# Young couple in huge debt!



## copea

Hey Everybody, 

Quite like a few people on here I am new to the forum and am really enjoying reading about everything on here. I was just wondering if anybody has any advice for my wife and me. 

We are recently married, own an apartment we currently live in and own one rental property, we are also $45,000 in debt! Ouch! My wife seems to think we are doing okay, but me being the one who constantly looks at the budget and the numbers doesn’t seem so enthused…

Here is our situation:

22 and 25 years old
Income = $58,000 combined or about $4,800 per month
Rental Income pays for the rental property

Owe $18,000 on line of credit (interest only payments till school finished)Owe: $14,000 on line of credit (interest only payments till school finished)Owe about $12,000 in student loan debt

Total debt about $44,000

Student Loan Payments: $329.00 for both of us
When we can, we try and put $500.00 on the credit lines, probably on average about $400.00 per month.

Total debt payments = $850.00/month.

Now I don’t mind the student loan debt, as I consider that good debt that we pay off each month, I am more concerned about the other $32,000!

The $30,000 in debt includes the down payment for the rental property as well as our recent wedding, and some school. So I don’t think we have that much debt for what we have, or do we?

My question is; are we putting to little or to much into our debt each month? It just never seems like we are getting anywhere!

Also, are there any hints or tips that you can give us so that we can pay down our debt faster?!!

Thanks a lot!

Benjamin


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## Addy

Have you considered selling the rental property and clearing up at least the 32K in loans? 

How much interest a month do you pay on the loans?


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## plen

copea said:


> Also, are there any hints or tips that you can give us so that we can pay down our debt faster?!!
> Benjamin


Are you saving any money right now? Where is the other ~$4000 a month going?


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## HaroldCrump

copea said:


> Rental Income pays for the rental property


Is the property fully paid off or are you carrying a mortgage as well?


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## Four Pillars

It seems like you had legitimate reasons for the debt (wedding/down payment/school etc) so it's not like are constantly spending more than you make.

As far as the amount of principal and repayment schedule, I think that is something you should figure out. 

What are your financial goals? Do you want the debt gone asap or is it ok to have it hang around for a few years? Are you planning to save for something else?

You might want to have a planning meeting with the missus and see if you two can figure out what you want to do. It might help if you can figure out a specific amount of repayment for each month, rather than just tossing a few extra bucks now and again.

BTW - you guys are doing pretty well for your age.


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## copea

*Recap*

Hey Everybody, 

Thank you for the replies.

*Addy *- We purchased our rental property this past march, and I do not believe it would be worth to sell atm, as we have not made any money off it. It does cover itself so I am happy about that one!

Also, we pay about 100/month interest, as it is interest only loans. I understand that it is quite a bit, but at least we dont HAVE to pay down the principal as well.

*Plen* - we spend about 1200 on housing costs, 800 debt repayment, 2000 misc expenses (food, clothing, insurance, gas, etc.), unfortunately we are not saving right now !

*Harold* - Both our properties have a mortgage, we purchased the first one about 2 years ago - have made money off it, and our rental this past march (under wife’s name) to take advantage of down payment rule changes through the cmhc.

*Four pillars *- Thank you, we are trying to get a foundation together so that in the long run it will hopefully work out!

As for both mortgages, we have increased the payments each month, and I have a detailed budget on excel that i work with to try keep tabs on things.. so I suppose we are doing okay!

So what i can tell from the posts is that we should discuss our financial goals and figure out what we want, as well try and save a little bit each month, and keep trudging along!

Benjamin


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## atrp2biz

copea said:


> Hey Everybody,
> 
> Thank you for the replies.
> 
> *Addy *- We purchased our rental property this past march, and I do not believe it would be worth to sell atm, as we have not made any money off it. It does cover itself so I am happy about that one!
> 
> Also, we pay about 100/month interest, as it is interest only loans. I understand that it is quite a bit, but at least we dont HAVE to pay down the principal as well.
> 
> *Plen* - we spend about 1200 on housing costs, 800 debt repayment, 2000 misc expenses (food, clothing, insurance, gas, etc.), unfortunately we are not saving right now !
> 
> *Harold* - Both our properties have a mortgage, we purchased the first one about 2 years ago - have made money off it, and our rental this past march (under wife’s name) to take advantage of down payment rule changes through the cmhc.
> 
> *Four pillars *- Thank you, we are trying to get a foundation together so that in the long run it will hopefully work out!
> 
> As for both mortgages, we have increased the payments each month, and I have a detailed budget on excel that i work with to try keep tabs on things.. so I suppose we are doing okay!
> 
> So what i can tell from the posts is that we should discuss our financial goals and figure out what we want, as well try and save a little bit each month, and keep trudging along!
> 
> Benjamin


At this stage of the game, I would tend not to accelerate mortgage payments. Your mortgages are likely your cheapest sources of capital. In addition, the mortgage for the rental property is tax deductible. From a tax perspective, it would be best to keep that property as levered as possible. The LoC debt has to be reduced as soon as possible as there are no tax benefits--I wouldn't even worry about an emergency fund at this point since the LoC would act as the emergency fund.

I would also not contribute to an RRSP until the two of you either 1) earn more money to bump into higher marginal tax brackets and/or 2) the LoC debt is gone.

All in all, I think the two of you are in pretty good shape. The title of the thread says "Young couple in huge debt", but you also have to look at the other end of the equation and see how much equity you have. Debt used to leverage equity is not bad at all--as long as it doesn't bother you and you can sleep at night.


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## sprocket1200

i love it! 'debt used to leverage equity is not bad at all'

i agree!! i have my cash ready to buy your houses when you are forced to sell them cheap!!!


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## atrp2biz

sprocket1200 said:


> i love it! 'debt used to leverage equity is not bad at all'
> 
> i agree!! i have my cash ready to buy your houses when you are forced to sell them cheap!!!


Obviously, I believe in M&M--while you don't. To each their own.


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## the-royal-mail

What's M&M?


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## Sustainable PF

Hi OP - can you break down that $2000 "misc" expenses for us?


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## atrp2biz

the-royal-mail said:


> What's M&M?


http://en.wikipedia.org/wiki/Modigliani–Miller_theorem

The Modigliani-Miller theorem states that a firm would be indifferent towards its capital structure in the absence of taxes. However, with the introduction of taxes, the value of the firm increases with the use of leverage. However, extensions of this model also incorporate increased risk of bankruptcy at extreme debt levels.

Although the theorem is used in corporate finance, I think individuals should view themselves as firms, with one's self as the sole shareholder. I enjoy keeping track of my personal finances in Quickbooks, noting trends and financial performance.


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## copea

*Update*

HI Everybody, 

Seems like quite a good discussion going! 

*Sustainable* - $2,000 misc expenses are broken down like this: Food House - $400, Food Out - $150, Insurance - $150, Bus pass - $100, Misc - $300, Internet - $50, cell phones - $200, Gas/travel - $300, Clothes - 100, Fun - 100. All depends on the month really.

This M&M theory seems quite confusing!

How we bought the rental property:

We purchased our first place with my income and a 20,000 downpayment from our parents. We were not married at the time, and because my wife was earning about the same as me, I felt that her income was being "un utilized" if thats a word. So I "gifted" her the down payment from the loc, and she purchased the rental in her name etc. 

We thought that it was a good idea at the time because of the changing rules with the CHMC, and we only needed a downpayment of 10,000 instead of 40,000 (with the new rules). The rental property is cash flow positive, and we only put about 100-200 into it each mont (as increased payments to force savings). Not to sure if that is what you call an M&M move?

Do any of you think it was a good move/bad move on our part?


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## hystat

copea said:


> Total debt about $44,000


so that includes the two mortgages? or no?

if not, what amount is owed on each property and what are the property values?

then someone can assess.


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## copea

*Mortgages*

Hi Hystat, 

The debt does not include the mortgages: 

Mortgage 1 (Apartment) = 145,510.44
Apartment 1 Value = 210,000 Est.

*Bought in april 2008 for 169,000*


Mortgage 2 (Rental Apartment) = 174,690
Apartment 2 Value = 186,000 Est.

*Bought in March 2010 for 181,000*

As for cash flow on the rental property I believe we earn about 30+ each month in cash flow.. so we do not pay each month for it.


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## OhGreatGuru

copea said:


> Hi Hystat,
> 
> The debt does not include the mortgages:
> 
> ...
> 
> Mortgage 2 (Rental Apartment) = 174,690
> Apartment 2 Value = 186,000 Est.
> 
> ...*
> 
> As for cash flow on the rental property I believe we earn about 30+ each month in cash flow.. so we do not pay each month for it.


You said part of the personal debt was for downpayment on the Rental Apartment. Is your cashflow covering the interest on that money too? If not, the apt. really isn't cash flow positive.

If it's keeping you awake at night, my advice would be to sell the rental apt. and pay down your debt, notwithstanding all the advice above to continue leveraging. Peace of mind is worth someting too. But the present difference between market value & your mortgage is not going to leave you much/any profit after expenses to recover your downpayment.


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## K-133

copea said:


> Hi Hystat,
> 
> The debt does not include the mortgages:
> 
> Mortgage 1 (Apartment) = 145,510.44
> Apartment 1 Value = 210,000 Est.
> 
> *Bought in april 2008 for 169,000*
> 
> 
> Mortgage 2 (Rental Apartment) = 174,690
> Apartment 2 Value = 186,000 Est.
> 
> *Bought in March 2010 for 181,000*
> 
> As for cash flow on the rental property I believe we earn about 30+ each month in cash flow.. so we do not pay each month for it.


You likely aren't accounting for income taxes owed on the rental property, which would be income minus sum of mortgage interest, condo fees, insurance, property taxes, other bills. You are likely losing $30 a month. Not a big deal as your mortgage principle is paid (my opinion), but just to be clear. For cash flow, you should also factor in a 10-15% contingency fund contribution to pay for the condo when it is vacant. So if your bills are $1000, add $150 on top of that to savings and make $1150 your condo's cash flow.

I think FT offers the best advice. Figure out where it is you want to be today, tomorrow and 5, 10, 15 years from now. Then make the choice to sell or keep your assets depending on what it is that


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## Sustainable PF

copea said:


> HI Everybody,
> 
> Seems like quite a good discussion going!
> 
> *Sustainable* - $2,000 misc expenses are broken down like this: Food House - $400, Food Out - $150, Insurance - $150, Bus pass - $100, Misc - $300, Internet - $50, cell phones - $200, Gas/travel - $300, Clothes - 100, Fun - 100. All depends on the month really.


If you are truly concerned with paying off the debt I can see some reductions pretty quickly.

Food: While some may disagree, $100 per week for food for 2 people indicates, at least to me, that you're not looking for the best deals. We scour flyers each week and stock up on sale items. We rarely buy anything but staples at "full" price. You can likely cut $25 per week on food if you put your mind to it. That would free up $1300 a year to pay down debt.

Food Out: Do you REALLY need to go out? Brown bag your lunch (or make lots of left overs!). This $150 is a want, not a need. So say you cut back to $50 a month and don't go to fancy places. Try going out once per month. Over the year you save $5200.

Gas + bus pass. A bit confused on this one. Do you both have bus passes? Or just one of you? Could you both have bus passes? Where are you driving to? Can you reduce the gas costs by taking transit? You're spending about $4800 a year on transportation ... try to curb that.

Misc $300. Not sure what goes into this pot - but it looks like $3600 a year that is undefined. Define what goes into this bucket and reduce where possible.

$100 on clothes. Really? Perhaps my wardrobe is pretty full - I think I spend about $300 a year on clothes, at most.

$100 fun. I get this one, but I also think you can reduce this number. There are LOTS of way to have fun that don't cost much money. Google: frugal fun (city you live in). 

I think that if you are truly concerned about the debt you will re-evaluate your lifestyle. There is a lot of opportunity for you to reduce your monthly spending IMO.


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## the-royal-mail

I personally feel $200 a month (or even much less) to spend on cell phones is a huge waste for the convenience these luxury devices offer. That's $2400 a year, half your TFSA allocation!

Better to invest and save your money than to give it to telco's - but that's just me. I think cell phones are a waste of money. Why not simply wait until you get home to place your calls? And if you're late, you're late. Just tell people who may be expecting you that you might be late.

Just my opinion. Flame away.


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## K-133

the-royal-mail said:


> I personally feel $200 a month (or even much less) to spend on cell phones is a huge waste for the convenience these luxury devices offer. That's $2400 a year, half your TFSA allocation!
> 
> Better to invest and save your money than to give it to telco's - but that's just me. I think cell phones are a waste of money. Why not simply wait until you get home to place your calls? And if you're late, you're late. Just tell people who may be expecting you that you might be late.
> 
> Just my opinion. Flame away.


I agree. With the discount carriers that are now out there, there's no need to paying over $80 if you want all the bells and whistles. Some unnamed carriers are currently even offering $40/m for unlimited everything. Granted, their coverage is limited, but for the urban dweller, this is irrelevant.

I didn't understand paying $200 plus back when it was all new, I certainly don't understand it now, with the options available.


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## copea

*Spending*

Hey Everybody, 

Great ideas to save some money; however I think that for where we live/age it is the norm. We currently live in Coquitlam BC (Greater Vancouver) and prices are quite high. Not to sure where other people live, if there is anybody in Vancouver, could you suggest of any ways to make things cheaper?!

Sustainable - Thanks for the opinions, I believe we do need to adjust our spending!!



> Food: While some may disagree, $100 per week for food for 2 people indicates, at least to me, that you're not looking for the best deals. ... That would free up $1300 a year to pay down debt.


We do shop at the cheapest place that we can find; however, with our lack of time (full time school/work) we only go to one or two places and have tried to cut back as my wife and I both work and are home late each night.




> Gas + bus pass. A bit confused on this one. Do you both have bus passes? Or just one of you? Could you both have bus passes? Where are you driving to? Can you reduce the gas costs by taking transit? You're spending about $4800 a year on transportation ... try to curb that. QUOTE]
> 
> This budget item is pretty set I believe. I have averaged it out over the past year. I have to commute to work by car, as it is a 45 minute drive and no busses. My wife commutes by bus to work each month. We do travel to Vancouver Island quite a bit 10x per year which increases this amount.
> 
> 
> 
> 
> 
> Misc $300. Not sure what goes into this pot - but it looks like $3600 a year that is undefined. Define what goes into this bucket and reduce where possible.
> 
> 
> 
> This item is for all the stuff that we do not have an area for. Misc gifts, personal affects. It fluctuates depending on what we need that month. Not to sure if anybody has any better categories to put them into?
> 
> 
> 
> 
> 
> $100 fun. I get this one, but I also think you can reduce this number. There are LOTS of way to have fun that don't cost much money. Google: frugal fun (city you live in).
> 
> Click to expand...
> 
> Living in the Vancouver area there are lots of free things to do, and we have been pretty cheap here. My wife has been complaining so I upped it to this amount. So we will have to see!
> 
> 
> Cell phones; We both have cell phones for work/school. No home phone as it would add another 50 bucks a month (lots of long distance). Both in contracts so no room to adjust.. unfortunately I think that this one cant be changed! Will be looking into the new carriers soon - wind etc.
> 
> 
> As for selling the rental property – I don’t think that it would be worth it, as we would lose more money on selling it (with fees etc) I think that in the long run it will be a good asset to have, considering we would need a much larger down payment to purchase a rental property today compared to last march.
> 
> 
> What categories does everybody use to arrange their purchases? As our misc area just gets all of the leftovers that I cant figure out where to put. I understand we need to adjust our lifestyle to pay our debts, so there have been some great ideas! Thanks everybody.
Click to expand...


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## Sustainable PF

Check out these budget spreadsheets: http://www.vertex42.com/ExcelTemplates/budgets.html

Find one that breaks things down to your liking and track your budget in the sheet of choice.

Too bad you have to drive to work, no reducing that fuel bill!

Don't forget my comments re: food out and clothes. This may pose a challenge if your wife is the primary driver on these items, but you can try to whittle them down some ...

Best of luck


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## osc

In my opinion, you have too much real-estate risk. You live in a Vancouver suburb and it's quite possible to see a huge real-estate correction in the next 1-5 years. If that happens, your apartments will have valuations in the $100k-$120k range. 
If I were you, I'd sell an apartment and pay all debt. Then I'd try to take advantage of the free money from government and/or employers (TFSA and/or RRSP and/or pension plans).
Also, I think you spend too much on food out, cell phones, clothes, misc and fun. All these could be cut and you'd save $10000/year. In future values this means $500-$1000/year. Postpone this spending for 10 years and you'll get it virtually for free afterward.


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## kcowan

osc said:


> Also, I think you spend too much on food out, cell phones, clothes, misc and fun. All these could be cut and you'd save $10000/year. In future values this means $500-$1000/year. Postpone this spending for 10 years and you'll get it virtually for free afterward.


I think the discipline of budgetting is more important than the line items. What gets measured, gets managed. Just look at the line items and ask yourselves if you can cut back and sustain a quality life.

My cousin in Chilliwack pays a lot in transportation and cell phone bills but more than makes up for that through lower mortgage payments. Its not for me but she seems to be OK with it because it makes her husband happy.


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## dogcom

I have never had any desire to live in Coquitlam because it rains like hell and you are slammed against a mountain by roads and traffic. I live in Richmond so you will have to be racist if you want to slam me.

To tell you the truth I can get to Bellingham Washington and buy very cheap stuff faster then I can do it driving to Coquitlam. Sorry to roast you man but it is the first time I can do this because everyone here is from Ontario.

Realistically sell the rental when you can make it work like the spring and pay down the debt. You have your own place and I think this is enough at this time.


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## kcowan

dogcom said:


> I live in Richmond so you will have to be racist if you want to slam me...


MIL lived in Richmond so I spent many hours driving there and back. It is a great place to live if you don't go downtown regularly. Chinese live in every Vancouver suburb now. Vancouver has become a genuine Pacific city that welcomes immigrants into any suburb.


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## osc

kcowan said:


> Chinese live in every Vancouver suburb now. Vancouver has become a genuine Pacific city that welcomes immigrants into any suburb.


Yes, it welcomes Chinese immigrants in Richmond, Burnaby and Vancouver and it welcomes Indian immigrants in Surrey. If you are not a member of these 2 ethnic groups, tough luck. 
If by "genuine Pacific city" you mean genuine Asian city, I agree. That would also explain why the real-estate prices are genuinely insane.


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## dogcom

Kcowan luckily I also work in Richmond. But I think it is a big problem getting to Vancouver from anywhere outside of Vancouver. I would like to live in Ladner but I don't think I can stand driving through the tunnel everyday.

Also I hate to say it but osc does have a point about the immigration problems. It is good for me that my house price goes up but it does leave most Canadians of all ethnic groups out if they hope to buy in Vancouver, Richmond and many other areas as it pushes the home prices up.


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## kcowan

osc said:


> Yes, it welcomes Chinese immigrants in Richmond, Burnaby and Vancouver and it welcomes Indian immigrants in Surrey. If you are not a member of these 2 ethnic groups, tough luck.
> If by "genuine Pacific city" you mean genuine Asian city, I agree. That would also explain why the real-estate prices are genuinely insane.


For many years, Persian immigrants have been welcome on the North Shore. It is only recently (two years) that they have had to compete with Asians for property purchases.


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## andrewf

What does 'Pacific city' mean? It sure sounds like a euphemism.


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## Taxsaver

andrewf said:


> What does 'Pacific city' mean? It sure sounds like a euphemism.


Sounds like the name of a bar.


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## osc

andrewf said:


> What does 'Pacific city' mean? It sure sounds like a euphemism.


"Pacific city" really means Asian-like city: very high density, skyrocketing housing prices, population is majority Asian. 
Seattle, San Francisco, Los Angeles, San Diego, Honolulu or Victoria don't fit this definition. Vancouver is the first real Asian city in America.


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## kcowan

Seoul and Tokyo are also Pacific cities and Sydney is not.


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## andrewf

San Fran and Sydney have real estate that is similarly insane as Vancouver. So is 'Pacific' code for east Asian? Yeesh. By that standard, Toronto is more 'Pacific' than Vancouver.


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## kcowan

andrewf said:


> What does 'Pacific city' mean? It sure sounds like a euphemism.





andrewf said:


> San Fran and Sydney have real estate that is similarly insane as Vancouver. So is 'Pacific' code for east Asian? Yeesh. By that standard, Toronto is more 'Pacific' than Vancouver.


No the definition is not about insane realty prices. It is about whether a Pacific resident can feel at home in any suburb of the city. Whereas there is great comfort, even ghetto-like familiarity, in the Asiancourt corridor of Toronto, it is still very uncomfortable in many suburbs.

That is no longer true in Vancouver.


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## osc

kcowan said:


> No the definition is not about insane realty prices. It is about whether a Pacific resident can feel at home in any suburb of the city. Whereas there is great comfort, even ghetto-like familiarity, in the Asiancourt corridor of Toronto, it is still very uncomfortable in many suburbs.
> 
> That is no longer true in Vancouver.


And by "Pacific resident", you mean someone from China or India, right?


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## sprocket1200

no, they mean someone from Hongcouver.

btw, I love M&M's.
increase your leverage boys and girls!!!

buy more real estate, you too can achieve this...
http://www.financialpost.com/person...irement+plans+sinking+into/3923619/story.html


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## kcowan

osc said:


> And by "Pacific resident", you mean someone from China or India, right?


It is about someone being comfortable living in the city like they would be in Tokyo or Hong Kong. It is not about where they are from...


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## andrewf

What do you mean by comfortable living in their city? Are the vast majority of people uncomfortable living in their cities?

It seems to me that you're saying Chinese residents are uncomfortable living in suburbs like Markham, Mississauga, etc. That's good for a belly laugh.


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## osc

andrewf said:


> What do you mean by comfortable living in their city? Are the vast majority of people uncomfortable living in their cities?
> 
> It seems to me that you're saying Chinese residents are uncomfortable living in suburbs like Markham, Mississauga, etc. That's good for a belly laugh.


I think he is saying that Chinese residents are comfortable only in suburbs with at least 80% Chinese population.


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## Four Pillars

For the record - I'm comfortable in some, perhaps even most parts of my city (T.O.).


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