Investing in Real Estate

My mother loses her mind every time I tell her I want to buy another property....and she would lose her mind even more if she knew I had not a dollar worth of RRSP's saved up for my retirement.

I am not a Certified Financial Planner (CFP) but I have been around the block enough to know that investing in real estate can be a secure way to retirement with higher returns than most RRSP investment plans I have ever seen.

I think of my grandparents. They bought a house on Dovercourt Ave. in Ottawa for $16,000. That's right $16,000! They lived there for 20 years or more and made very little upgrades to the house except for the usual maintenance like a new roof, furnace and windows over the 20 year period. When they sold it, it still had its original cabinetry, flooring, etc. They sold that house for over $350,000!

Now let's forget about this example and use some simple statistics.


Let’s say you have $50,000 to spend on an investment.

Option #1 - RRSP
One option is to buy a $50,000 RRSP. You hold this long-term investment for approximately 15-20 years, at which time you decide to retire. The “rule of 72” for investing purports that an investment will double its value in 7.2 years at 10% interest. If your RRSP earned 10% interest, it would double twice in approximately 14.4 years. Therefore, your original $50,000.00 would have increased to about $200,000.00 at the time of your retirement.

At retirement, you decide to use your RRSP as income, which is taxed at your retirement rate of taxation. What do you think your rate of taxation will be at retirement? For example, if you think your rate of taxation will be 30%, your $200,000 will be worth $140,000. If you think your rate of taxation will be 50%, your $200,000 will be worth $100,000.

Don't forget you have to pay tax on that money sometime! Hell, if you are an entrepreneur like me I would venture to say that by the time you hit so called "retirement" all of your ventures should be yielding you a nice profit by then and you might be in your highest tax bracket ever. Here's hoping for me :)

Now let's look at putting your initial $50,000 into real estate instead.

Option #2 – Real Estate Investment Property
Let’s say you find an investment property in the Ottawa area for $200,000. You use your $50,000 as a down payment on your property. You charge enough rent to pay for the mortgage payments, insurance, property taxes, renovations, and potential vacancies. The tenants pay all utilities. After approximately 15-20 years, you are ready to retire. The mortgage has now been paid in full (by your tenants over the years). At this point you have two options:

1.The first option is to continue to rent the property and keep the rental profit as monthly income.
2.The second option is to sell the property and use the profit as retirement income.
Let’s say you decide to sell the property for $200,000. The entire $200,000 is tax free, since there was no capital gain on the sale of the property (you bought and sold it for the same price). This example assumes that your property is still worth $200,000. Unless we are in another great depression it is highly unlikely that you would sell the house 20 years later for the same price you bought it for, right?!?!?! Statistics obtained from the Ottawa Real Estate Board show that since 1956, the average increase in value for a property over 15 years was 99.41%.

If you sell the property for higher than you bought it for, you will realize a capital gain and pay tax on ONLY the profit. For example, selling the property for $400,000 (this is a realistic amount considering the statistic mentioned earlier) will give you a capital gain of $200,000. Today’s income tax rules charge capital gains tax at your current tax rate on 50% of your capital gain. In this scenario, you will be charged tax on $100,000 (50% of $200,000 capital gain). Assuming a tax rate of 50%, you will pay $50,000 in income tax. This is not bad considering you have the remaining $350,000 to $370,000 in your pocket!

Now, let me remind you that there is no such thing in life as "easy money". Having investment properties does not come without their fair share of potential problems. Being a landlord is a "job" and you cannot just sit back, relax, and make money. One could argue that RRSP's allow you to just sit back, relax and make money.....but that would be too boring for me :)