Creating A Pension Plan
Michael Hallett • April 30, 2016
What's a pension? I don't have one. In today's day in age there are not many people that will have one when they retire. So it's up to us, as individuals, to create our own - build your net worth from within. There are many ways to create a pension plan, acquiring rental properties is just one of them. Many of the wealthy people these days have utilized real estate to grow their empire, whether it's through buying and selling or buying and never selling. When acquiring a portfolio of properties one is able to plan for continual growth by utilizing the potential cash flow and accrued equity to purchase a second, third, forth...property.
First step is to determine your budget, which may ultimately be decided by how much of a down payment you have as well as to figure out what your monthly comfort level is for cash flow. For all intense purposes I will be using values and amounts from my local area on a relatively new 1 bedroom/1 bathroom condo. With newer units comes less risk of future assessments. Do your homework*.
Purchase Price: $225,000
Down Payment: $45,000 (20% minimum, lender may request more)
Mortgage Amount: $180,000
Mortgage Insurance: $0 (lender may require depending on how income is reported)
Total Loan: $180,000
Variable at 2.40% (P-0.30%) 5 year term CLOSED 30 year amortization
Monthly Mtg Payment: $700.79
Est. Monthly Strata: $200
Est. Monthly Property Tax: $100 ($1,200/year)
TOTAL Monthly Payment: $1,000.79
Property Transfer Tax:
$2,500 (paid at completion, cannot be rolled into the mortgaged. It is calculated based on 1% of the 1st $200,000 and 2% on the remaining balance.) To calculate Property Transfer Tax http://www.bcrealestatelawyers.com/ptt-calculator/
Appraisal:
$300 (required to validate the purchase price because there is no mortgage insurer involved; CMHC, Genworth or Canada Guaranty).
Home Inspection:
$400 (highly recommended)
Title Insurance:
$200 (In short, title insurance is an assurance as to the state of title of a given property. In practical terms, it protects lenders and purchasers against loss or damage suffered due to survey problems, defects in title and other matters relating to title as specified in the policy.
Approx lawyer fees:
$1,500
The cost to acquire the property was $4,900.
Well that was easy, you just purchased a rental property...NOPE, you are just getting started. The obvious goal is to pay off the mortgage with the rent ($1,200/month) coming in.
Yearly Cash Flow
= Rent - Mortgage Payment - Property Tax - Heat - Strata - Renters Insurance** - 3% Vacancy
= $14,400 - $8,409.48 - $1,200 - $1,200 - $2,400 - $500 - $432
= $258.52
Positive cash flow is ultimately what you are seeking with a rental property, however this is not always attainable from the start. Just because there is positive cash flow at the beginning DOESN'T mean that you should start paying yourself (a pension), and that amount of $258.52 is yearly. So more or less this property just breaks even.
Because the real estate market is cyclical we are going to estimate the increase in market value by a modest 3%, year over year, some years more than others. Along with calculating the year over year market value increase we will look at how the mortgage balance has decreased over time. Remember the purchase price was $225,000 and the starting mortgage amount was $180,000.
Market Value Mortgage Balance Potential Equity
End Of Year 1 $231,750 $175,844 $55,906
End of Year 2 $238,702 $171,588 $67,144
End of Year 3 $245,863 $167,227 $78,636
End of Year 4
$253,238 $162,764 $90,474
End of Year 5 $260,835 $158,191 $102,644
This was the part 1 in a series of multiple posts that walk through the acquisition of rental properties in order to create a sustainable pension plan. Next up, buying property number two.
Legend
*Read everything single piece of information provided by the seller and strata; AGMs, strata minutes, property disclosure statement, Form B as well as the depreciation and engineers report if available.
**Renters insurance (purchased by the property owner) has many variables to consider for the cost; detached home, condo, townhouse, location, value of personal contents, any betterment and improvements.
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One of the most common questions, “how long does it take to get pre-qualified?” My response, “how fast can you provide the information I need.”
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This would have been a fun stunt once upon a time!
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A tasty beverage while on the water yesterday from @backcountrybrewr and @backcountrybrewing
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Wood to wood gap in Whistler.
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Archery target: before, during and finished.
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Saratoga Beach fire.
Canadian tuxedo.
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Distancing myself from the real world!
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Does anybody need or want any firewood? It’s free...you come pick it up.
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The Bank of Canada announced today that it is maintaining its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%. For Canadian homeowners, buyers, and anyone with a mortgage on the horizon — here's what you need to know.
Ready to Buy Your First Home? Here’s How to Know for Sure Buying your first home is exciting—but it’s also a major financial decision. So how can you tell if you’re truly ready to take that leap into homeownership? Whether you’re confident or still unsure, these four signs are solid indicators that you’re on the right path: 1. You’ve Got Your Down Payment and Closing Costs in Place To purchase a home in Canada, you’ll need at least 5% of the purchase price as a down payment. In addition, plan for around 1.5% to 2% of the home’s value to cover closing costs like legal fees, insurance, and adjustments. If you’ve managed to save this on your own, that’s a great sign of financial discipline. If you're receiving help from a family member through a gifted down payment , that works too—as long as the paperwork is in order. Either way, having these funds ready shows you’re prepared for the upfront costs of homeownership. 2. Your Credit Profile Tells a Good Story Lenders want to know how you manage debt. Before they approve you for a mortgage, they’ll review your credit history. What they typically like to see: At least two active credit accounts (trade lines) , like a credit card or loan Each with a minimum limit of $2,000 Open and active for at least 2 years Even if your credit isn’t perfect, don’t panic. There may still be options, such as using a co-signer or working on a credit improvement plan with a mortgage expert. 3. Your Income Can Support Homeownership—Comfortably A steady income is essential, but not all income is treated equally. If you’re full-time and past probation , you’re in a strong position. If you’re self-employed, on contract, or rely on variable income like tips or commissions, you’ll generally need a two-year history to qualify. A general rule: housing costs (mortgage, taxes, utilities) should stay under 35% of your gross monthly income . That leaves plenty of room for other living expenses, savings, and—yes—some fun too. 4. You’ve Talked to a Mortgage Professional Let’s be real—there’s a lot of info out there about buying a home. Google searches and TikToks can only take you so far. If you're serious about buying, speaking with a mortgage professional is the most effective next step. Why? Because you'll: Get pre-approved (and know what price range you're working with) Understand your loan options and the qualification process Build a game plan that suits your timeline and financial goals The Bottom Line: Being “ready” to buy a home isn’t just about how much you want it—it’s about being financially prepared, credit-ready, and backed by expert advice. If you’re thinking about homeownership, let’s chat. I’d love to help you understand your options, crunch the numbers, and build a plan that gets you confidently across the finish line—keys in hand.
