Develop your own pension plan with real estate - MoneySense

Develop your own plan

How two Ottawa artists created their own monthly income stream

pension plan

Steward Kinmond, 70, and Barbara Sibbald, 58, in front of their mortgage-free new-build, close to Parliament Hill. (Photography by Jessica Deeks)

Every morning, Barbara Sibbald and her husband Stewart Kinmond gaze out across their big backyard and watch the sunrise. Directly behind them is part of their retirement plan—standing as solid as a brick house. Because, well, it is a house. A big, old Victorian, in fact, that’s been retrofitted into a triplex just 15 minutes away from Parliament Hill in Ottawa.

When Barbara met Stewart just over a decade ago, he already owned two rental properties, including the Victorian triplex. After three years of dating, the two divorcees decided to tie the knot, but agreed: They’d live separately in their own homes. “We’re both artistic and needed space to create,” explains Barbara, an award-winning health journalist who also has a book of short stories coming out next March.

At the same time, Barbara started to look for her own investment property as a way to top up her nest egg. “I have a pension but in a town where everything is weighed against the government, it’s only a modest pension,” she says. A smart saver, Barbara had always maxed out her annual RRSP contributions, so there wasn’t much room to play on that front. “I needed a live/rent investment and each one I looked at lacked in some way.” One was too dark; one needed extensive repairs; and another was too expensive. The list went on.

Soon, the couple began to joke about building Barbara her own place in the large backyard of Stewart’s triplex (where he also lived in the second-floor unit). Time passed. The joke became a reality. Barbara sold her home and moved in temporarily with Stewart, while plans were drawn up for a 700-sq.-ft. cottage. But then Stewart’s sister became very ill. The cottage was put on hold as they both dealt with family issues and job demands. After a year, however, they both knew: They would build a 1,400-sq.-ft. home in the backyard—and live together. Now, both Barbara and Stewart share a newly built home that’s mortgage-free. All three units in the triplex are rented—“we’ve never had a month of vacancy,” says Barbara—and the upkeep costs and mortgage interest are tax-deductible. “I never planned on being a landlord, but it’s a much better investment for someone like me,” explains Stewart. “It’s given me the freedom to transition from one career to another”—from architect to artist. Barbara adds, “and it’s given me a little buffer of security to make the same transition.”

The rich do it

“Real estate is very popular because investors can actually see and touch their investment,” says Talbot Stevens, author of The Smart Debt Coach. “It’s also highly adaptable to your goals and resources.”

Even before the run-up in real estate prices, property was considered a good alternative investment. It offers an inflation hedge, uses leverage, gives you yield and provides capital gains. Plus, as an asset it typically lags equities during market declines and most costs incurred are tax-deductible. Maybe this is the reason why North America’s ultra-high-net-worth investors put 27% of their investment money, on average, into real estate, according to a recent survey of the member of the high-net-worth, peer-to-peer network group Tiger 21 (for people with a minimum of $10 million to invest).

Aren’t stocks a better bet?

The numbers don’t lie: Data from the Canada Real Estate Association show that from 2004 to 2013, the national average appreciation of a home was 5.4% per year. The comparable average return from stocks during the same time period was just under 8% per annum. So why are so many interested in bricks and mortar?

“The perception of stocks has been hurt by two market crashes since 2000,” explains Stevens. “Frustrated with watching $1 turn into 50 cents, people are driven to real estate because it’s a visible bet.” But let’s be clear, says Stevens, buying real property is an equity play. “Like stocks, real estate investment has historically grown wealth much faster than GICs.” It’s only appropriate for long-term investing.

What to consider

In order for property to be a good investment: You must tie up your money in an illiquid asset; buy in a high-demand area (such as homes close to a transit route, school or amenity, like a hospital); look for ways to improve the property, perhaps by converting a single-family home into two or more units, or doing a major update on a four-plex or buying a home with a large-enough lot to add a future build (like Barbara and Stewart did). Ideally, the rental should also be close to where you live (or factor in the cost of a proactive property manager). But most importantly, the rental needs to generate consistent positive cash flow. A decade ago, a 7% return per year was the accepted standard, but with rising property prices most investors now expect a return of 4% to 5% per year after all expenses are paid.

Retirement income

Despite a landlord’s challenges of finding a cheap-enough property with positive cash flow—real estate is still “a great asset to have in retirement,” says Andrew McLean, author of the Home Buyer’s Advisor. Stewart agrees, adding, “the income stream is pretty reliable and doesn’t go up and down with the market. Plus it keeps up with the cost of living.”

For Barbara and Stewart the plan is to continue maxing out their RRSPs and TFSAs, while mortgage rates are low. Then, they’ll use some of their invested savings to pay down the mortgage as Barbara gets closer to retiring from her current career. “At that point, we won’t need the tax deductions from the mortgage interest,” she says. Instead they’ll use the rent paid by their tenants as a pension-like monthly sum. “It ends up being a pretty secure investment,” says Stewart.

As McLean explains, “Even if you’re only making a little money in the beginning, your monthly cash flow will start to climb over the years making real estate rentals an ideal way to supplement your income, particularly in retirement.”