May 17th 2022
In our last article on the Money Machine appearing in April’s Market Trends Newsletter, we began a series of Best Practices designed to help you manage your real estate investment portfolio successfully. The goal as always is to reach the finish line with a number of investment properties (at least 10) fully paid for, and provide you with an abundant cash flow into retirement.
In the last issue, if you recall, we talked about the importance of keeping all your rental units in good repair. Today I’d like to talk about the importance of paying down the balance of your mortgage as quickly as possible.
I should say there are two distinct schools of thought on this issue of paying down the mortgage. Robert Kiyosaki in his landmark book ‘Rich Dad, Poor Dad’ was of the mind that positive cash flow was much more important than ever in reducing and discharging the mortgage. His mentor and entrepreneur father of his best friend asked in fact ‘why would you ever want to buy or own a property that didn’t give you positive cash flow?’ But you must understand the philosophy espoused in this book wasn’t to create a retirement income stream, but rather to increase current income and to hold for a relatively short time, then sell and replace. And there are solid arguments to be made in favor of this approach. In fact, many, many investors have made vast fortunes with this exact approach to real estate. Buy, renovate, develop, sell, and upgrade. It can work extremely well if someone is astute and knows what they are doing. Of course, it’s much easier to do in the USA where roll-over provisions in their income tax act doesn't penalize selling and re-investing, whereas here in Canada the sale of an investment property, be it residential, commercial, retail or investment gives rise to a tax bite out of the profits in the way of capital gains and recapture.
But for our purposes, the end goal is amassing of rental property that is free and clear of mortgages so one can enjoy the proceeds. And the sooner the mortgage is paid off, the sooner that can happen. So, if at all possible, at the time you purchase, set up your mortgage to be amortized over no more than 15 years, and when you can, take advantage of pre-payment privileges. As we’ve acknowledged in past articles, this is not always easy, especially 
when the principal you pay down each year is subject to tax. But it can be done. Make it a priority.
Now, I should say, there are exceptions to this rule, and they depend, among other things on your age. The ‘Simple Plan’ of acquiring 10 properties and paying them off requires a time span of 20 to 25 years. And your end goal is retirement income. But if you are young enough that time is on your side, and the equity in any of your rental properties has grown substantially, through a combination of principal reduction and appreciation in property value, you may want to consider refinancing a property or two, to release equity which can be used for further investment. It’ll delay the day you retire the mortgage, but keep in mind, every $200,000 you ‘pull out’, at 20% down can be used to acquire another $1,000,000 in property. And that investment once paid for, at 5% return will increase your retirement income by a further $50,000.