July 2023 - Money Machine - A Cash Cow

The Money Machine concept is really quite simple. Buy one property a year for ten years. Never amortize for more than fifteen years. And never sell! Simple yes. But not easy.
 
Having done this for over fifty years now, I’d say I’ve learned a thing or two along the way. All of which I’m doing my best to pass along to you. And if I were to catalogue the biggest challenges being a residential landlord brings with it, I’d say these are the big five:

1. Screening for tenants: the showing and selection process.
2. Landlord-tenant issues: handling the calls and crises that crop up.
3. The eviction process: navigating the Residential Tenancy Act to get rid of ‘bad’ tenants.
4. Tax issues: Paying the tax on income used to pay down the mortgages.
5. Saving a down payment.

The Money Machine concept will absolutely and unquestionably work. Follow it to the letter and you will retire in style. But if anything causes the plan to go off the rails and results in a landlord giving up, it will be one of these five issues.
 
There are ways to approach each one, and to ease most of the associated pain. And I have spoken to and will again be speaking to each one. But today I’d like to talk about number 5. Saving the down payment. Never easy but absolutely necessary.
 
And let me say there is no easy way to get around this challenge. You’ll have to scrimp, sacrifice and save to get this process off the ground. Sorry! But you won’t have to do it ten times. It gets easier as you move forward and there are things you can do to ease the pain.
 
Tapping the equity in your existing home, if you have one, is one easy solution that’ll help you buy one or two properties. And a credit line against the equity in your principal residence is the best way to access that.
 
But for today, I’d like to suggest something else. What I’d like you to do is consider stepping outside the Money Machine concept for a moment and consider acquiring a different property. Not one that fits into your portfolio plan perhaps. A cash cow! There are properties that are exceptionally good at generating revenue. Much better than average. They may be a student rental building, perhaps. Or it may be a multi-family property outside of the region where you live. I had an agent mention to me the other day that he found returns in the Brockville area were much higher than they are here in Niagara. I spoke to an agent in Napanee who told me the same thing about his area. Based on sale price rents are much higher than they are here. And I know many, many places in the U.S. are seeing cap rates for residential properties coming in at or above 10%.
 
Before moving to St. Catharines in 1984 I owned a couple of rentals in Hawkesbury. They produced excellent rental returns based on acquisition costs. One in particular I was able to put on a short amortization and over time, re-finance three times to pay the down payments on three different investment properties I was buying here in St. Catharines. Now I was eventually forced to sell them because it’s just not practical to operate a duplex long-term from a distance of several hundred miles, but while it lasted it really made a difference.
 
So, whether it’s a rooming house, student rental or Air B&B around your local area, or an investment opportunity offering excellent returns some distance away, maybe even a property in a sunny destination in the southern U.S., paying you in U.S. cash, find a ‘cash cow’ that while not practical for the long haul, can be an excellent source of savings in the short term. Outside the plan, I know, as is a ‘fix and flip’ but it’s a real estate vehicle none the less and can really help you overcome the hurdle of amassing some of the down payments you’ll need along the way.