The boon of the oilfield/trades is the ability to utilize high income for high leverage real estate investing purposes, with minimal upfront investment both in human and financial capital. The alternative would be to take the long, expensive traditional route of 7+ years of higher education to reach such income levels.
As a colleague used to say, in essence:
We are like strippers. We once all wanted to make it big going to school, but we end up doing odd things for our fortunes, and not many people could date us.
I wrote before about my plan for the next several years previously, aligning it precisely with my anticipated job advancement and school completion times. The problem with that analysis was the assumption that employment earnings remain consistent with expectations, which is very unrealistic in the industry and in today’s lackluster job market. Also, the exact numbers for my primary residence have changed slightly. Thus, this time I will approach it with emphasis on required and anticipated saving rates: a saving x amount approach, and within 5 years instead.
- $1,500/month from employment in the 1st 2 years
- $2,000/month from employment in the next 3 years
In order to reach my objective in 5 years from this time of writing.
Before anyone asks, I am an electrician apprentice and trucker, being in the industry since I was 19, starting with odd jobs and working my way up 3 years ago. I used to want an office job and have kept my 4th year university status since then.
- Budget: Obvious expense variations that will throw this off, but we will omit such possibilities for simplicity.
- Income (including rental) and employment remains consistent.
- Anticipated apprenticeship progression is accurate.
- Single martial status, or dating to not adversely affect earning power.
- Lifestyle remains relatively consistent.
- No sudden expenses.
- Near-o upkeep costs with properties and 0 vacancies.
- Financial figures are in today’s dollars.
- Properties are not yet sold and hence not considering capital gains tax and commissions.
The Starting Numbers
As of June 1, 2016, I take possession of my first home- a prime location 2 bedroom condo of 813 sq ft. The current age is 23. Sharing the property with a student or a professional will bring my total monthly budget to $4,300/month. My average income is same as before: $5,822/month. Therefore, saving is deemed to be $1,522/month. We will use a “saving $1500/month” goal/model.
Primary residence average principal contribution over the 5 year term is $795/month.
Leaving a budget of $2,200 for additional cheap furniture and a TV set, this leaves me with a cash balance of $13,000 as of July 1.
Using these numbers, by the end of 2016, I would then have $23,500 cash on hand. This would be sufficient to get into a second condo of $275,000 pricing after closing costs, saving $8,500 cash for emergency purposes. Monthly housing costs are to increase by $200 as there will be no roommate, but the mortgage and fees are a bit smaller. Principal in the primary residence would be $5,565 + 5,132 from downpayment net CMHC = $10,697.
Statistics for first condo rented out:
Rental income: $22,800 (1900/month)
Interest (yearly average): $11,559
All figures are for over 1 year. Note this is an irregular mortgage with a higher interest rate (3.89%), but the full downpayment is returned after closing. The trick is to use the interest as a tax write-off while getting extra cash from the bank. The result is a higher leverage ratio but also a magnified ROI.
Condo fees plus insurance, power: $5,400
Property tax: $2,374
Income tax: $1,156
Cashflow: -$5,124 (-427/month)
Principal contribution: $9,587 (averaged)
Net equity gain: $4,463
ROI on negative cashflow used, excluding appreciation: 87.1%
Leverage (initially): 64x
New primary residence principal contribution would be $9,223/year, with $4,345 of the downpayment contributing also. The new property has about 200/month extra carrying cost versus sharing the previous one with a roommate, but it is assumed the lifestyle budget is adjusted accordingly. So at the beginning of 2017, halfway into age 23, net worth increase since the beginning of this post is $23,542.
Aiming to maintain a similar savings rate for the next 1.5 years at $1100/month (we’re still saving $1500/month from employment, but we have about a 400/month negative cashflow from the rental), investing this monthly for an annual 8% return in a TFSA:
$23,542 starting equity
+$21,103 more savings.
+$6,695 equity in rental
+$13,835 equity in new primary residence
= $65,175 net worth 2 years later; Age 25.
Now anticipating an income increase, if the savings rate then becomes $1600/month (2000, but we are losing 400 to the rental) for the 2 years after:
$65,175 starting property equity and cash
+$45,418 more savings (now 66,521 in TFSA)
+$8,926 in rental
+$18,446 in primary residence
= $137,965 net worth at end of Year 4; Age 27.
Here now we have enough savings for a 3rd rental condo with similar characteristics as our current 1. For simplicity we will use the same one as an example, and with 20% down, after the lawyer fee we’ll have coincidentally just enough. The statistics change a little with 20% down, however, and through this analysis we learn something interesting about the cash back mortgage in our previous example:
Rental income: $22,800
Condo fees, insurance, fees: $5,400
Property tax: $2,374
Income tax: $2,865
Principal contribution: $8,975
Net equity gain: $6,731
Amount “invested” in a year: $67,844
We can conclude that ROI in the absence of appreciation is significantly lower with 20% downpayment- only 9.9% versus 87.1%, though now there is only 5x leverage versus 64x. We use 12.8x more leverage for a 8.8x higher return. In theory this is much “safer”, and the loan coincidently easier to qualify for.
One year later, though less exciting, now we gain:
+ $6,731 New rental
+ $4,463 old rental
+ $9,223 primary residence
+ $20,053 compound savings (8%/yr, TFSA)
= $178,435 worth at Age 28
So in the absence of 0 property appreciation and no Journeyman ticket hence only modest pay increases, I would then be worth $178,435.
Now here is the interesting part. If we follow the historic statistic of properties appreciating along with inflation (2%):
Property #1: 328000(1.02)^5 – 328000 = $34,139
Property #2: 275000(1.02)^4.5 – 275000 = $25,646
Property #3: 328000(0.02) = $6,560
= $66,345 more; $244,780 Net Worth
You may be wondering why we selected negative cashflow properties for our analysis. This is because the properties are in a more appreciative area; in some good years, YoY condo appreciation was as high as 7.4% (e.g. 2014 to 2015 YTD); for detached, average YTD sale prices increased 19% from 2014 to 2015, though we aren’t rich enough for one of those. In real estate investing, you usually have only either high appreciation but negative cashflow, or low appreciation but positive cashflow- Vancouver and Toronto being extreme examples.
One place I used to rent in a less desirable area appreciated by about 5% YoY in normal, non-recessionary conditions. If we use this figure as somewhat of a middle ground,
Property #1: 328000(1.05)^5 – 328000 = $90,620
Property #2: 275000(1.05)^4.5 – 275000 = $67,621
Property #3: 328000(0.05) = $16,400
= +$174,641; $353,076 Net Worth
So overall, we can conclude the financial picture looks significantly better with normal appreciative conditions, aided by the high leverage real estate allows, which requires high oilfield/trades income to utilize at a young age. The key is to get started early.
A new Ferrari California or Lamborghini Huracan is about $289,000. By then I could put $140,000 down and finance the rest (obviously depends on the rate, but using typical high demand vehicle rate of 5.9%), increasing my current monthly budget by $2000 + insurance. If my education is done by then, I should be making about $160,000+/yr from employment; about $2800/month more than the latest figure used in the above calculations.
In reality I do not expect the route to be so clear-cut, as I still know few people in Alberta to this day and hence have limited networking opportunities. The most significant obstacle is to obtain continuous income increases, as the trades are very close-knit- being almost impossible to advance in an apprenticeship without knowing anyone. And without the expected income increases through the apprenticeship and eventually my Journeyman ticket, income would soon stagnate, complicating this plan.
I also am an extreme risk taker though, so maybe by luck I will be able to raise more money sooner. Never know until you try. As I used to say to a good old friend of mine:
Go to school, bust a nut, and hope it all works out. If it doesn’t, keep trying, as something has got to work eventually!