Articles
Buy Appreciating Assets … Not Depleting!
Aug 28, 2006 - 4:52:00 PM

Let’s assume you have $20,000 to invest and have 15 years to retirement.

You take your savings and invest it into the stock market directly or through mutual funds and make no further payments. What is the chance that your $20,000 will grow to $200,000 in 15 years? Let’s just say, you would need over 16% return annually! But for the purpose of this illustration, let’s assume you are able to achieve this.

Now that you’re retired, you start to draw on these funds (for example $1,000 monthly), this asset begins to deplete. Because it’s a depleting asset, most retirees hope that their funds will last longer than they will; if anything is left over, they can give to their children etc…

Alternatively, you take your $20,000 initial savings and use that as a downpayment to buy a $200,000 rental property today. Over the same 15-year period, the tenant pays off your mortgage. Without factoring in appreciation or any positive cash flow (which is highly likely), you still end up with a $200,000 property fully paid off.

Now, the rental income produced from the property (let’s say $1,000 net of holding costs monthly) goes in your pocket and you don’t touch the asset… it does not deplete, in fact, it will likely appreciate during your retirement years as well.

So what can you do with this appreciating asset after you’re gone… I suggest a trust that prevents the beneficiary from ever touching the asset and have only access to the revenue the property generates, that way, your children or grand-children will be virtually guaranteed a monthly income of $1,000 for life generated from the rental property.

Imagine, what you would have done differently in your life if someone had left you with guaranteed monthly funds? Would you have made the same choices in your job, finances etc… that’s the legacy you can leave to your children through real estate rather than the usual left-overs most people leave through depleting assets.

This goes back to one our fundamental philosophies; every Canadian should have two properties:  

1. The property they live in.
   
2. A rental property to achieve financial freedom.

If you do that, the question remains, what should you do with your own property once you pass on? Simply provide a provision where your property is also put out for rent and your beneficiaries only have access to the cash flow and not the asset. Now, your beneficiaries have $2,000 per month coming in guaranteed. How would that change their life?

Note: For most people $1,000 per month will not nearly be enough to retire on. The numbers used in this example are not important; it’s the idea that I want to get across. Buy assets that will provide you with the cash flow at retirement without depleting the assets. If you need higher cash flow, buy more than one property over time.

About the Author: Ravinder Tulsiani, CIM, FCSI. After graduating as a law major, Ravinder spent nearly a decade in the financial industry as a banker, securities broker and Chief Compliance Officer. Ravinder left the securities industry in 2005. He is now exclusively focused on real estate investing and holds properties throughout Canada and overseas.