Passive Income Unicorns

By Bruce Firestone | Uncategorized

Jun 29

Everyone seems to want passive income. You know, the type of money that flows into your bank account without you having to put forth any (or much) effort.

It’s a unicorn. 

If you can claim to have found such a munificent source, it’s almost as good as having discovered the fountain of youth. Heck, maybe it’s better–I mean who wants to live forever?

As Toronto-based band The Strumbellas (https://www.youtube.com/watch?v=F9kXstb9FF4) say in their hit tune, “Spirits”–

And I don’t want a never ending life
I just want to be alive while I’m here

If you check out the online world, there are a zillion claims to have found it via affiliate marketing (where you set up a site, drive your own traffic to it, and re-sell other people’s products for a percentage fee) or, more recently, by creating your own (say) bitcoin empire. See below.

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I prefer my own answer to this profound challenge–buy your own home and 4, 5 or 6 residential rentals. Buy smart, well-located properties close to you (within an hour of where you live usually). Animate them (adding differentiated value and increased income). Rent them to good folks at decent rates. Hold onto them, don’t flip them for goodness sake. Pay off your mortgages and 10, 12, 15 or 20 years from now in a place like Ottawa, this is what you will be looking at from your winter home in Crete (or Costa Rica or Florida or Mexico):

-your own home, bought for $500,000 now worth $950,000

-six residential rentals, bought for $400,000 each now worth $760,000 each

-total portfolio, now worth $5,510,000

-cap rate on your whole empire, 6.5% pa

-net operating income, $358,150 pa or $29,846 per month

If you get into trouble or one of your kids wants to buy their own home, you can remortgage two properties in your portfolio and take out (say) $380,000 each (for a total of $760,000) in cash (tax free since it’s finance not proceeds from a sale). You can gift $760,000 to your child, so s/he can buy a home for cash.

Your loan to value ratio on the two places now with mortgages on them is just 50%, the rest are still mortgage-free. 

What’s super nice about this is that your tenants will retire your new mortgages for you just like they did for the original group of six rentals you bought and your “passive” income will return to its lofty nearly $30k a month. You could also crank up the amortization (by shortening your amortization period from say 20 years to perhaps 11) so you can pay off your mortgages faster too…

This is a stable predictable outcome. I’m not sure you can says the same for affiliated programs or digital currencies.

It’s also quite straightforward in terms of passing on your property to your heirs by adding them (at least in Ontario) as joint tenants, which means after your passing, your name is simply struck from land titles (the land registry office) and your kids and/or grandchildren (the ones you added as joint tenants on title) now own them. No fuss, no muss. No attorneys, bankers, accountants or dishonest executors to get in the way and steal your estate. No family disputes either.  

Why don’t more people do this?

Mostly, for five reasons:

1. they can’t focus for long enough periods to do something that requires discipline over a period of 10, 12, 15 or 20 years

2. they are looking for shortcuts and zero work, and real estate just isn’t “sexy” enough

3. they listen to bad advice and react to every new fad–running after different colored unicorns every few years or months, which is a surefire way to waste 25 years (or more) of your life to accomplish… nothing

4. they run into a bad tenant (one who not only doesn’t pay his/her rent, they upset other tenants and neighbors, and damage your building too–basically, they are a nightmare to deal with), which leaves a horrible taste in your mouth and so you give up, forgetting that your other tenants have been awesome…

5. they don’t have a coach to initially set them on the right track and then help keep them there.

If you are looking for a real estate investment coach by the way, one with a long track record of success, I’m available.

Prof Bruce

Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD, Century 21 Explorer Realty Inc broker, Ottawa Senators founder, Real Estate Investment and Business coach 1-613-762-8884 bruce.firestone@century21.ca twitter.com/ProfBruce profbruce.tumblr.com/archive brucemfirestone.com

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