Freedom In Retirement Through Real Estate

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Image source: forbes.com

BY: MAURICE ANDERSON

Real estate provides advantages over the stock market because many factors that affect real estate values are more easily understood and controlled, for example, location and highest and best use. When Microsoft is down it is down globally. Real estate can be appreciating rapidly in several areas of the country while other areas are stagnating. Within a ten-year period of owning a property, there is usually a three-year period when it did the majority of its appreciation. This strategy involves doing research to learn in what direction a community is growing, where the next free interchange will be built (hwy 401 east of Scarborough, hwy 410 expansion in Peel and hwy 407) and buying raw land or new developments within those areas and then sell and repeat the process. If you’re facing retirement and short of the funds you need, consider an income property. Income property can be an important bridge to retirement for those without quite enough to retire in a traditional manner.

TD Bank forecasts home prices will soar between 20% and 25% overall this year. I can imagine there would be two issues with that forecast. One, a recession would cause home prices to fall substantially. The level of income to debt ratio among households would hold back an economic recovery too because recent statistics stated over the past ten years the average debt per household has risen to 161% due to low lending rates. As the Canadian real estate market continues to rise, some investors want to put their RRSP money to work in a real estate investment. While there are limitations, there are also several options available to investors. Unfortunately, those looking to buy a rental property with their RRSPs are out of luck. Tax-free withdrawals can be taken under the home buyers plan to buy or build a qualifying primary residence to live in but not for a rental property investment.

Four major ways to profit from real estate is to get your tenant to pay your mortgage, positive cash flow net of expenses, providing the equivalent of a pension even if you own only a couple of properties; capital appreciation from the market; and forced appreciation that comes from renovating and improving properties. The foreign buyer tax that was implemented in Vancouver was never meant to be an instant cure and Toronto should expect the same if the government implements some of the new regulations in July. Economists argue it is a decent first step. If there is a negligible impact on the housing market then domestic speculation could be the larger issue that needs addressing. Scotiabank chief economist Jean-Francois Perrault suggests such a measure is in order. “Given there is evidence of speculation driving Toronto prices to unreasonable, unjustifiable levels, you might want to make speculation a little bit more costly,” he says. One way that may be accomplished is a higher tax on the sale of a secondary property. The shorter the duration of home ownership, the higher the tax. This would have a bigger impact on the market as it would affect both domestic and foreign speculators, Perrault says.

Real estate investment trusts (REITs) are RRSP-eligible investments that pool together income generating real estate. Typically the pool may include residential, office retail, industrial, self-storage, healthcare or hotel properties. REITs are a way for investors to invest indirectly in real estate that is managed by a professional team as I previously mentioned in an earlier article. It is also possible to hold your own mortgage in your RRSP, effectively making you your own lender. Fees may be a few thousand dollars upon setting it up.

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