Couple is all in on real estate — is it the right choice?

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At 39 and 33, newlyweds Dan and Charlotte* are focused on an early retirement. To make that happen, they’ve built a real-estate portfolio that includes their primary residence, four rental properties and a 50 per cent interest in another property.

They’d each like to retire at 53, when they are able to receive their individual employers full defined benefit pensions. Are they doing enough — and in the most efficient way — to realize this goal? Can they be even more aggressive and retire at 50?

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To this point, the couple has focused on aggressively paying down their three mortgages (one rental property is paid off). They plan to consolidate them in the next four to six months, when two of three mature, to streamline expenses.

“It would be cool to be mortgage-free in our 30s and 40s, but is this the right strategy?” asked Dan. “The mortgages on the rental properties allow us to claim a tax deduction. Does it make more sense to focus less on the mortgages and direct more money to our investment portfolio?”

The couple also plan to buy a bigger home with more space to grow in the next five years but would like to keep their primary residence (valued at $600,000) and rent it out. They are already renting out the basement apartment, which brings in $1,500 a month. Is this possible or even a good idea?

The mortgage is $211,882 at 5.39 per cent — far higher than the 2.64 per cent they are paying on the other mortgages. Dan has been aggressively doubling payments to $4,000 a month to pay it off before it matures in 2028. There will be a fee if he chooses to combine it with the other lower interest mortgages when they mature in early 2025.

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All of their properties are in Central and Northern Ontario. The approximate value of their real estate portfolio is $2.3 million and it generates $7,350 a month in rental income. Their combined monthly mortgage expenses are $6,746.

Dan earns $133,000 a year (before tax). If he retires at 55, his indexed-to-inflation pension will pay about $5,800 a month (before tax). This increases to nearly $6,600 a month at age 60 and $7,200 a month at age 65. He also generates about $4,500 a year in dividend income from his Registered Retirement Savings Plan ($113,000) and Tax-Free Savings Account ($129,000), which are invested largely in Exchange Traded Funds (ETFs). The dividends are reinvested in the accounts.

“I’ve been investing in the markets for several years trying to use a diversified approach, but decided to sell off just prior to the big COVID downturn,” said Dan. “Getting back into the markets has been difficult and I haven’t seen the gains I would have liked.”

Charlotte earns about $83,500 a year (before tax). If she retires at 55, her pension, which is partially indexed to inflation, will pay about $3,420 a month (before tax). This increases to nearly $5,000 at age 60 and nearly $6,100 at age 65. She has just recently opened a Tax-Free Savings Account (TFSA) and has $5,000 invested in ETFs.

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Their vision for an early retirement includes part-time work and lots of travel. “We’ve been focused on real estate to help diversify our income now and when we retire, but is this the best strategy? asked Dan.

“Should we buy life insurance — or utilize some other retirement income vehicle? Is retiring at 53 or 50 too early? We both realize we are ahead of the curve but aren’t sure how to set ourselves up for our brightest future while still being flexible and having some fun.”

What the expert says

“Dan and Charlotte’s focus on real estate — and aggressively paying it off — has set them up for a prosperous future and the early retirement they want,” said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management.

Given their young ages, pensions and if, as planned, they pay off the mortgages on all of their properties — including a larger principal residence — in the next 10 years, the math works. “Mortgage-free, with the rental income ($78,000 a year) and pensions, including bridge benefits ($148,000 a year combined), they can each retire at 53 and earn more in retirement and have more disposable income than ever,” said Einarson.

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The fact they both plan to work part time in early retirement is smart and will help them if they choose to retire at 50. “This is a great way to bridge any financial gap until their pensions start.” As they pay off their properties, Einarson said Dan and Charlotte can start to focus on building other assets and increasing diversification.

“Taking advantage of and maximizing their TFSAs until retirement can add more security to their future and provide more flexibility than RRSPs.”

Since they are newly married, Einarson believes this is a great time to work with a professional to create a detailed retirement plan.

“Retirement planning is about solving for future income needs from all sustainable cash flow sources, as efficiently as possible,” he said. “A personalized retirement plan will help them make important decisions together as a couple, with the benefit of seeing a clear overview of what is possible for their future by assessing what-if scenarios and the pros and cons of competing courses of action — such as whether to focus on paying down the mortgages or adding to current investments.”

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Einarson points out the planner will have a detailed questionnaire that will also include often overlooked information about personal preferences, lifestyle goals, feelings around finances and potential known and unknown biases.

“For example, did emotions play a role in Dan’s investment decisions? How can he plan to respond better to the next financial challenge? An astute planner will also take a look at the risk their real estate holdings may pose. For example, if properties are confined to one geographical location or in markets driven by one or two industries, it could be like having your entire portfolio invested in one industry in a single location. No professional would recommend that.”

Currently, with essentially all rental income going towards mortgage payments and other costs to carry the property, some planning around tax for when the properties are paid off is an important conversation to start having with their tax advisor. “The key here is not to delay engaging in planning. They have significant assets, and Dan is entering middle age with important questions.”

* Names have been changed to protect privacy.

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