Turning Rental Properties into Investing Cash Flow Key to Ontario Couple’s Retirement

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“The couple are banking on appreciation to justify the added risk, complexity and labor of owning two rental properties,” said one expert.

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In Ontario, a couple we’ll call Fred and Suzy, both 42, are raising their child, 12-year-old Laurie. They bring in $ 9,000 a month after tax from their tech jobs and add $ 1,900 in rental income from two properties. In total, 94% of their nearly $ 2 million assets are in real estate – their $ 850,000 home and $ 1,010,000 in two rentals – offset by three mortgages totaling $ 1,052,000.

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Fred and Suzy would like to retire in 18 years when they turn 60 with debts paid and after-tax income of $ 70,000 a year. Neither has a defined benefit pension. Their retirement income will depend heavily on their investments.

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Family Finance asked Owen Winkelmolen, Director of Planeasy.ca, a London, Ont., Only advisory service to work with Fred and Suzy.

Too much money in real estate

The first problem is their high allocation to real estate. The couple pay $ 2,821 per month for mortgages, plus $ 1,784 in property taxes, property management and utilities for rentals. The buildings show negative cash flow. Fred and Suzy subsidize them at the rate of $ 9,672 per year. Even a small increase in interest rates will double the subsidy needed. This will reduce the couple’s ability to save for retirement.

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Rental mortgages will need to be paid well beyond their expected retirement date. As Winkelmolen puts it, “The couple are relying on appreciation to justify the added risk, complexity and work involved in owning two rental properties.” The implication – selling both properties to reduce negative cash flow and the huge allocation of their wealth and financial future to the property.

Fred and Suzy want to fund Laurie’s studies. They don’t have an RESP, but they can create one. They can contribute $ 5,000 for a year, a catch-up allowed by the rules. This will attract the two-year equivalent of the Canada Education Savings Grant from the lesser of 20 percent of contributions or $ 500 per year, or $ 1,000 net in this case. There is a limit of $ 7,200 per beneficiary on CESG contributions and a lifetime contribution limit of $ 50,000 per beneficiary. The couple will get closer but will not exceed this limit. If they contribute $ 2,500 per year for the remaining six years, the RESP will have a value of $ 38,800 and therefore provide $ 9,700 per year for four years of tuition, which is sufficient if Laurie lives at home. .

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Build up retirement savings

Fred’s income puts him in the 43.41% Ontario tax bracket, which makes RRSP contributions very attractive. He can get that rate in the form of a tax refund on contributions, and then, in retirement, pay tax at a potential rate, depending on income, of 20 percent. If Fred contributes $ 24,000 a year to his RRSP, he can use his space. With annual contributions of $ 24,000 and annual growth of 3% after inflation, Fred’s $ 17,400 present-value RRSP will grow to a value of $ 609,000 in 18 years of retirement, Winkelmolen estimates.

Suzy benefits from a defined contribution pension plan (DCPP) with her employer. It has a current value of $ 37,000. It adds $ 2,700 per year. In 18 years, with 3% growth after inflation, it will be worth $ 126,200, the planner estimates.

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By combining the two plans, they would have RRSP and DCRP capital of $ 735,209 at age 60. This sum, converted into an annuity for 35 years at age 95 at a rate of 3% growth per year after inflation, would generate $ 33,220 per year.

The couple also have plenty of TFSA contribution room. However, due to their income, expenses, and negative rental cash flow, they will not be able to add to their plans. Contributions to TFSAs will then have to stop in 2023 after the negative cash flow on their new property reduces their ability to save. Their TFSA balance will continue to grow by 3% after inflation until age 60. It will then have a value of $ 36,380.

In retirement, the couple wish they could spend $ 70,000 a year, but mortgage payments on their home and two rentals will make that difficult.

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Assuming they sell both properties before retirement but keep their home, they can have $ 1,010,000 minus $ 112,354 for real estate fees and capital gains taxes and $ 271,570 for mortgage elimination. . This will leave them with $ 626,076. This money can be used to pay off the remaining $ 127,292 in mortgage debt on their home at age 60. Then they may have $ 498,784 to invest for retirement income.

Estimate of retirement income

Based on their current TFSA contribution room and assuming they each generate $ 6,000 of additional TFSA space each year until age 60, $ 292,000 of rental property proceeds plus their TFSAs will have a balance at age 60 of $ 329,060. This sum, still generating an annual return of 3% after inflation, would bring in $ 14,870 for the following 35 years until the age of 95.

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The remaining $ 206,784 in cash from the sale of the property can be added to a non-registered investment account. This amount, generating an annual return of 2.5% after inflation and taxes, would bring in $ 8,700 for the next 35 years until the age of 95.

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The couple will be eligible for Canada Pension Plan benefits of $ 10,474 for Fred and $ 8,366 for Suzy, for a total of $ 18,840 at age 60.

Total income at age 60 would consist of $ 33,220 in RRSPs, $ 14,870 in TFSAs, $ 8,700 in taxable investments and $ 18,840 in CPP. That’s a total of $ 75,630. They would pay tax at the rate of 13% (excluding TFSA cash flow) and have $ 5,650 to spend each month. With the elimination of debt service, child care and savings, their expenses would be $ 3,900 per month. They would have an income in excess of their basic needs.

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Five years later, they can start receiving Old Age Security benefits. Based on years of residence in Canada, Fred will receive $ 6,646 and Suzy $ 6,461, a total of $ 13,107 per year.

In total, at age 65, the couple would then have $ 33,220 in RRSPs, $ 14,870 in TFSAs, $ 8,700 in non-registered assets, $ 18,840 in the Canada Pension Plan and $ 13,107 in OAS. That’s a total of $ 88,737. After qualifying income splitting, they would pay tax on everything except TFSA payments at an average rate of 13% and have $ 6,594 per month or $ 79,130 ​​per year to spend. That’s above their annual after-tax income goal of $ 70,000.

Retirement stars: three stars of retirement *** out of five

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