Turning rental properties into investment cash flow key to Ontario couple’s retirement
‘The couple is banking on appreciation to justify the extra risk, complexity and work of owning two rental properties,’ expert says
In Ontario, a couple we’ll call Fred and Suzy, both 42, are raising their child, Laurie, 12. They bring home $9,000 per month after tax from their jobs in technology and add $1,900 in rental income from two properties. A total of 94 per cent of their nearly $2 million in assets are in real estate — their $850,000 house, and $1,010,000 in the two rentals — offset by three mortgages totalling $1,052,000.
Fred and Suzy would like to retire in 18 years when they are 60 with debts paid and have $70,000 per year of after-tax tax income. Neither has a defined-benefit pension. Their retirement income will be heavily dependent on their investments.
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The rental mortgages will have to be paid until well after their intended retirement dates. As Winkelmolen says, “The couple is banking on appreciation to justify the extra risk, complexity and work of owning two rental properties.” The implication — sell both properties to reduce negative cash flow and the huge allocation of their wealth and financial future to property.
Fred and Suzy want to fund Laurie’s education. They have no RESP, but they can set one up. They can contribute $5,000 for one year, a catch-up allowed by rules. That will attract two years’ worth of the Canada Education Savings Grant of the lesser of 20 per cent of contributions or $500 per year, net $1,000 in this case. There is a $7,200 cap per beneficiary on CESG contributions and a $50,000 lifetime contribution limit per beneficiary. The couple will get close but not exceed this limit. If they put in $2,500 per year for the remaining six years, the RESP will have a value of $38,800 and therefore provide $9,700 per year for four years of tuition — enough if Laurie lives at home.