The 6 Best and Worst Places to Buy Rental Property in Canada

I came across an interesting article the other day from Money Sense by Romana King that listed the 6 best and worst places to buy rental property in Canada. I decided to summarize her tables in one place:

I was recently living in Vancouver and would agree that the real estate prices there are ridiculously expensive. It would be very difficult to succeed as a real estate investor in Vancouver, however it's an awesome city to live in. Charlottetown on the other hand would be a much easier place to become a real estate mogul, given that you like potatoes and Ann of Green Gables.

The 11 Best Tips For Buying Your First Investment Property:

Looking for Passive Income?

The two main way to meet personal financial goals is to save more by cutting expenses. The other way is to increase your income. There are only so many hours in the day to work and quite frankly working every waking hour may not be much of a life at all. One way to increase your income is by increasing it passively through investments. One of the best sources of passive income is through dividend paying stocks.

In Charles Carlson's "Little Book of Big Dividends", he goes through the basics of investing in dividend paying stocks. Given that you already know how to go about purchasing stocks, this book focusing on the process in which to choose solid companies that will likely be safe and will continually pay you through dividends.

So what are some of these important criteria that a stock must meet in order for it to provide big safe dividends. One concern is the dividend payout ratio. When a company makes money through sales it has to subtract costs to obtain its earnings. These earnings (if the company is making money at all) can either be reinvested into the company or paid out to shareholders as dividends. The percentage of the earnings that is paid out as dividends is known as the dividend payout ratio. For instance, if a company earns 1 dollar per share in earnings and pays 50 cents at the end of the year per share, than the payout ratio is 50% (0.5 divided by 50).

Carlson says for the dividend to be safe the payout ratio should be no more than 60%. That way some of the earning is kept within the business to allow for its growth.

Another main consideration is if the company has a history of raising dividends over time. This is critical because growing dividends helps your income keep pace with the increased cost of living (known as inflation). An additional screen would be to find companies that have consistently grown there dividends over the years. Inflation averages out to be about 3 to 4% per year, so dividend growth that exceeds that would be optimal.

A final word of caution is not to chase exceedingly high dividend yields. A dividend yield is calculated by dividing the dividend by the stock price. Say the dividend per share is 10 cents a year and the stock is trading at 1 dollar share. In this case the dividend yield would be 10% (10 cents divided by 1 dollar). That's a pretty sweet yield. Chasing high yields is tempting, but it can also be a sign of trouble. It is difficult for companies to sustain high dividend yields, therefore exceedingly high yields could mean that there is going to be cut in dividends in the future or that the company is in dire financial trouble.Historically, safe dividend yields can range from 1-6%, anything greater should be investigated with caution.

For more information I would recommend borrowing this book from the library. It's a really quick read and gives you the basic foundation for dividend investing. Good luck and keep saving!

Why dividend stocks?

Rules of Retirement Have Changed!

We all occasionally daydream of the day when we don't have to work anymore. Images of feet in the sand and a cold beer in hand come to mind. For most of us retirement is far from reality and it may seem to far away to think about. Now with the recent changes to company and government pension funds retirement may seem more like fantasy than reality.

First of all it's important to note that the rules of retirement has changed. In the past people would work at one company for 30 years or so and get a pension where 70% of there annual salary would be paid to them for the remainder of their life. This type of retirement plan is known as a defined benefit plan. Most companies have found that a defined benefit plan is too costly to their bottom line since they have to ensure they can pay for employees that are no longer working. Therefore, companies are moving towards a new type of pension plan known as a defined contribution plan. The way this pension plan works is the employee contributes a certain portion of their pay cheque (usually 5-10%) into a registered retirement savings plan (RRSP) and the company matches the contribution.

There is a dramatic difference between these two types of pension plans. The pro to a defined benefit is that the company will ensure that you get a steady pay cheque after you retire (unless the company goes bankrupt). The con is that you have to stay with the same company for 30 years, which is happening less and less these days. The pro to a defined contribution plan is that it is usually portable, which means it travels with you if switch to a different company sometime down the line. The con is that now the employee is responsible for the management of their own retirement fund (to a certain extent, more on this in future articles), so if the markets perform horribly just as you are retiring you are up the creek without a paddle.

So now that we know the rules have changed and that our retirement is now our own responsibility, what can we do to ensure that we can retire? The simple answer is to set a goal, calculate your current cost of living, and to save and invest wisely so that your savings and passive income can support your cost of living. This is one article that can lead to endless topics, but the most important step is to realize that the retirement rules have changed and we need to change our financial planning accordingly.

For more on passive income check out the following articles.

Top 4 Forms of Passive Income
http://reynold-savemoney.blogspot.com/2010/08/top-4-forms-of-passive-income.html

Rich Dad Lesson: 3 Types of Income
http://reynold-savemoney.blogspot.com/2010/07/rich-dad-lesson-3-types-of-income.html


Here is a clip from http://www.howdini.com/ of David Bach the author of Start Late, Finish Rich on saving for retirement:


For information on "The Automatic Millionaire" by David Bach check out: http://reynold-savemoney.blogspot.com/2010/09/whats-your-latte-factor-automatic.html

Top 4 Forms of Passive Income

There are limitless possibilities when it comes to generating passive income. Passive income is a way of earning income without actively trading your time for money. Conversely earned/active income is when your time is traded for money, like when we earn a wage or get paid a salary. We’re raised to believe that we should get an education, then get a secure job so we can earn an income. (For further information about the different types of income check out http://reynold-savemoney.blogspot.com/2010/07/rich-dad-lesson-3-types-of-income.html). Although, this is an excellent way of earning a living this is not the way the wealthy earn a living. The wealthy maximize their passive income streams. Passive income also comes with huge tax breaks, which is the biggest expense in life. Therefore, we should learn to maximize our passive income streams. Here are the top 4 ways of maximizing your passive income.

1) Stocks and Bonds – this form of passive income is also known as portfolio income. Depending on the stock you purchase you will be either paid a monthly or quarterly (every 3 months) dividend. This is to reward the shareholders for the risk they take holding the stock. There are some stocks that do not pay a dividend at all, these companies believe that they produce more value for their shareholders by reinvesting the money back into the company, hopefully leading to an increase in share price. Since we are talking about passive income it’s best to choose a stable company that pays out dividends on a regular consistent basis.

When a country or company is in need of money they can issue bonds which is a form of loan. I won't be getting into the details of bond trading today, since bond trading is a very complex topic. Basically they are seen as a much safer investment than stocks, however the returns are typically lower. Bonds pay monthly coupons which is the interest on the loan. For beginners who want to get into the bond market, you can start by purchasing some bond index mutual funds with low management fees at your local bank.

2) Invent Something – people who have patented inventions can make a fortune, if their invention sells well. This is easier said then done, however we all have had that aha! moment in our lives where we thought of a great idea. The trick is writing it down, designing, testing, building your invention, finding a patent lawyer and selling your idea. Also easier said then done (passive income sounds easy but can be quite challenging to earn). However, a lot of inventors have taken this route to maximize their passive income, like the guy who invented the pet rock. You can also think of writing a book. I know of one professor who wrote a mystery novel when he retired. Not sure if it’s selling, but if you love writing you can turn your ideas into a great read.

3) Rental Property – owning rental property is definitely one of the top ways of earning passive income. There are several ways you can get into the property game. Fire sales and foreclosures pop up often, where the original home owner cannot afford to make their payments. In these cases you can often get a great bargain on property. Renting property is not going to earn you a huge income as long as you have a mortgage on the property. However, over time you will own a huge asset. Your rental property can then be your collateral for a low interest loan to purchase more property! If the idea of dealing with tenants is already giving you a headache, you can hire a property manager (your rent may have to increase). For more on investing in property check out: http://reynold-savemoney.blogspot.com/2010/07/your-home-one-of-best-invesments-youll.html.

4) Build a Business – building a business can be a lot of work at first, but also very rewarding. Once the business system is set up you may not have to put as much time into it if you can hire a manager to take over the daily responsibilities. The Four Hour Work Week by Timothy Ferriss is an excellent book that talks about building efficient business systems (http://reynold-savemoney.blogspot.com/2010/07/4-hour-workweek.html). Another amazing read that will inspire you to become an entrepreneur is entitled Start Small Finish Big by Frank DeLuca who started the Subway franchise (http://reynold-savemoney.blogspot.com/2010/06/start-small.html).

I've included a video from our Rich Dad (Robert Kiyosaki) who briefly describes the different kinds of income.

Expand Your Means! Another Rich Dad Lesson

The other day I was out with a friend. We were sitting on the patio at our local pub sipping on some suds and enjoying the beautiful summer evening. We were discussing our summer plans and she mentioned that she'd love to go see a football game in Toronto. Unfortunately, she was currently on a job hunt and unemployed which meant funds were low and this particular game was going to be pretty costly. Immediately she said "I can't really afford it."

This one phrase is really the killer of ambition, drive and ingenuity. It's this phrase that can really be detrimental to our financial livelihood. As we were growing up we were taught that the best way to handle our personal finances is to live well below our means and save. Nobody really gave us the advice that we should seek to expand our means so that we can afford the things we enjoy most in life. Sure, our parents always told us to go get an education and get a secure well paying job, but that's not quite the same as telling someone they should expand their means to get the most out of life.

This one phrase "I can't afford it" is really a brick wall. After it is said that's the end of the conversation and the end of the financial road. Instead we should be asking "how can I afford this?" The subtle wording is enough to unleash a brainstorm of activity. Once you start asking this question your paradigms shift and your whole financial situation takes a drastic 180 turn. "How can I afford this?" is a phrase that unleashes the entrepreneurial spirit and your mind to delve into a world of possibilities. It's well understood that money is traded for things of value, so with this little phrase we begin to think about ways we can add value to the economy and the world!

So the next time you're about to say to yourself "I can't really afford that", change it to this question "how can I afford that?" and unleash the possibilities!

Included is a video from our Rich Dad.

Rich Dad Lesson: 3 Types of Income

Like I promised here is another lesson from the book Rich Dad Poor Dad by Robert Kiyosaki. Robert explains that he is often approached by reporters for interviews, where he is asked what he does for a living and how much he gets paid. He usually tells the reporter that he makes a small salary from working at his company (compared with Fortune 500 CEO's), and that's usually where the interview ends. What most reporters fail to ask Robert is if he has other sources of income. Robert is rarely asked what kind of business he is in, what investments he has made and if he has other sources of income.

In Kiyosaki's book he explains that there are three types of income. There is active income, passive income and portfolio income.

1) Active income comes from your full-time job where you work 9-5. Active income typically comes from exchanging your time for a salary or wage.

2)Passive income is the opposite of active income. This is where you receive cash flow without actively putting in long hours. Passive income comes from what Robert defines as an "asset" (see article http://reynold-savemoney.blogspot.com/2010/07/rich-dad-poor-dad-whats-asset.html ). In this case it can be something like owning rental property, where tennants pay you rent on a monthly basis.

3) Finally, there is portfolio income which comes in the form of stocks and bonds. When you own these types of investments you receive cash flow in the form of dividends, distributions and coupons.

Reporters often fail to ask what are Robert's passive income streams, they are only interested in his active income or how much he earns at the job he works. They fail to notice that he owns apartments, stocks, bonds and patents. He has published various books that he continues to receive royalties for. He owns patents on board games that he invented to help people learn about personal finances. These patents provide Robert with a constant flow of cash.

We learn from a young age that we should go to school, get good grades, so that we can get a high paying job. We are told to strive to become doctors or lawyers. Doctors and lawyers make a great salary, however they have to put in their time and expertise to earn their salary. These professionals are limited in their earnings by the amount of hours they can work in a day. So, it's important to understand the other forms of income, such as passive and portfolio income if your goal is financial freedom!