By Patrick FranceyNow is the time to slow down and reflect on your financial situation as you consider commitments, goals, or intentions for the future. You may choose to spend less, or commit to increasing your income, or you may even define a dollar amount you want to add each month to your savings or future retirement fund.
For many, placing money into a savings vehicle becomes an essential part of growing their long-term net worth. Those savings might include such things as an RRSP, a TFSA, a GIC, or a high
interest savings account.
However, to achieve increased savings, what needs to happen? Traditionally, you either need to increase income, or closely manage your paycheck so you can afford to put money into a savings account. The math is simple: for example, if you net $5,000 a month, and want to put $500 a month into savings, you now have only $4,500 to meet the balance of your cost of living. But for most, saving money comes from making sacrifices: Spend less here, trim the budget there, sacrifice this, and give up that. Sure, the necessities get covered but it often comes at the cost of other lifestyle choices, like a date night with your spouse, or a family night out.
What if it doesn’t have to be that way? I’m going to share with you a perspective for how you can
expand your future net worth and increase your monthly savings, all while freeing up your monthly
PART 1: INVEST IN REAL ESTATE
Since you’re reading this, you’re among the relative few who understand the power of real estate
investing. Perhaps you’re an active investor yourself or you’re seriously considering it as a compelling way to build wealth. You know that real estate investing is a powerful use of leverage (a small investment for a much larger purchase) and it builds your real estate portfolio, significantly grows your net worth,and funds your lifeworth.
You find a great property that will positive cash flow; in short, you acquire it, maintain it and maximize rental income to enjoy an escalating ROI (return on investment) from it. In turn, the rental income covers all expenses and the cash flow accumulates to build and grow a strong reserve fund. In short, there are no out of pocket cash calls in the future here!
In time, the mortgage is paid down or maybe even paid off, the reserve fund is strong, and the property will be worth even more to you because (1) you own the asset, (2) the rental income has likely increased so now the majority of cash flows into your pocket, and (3) the value of the property has appreciated.
PART 2: STOP SAVING YOUR MONEY
This is the perspective that many investors have not considered. After they acquire a property, they continue to save (or try to save) a portion of their paycheck for long-term savings (i.e. an education fund for their children, their retirement fund, a high interest savings account). For some this is doable, but for others it would require a far bigger paycheck.
Perspective shift: Consider that since you have a property that is continually growing in value, you
can release much of the pressure of saving your paycheck because your PROPERTY is now your
“savings” fund – and it’s one that can grow at a far higher rate than any money you tuck away in a high fee fund or bank savings account.
For example, the principal amount of a $325,000K mortgage amortized over 25 years at 3% is paid
down by about $45K in just the first 5 years alone. Cash flow and appreciation aside, this principal buy down equates to over $750 per month and can have an immediate positive impact on your life by raising your household cash flow by the amount that you were once sacrificing to save. If you were putting away $500 a month, you now have it to spend on what best suits you or your family’s needs, or to perhaps save towards a down payment on your next investment property. And, if you weren’t saving, you can sleep at night confident in knowing that your new savings account is growing anyway.
THE HIGH-LEVEL PERSPECTIVE
What’s happening here from a high level is that rather than tightening your household budget to
tuck away money for the future, you’re leveraging capital (yours or others), mortgage buy down, cash flow, and appreciation as your savings vehicle to grow your wealth with none or limited financial input on your part. Also, that money you once had to cut from your paycheck to save, you have the option of adding back into your household income to spend as you wish.
The best part of this strategy is your savings is growing and your personal monthly income doesn’t
need to fund it. You can think of a rental property as a piggy bank that someone else is putting their money into for you to use!
Most investors know about the first part of this concept – the value, the ROI and the benefit of a real estate investment. I’m often surprised, however, by how often investors overlook the perspective of the second part – the immediate financial benefit of being able to “recapture” the money they once cut from their paycheck to save, and can now use to increase household cash flow.
Recently I provided this second perspective to a REIN Member using the following example. She and her husband had begun saving $350 per month to put towards their young child’s university education fund. They had begun setting money aside in a registered educational savings plan, which is a proactive and responsible strategy.
Here’s the alternative I suggested she consider: Rather than putting money into an RESP, why not instead buy a rental property that is ‘allocated’ as her child’s education fund? By the time her child is old enough to start post secondary education, they could choose to sell the property, refinance the property, or pay for school from the rental income earned.
Once again, a few important perspectives to note: Firstly, it is the tenants then who have ultimately paid for her child’s education and the cash she used for her down payment can come back to her on the sale or refinance of the property (depending on her exit strategy). In short, she has now more than covered the cost of her child’s education. Secondly, she wouldn’t have to sacrifice her own household income each and every month from her paycheck to put into an RESP. Instead that money could remain as additional liquid household income to spend on her daughter and family to enhance their lifestyle.
TAKE ACTION RIGHT NOW…
STOP SAVING MONEY!
Traditional financial learning suggests and guides us to first save money… and then learn how to
invest. From banks and financial advisors to RRSP and RESP ads, it’s easy to be swept up in the
marketing path of save first and then learn to invest with us.
The power of investing in real estate is that it expands your opportunity to save your money and
build your net worth in a strategic and proven way. It doesn’t need to mean you have to wait until you get a raise, accumulate a bundle of cash or that you sacrifice the quality of your lifestyle. Think of your rental property instead as a monthly automatic savings account that requires a relatively minimal down payment to get started in order to leverage yours (or others) investment capital. Your tenant pays down the mortgage, the cash flow sustains the property and the value of your asset appreciates in value over time. Meanwhile, you decide how you want to spend, invest or continue to save your money…you now have choices, and they are yours to
We are taking a more in-depth approach to the power of real estate at free, 3 hour events in Calgary, Vancouver and Toronto. Sign up for free here.
Patrick Francey is the CEO of REIN. As a serial entrepreneur he owns many businesses and has been a real estate investor for nearly 20 years. The majority of his holdings are located in Edmonton and Grande Prairie.