# What would you do - financial advice please



## thebomb (Feb 3, 2012)

Hi all, I have a scenario I am struggling with and have come here to try and see if I can get some thoughts on WWYD (what would you do). 

I have a rental property that I rent out to university students. 12 month contract 1 year leases. Never empty 

Property Value 360,000
Mortgage 228,000
Years remaining 21
Current rate 5.75 5 year fixed (ouch) 
ING rate hold 3.34 5 year fixed (if locked in by June 8th- so 3.5 mos earlier than the renewal date)
Mortgage renewal Sept 21, 2012
Current income 2150 mos. 
Current mortgage payments 720 bi-wkly
QUOTED mortgage from ING based on a 240,000 mortgage 609 bi-wkly

So here is the situation. The house is 100 years old, good solid brick home. Fortunately (and unfortunatly) it has not been a student rental forever so it significant period pieces still stain glass, solid wood trim and doors etc. Since I bought it I finished the basement - to add a bedroom and bathroom- and also redid the upstairs bathroom. 

It desperaly needs a new furnace, it is currently oil and even though the students pay the utilities the cost is ridiculous. It also does not have central air. In addition the windows and kitchen are original (and terrible). 

My plan (as you can see from the amount I had ING quote me) I am considering increasing the mortgage by 12k to get the furnace/central air, windows and kitchen done. PARTS only for all three as we are able to replace all 3 on our own (for those about to say it is not possible- it is- I already did the homework on the costs) 

From a personal perspective, I also plan on having kids in the next year and as the female and main breadwinner I will be down in income and relying on EI and savings for about 8-10 mos ( I am not planning on taking the whole year). So the next 5 years of my life will see child care costs and possibly 2 children. 

So what would you do? The thought of addiing to debt to do reno's is really killing me as I try to be debt averse and I feel like the millions of others that have tapped equity to do home repairs and I hate to be one of them. On the other hand, I can get the stuff done, have lower payments while I am at it, at a time when I will need to extra breathing room and of course I claim the mortgage interest on my taxes. 

I am interested in your thoughts. And yes, yes...I undertand about emergencies funds and all that stuff, so that wont help as an answer in this situation. If you need more info please ask. 

Thanks in advance


----------



## crazyjackcsa (Aug 8, 2010)

I'd look at what you really need done: Furnace. The others are nice to have things that don't need to be done in a rental, much less a student rental. If the windows don't leak water, and the kitchen is serviceable, leave them until they fail.

Truth be told, I'd do the same for the furnace. Has it stopped working, or is it just inefficient? I live in an old house about the same age you are describing. The lack of insulation in old homes is a bigger issue than the furnace's efficiency.

So, I'd pay for the furnace out of cash, and forget the rest. Since you're looking at needing money for the next 5 years, you could lower the payments to $580 bi-monthly just by refusing to add to the mortgage.


----------



## Jungle (Feb 17, 2010)

Also most major banks allow you to do an early mortgage renewal instead of waiting until Sept, you can use the posted special rates they have. Might be worth saving money over the next 5 months instead of waiting. 

I did this with our rental, rate was 5.5 went to 2.79, etended amortization and opened up a lot more cash flow. The extra interest cost will be tax deductible.


----------



## Spidey (May 11, 2009)

If you change the furnace from oil to natural gas the payoff period is surprisingly short. I know that my mother recently made the switch and, with the currently low natural gas prices, her heating bills are almost cut in half. 

From the personal perspective, you will have to decide if you can handle the stress of renos and other related issues at the same time you are starting a young family. Sometimes I think a valid alternative, would be to invest a similar amount in REITs rather than individual rental properties. In reality however, very few people would take a mortgage (and perhaps banks would be reluctant to lend such amounts) to invest the equivalent amount in a basket of REITs but it would have been a good strategy if one had done it a couple of years ago. (Not meant in any way to be critical, just wondering out loud - your property sounds like a very good long-term investment.)


----------



## the-royal-mail (Dec 11, 2009)

I think you are trying to do too much at the same time. Emergency funds aside, I have always been of the opinion that we should be saving up for the things we want. In this case you want to renovate and have kids. So since you asked, my advice would be to save the money FIRST for these things.

Otherwise, you will be adding to your debtload *and* trying to do renos while pregnant *and* while your income is on EI?

The problem as I see it is wanting to do too much, too quickly.

So plan it out say over the coming 5 years:

1. save the money
2. renovate
3. save the money
4. have kids
5. go back to work

My napkin calculations say that's about 5 years' worth of projects there.


----------



## slacker (Mar 8, 2010)

You have not justified WHY those renovations are required to run your rental business. Is it impacting the rentability? Will the renovation allow you to charge more rent? etc.

Borrowing to invest is quite fine. Borrowing to buy consumer items, well that's just not smart.


----------



## thebomb (Feb 3, 2012)

slacker said:


> You have not justified WHY those renovations are required to run your rental business. Is it impacting the rentability? Will the renovation allow you to charge more rent? etc.
> 
> Borrowing to invest is quite fine. Borrowing to buy consumer items, well that's just not smart.


I knew someone would ask/state this and I wasnt sure how I would respond, other than to say sometimes things are just needed. The kitchen is brutal/ like I mean hand crafted drawers added on , counter falling apart, etc......The windows are single pane with the air from outside running right through them. As for the furnace, its oil. I have actually had my last tenants (again- this is a student rental) use space heaters because the cost of oil was too much for them to heat the whole house, so they only kept their rooms warm. Believe it or not I actually do not want to be a slumlord. In addition, when you have a crap house as a student rental, they trash it. If you have a nice house, they keep it nice. I would also argue if a furnace/kitchen and windows are 'consumer items'...and yes, I can also charge more rent. Not significantly more, but more.


----------



## Four Pillars (Apr 5, 2009)

thebomb said:


> And yes, yes...I understand about emergencies funds and all that stuff, so that wont help as an answer in this situation.


If you think this kind of disclosure will spare you from the tieranny (mis-spelling/pun intended) of a certain emergency fund fanatic, you are sadly mistaken. ;P


----------



## thebomb (Feb 3, 2012)

I thought I could atleast try Four Pillars ....


----------



## the-royal-mail (Dec 11, 2009)

Nice to see the trolling continues by some.

Borrowing to invest is NOT "quite fine" and and renovations on a house with crappy windows are NOT "consumer items".

My comments stand.


----------



## mind_business (Sep 24, 2011)

I would take care of the furnace only, as it seems to be more of a necessary expense. A/C is just a nice-to-have, however most of the students will be renting in the winter months when they don't need A/C. They'll make due. Throw some paint on the cupboards to spruce them up, but don't waste too much money on a student rental place ... especially since they will likely see some serious abuse from students. 

For these types of decisions, you really should develop a priority list, and a payback period analysis.

Btw, I agree with TRM. You're planning to make a big change to your life in the near term. This will add lots of joy, but also stress to your life. There's nothing like having money in the bank as an emergency fund to help reduce some of that stress.


----------



## Spidey (May 11, 2009)

mind_business said:


> I would take care of the furnace only, as it seems to be more of a necessary expense. A/C is just a nice-to-have, however most of the students will be renting in the winter months when they don't need A/C. They'll make due. Throw some paint on the cupboards to spruce them up, but don't waste too much money on a student rental place ... especially since they will likely see some serious abuse from students.
> 
> For these types of decisions, you really should develop a priority list, and a payback period analysis.
> 
> Btw, I agree with TRM. You're planning to make a big change to your life in the near term. This will add lots of joy, but also stress to your life. There's nothing like having money in the bank as an emergency fund to help reduce some of that stress.


:encouragement: Good points. There's no need to do everything at once. The furnace would be a good place to start, and then the OP can see if the financial situation allows further improvements in subsequent years.


----------



## Cal (Jun 17, 2009)

I too would only do the furnace. Central air for a bunch of students does sound a little too much.

You are cash flow positive....so why can't some of that money be put back into the property for the furnace. Do you have another job too, or is this your only source of income?

I did snicker a bit when you typed 'ouch' in regards to the mortgage rate. Statistically anything under 6% is pretty good. We have been in a low rate environment for so long, we are getting spoiled, you are doing the right thing by locking in for a longer duration.


----------



## donald (Apr 18, 2011)

It sounds like your rental is very close to needing a lot of revamping-windows,kitchen,furnace ect ect(and you don't want to be a ''slumlord"The market is still hot and it is close to the peak?(esp if you live in t.o or van)Why not sell?depending on when you bought it of course,you should have a healthy profit.Sounds like you want to simplify and you are starting family ect.Could do that and than map out another plan going foward in your life-Sounds like your hinting you don't really want the rental anymore-so selling might be the answer.


----------



## slacker (Mar 8, 2010)

My bad, I didn't phrase it quite right.

This is what I meant to say, but failed in my original post:

1. Borrowing to invest is quite normal. In fact, you're already doing exactly that with your mortgage rental property.

2. I meant to say, borrowing to purchase consumer items like big screen TV or vacation, is not smart.

On whether replacing a furnace and windows are consumer items, sounds like you already decided it's a necessity. Just make sure it's not one of those "I want a granite counter top because it's a good investment" cases. (I'm sure it's not)


----------



## marina628 (Dec 14, 2010)

Assuming you have the proper licenses to convert oil to gas and have factored in the cost to have the oil tank removed .Environment Canada and your insurance will need proof it was done correctly by licensed professionals.My husband worked in this business for many years and holds many licenses and has seen many situations where people try to remove oil tanks without knowing what they are doing.Best story was when homeowner was in process of disconnecting the tank to remove himself,oil truck came and filled up his tank and it all went into the basement.That was almost a 2 million dollar situation!


----------



## thebomb (Feb 3, 2012)

Interesting comments, thank you. To clarify a couple of things. No I do not want to sell and yes- aside from this rental income I have a full time job with a healthy salary + bonus. 

Maybe I should pose the question a little differently. 

If you had the cash in your bank account or you could put it on the mortgage at renewal time (as per my original post) would you drain some of you savings at a time when you are thinking about starting a family (give or take a year down the road) or would you put it on the mortgage at a lower interest rate, still earn monthly income on the rental and claim the interest on the mortgage.....maybe that is a better question to be asking.


----------



## Four Pillars (Apr 5, 2009)

thebomb said:


> I thought I could at least try Four Pillars ....


Haha - some things in life are inevitable.

This thread has brought up a lot of interesting topics - most of which you weren't asking advice about. 

To answer your last question (assuming I understand it correctly), I would add the reno cost to the rental mortgage.

With respect to your concern about being like other people who borrow to do renos - You can't compare borrowing to do renos on an investment property with doing renos on your personal house. You have a $400k business that needs some capital infusion. As the chief shareholder, you have to provide that capital and it only makes sense to borrow it. Rental houses are all about leverage and if you have to borrow a bit more, then borrow a bit more (within reason). There is no reason that capital improvements to a rental house have to affect your lifestyle. Ie you shouldn't have to end your mat leave early or cut back on things because you are doing these improvements to your rental place.

And even though this isn't what you asked - I too tend to think that maybe the furnace should be prioritized over the other items you mentioned. Will things like a better kitchen/windows really raise the amount of rent you can get? It's been a while since I've been in school, but back then - most students wanted crappy places because they were cheap. If you improved them and raised the rent - they would go elsewhere.

One more thing about the heating - do you know what the insulation situation is in the house? If the attic insulation is old or non-existent - that could be a fairly reasonable cost improvement that would help the heating bills regardless of the furnace type. I know you can get walls insulated, although I have no idea of the costs.


----------



## Assetologist (Apr 19, 2009)

Why would anyone pay full retail price (ie. dollar for dollar) for 'emergency funds'?!

This most likely one are of investing where it is prudent to use leverage.

Businesses use LOCs to balance the ups and downs of cash flow and we should treat our personal finances as businesses.

Sitting on cash or cash equivalents whilst waiting for investment opportunities makes sense but sitting on cash as insurance makes no sense to me unless one has so much free cash that a chicken little fund can easily be segregated it is nonsense!


----------



## Young&Ambitious (Aug 11, 2010)

I'm going to be mostly against the grain here and say do the furnace, kitchen and windows. These will all need to be done at some point and if I were you, I'd rather get it out of the way _before _kids come into the picture. Based on your budget I'm assuming the kitchen will offer all the bare essential functions without being expensive so that sounds great. 

Four Pillar's post on leveraging I second.


----------



## donald (Apr 18, 2011)

None of my business!just shooting from the peanut gallery!Why would'nt you want to sell?from a logical and life perspective it would seem like a attractive option imo.Your at a stage in the rental(condition of the place)high capital costs on what you need to do(windows,kitchen,furnance-100 yr old house)and life(starting family,busy career)You have a healthy profit locked in it seems(plus 100k after real estate fees ect if you sell?or close to it)Top of the housing market....Take the profit and run lol(Top up all investments rrsp/tfsa and maybe keep some for a resp with the proceeds or a non reg acct-and keep your money you have now)Only reason i say this is your plate is going to full once you have a family-Buy rio-can and watch the monthly payments come in if you want re exposure or buy a etf-No headaches!(except a correction from time to time on share price)sit back and collect divs!re-invest...way easier?)


----------



## thebomb (Feb 3, 2012)

donald said:


> None of my business!just shooting from the peanut gallery!Why would'nt you want to sell?from a logical and life perspective it would seem like a attractive option imo.Your at a stage in the rental(condition of the place)high capital costs on what you need to do(windows,kitchen,furnance-100 yr old house)and life(starting family,busy career)You have a healthy profit locked in it seems(plus 100k after real estate fees ect if you sell?or close to it)Top of the housing market....Take the profit and run lol(Top up all investments rrsp/tfsa and maybe keep some for a resp with the proceeds or a non reg acct-and keep your money you have now)Only reason i say this is your plate is going to full once you have a family-Buy rio-can and watch the monthly payments come in if you want re exposure or buy a etf-No headaches!(except a correction from time to time on share price)sit back and collect divs!re-invest...way easier?)


I understand your thought pattern, and fully recognize this is a finacial forum. So perhaps what I am going to say next may make some snicker. I 'understand' real estate best, better than dividens, stocks etc, etc. I have the resources to do the repairs myself, eventually I would think every rental gets to a place where it needs an infusion of cash- we just happen to be there now. I suppose the other way I look at it is like this....I buy the house, someone pays for it. I cash in (capital gains aside) when I am 55. My preferred age of retirement. Even if the market tanks in the next couple of years, I have 21 yrs to make it up. I quite frankly do not find being a landlord all that difficult. Sure it takes some of my time, but I hardly expect it to be no work, otherwise everyone would be doing it. Lets assume even 350,000 after 25 years, with an outlay over 25 years of 50k for repairs less capital gains tax. Not a bad gig is it? I dont know, to me I grew up with my parents (European hard working parents) buy a few properties and act as landlords. They are doing pretty good now.... So perhaps its what you know or grow up with. Let someone else pay the mortgage and fund my retirement.


----------



## donald (Apr 18, 2011)

I hear ya bomb.Soild plan you have.Bonus you have landloarding running in the fam!


----------



## Young&Ambitious (Aug 11, 2010)

Well I am curious, have you decided what you will be doing?


----------



## Just a Guy (Mar 27, 2012)

For me, I'd look into borrowing the money I needed for renovations and keeping my cash for me.

As long as the property cash flows, and I'd say you are close to a break even point in a "normal" situation (i.e. when interest rates return to normal), if not a bit underwater. But, if you lock in for 5 years or so, maybe longer, you should be fine and you know you'll be cash flow positive for that period.

I don't depend on my real estate for day to day living, so if they break even on paper, I don't need to pay the government extra while someone else pays down the loan. They'd just waste it if I did anyway.

I wouldn't use your own cash, because there is no benefit to it. If you borrow it, the interest is a write off, the place improves in value (making the loan more secure), you charge more rent, and someone else pays for it. If things go wrong, you still have your cash to pay it down or cover a shortfall.

Save your cash for things you can't write off.


----------



## kcowan (Jul 1, 2010)

I think you are taking a responsible approach. You will get some returns on the gas furnace and lots of satisfaction from the windows and kitchen (as well as some savings). Go for it with that new mortgage. Don't try to do market timing. Make sure to seal the oil filler tube. And get the approvals for insurance purposes.

(We had a neighbour who removed the tank and filler tube but left a vent pipe which the oil company proceeded to fill up! It was in the country and the oil flooded the space under floor for water sump overflow. It took 3 years to get rid of the smell! The house sat empty for 3 years, then sold at a discount.)


----------



## marina628 (Dec 14, 2010)

I would definitely go through proper channel to remove the oil tank, it is on record as being there one day when you want to sell you may be asked to show it was properly removed.Also the fines are HUGE if something goes wrong.


----------



## thebomb (Feb 3, 2012)

Young&Ambitious said:


> Well I am curious, have you decided what you will be doing?


Yup- gonna put it on the mortgage. I just haggled some more and now have my mortgage quote down from 3.34 to 3.19. Doing all 3. Furnace/windows/kitchen. Thanks for the responses


----------



## jet powder (May 29, 2012)

Best of luck with the investment I hope it works out but I kinda think you should sell.I know you said you didnt want to sell but when you bought the property what did your method tell you when to sell. (The reason I buy an ETF is to sell, The reason I buy a GIC is to collect interest, I never had the guts to buy a rental for income))

Usually the time to sell is when you dont want to sell. No one wants to sell @ or near the top of a historic high , everyone wants out @ the bottom. There is a reason some of the best traders & investors dont take comfort when buying or selling like the average investor does but feel sheer panic when buying or selling because they are going against what feels natural but they will go against thier feelings & base the decision on what thier method tells them. 

If you already own a house & have to borrow for more real estate. Is the clasic case of the investor on margin @ a market high ?

Education is in a bubble when it bursts are you going to find renters ? Be


----------



## thebomb (Feb 3, 2012)

jet powder- I was surprised to see my thread on the main page again, your comments however made me have to answer. According to the entire world everything is in a bubble....we are all just waiting to spontaneously imploud....

McMaster University as far as I know is not going anywhere and when I bought I knew that I was buying to provide a source of income for my retirement, and I dont really get your comments on classic case of investor on margin @ a market high, maybe its just the lingo, but not sure what you are getting at.


----------



## Mall Guy (Sep 14, 2011)

Interesting discussion, classic MBA class discussion on the perfect capital structure on a micro scale, every company goes through this every day of the year . . . my vote no furnace without windows . . . and has the wiring been done . . . space heaters on knob and tube . . . ouch !


----------

