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Personal finance question

9K views 17 replies 6 participants last post by  Rickson9 
#1 ·
Hi,

My name is Jim. My question is: (when?) should my wife and I move to a new home?

My wife Natalie and I are in our mid-30s with a dog and no children. Our combined income $250k per yr. We have 2 break-even rental properties valued at $600k and mortgages of $300k. Our primary residence is a $300k townhome in Mississauga with no mortgage; it has a secured and unused $200k LOC on it. We have $225k in retirement savings (mostly stock), $225k in a non-registered stock trading account (mostly stock), $12k in our TFSA (mostly stock), and $100k in cash. Our net worth is approximately $1M.

We would LIKE to move somewhere into the GTA, but we don't NEED to. Should we: a) stay in our Mississauga townhome, use our $100k cash to pay down the mortgages on our rental properties to make them profitable, b) sell our townhome and move, or c) rent out our Mississauga townhome and move, or d)???

And if we decide to do c) should we use the LOC on our Mississauga townhome for a down payment?

Our fears are:
1) Mortgage rates are uncomfortably low (ie. there is a higher chance that rates will ratchet higher rather than lower during the amortization period of a new mortgage)

Our fears are NOT:
1) Stock market declines. We relish declines in any asset class. We made huge purchases in stock over the last year during this meltdown (as well as the last 2002 meltdown). We LIKE stock market meltdowns.

Our tendancy is:
1) Continue the status quo.

Our reasoning is:
1) The government is printing money to prevent the collapse of financial institutions. In economics nothing is 'free'. Inflation is a very real possibility over the next half decade. This will result in a large spike in mortgage rates sooner or later.

PS: We do not want to consult a financial planner with regards to investing. Their knowledge is very bad.

Best regards,
Jim
 
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#2 · (Edited)
Jim, first off my hat is off to you, you have incredible finances... I'm sure there are a lot of us who would kill to have your income and net worth in the mid 30's, and at this point, financially it would appear that any route you take would be a success.

That being the case, are you sure it's a financial question and not a lifestyle question? The reason I ask is that normally when I've seen similar questions it's always been "This is what we would like to do, does it make financial sense?". In this case you mention that you would like to move to the GTA (a very broad area), but that your tendency is to stay put. How about if we turn this around and ask... "Without considering finances, where would you LOVE to live and why?". Because to be honest, I can't see any reason why your finances would restrict you to where you are, it just sounds like you aren't too sure what you want.

PS: In regards to mortgage rates going up, that would imply high inflation, and that we would expect to cause your stocks and related dividends to increase as well, not to mention that it would be understandable in those circumstances to increase the rent you charge. Over time, the mortgage balances will decrease whether you dump cash on it or not, so either way in the long term the properties should move from break even to profit naturally, and even if they don't, your diversification should keep you going up whether rates are low or high.
 
#3 · (Edited)
Jim, first off my hat is off to you, you have incredible finances... I'm sure there are a lot of us who would kill to have your income and net worth in the mid 30's, and at this point, financially it would appear that any route you take would be a success.

That being the case, are you sure it's a financial question and not a lifestyle question? The reason I ask is that normally when I've seen similar questions it's always been "This is what we would like to do, does it make financial sense?". In this case you mention that you would like to move to the GTA (a very broad area), but that your tendency is to stay put. How about if we turn this around and ask... "Without considering finances, where would you LOVE to live and why?". Because to be honest, I can't see any reason why your finances would restrict you to where you are, it just sounds like you aren't too sure what you want.
Hi Stephen, you bring up an excellent point.

Sometimes I catch myself saying that I would "love" to live in Toronto, but truthfully it is more a "like" than a "need". We like the GTA because of all the activities, bike trails, beaches area, downtown shopping, etc that the city offers.

However, our fear is that our current 'comfortable' lifestyle would be compromised, or worse, if the RE market tanks, we would find ourselves regretting the move. I guess, as you insightfully mentioned in your post, we just need to make a decision about what we want.

Here is a more accurate summary: we would LIKE to move into the Avenue Rd. area, but we CRINGE at the 600k+ price tags most of these homes command.

How about the LOC question? If we move, should we use the LOC or sell the townhouse?

Another consideration is that, God willing, we would like to start having children so this is another issue in the mix...

Inertia is such a difficult thing to overcome...
 
#4 ·
My wife Natalie and I are in our mid-30s with a dog and no children. Our combined income $250k per yr. We have 2 break-even rental properties valued at $600k and mortgages of $300k. Our primary residence is a $300k townhome in Mississauga with no mortgage; it has a secured and unused $200k LOC on it. We have $225k in retirement savings (mostly stock), $225k in a non-registered stock trading account (mostly stock), $12k in our TFSA (mostly stock), and $100k in cash. Our net worth is approximately $1M.
Wow! You are doing a really good job Jim. What I'm most impressed with is your net worth is around 4x your income and you are only in your mid-thirties

Our fears are:
1) Mortgage rates are uncomfortably low (ie. there is a higher chance that rates will ratchet higher rather than lower during the amortization period of a new mortgage)
My feeling is that your fears are unfounded. Because of your solid financial position, any route you choose should work out just fine.
 
#5 · (Edited)
Jim, I think maybe this is what is causing you difficulty (aside from needing to decide what you want):

if the RE market tanks, we would find ourselves regretting the move
Is maybe the issue that you are considering your home as an investment and your desire to maximize profit/returns is conflicting with your desire for more personal amenities and a desire for change? And hey, if I'm way off, just chalk it up to me not knowing you and trying to bounce ideas of you, I'm not trying to psychoanalyze you :)

For example.. let's say there's a house downtown Toronto that is your dream house, absolutely perfect. Without thinking of it as an investment, your instinct is to snap it up while it's available because it's your dream house... but thinking of it as an investment you start thinking "there are lots of signs that the market might have more to drop, maybe I should wait and see if the price goes lower". Maybe you've always wanted a house with a pool, but you know that houses with pools generally have lower resale value or are harder to sell in the future. You have plenty of other assets to cover everything else you want in life... retirement, travel, investment, etc... so why not indulge yourself when it comes to your primary residence?

That said, at this stage in your life, considering the expectations that RE will still continue to go down a bit, and then remain stagnant for quite a while, I personally wouldn't jump from a place you're satisified with to a "step up" home... I'd wait to find your dream house in your dream location, and then when it's available, grab it for the best price you can. I'm biased when I suggest that, because that's exactly what we did recently, but I have to admit it's made us quite happy.

PS: You added "How about the LOC question? If we move, should we use the LOC or sell the townhouse?"... Personally, selling the townhouse or renting would be a decision you're much more qualified to make. If you decide to rent it, then generally I'd think a mortgage would be cheaper than the LoC, so you could mortgage your new house secured with the townhouse and the new house, which should get you a rock bottom rate without needing to mess around. For example, if the new house was $600,000, you'd want 20% down to save money, which is $120,000. So you mortgage $120,000 from the Mississauga home and $480,000 from the new home.
 
#8 ·
Jim, I think maybe this is what is causing you difficulty (aside from needing to decide what you want):

Is maybe the issue that you are considering your home as an investment and your desire to maximize profit/returns is conflicting with your desire for more personal amenities and a desire for change? And hey, if I'm way off, just chalk it up to me not knowing you and trying to bounce ideas of you, I'm not trying to psychoanalyze you :)
Your accuracy is uncanny! This is exactly how we are thinking. We find it difficult (if not impossible) NOT to consider our current townhome and the potential new home as an investment; something for us to resolve within our personalities I suppose :confused:

PS: You added "How about the LOC question? If we move, should we use the LOC or sell the townhouse?"... Personally, selling the townhouse or renting would be a decision you're much more qualified to make. If you decide to rent it, then generally I'd think a mortgage would be cheaper than the LoC...
This is good to know! We didn't know (generally) how a LOC would stack up to a new mortgage.

...so you could mortgage your new house secured with the townhouse and the new house, which should get you a rock bottom rate without needing to mess around. For example, if the new house was $600,000, you'd want 20% down to save money, which is $120,000. So you mortgage $120,000 from the Mississauga home and $480,000 from the new home.
Actually we didn't even consider mortgaging our current townhome as an option (I'm not sure why since it is staring us in the face). Our idea with the LOC was to use it as a 'release-valve'; if things got tough we could reduce our debt load in a hurry, but I guess an open mortgage could accomplish the same thing.

Thanks for the ideas!
 
#6 ·
Your rentals are only break even with 50% equity in them? If so, these are terribly performing investments, and you should sell them immediately.

Use the $300k equity and go buy your dream home. No mortgage worries, no worries about a housing crash, no tenant issues.
 
#9 · (Edited)
A few comments:

1. Upon purchase, we only had 25% equity in the properties. The bulk of the gained equity is from how the real estate market has performed over the last decade.

2. The rentals are at below average rents. I have friends staying in there that I've known since I was a teenager. (approximately 25% less than market), so we have absolutely no tenant issues at all. If we have money (which we do), we like to do what little we can to help our friends who don't have as much.

3. We don't care about asset crashes; stock or real estate. We actually WANT a crash. We WANTED a stock market crash (and we got one) and we WANT a RE crash. We don't actually 'worry' about crashes - we wish form them to happen (often).

4. My wife and I earn high incomes. The interest from our mortgage helps reduce our taxable income quite a bit.

5. My wife and I don't like to sell assets. We believe that 30 years after selling, any 'profit' we would reap would be insignificant. In addition, all the appreciation is tax-free money.

No offense, but we think that the idea of selling an appreciating investment that is not losing money and providing tax benefits in exchange for a personal non-investment property with no tax benefits is actually a very bad idea that would deteriorate our net worth substantially over time. We would rather see how are assets are doing a quarter century from now when the mortgages on them are a distant memory.
 
#16 · (Edited)
To clarify the situation with regards to the rental properties:

A person puts $100K down to purchase an investment property at a price of $400K (ie. 25% down). The investment is rented out and has neither positive or negative cash flow. The debt is $300K and the equity is $100K.

The market rises and the property is worth $600K. The debt is still $300K but the equity is now $300K. The property still breaks even.

The property has 'made' the individual $200K for doing nothing except collecting rent cheques.

When the property appreciates $40K. Sell now? When the property appreciates $100K. Sell now? When the proeprty appreciates $200K. Sell now?

Fast forward 30 years. Would the $40K 'profit' look good? Would our $200K profit look good? Sure, better a profit than a loss, but we wouldn't consider this a successful outcome.

In general, we are a long term investors, and 'selling' (to us) is a bad idea because in a few decades, the (taxable) 'profit' that we gain will be inconsequential.

Hundreds of dollars soon become thousands of dollars which soon become tens of thousands of dollars which soon become hundreds of thousands of dollars and so on and so forth. The problem is that the vast majority of individuals are seduced by thousands of dollars and as such, never go on to experience anything more.

We have always been told by accountants and financial planners to sell. They are always very quick to sell. Over the last decade, if we had followed their advice, it would have been a horrible decision.
 
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