fbpx
view from hammock of feet

Here’s How Much Money You Need When You Retire

Surely you have made some plans for your next vacation, listed the locations, browsed the options and estimated the costs but have you considered saving for your retirement?

Most millennials might shrug it off as a stage that will appear in a few decades but that’s why you need to ask yourself a few questions – how much do you need to retire at 50/60 or 70?

How do you know if you are financially ready for retirement and how can you invest for the future without being stingy about your present.

You are not alone, 64% of Canadians think they won’t be able to save enough for their retirement. Yes, it is shocking but there is a cure – plan ahead and start investing your savings as soon as possible!

This article will help you determine how much money you need for retirement in Canada. We will also explain the benefits of investing early. Let’s get started.

How Much Money Do I Need To Retire?

Here are some questions to help you determine the retirement income you need:

  • When do I want to retire? – It’s simple math; the earlier you want to retire, the more you’ll have to save every year.However, things like life expectancy and general retirement age play a vital role in this equation. For instance, you might want to retire early at 50 but the average life expectancy is 75 years. In such a scenario, you will have to save 25 years’ worth of retirement funds.
  • Where do I want to live after retirement? – Whether you dream of spending your retirement by the beach or living in the city also determines how much you need. This is because the expenses needed to maintain the property where you live change according to the location.
  • What will my expenses be? – The general rule of thumb is that you will need 70-100% of your current income to maintain a similar lifestyle post-retirement. However, this can change based on the lifestyle you want to maintain in your retirement days.For example, you might want to slow down and live a simple life. In that case, you would need less than 70-100% of your current income.
  • How much income will I generate? – Perhaps the most critical question to answer is how much money you’ll be able to earn after retiring. Knowing this figure will help you stay prepared and develop a plan that caters to all your desires.

50% of millennials think they need $300,000 or less to retire in comfort. In reality, that figure could be much higher or much lower. The 70 percent replacement rate is a typical rule of thumb to estimate how much money they need for retirement.

Even then, it’s essential to always have more for emergencies and personal requirements because consistent investments of savings can give you the freedom and control to live life exactly how you want.

As per the Canadian Pension Plan(CPP), one of the Canadian citizens’ main retirement income programs, the average Canadian Pension Plan retirement payout person is approximately $8,500.

If you meet the CPP criteria, the maximum monthly payout for CPP that you can expect to earn is $1,203.75, whereas on average, the payout has been $736.58 in 2021.

While the retirement income generated through CPP helps increase your retirement funds, it’s not enough. Thus, it’s essential to plan for retirement without banking on the CPP income and using it as an emergency fund in case things don’t go as you had planned.

If you want a more specific figure based on your particular requirements, you can also consider using a retirement calculator. 

Why You Should Start Investing Early

While the figure might vary based on requirements and circumstances, you cannot rely entirely on your salary to save a substantial amount of money for retirement.

This is because one cannot build wealth merely by earning an income. Instead, to amass a significant amount of money, you need to make money work for you through active and passive investing.

When you start investing early, you can enjoy the following benefits:

  • Compounding – With the help of compounding, you can make your money grow faster as you earn interest on your savings and the interest that you’ve earned.
  • More savings – By investing early, you can develop a habit of saving more and investing your savings.The more you invest, the more returns you’re able to get in the future. Moreover, by developing the habit of saving, you can also learn how to cut down on unnecessary expenses and use those funds for investing.
  • Time value of money – The time value of money increases over a period as investing early leads to compounding returns. At the time of retirement, these early investments can reap huge benefits.
  • Understanding finances early – By investing early, you enter the world of finance at an early age and have more time to learn and improve your investment skills and knowledge.
  • Regular investments and Diversification – You don’t need to look for shortcuts to get rich quickly since you have time on your side.You can follow tried and tested practices such as portfolio diversification and investing regularly to build your wealth over decades.
  • More ability to take risks – When you start early, you don’t have much to lose. Hence, you’re able to make more risky investments, and as the old saying goes, ‘more the risk, more is the reward.’Thus, by taking more risks, you can also increase your chances of earning exponential returns.
  • Supporting your retirement plans – By saving for retirement from a young age and investing early, you also increase your chances of reaching financial stability when you’re young.Early investments will boost your retirement funds, and you’ll be able to lead a happier life post-retirement.

Conclusion

While ‘how much money do I need to retire’ is a simple question, the answer is quite complicated. When it comes to determining how much money is needed for retirement, no one size fits all.

As everyone has different needs and wishes, every retirement is not the same, and hence, it’s vital to plan accordingly.

Many millennials struggle to make sound financial decisions at an early age. If you’re looking to achieve your long-term financial goals to support your financial plans, feel free to contact info@buyproperly.com.

BuyProperly enables millennial investors to build their portfolios with the best real estate investment opportunities in a hassle-free and secure manner.

How to Calculate ROI in Real Estate to Maximize Your Profit

How to Calculate ROI in Real Estate to Maximize Your Profit

If you’ve dabbled in real estate investing (or even if you’re brand new) you’ve undoubtedly heard of “Return On Investment” (ROI) and how important it is to consider when making your investment decisions.

But what exactly is it, and how do you calculate ROI in real estate? Is it crucial for investment success?

We’re going to break down the basics of ROI, how to calculate it, and how to use it to make smart investment decisions so you can grow your real estate portfolio with confidence.

Ready? Let’s dive in!

What is ROI?

Because ROI stands for “return on investment,” it’s a very important concept to understand when it comes to real estate investing.

It is a standard metric used to calculate the profitability of an investment on a case-by-case basis. It measures the financial return of a particular investment relative to its cost. The higher the ROI, the more profitable the investment and (presumably) the better it is.

Why is ROI so popular for measuring profitability?

Two reasons: first, it’s incredibly simple to understand and easy to calculate the ROI on almost any investment.

Second, it provides a simple way to get a financial snapshot of an investment, relative to other investments, so you know when to buy, sell, or simply measure whether or not your portfolio is on the right track.

Although it’s incredibly important to know the ROI of any investment, it often doesn’t take into account the complexities, nuances, and “life factors” involved in growing a successful real estate portfolio. For this reason, it should be used as a tool to give broad feedback on the quality of your investments.

Why is ROI in real estate so important?

Although many ROI formulas paint a simplistic picture of investing, they can also give a very quick and solid overview of a property’s profitability.

In a pinch, you can figure out the “health score” of any potential investment you’re interested in and ditch some of the lemons along the way. Properties with an obvious cash flow issue or negative ROI can be identified quickly.

When taken into account along with your overall investment goals, using ROI calculations will help you make smart financial decisions and build a solid real estate portfolio.

At BuyProperly, an online marketplace for fractional real estate investments, they calculate ROI for investors and use it as a benchmark to measure the profitability of their properties. Most of their investors can expect to see projected annual returns of 10-40% Take a look at their properties.

The formula for calculating ROI

There are a few different ways to calculate ROI depending on the type of real estate investment you have. Let’s look at how to calculate ROI for real estate investments that are resales or rental investments.

Here are some examples:

Resales

When calculating the profitability of resale real estate investments, use this simple formula:

Your equity in the property (total gains minus your total costs) divided by total costs

There are two methods real estate investors can use to calculate their gains and costs:

  1. the Cost Method
  2. the Out-of-Pock Method

Let’s look at them both in detail.

1. The Cost Method

This method for calculating ROI uses the total equity in a property divided by that property’s costs (renovations, repairs, and sale price). The Cost Method works for properties purchased with cash and/or financing.

For example, say you purchase a home for $250,000. After putting in an additional $100,000 for repairs, you sell the property for $500,000.

First, you need to calculate your equity in the property. If it sold for $500,000 after your total costs were $350,000 for the purchase and repairs, you had $150,000 left of equity.

Next, calculate the total costs. As mentioned above, the total costs for the property were $350,000 ($250,000 purchase price plus $100,000 in repairs).

After you divide your equity ($150,000) by the total costs ($350,000), you get 0.43, which is a 43% ROI.

2. The Out of Pocket Method

The second popular method for calculating ROI looks at only what you’ve spent out-of-pocket for property costs and expenses and doesn’t take into account the property financing.

When would investors use this method? The Out of Pocket Method can be used to calculate ROI only when investors purchase a property with a mortgage. Both the down payment and financing on the property are calculated as equity, making the overall ROI higher.

Let’s use the same example as above.

You purchased the property for $250,000 and put in $100,000 of repairs, only this time, let’s say you put a 20% down payment on the house and used a traditional mortgage to finance the rest.

This means your out-of-pocket expenses are only $50,000 (your down payment) plus $100,000 (repair costs).

If the property is worth $500,000 after repairs, this means you have $350,000 of equity (including your bank financing as leverage). After you divide $350,000 by the total sale price ($500,000), you’re left with an ROI of 70%.

Rental properties

Calculating ROI on rental properties is slightly more complex since we need to factor in year-over-year profitability.

For this ROI, we use the following formula:

Net operating income (annual rental income – operating expenses) divided by the total out-of-pocket expenses.

Using the example from above, if you purchased your property for $250,000 with a 20% down payment, that means your out-of-pocket expenses would be $50,000. Add in closing costs ($5,000) and some money you spent on repairs ($20,000) your total expenses are $75,000.

Now, let’s say your monthly rent is $1,200. Multiply this by 12 to get the average yearly rent. Subtract operating expenses (let’s assume these are $500 a month). This leaves you with a yearly net operating income of $8,400.

Divide $8,400 by your out-of-pocket expenses ($75,000) and you’re left with an ROI of 11%.

Other important factors when considering ROI

When you’re trying to paint a more detailed picture of your ROI on a property, there are two other important factors to consider:

  1. home equity
  2. year-over-year appreciation

Using the above example, if you buy a $250,000 property with a $50,000 down payment and a $200,000 mortgage, your equity grows over time as you pay down the principal balance on your loan.

Let’s say that, according to your mortgage amortization schedule, you paid $2,300 on the principal balance of your loan in the first year. This $2,300 now becomes equity and can be used in your ROI calculation.

Furthermore, it’s important to consider year-over-year appreciation. If we assume your $250,000 property appreciates at 6% each year, then next year, your property will be worth $265,000, adding an additional $15,000 to your equity.

At BuyProperly, they calculate ROI using net cash flow, mortgage repayments, and capital appreciation to paint a more accurate picture of the returns investors will make over time.

What is a good ROI for real estate?

Determining your acceptable ROI for real estate investments depends on your personal goals and your ability to tolerate risk, which means there’s no right or wrong answer.

Investors looking to rent will normally be content with lower yearly ROI numbers knowing they plan on holding the property as a long-term investment. For rental properties, it’s common to expect a 5-10% ROI.

Property flippers, on the other hand, are more interested in the immediate ROI and are looking for a property with the potential to generate higher returns. In this case, an ROI of 20% or above is ideal.

At BuyProperly, they help real estate investors get started for as little as $2,500 and see projected annual returns of 10-40%. Want to know how? Learn more >>

Conclusion

ROI is an important consideration when investing in a property. Whether you’re looking for a quick return or long-term cash flow and appreciation, calculating ROI can help make your next investment decision easier.

Remember, since ROI is a simplistic method of sizing up your next real estate investment, it’s important to analyze it alongside your risk tolerance profile, as well as your long-term and short-term goals ,before making any investment decisions.

Looking to get started in real estate investing without feeling overwhelmed? Check out BuyProperly’s properties and see how they use a fractional ownership model to help investors build their real estate portfolios.