Direction anyone?

[dcaz4moores]

2 questions:



Realistically, how long would it take to replace an earned income of 140,000.00 annually...with passive income from real estate investments, if one invested aggressively, keeping in mind my wife and I are just starting out?

Secondly, I can increase my annual income ( to the 180,000.00 range), but means changing employment and time away from family...a short term negative for a potential long term positive. It would increase my investment capacity, and could possibly expedite the process of reaching my goal. (The goal: To replace my earned income within 5 years with passive income...and make my passive income resource my full time responsibility)



I am not looking for a get rich quick scenario...but honest results due to serious effort, education and the equipping of positive networking.



Anyone willing to offer feedback as to whether the income earning shift could be beneficial, or maybe the income shift is not really necessary? Secondly does anyone think my 5 year goal is exceedingly unrealistic? I know it is attainable, but I am not 100% sure if the time line is going to make it a frustrating experience?



Please keep in mind that my wife and I just starting out. However we have made a conscience decision to move forward, and are deeply committed to building our business in investing in Real Estate.



Looking forward to reading the responses.



Regards,



Dave.

 

[ChrisDavies]

Hi Dave,



I don't think your goal is over ambitious, and I think you appreciate just how how significant a goal you've laid out for yourself. Tough, yes, but even if you only make it 80% of the way to your actual goal, you'll still have a pretty great life.

 

[dcaz4moores]

Thank you Chris...that is encouraging.



If you were giving advice, would you say, make the employment change and utilize the additional cash...or you make enough now, and if managed wisely, the goal can be reached?



Thanks again.



Regards,



Dave.

 

[Alvaro Sanchez]

In my book, family comes first... so don't rush things and enjoy the journey. Make them participants of your dreams, educate and prepare them so that when is time for them to take over they know what to do. (My 2 cents).

 

[Thomas Beyer]

[quote user=dcaz4moores]how long would it take to replace an earned income of 140,000.00 annually


Assuming you have some $s, investing $1M today for a $3M asset, say a 30 suiter in Edmonton for $100,000/door would yield:



6% CAP rate = $180,000 net operating income before mortgage

4% interest rate on a $2M loan = $80,000/year

net cash-flow + mortgage paydown = $100,000/year in a flat, 0 appreciation market.



Let's say you spend $20,000 of that $100,000 on add'l upgrades annually. So 80,000 net.



Let's assume a conservative 2% annual appreciation .. another $60,000 !



80 + 60 = 140K !



Voila .. you have arrived !!



Now, not all of that $140,000/year is cash-flow .. but it is return on investment in my books.



So, the big question for some is: how to get to $1M cash to start with.. but maybe not for you !

 

[dcaz4moores]

Asanchez I like your thinking. Family is critical to me and my most precious asset.



Thanks for your response.



Regards,



Dave

 

[dcaz4moores]

Mr. Beyer, I like that you get straight to the point. The numbers seem straight forward enough even for an extreme novice such as myself (though I have to look up terms and find my self memorizing the acronyms and their meanings to make sense of the financial verbiage).



As mentioned, I feel quite capable in earning (working for) money, but have reached a plateau in the fields I serve. My desire is to turn the tables and learn the trade of having money work or me. I am not so naive as to think this can happen over night, as it took me 15 years to master my current methods. However, I feel tenaciously focused and keenly interested in this new world of investing.



I look forward to meeting you, as I trust our paths will cross in due time.



Thank you for your response.



Regards,



Dave.

 

[gwasser]

Simple and... not easy to do. A lot depends on your investment savvy and current net worth.

As Thomas states get something that cash flows $140,000 per year. My question would be, are you planning to spend $140,000 each year? Probably not! So you should look at your costs of living after the kids are out of house, after CPP and OAS income (if you're that old), after any other pension income and maybe even royalties?



So my guess is that when your house is paid off, you can live pretty well from about $80,000 before taxes. Shoot, the average Canadian household lives from $70,000 before tax. So... how much do you really need?



There is ROI (return on and of investment) and there is net cash flow (after operating and investment expenses). Try to live of the net cash flow while the total ROI will take care of increasing your overal net worth and to protect your net worth against inflation.



I think in today's market a net cash flow or a dividend/ interest income of 3% is not an unreasonable expectation. So if 3% equals $80,000 then $80,000 divided by 3 and multiplied by 100 is the net worth you require: $2.7 million not including your house.

 

[dcaz4moores]

Gwasser, I just returned from reading your posted outlook on 2011...and thought to myself "man, these guys are good and even better is that they don't lose themselves in the seriousness of it all".



I appreciate the balance of your comments regarding my query. I have a few years before the kids leave the nest, though they are inching ever closer to the edge To consider actual cost of living and genuine needs (mingled with wants) keeps the perspective simple and focused.



Thank you or taking the time to respond.



Regards,



Dave.

 

[Thomas Beyer]

[quote user=gwasser] My question would be, are you planning to spend $140,000 each year?


with 2 kids in university .. 2-3 annual vacations and a weekly meal out that money is EASILY spent !



Of course, one can live on a LOT LESS.



But why not aim high .. one can always lower one's standard later .. or downsize to a smaller/cheaper/uglier/worse located house/condo/apartment .. but usually a more expensive home is usually also nicer .. and as i blogged elsewhere, try to live in the most expensive house you can afford as it is a tax free investment in Canada that on average goes UP in value 3-5%/year !! Why not live in your (nice) investment ??

 

[bizaro86]

[quote user=ThomasBeyer]try to live in the most expensive house you can afford as it is a tax free investment in Canada that on average goes UP in value 3-5%/year !! Why not live in your (nice) investment ??


A different perspective: Why not live in a cheaper house for awhile, and then upsize? After all, although a personal residence will appreciate, so will investment real estate. So why not take those extra dollars of mortgage payment, and use them for downpayments on investment properties?



On the other hand, my personal residence was as expensive as I felt comfortable buying, and as you say, the more expensive house is usually nicer. Tradeoff everywhere, I suppose.



Regards,



Michael

 

[Thomas Beyer]

[quote user=bizaro86]Why not live in a cheaper house for awhile ... Tradeoff everywhere, I suppose.


As I said ".. the most expensive house you can afford .." .. and that differs in various stages of your life.



Our house in Canmore almost tripled in value in 10 years. Imagine I had bought a hovel. We sold this summer .. after it dropped 20% from its 2007 peak .. and moved back to Vancouver ..



I lived in Vancouver 20 years ago .. man, I had VERY LITTLE MONEY then .. and houses were expensive then .. They wanted $200,000 for a bungalow !! $200,000 ! wow !! Thus, we rented .. Today that same house, 20 years older is probably $800,000 or so !



In 2030: $2.0 M probably !!



.. btw: tax free !!

Go figure !

 

[gwasser]

I am with Michael on this one. You buy the house you need - that does not mean the most Spartan place you can find, but somethinng you live in comfortably. Use the extra money to invest. E.g. in a rental property and let the tenant(s) make the extra mortgage payments (rather than you for something you don't really need).



I bough our family home in 1982 for $93,000 in a decent neighborhood in Calgary. Now it is worth (including renovations - approx $100K over the years) over $600,000. We still live in this house. The mortgage was paid off in about 5 years. After that we use helocs registered against the house to finance other properties from time to time - this way your home equity is not 'dead' money.

 

[dcaz4moores]

This is the approach (heloc) I am planning to use to get our investment business started. From there I hope to continue educating myself and surrounding myself with good educated people...and take another step towards additional investments.



Thanks for responding.



Regards,

 

[Thomas Beyer]

[quote user=gwasser]Use the extra money to invest. E.g. ...
a house you live in IS AN INVESTMENT is it not ?



it is tax free .. and it is enjoyable and tangible !

 

[kboughen]

I use a very simple calculation when I ask myself the same question you did. It is my 1% rule, I expect my cash investments in real estate (and all other investments) to return to me 1% monthly ( annual average of 12%). Therefore, to realize $11,667 per month ($140K/yr), I would need to have $1,116,667 invested.



I was thrilled to see that Thomas's calculation produced a very similar result.

 

[Thomas Beyer]

[quote user=kboughen]... to return to me 1% monthly ...


cash-on-cash .. or all in (equity creation through mortgage paydown, appreciation, cash-flow) ?

 

[gwasser]

[quote user=ThomasBeyer][quote user=gwasser]Use the extra money to invest. E.g. ...
a house you live in IS AN INVESTMENT is it not ?



it is tax free .. and it is enjoyable and tangible !




It is only partly an investment, the other part is personal consumption.

Neither does it provide cash flow - it takes cash flow!



On the other hand , it appreciates. So in my mind, a personal residence is a hybrid. Some financial authors, including your 'favorite' Robert Kyosaki, advocate to see a residence as a non-investment. I don't agree with that either.



The different views may also depend on different taxation rules in Canada vs the U.S. I have never played with the actual numbers, but intuitively to me it makes sense that you live in a modest house - a 'good enough' house. It helped me pay off my mortgage fast and got me going early with savings and investing.



Warren Buffett bought his house a long time ago (I think since he married he only owned two residences); always lived in Omaha. That is not to say that for others the thinking may be different. Their lifestyle expectations may require a 3000 sft house. Mine is 1000 plus a fully developed basement. I lived here for nearly 30 years and we raised two kids in it. No they are not disformed, in fact one is over 6 ft.



The house besides us is just as old - build in the 1950s. We're living in the inner city of Calgary and around us are now shooting up those one million dollar mansions that barely fit on the lot. Accross our back alley they build 3 unit condo complexes with the exit of their tiny single car garages inches away from the back alley. The only way they can get their oversized trucks in and out is to drive over my garage pad. If I ever decide to build a fence or move my garage closer to the back alley, I'll face a revolution.



Anyway, my neighbours' house is even smaller (and slated to be replaced by another million dollar plus monstrosity). But this 900 sft house with developed basement was good enough for a bank employee and house wife to raise 3 children in the 1960s - she moved closer to relatives 4 years or so ago. This house was build for around $25,000 at the time. The land sold this year for over $500,000.



So, it is a lifestyle choice that you make when buying a residence and if I lived in one of those million dollar monstrosities I would have to give up a lot of investment mullah. So yes, a larger house translates into larger utility bills, larger maintenance costs, higher property taxes and higher mortage (interest) bills and still only 3- 6% annual appreciation. These are the places that make you house rich and cash poor. That extra money can so easily be put to work into much more profitable assets.



You may say, oh... poor Godfried he lives in this old run down shack. But no, I live quite comfortable thank you! in the inner city with a beautiful, automatically sprinkled back yard, an oversized double garage; an air conditioned, high energy efficiency heated house with beautiful hardwood throughout, a nice modern kitchen, wireless network with 6 computers, three bedrooms, two offices (one for my wife and one for me), a nicely furnished living room, a rec room/house theatre. All in 2000sft living space or a 1000 sft house. Did I mention bathrooms and a proferssionally landscaped front yard (planned next year)? So, do I give up on livestyle? Absolutely not - many do envy us our place.



So... no Thomas, I absolute disagree with buying the largest residence you can buy. Sorry Ed, that was another long posting - maybe I should have stuck with the first 5 lines and not elaborate.

 

[Thomas Beyer]

[quote user=gwasser] ... Thomas, I absolute disagree with buying the largest residence you can buy. ..


fair enough ! a good debate !



I did not say " the largest you can buy" as I know you and I could both buy even bigger homes .. I said "the largest you can afford" or should I say perhaps "the largest you chose to afford" .. as some folks chose to spend more on a home than a car, for example, while others splurge on fancy cars or fancy vacations with a modest home.



What is the purpose of money then ? just to invest it ? Enjoy it too, man !! Invest AND enjoy is my motto ! So, if I can make 12% to 20% on my investment before taxes and 8% to 12% tax free in my own home, why not invest in my own home ??



It also depends on the state in your life. Perhaps at the beginning the strategy is different than later. Perhaps a better metric is: what % of your networth should or could be in your personal home ? 2% ? 10% 25% 50% ? 100% ?



I think it should be somewhere between 25% and 40% .. and if that is a nice house: great.

 

[kboughen]

"cash-on-cash .. or all in (equity creation through mortgage paydown, appreciation, cash-flow)"



My 1% calculation is more of a personal reality check on what I need to accomplish to reach my passive income targets. For example, if I wanted to generate $10,000 in monthly passive income today, I feel I would need at least $1,000,000 to achieve that. I would need to carefully invest that money in any combination of free and clear properties, partially leveraged properties, RTO properties, 2nd mortgages, short term 1st mortgages etc. Some people will argue this is far too an aggressive return projection, others will say it is too conservative.



Now that I know where I think I need to be ($1M invested in this example), I can base my current investment decisions on how I will get there and that definitely includes equity creation through mortgage paydown, appreciation and cash-flow. It also includes savings and other investment tools.