How Your Real Estate Portfolio Changes At Retirement (Plan Your Toronto Investing Roadmap!)
Real Estate Portfolio Components
Here’s what a typical real estate portfolio is made up of:
- You have your principal residence which makes sense to own instead of rent if you’re living in it for more than a few years. The main reason is because you’re able to continue to grow your money as you pay into your home each month whereas if you’re renting, you’d be growing your landlord’s wealth.
- The other part of your real estate portfolio are your real estate investments, which can give you better returns and is easier to carry because rental income will help pay for most of your monthly costs. You are likely to get positive cash flows on a house rental in Toronto (if you ask us to help with this!). If you go with a condo rents, they are a bit tougher to carry with negative cash flows and slightly lower ROI.
Linear Changes To Your Real Estate Portfolio Over Time
Capital vs. Age: The first one is your capital. If you continue to invest and grow your investments, you should see your wealth grow over time as well.
Investment Timeframe & Risk vs. Age: On the flip side, your investment timeframe shrinks over time. So if you’re looking to take on riskier investments, it’s always better to do it when you’re younger because you benefit from time. If you can hang onto the investment for long enough, you’re likely able to ride out the volatilities and reap the higher upside potential.
As your age, your timeframe shrinks which means you should start tapering your risk. Leverage magnified your volatility: your upside the multiplied and so does your downside. So as you plan for retirement, it’s a good idea to start cutting back on leverage, which means your returns would fluctuate less and at the same time, it won’t grow as quickly.
Having a shorter investment timeframe also means liquidity becomes more important, and this means more stable markets would be increasing important closer to retirement because they allow you to cash out more readily when you need the money. This is where Toronto sticks out as a big winner because it is more mature and stable compared to other markets further from the core.
The Bank of Canada even came up with a new theory called the housing supply elasticity. Basically, Toronto has an inelastic market because living in Toronto is a necessity so demand for housing will continue to go up even when prices keep going up. On the other hand, the suburbs tend to have more elastic markets where demand drops when prices go up. The reasoning is that living there is more of an option or they call it a luxury, so you’ll see more price volatility in the suburbs.
Now that I’ve talked about liquidity, perhaps this might also be a good time to talk about real estate investment trusts (REITs). In general, REITs aren’t your best option because returns aren’t as good. Typically, you’re generating around 10% returns on residential REITs because a good chunk goes to fees for the fund manager. But as your approach retirement, REITs do become more attractive because they are completely passive, they’re way more liquid, you can more easily diversify smaller chunks of capital into it across various real estate classes while still getting returns that are generally better than the S&P500 index.
Time & Energy vs. Age: As we age, our investment timeframe shrinks and sadly our free time and energy level also drops in general. So the time to take on the big value add projects should be when you’re young because as you get older, more time will go towards the family and you might also get physically constrained from taking bigger value add projects on. Of course, this varies from person to person and if you can handle it and enjoy it, then go ahead and take renovations. Just note that many people do end up investing in more turnkey investment properties and outsource more active roles like leasing and property management later on in life.
Non-Linear Changes To Your Real Estate Portfolio Over Time
Investment Percentage vs. Age: Your investment percentage of a portfolio will zip zag over time:
- In the beginning, you’ll have a heavier weight on investments if you want to grow more aggressively.
- Then as your grow your family and quality of life, you’ll increase weight on your principal residence.
- Your investments will catch up because it grows more quickly.
- Then your might decide to bump up your principal residence percentage again to further improve your home.
- Once you secure that forever home, your investments will become more permanently dominant in your portfolio because rental income make your returns grow more quickly and even beyond that if you decide to downside.
Income vs. Age: When you start your career, you’re at the lowest point of your income with a starting salary and the least amount of investments. Then, your investments will continue to grow until you retire, which at that point, you’ll see the total down drop because your salary is taken out of the picture.
Now this drop in income towards retirement will have two main effects. The first one is that it will lower your borrowing capacity so if you’re thinking of buying more real estate close to retirement, you should probably get in before you actually retire to make qualifying for a mortgage a lot easier.
The second impact is that because your salary drops off, you might want to compensate by putting a heavier weight on investments with higher cash flows. In terms of real estate, this would mean choosing houses instead of condos, semis over detached properties, and houses with more units over those with less units.
How We Can Help
Here on our Elevate sales team, we’re all real estate investors and we tend to steer towards lower risk investments which are more resilient during downturns validated with the pandemic. Real estate with better cash flows translated to more stable price growth during the past couple of years. Using the Bank Of Canada’s terms, we also believe in choosing more inelastic markets. That’s why we choose Toronto which has a large real need for housing making it less volatile and at the same time benefit from higher long term returns.
Of course, it’s possible to make more money if you go with more risky markets, but higher possible gains can also mean higher possible losses. This means you’ll also have to factor in changing up your investments over time and factor in extra costs each time you buy and sell.
If you prefer more passive real estate investing, our best advice is to focus on Toronto freeholds which can be a solid strategy that’s good until retirement.
If you’re looking to grow your real estate investment portfolio in Toronto and want to know what’s best for you, let’s chat. We can look at your requirements and preferences and then match you up with the best investment property that fits your needs. If you want physical real estate but at the same time, you also want a more passive investment, our team also provides leasing and property management to help you out. Just connect with us if you want to learn more about our services!
Do You Want Help With Real Estate Investing In Toronto?
We’d be happy to learn more about your situation and help you find the best investment opportunities for you.