10 Mar

Are Rental Properties The New Pension For Millenials?


Posted by: Jesse Smith

The fact is, when it comes to retirement this generation faces some challenges that previous generations have not needed to worry about as much, speaking mainly of pensions. In the past, if you had spent your working life at one company, they would provide a pension to take care of your retirement for you. This was common practice then, and there were many companies offering this as part of their employment. This is hard to find now and is associated with only some of the biggest companies out there, and even then you are still more likely going to get company RRSP contributions than a full pension.

If it’s an excellent pension you’re after, your choices are basically left to government and military employment, but where does that leave the rest of us? It can be a staggering fact that if you retire at the typical age of 65 with today’s life spans climbing you could need 25+ years worth of retirement income.

If you don’t have access to a pension a good way to supplement that for yourself is with rental properties. For example, say you have a 20% down payment when you are 35 years old, on a 25 year amortization. You’re Making regular payments, and by the time you are 60 the property has paid for itself and you have a great source of revenue 5 years before retirement. In many cases the income from 1 mortgage free rental property can be as much, or more, than most pensions!

A common objection some people have with rentals is the management of them, the whole “I don’t want to fix toilets’ ‘ argument. The good news is, if you buy right you won’t need to do any of that, because investing in a property manager not only saves you a lot of time and headaches, it also allows you the freedom to explore rental opportunities out of your current market area. It can be really difficult to save up a 20% down payment in some of the larger centers where property values are high, but not as bad in some of the smaller centers outside of major hubs, and sometimes without much of a drop in rent prices. There is also a growing population who would rather keep renting than buy their own home, this means a steady flow of good quality tenants for years!

Does saving up a 20% down payment sound too daunting? That may not be as much of a problem as you would think, as long as you are ok with moving! There are no mortgage rules about turning your current property into a rental property. So lets say, if you bought a house with the intention of making it your primary residence and then decided for any reason to move at a later date (life happens), you can easily make that house into a rental property AND still do 5% down for your next purchase (assuming approval of mortgage insurance) as long as you are making it your primary residence.

You can only insure up to 3 mortgages at a time, so for the fourth house you will need 20% down, providing you keep the first houses insured. But once you have enough equity in the first 3 purchases you can refinance, drop the insurance and even use the equity you took out in the refinance as the down payment for the next purchase! see how the snowball starts to form?

The real magic of rental properties is that you can compound the returns. While the property is paying for itself, any extra cash flow can be put towards other investments like RRSP or TSFA accounts and keep growing! Your initial down payment investment could potentially cover most, if not all, of your retirement if it is done like this.

With retirement getting more and more expensive, and inflation creeping up every year saving for retirement is more important than ever, and the younger you start the greater the returns. Rental properties are a great way to have passive income in your golden years and are a fantastic way to diversify your investments. If you are interested in rental properties I recommend educating yourself on the subject, learn what to look for and how to work the numbers. Real Estate can be the most incredible investment, but it has to be done properly. I personally have rental real estate and love talking about rentals so if you have any questions at all please feel free to send me an email!