A fresh perspective on funding retirement
BOOK REVIEW
The Real Estate Retirement Plan by Calum Ross Dundurn, Toronto, 2017
As many baby boomers on the cusp of retirement are well aware, employer-sponsored defined benefit pension plans are getting scarcer than hen’s teeth. So when I picked up a pre-release copy of Calum Ross’s book, The Real Estate Retirement Plan (Dundurn, Toronto, 2017), I was intrigued by his opening chapters on “reconceptualizing retirement.”
Now that the book is out there, and climbing the bestseller lists, I felt a twinge of regret for not investing myself in real estate beyond a principal residence and a few REITs. Ross — a top mortgage broker — together with veteran real estate broker Simon Giannini present a simple alternative to traditional pensions and RRSPs: borrowing to invest in real estate.
Now I’m the first to admit that I have publicly declared in my own writing that the “foundation of financial independence is a paid-for home.” I’m personally debt averse, and tend to believe conservative retirees should also eschew debt. Indeed, while extolling the virtues of leveraged investing, Ross does declare that one needs to embark on a real estate retirement plan ideally before age 60 (which means I’m beyond the pale). At one point he argues that “failing to invest early (in real estate) could mean failure to retire.” I’m not sure about that, unless he means “failure to retire in style.”
Addressing those of us with big gains on mortgage-free principal residences, Ross makes the case for putting that dormant equity to work in investment real estate: taking advantage of the time value of money, of getting tenants to pay down your mortgage or multiple mortgages, of being able to deduct the interest income from your taxes, and ultimately of reaping the long-term capital gains that real estate has historically generated in Canada.
While advocating conservative leverage — which he adds can also work for investing in dividendpaying stocks — Ross stresses that if it is to work as a retirement plan, real estate should still be only one part of a well-diversified portfolio that also includes traditional financial assets like stocks, bonds and cash. He himself still invests in RRSPs, TFSAs and — for his two children — RESPs. But he also strongly believes that those who only own their own homes are severely underinvested in real estate: in the absence of investing directly in rental properties, triplexes and the like, he suggests Real Estate Investment Trusts or REITs.
I agree employers are doing all they can to avoid providing employees with traditional DB pensions, preferring to offer marketsensitive defined contribution pensions; however, I’m less sure about Ross’s declaration that the Canada Pension Plan (CPP) is “drastically underfunded.”
Organizing the book in three parts, Ross wrote the first two and Giannini the third. A key Ross chapter is on the “Portfolio Approach to Real Estate.” Complementing traditional investments, Ross points out that real estate is less volatile (unlike stocks, it’s not marked to market every day); provides diversification with a favourable balance of risk versus return; is favourably taxed via capital gains tax treatment and interest deductibility; generates returns similar to the stock market and “often more”; provides principal protection; a hedge against inflation and a pension-like “monthly coupon.” Pretty compelling list, I have to admit.
Giannini describes the four major ways to profit from real estate: paying down mortgages (ideally tenants do this on your behalf ); positive cash flow net of expenses, providing the equivalent of a pension even if you own only a couple of properties; capital appreciation from the market; and so-called “Forced Appreciation” that comes from renovating and improving properties, sometimes flipping for quick sale.
But the “master principle” behind all this is leverage, the authors remind us at multiple points. And how many properties are needed to mimic an old-time pension plan?
They include a case study of a client named Paul, who parlayed equity in his downtown condo into 20 similar properties in the same area, resulting in $10,000 a month of positive cash flow. In this case, he carries $5 million in debt for a portfolio that’s 50 per cent financed. However, they add, most people won’t need that many properties: two or three may suffice, depending on how grandiose one’s retirement dreams are.
In short, this book provides a fresh and alternative perspective on the growing body of retirement literature. Younger readers in particular might want to find a place in their libraries for it, especially if they share the authors’ views on CPP and traditional employer pensions.