would
be $3,000. Assuming the funds generate 10% ($10,000)
of income with no income taxes, the net income
would be $7,000 per year ($10,000 - $3,000). This
would pay off the loan in fourteen years.
Conclusion
This is a bold and innovative program that has
significant advantages over a real estate approach.
Although the program has internal checks and balances,
regular reviews with your financial advisor are
essential for peace of mind and a profitable experience.
To see if this is appropriate for your situation,
speak to your Bick Financial advisor.
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