Please comment on my strategy.....

Hi,

I have been reading about this forum for a while, and this is my first post.

My wisdom collection says,

1. It's not how much one earns that matters, but how much one saves.
2. Having a monthly positive cashflow is the first step to build up your networth.
3. The first step to invest is to *SAVE* money

Having said that, here's my investment strategy.

32 Year old, never married, making 90K annually as engineer in Kingston. I live by myself in purchased condo.

I have saved up a good chunk in RRSP (120K) with 70% in fixed income (arm-length 13%) and 30% stocks in Canadian Growth (AFG). Maximizing it every year.

I estimated myself with monthly after-tax expense of approx $2300 per month (mortgage, car, gas, utility, food, gift, insurance, etc). I own two rental properties managing themselves with approx $700 cashflow per month. I also invest in mortgage yielding 12-15% with $1200 per month. My goal is to get my passive cashflow equal to or exceeding my monthly expense (now still short $400/mo), so I can technically save up all my full-time after tax income (~$2000 biweekly) as investment.

So, I need approx $40K at 12% to give me $400/mo. I have other investment (approx 30% of non-registered portfolio) in stocks (e-series, recommended by RFD), and I plan to keep the way it is.

To generate that $40K, I will probably need to save another year of full-time income.

Any comment about my strategy, from RFDers?

Jason

What's your risk tollerence?

You have 70% of your retirement savings in fixed income, which seems very conservative for someone who's still quite a ways away from retirement. Yet you expect a 12% return from your non-registered investments, which would require a very aggressive investment strategy. The numbers just don't make a lot of sense to me.

Where are you going to get a steady 12% for your additional $40k? More real estate properties? How much equity do you have in your income properties?

What is the arms-length 13% item you refer to?

Do you plan on getting married/having kids anytime soon?

Originally Posted by Shojin

Where are you going to get a steady 12% for your additional $40k? More real estate properties? How much equity do you have in your income properties?

What is the arms-length 13% item you refer to?

Do you plan on getting married/having kids anytime soon?

Well he's currently getting that from a mortgage according to his post, so maybe he could get another one...

Originally Posted by YYC27

What's your risk tollerence?

You have 70% of your retirement savings in fixed income, which seems very conservative for someone who's still quite a ways away from retirement. Yet you expect a 12% return from your non-registered investments, which would require a very aggressive investment strategy. The numbers just don't make a lot of sense to me.

12% return is very realistic in real estate investment. I am comfortable with the risks in the areas I am familiar with (real estate).

Where are you going to get a steady 12% for your additional $40k? More real estate properties? How much equity do you have in your income properties?

Yes, real estate type of investment (joint venture, or mortgage)

What is the arms-length 13% item you refer to?

Arms-length mortgage via Self-direct RRSP account.

Do you plan on getting married/having kids anytime soon?

Yes, but my GF and I discussed. Let's build up more wealth in 2 years.

Assuming a long-term rate of return of 12 is very unrealistic. Returns and risk are always related. To be able to achieve these kind of returns you would need to take on a lot of of risk.

Besides, most of your money is invested in only one asset class. (RE) I would not put my eggs only into one basket. Way to risky.

Having a mortgage and fixed income at the same time is IMO not a very good idea either. It would be better to just pay down your mortgage with this money, because it is likely that your interest rate on your fixed income is lower than your mortgage interest rate.

I suspect the OP is not invested in real estate like the rest of us think of as real estate investing. I don't think he's in a REIT or similiar. He's likely using his self directed RRSP to provide 2nd mortgages.

I've family that do this because they're familiar with what they're doing. They know the people, they know the properties, they know what they're doing.

It's really more being familiar with an industry or a business than it is investing as we'd see it normally. I

Originally Posted by Germack

Assuming a long-term rate of return of 12 is very unrealistic. Returns and risk are always related. To be able to achieve these kind of returns you would need to take on a lot of of risk.

I also invest in real estate. A return of 12% in real estate is very realistic (monthly cashflow, appreciation of land, depreciation of property and mortgage paydown). Granted you have to invest a larger amount which turn many people off.

I always believe "the higher the return, the higher the risk" only applies to stock markets, because you cannot control the price. In real restate, you can increase the price by forced appreciation or increase rent, etc.

As for mortgage investment, 8-10% for first and 12-15% for second is very normal. Just make sure you do your due diligence where the property is in a salable town, low LTV, owner occupied.

Also, do more small deals than one big ones - this will diversify your risk.

Having a mortgage and fixed income at the same time is IMO not a very good idea either. It would be better to just pay down your mortgage with this money, because it is likely that your interest rate on your fixed income is lower than your mortgage interest rate.

Agreed. But I think the OP's fixed income = mortgage monthly income, which is 12-15%.

Originally Posted by peter_ross

I also invest in real estate. A return of 12% in real estate is very realistic (monthly cashflow, appreciation of land, depreciation of property and mortgage paydown). Granted you have to invest a larger amount which turn many people off.

I always believe "the higher the return, the higher the risk" only applies to stock markets, because you cannot control the price. In real restate, you can increase the price by forced appreciation or increase rent, etc.

As for mortgage investment, 8-10% for first and 12-15% for second is very normal. Just make sure you do your due diligence where the property is in a salable town, low LTV, owner occupied.

Also, do more small deals than one big ones - this will diversify your risk.



Agreed. But I think the OP's fixed income = mortgage monthly income, which is 12-15%.

So these real estate investments got nothing to do with investing in people's mortgages or holding within a RRSP?

Originally Posted by alanbrenton

So these real estate investments got nothing to do with investing in people's mortgages or holding within a RRSP?

There're many forms of RE investment. The strategy that the OP uses are landlording (as he has two rentals) and mortgage investment. For mortgage investment, you can hold it within or outside RRSP. Basically you become the bank (think like you're CIBC Home Trust) to lend out money to borrowers, who do not qualify for traditional mortgage.

There're risks, but you can mitigate the risk by cherry picking properties and borrowers.

Originally Posted by peter_ross

There're many forms of RE investment. The strategy that the OP uses are landlording (as he has two rentals) and mortgage investment. For mortgage investment, you can hold it within or outside RRSP. Basically you become the bank (think like you're CIBC Home Trust) to lend out money to borrowers, who do not qualify for traditional mortgage.

There're risks, but you can mitigate the risk by cherry picking properties and borrowers.

Thanks Peter.

Originally Posted by peter_ross

I always believe "the higher the return, the higher the risk" only applies to stock markets, because you cannot control the price. In real restate, you can increase the price by forced appreciation or increase rent, etc.

Have you not been paying attention to the US real estate market? There's a lot of people who aren't in control of the price there. And a lot of people who can't find renters for their properties or have had to make large drops in their rental rates in order to find a tenant.

Real estate prices don't always go up. Rental rents don't always go up. And sometimes vacancies are hard to fill. It doesn't matter how good you think you are at picking properties.

Originally Posted by asdfvcx

Have you not been paying attention to the US real estate market? There's a lot of people who aren't in control of the price there. And a lot of people who can't find renters for their properties or have had to make large drops in their rental rates in order to find a tenant.

Correct - that's a generalization in US, but there're cities with growth and development. Similarly in Canada, investors should not look at the general number (ie average house price in Canada because you're not investing in Canada as a whole). Investors should invest in specific city with specific property (for example, Waterloo townhouse 5km within University). If people blindly invest, then they will lose money!

Real estate prices don't always go up. Rental rents don't always go up. And sometimes vacancies are hard to fill. It doesn't matter how good you think you are at picking properties.

Have you tried yourself?

sorry to interfere in the discussion but what's an

''Arms-length mortgage via Self-direct RRSP account'' ?

can someone explain plz ??

Originally Posted by ziploc

sorry to interfere in the discussion but what's an

''Arms-length mortgage via Self-direct RRSP account'' ?

can someone explain plz ??

It means he holds someone's mortgage in his RRSP ...

Arms-length just means that it's not his own mortgage, or that of a spouse, etc.