Baby Boomers 10 yr real estate retirement plan

Last week, I was asked to comment on BMO’s Retirement Report  which pointed out that more Canadian Baby Boomers are using their home as their retirement fund.  The BMO study shows the baby boomer generation were not downsizing like many experts were thinking.  But instead, they are buying bigger, more expensive homes.   The thinking is that the higher priced homes will grow their retirement fund more quickly and more securely.

Several Financial Experts commented on this study…. mostly offering negative reviews about this retirement strategy….. including BMO… you know, eggs in one basket, diversification, that sort of thing…  there is merit in the statements but I really don’t agree with the negative spin….. Here’s a link to my quotes about the “10 year plan” in The Star.

The 10 year plan has grown in popularity over the last 5 years as we’ve seen the value of our RRSPs or other investment drop in value.   It’s capitalizing on real estate values going up over the long-term.    It’s really simple to understand….

THE 10 YEAR RETIREMENT PLAN

Here’s an example of what one couple did….Let’s say you’re between the ages of 35 and 55.

  • You own a home worth $500k.
  • You have a $300k mortgage., but you can afford to buy a $700k home.
  • Your new mortgage is $500k.
  • You are committed to keeping that home for 10 years….and you can afford the payments..
  • In that 10 years, the goal is to pay down your mortgage by at least half, if not more. (a realistic goal considering the average Canadian pays off their home in 12 to 17 years).
  • if your home goes up by 5% each year, on average (and this is probably a realistic number looking back at historical values), then your home should be worth $1.14million.  
  • the 10 year timeframe is critical… we want to give enough time to live through any up or down real estate market…

Using the example above, in 1o years you should have a mortgage of $350k or less and house worth $1.14millon… that’s $790,000 of equity in your home.   Oh, and it’s all Capital Gains Tax Free….

Does it sound too easy or too good to be true?   It’s really not… take any 10 year period in history…  work out your own stats… This is reality…

By the way, the couple I’m referring to are real… they are actual clients of mine.   They bought their home in 2007 for $850k… They have paid down their mortgage to $300k…this is way ahead of schedule…(the low interest rates have helped)….  The value of their home today is approximately $1.5million.  They have $1.2million in equity today.  They estimate the home will be worth $2million in 5 years…  but even if it isn’t, even if the property is only worth $1.2million 5 years from now, I’d say they’ve done pretty well, wouldn’t you agree?

And for those that prefer stocks and bonds, then stick with those investments…  There isn’t one good strategy…  This plan is less exciting and probably a little boring…  but I like boring when it comes to my money and my retirement…

This plan isn’t for everyone.  You need to be comfortable with debt and understand real estate…. and you need to commit to owning real estate for 10 yrs (it doesn’t have to be the same house.. you can move)…

If you need help with this plan or just want more info to help understand it, give me a call anytime.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

4 Responses to “Baby Boomers 10 yr real estate retirement plan”

  1. Phil O'Connor Says:

    Real Estate has always been a great investment and over the long term can net some great returns. Yes, historically property values do double every tens years and if you work that out as a percentage then you are seeing a return of just north of 7% for your property investment. (Disclaimer) Each market needs to be looked at for it’s specifics and a good real estate agent knows how to extract this data for you.

    Now, take it to the next level… There is good debt and bad debt. Bad debt is self explanatory and most of us are all too aware of what this is. Bad debt takes money out of your pocket and reduces your income, i.e., financing a car, furniture, credit card interest, etc… you get the picture!

    Good debt, on the other hand, puts positive cash-flow into your pocket. Let’s take your example, your couple has $1.2M in equity and as a result has the ability to borrow against this equity. With the current rules, financial institutions will generally offer 65% against this equity or, your couple can borrow $780,000, not bad. So, what to do with $780,000? You often hear that someone borrowing against their home equity in order to buy new furniture, do a home renovation, take a holiday… This is BAD debt and simply robs you of your future and, your kid’s inheritance.

    You already know how profitable real estate can be. Take this home equity line of credit and invest in more real estate. This is considered good debt, you’re using financed money to make more money, Real Estate Investment Trusts figured this out decades ago. With a good rental property, the tenant is paying the debt of carrying the property, you will build equity through natural appreciation, build equity through the reduction of debt and with a good rental property can actually develop a positive cash-flow. That rental income is an incredible annuity.

    You are the pro on Lenders and can confirm the Lender’s needs. I generally see a Lender needing 25% down for an investment property. Your couple now has $780,000 at their disposal so they have the ability to purchase 10 x $300,000 properties with a $75,000 down payment on each one. By doing this, their real estate portfolio will now increase to $4,500,000 and if you subscribe to same math as above and double the value over ten years, then their holdings will increase to $9M. Wow! That amounts to a growth on their property holdings’ value of $4.5M which is equivalent to $450,000 per year or $37,500 per month.

    Now, that’s what I call making your money work for you.

    It may sound too good to be true, so I challenge you to do the math.

    Cheers

    Phil O’Connor

    • Steve Garganis Says:

      Hi Phil,

      Well said… We talk a lot about Good Debt and Bad Debt at CanadaMortgageNews.ca. It’s not a secret… The wealthiest people in the world made most or all of their fortunes from investing in Real Estate… Stay away from get rich quick schemes… they almost never work… Talk with knowledgeable professionals… seek out a good realtor, lawyer, mortgage broker….

      You are correct with your numbers too… and with today’s record low rates, the numbers make even more sense…

      Steve

  2. Corey Zaal Says:

    I sell real estate in the Comox Valley, an area seen as a retirement destination to many baby boomers. Since these buyers can get more for their money in the Comox Valley area than where they are typically coming from, they don’t seem too overly concerned about the size of the house, but there are a few unique items that they do seem to consistently look for:
    1) One level living
    2) Low maintenance
    3) Close to amenities

    One level living typically means smaller homes but new styles of homes are emerging that offer one level living but with a larger square footages. Homes that have spare bedrooms upstairs while keeping everything else on the main level for example.

    Low maintenance normally means small yards, and newer construction.

    Locally, one level homes are going up in price significantly faster than traditional two levels, and builders are doing there best to keep up. Baby boomers that wait to purchase may end up paying significantly more for their retirement home as a result.


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