September 2025 - Money Machine - Disposition

The Money Machine seminar, boiled down to its simplest form, is a three-step process. 1. Buy one property a year for ten years. 2. Never amortize your mortgages for more than 15 years, and 3. Never sell. Stick to that exact formula and you’ll never have to worry about cash flow in retirement. I realize they say rules are made to be broken. And there may be some truth in that. For example, rule #1, a number of students have refused to stop at 10 properties. They have gone on to acquire 20 or 30 or even more. And, rule #2, sometimes when prices are spiking or interest rates have risen, you may not be able to place a mortgage at or under a 15-year amortization period. But follow the spirit of the rule. Subsidize a shortfall for a period of time if you can afford to. And shorten the amortization down by pre-payments and at renewal time. The goal is to get those mortgages paid off. But rule #3, I still maintain that the process in its purist form will see you holding all your properties and one day let them pass on to your heirs. But there are extenuating circumstances at times and a certain amount of planning is required. Men like Bill Gates and Warren Buffett have each spent their lives amassing their fortunes. They aren’t just millionaires. They are billionaires. Hundreds of times over. Not only will they never spend this wealth, but they will never spend the interest on their wealth. I mean, when you’ve got hundreds of billions of dollars, even simple interest at 2% will give you a yield in the billions. How do you spend that kind of money? You can only buy so many 100-million-dollar yachts or estates. But you’ve got enough interest to buy one or more every month. So, as they get older, their thinking changes. They think less about amassing money and more about divesting it. Giving it away to worthy causes. Creating a legacy. Sounds simple? Not necessarily so. King Solomon. The third King of Israel, and reported to be the wisest king that ever lived, was also one of the wealthiest. As an example, he took up raising horses. He had 10,000 box stalls. He wanted a luxury mansion for himself. It took him 20 years to build. As Solomon got older, he started thinking about his eventual passing. And it troubled him. He thought, “I’ve built up this mighty kingdom. All this wealth. How do I know the person who inherits all this will be wise? He may be a fool and undo all that I’ve done.” If you’ve followed the principles of the Money Machine, you will have amassed considerable wealth in retirement. And certainly, you can just leave it in your estate and bequeath it to whoever you choose. But that process isn’t as simple as it sounds. Technically, at the time of your passing, the government (Canada Revenue Agency) considers it as if all your properties are sold as of that day. They call it a ‘deemed disposition’. And it’s subject to tax. And that tax must be paid by your estate within 6 months of your passing. Let’s look at some numbers. Suppose you followed the plan and acquired 10 properties. And let’s suppose in today’s dollars (market value) they are worth on average $700,000. That’s a net worth of $7,000,000. And because you’ve bought them gradually over time and paid them off over time, it may well be that you don’t have more than $2,000,000 in acquisition costs. If that. I mean, the first property I bought here in St. Catharines is worth over ten times what I paid for it. And so you would have a capital gains of $5,000,000. At today’s 50% rate for capital gains that’s $2,500,000 your estate would have to pay tax on. And if you’ve depreciated these properties over time, the exposure is worse because recapture comes into play. Let’s say your marginal tax rate is 53%. Your estate owes Revenue Canada $1,325,000. And they want their money. That’s a problem. Oh, there’s lots of equity to support mortgages, but is your spouse or your children going to be able to qualify for that sort of a loan? Or are they going to have to fire sale off some of the properties to pay the tax? And then there’s the issue of competence. You’ve been at this a long time. You’ve got a network of competent tradesmen. You know how to repair. You know how to attract tenants and how to separate the wheat from the chaff. And even there, with the current climate of the Residential Tenancies Act, it isn’t easy. Will your heirs know what to do? Maybe the best process is to gradually transfer ownership of some of these properties to the intended heirs. That will spread the tax burden over time. The tax exposure is never easy, but it’s easier to come up with $132,500 in a year, multiple times, than all in one hit. And it’ll mean you can school the beneficiary on how to handle investment property gradually over time. Now, it may be that the rental properties are held jointly between husband and wife. Generally, as joint tenants with the right of survivorship. But even there, with the passing of one spouse, their interest is taxable at the time of passing. Or if it’s held by one spouse as a corporation, like a numbered company, it can pass to the surviving spouse without tripping the tax. But not their children. It defers the tax, but it definitely doesn’t avoid it. Or, and this would be low on the list of desirable options, you can just sell your entire portfolio of properties. Pay the tax man. And live in luxury on what is left. You won’t leave a legacy, but chances are you won’t run out of money either. Even if you live to 110.