# What would you do?



## FrugalCanuck (Jan 28, 2010)

Hey folks,

My girlfriend and I both have big question marks looming over our heads.

First, sorry. But its a long story. I guess I have two questions. Since this would be my first purchase of real estate I'd like to know if I missed anything in my assessment section of my story. The second I would enjoy hearing what you would do in this situation.

Current status of _We-Inc_:
She runs a successful small hotel out of her home (4 rooms) and we live on the first floor. It is not a big building so space is at a premium but we make it work because we both hate "stuff". This place is now mortgage free, the business takes on the payments of utilities and the bills. I am employed & take care food, all transportation, vacations and investments. i.e. we're very cash flow friendly. 

Our, or my only debt is my 10K left of a student loan...aggressively being paid off.

Situation: 
Her property is back to side of another property. Picture the letter L with her property being the lower horizontal piece and the other property being the larger vertical line.

My girlfriend dropped a hint a few months ago through a discussion that we would be interested in a property in the neighbourhood. Two days ago her neightbour came to our place two days ago and said it is not looking like they will rent thier place they are currently in (they bought another house close to the school they want for the kids) but someone else was interested in making an offer to purchase. Because she mentioned something a while ago, he was wondering that if that offer came in, if we would be interested to know what it is and if we wanted to match it. He would offer the house to us if we did.

The House: 
Gorgeous. I will spare you the details but it has everything you want in a recently renovated house. We took a tour yesterday to confirm. And obviously it's in a very ideal location.

Financing: 
While we're not 100% on what he may ask, We have secured a resonable sum from Family and our own savings. Enough that we're confident that we could purchase the house outright and workout payment details to the family member at little to no interest. We take this generosity very seriously and ofcourse would pay back every red cent.


Assessnet:
PROS:
the opportunity for this location, the extra space, the financing, possibility (after crunching the numbers) to rent it until we want to occupy it. Or rent out the current 1st floor of the hotel and live in the house. It has a backyard (we have a puppy), long-term investment (a lot of city plans projected for the area)
CONS: 
An extra set of expenses, double the maintenance, we don't *NEED* extra space at this time. More space just gets filled with more stuff. All the cash that is being spent on the house we could invest and grow our portfolio. 
RISK: 
Because of the way he approached us, and in self interest we're expencting his price to be above market value (though this can be mitigated somewhat since we're not financing with a bank) non-occupancy. Like any landlord we're on the hook for all expenses if no one is living there. possibly can't rent it and sell at a loss & end up in debt to our family member. 

Thanks to anyone who made it to the end!


----------



## Four Pillars (Apr 5, 2009)

Interesting story.

1) Don't pay above market for a property just because you can. You would be throwing money away.

2) Is the proximity that important? Sure, it's convenient but if you eventually buy a property that is 5 minutes walk away - isn't that just as good? 

3) Don't buy a property just because it is available. From the last part of your post, it kind of sounds like you are saying you don't really need this place. 

I would take some time to figure out what YOU want to do - stay in the hotel and save big $$? Buy something more private to live in etc.

Once you decide then make a move - not before. This property might be a good fit, but first you need to know what you are looking for.


----------



## FrugalCanuck (Jan 28, 2010)

Thanks 4P,

We're both not keen on a big price tag. And if it is too high we are prepared to walk away. I just wanted to point out because of the lack of interest in our payments the over all cost of purchasing the house even if higher could still be less then if you lumped in all the interst.

The proximity is important, especially to her. Since she works from home and we can keep a much closer eye on the place. 

And you're spot-on in your third comment. We don't need it. But we recognize the opportunity and want to consider more opinions that passing on it is the right thing or grabbing it early is the right thing to do.

We have been having nothing but discussions over the pass few days about this. So far, the one item thats winning is we want what's in the best interest of building long-term wealth.


----------



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

Yes, this is interesting. I'm hard pressed to find anything against your plan, so I'll default back to my usual concerns, bear with me if you've heard and have implemented them:

1. Do you have the 3 tiers of savings in place? See my older posts for my comments on this topic. They apply to most adults.

2. I'm a bit concerned with you involving family in something like this. I normally only ask family for cash during an emergency. How much money are they giving you?

3. How much is this house going to cost?


----------



## FrugalCanuck (Jan 28, 2010)

Thanks Royal,

I have them implemented but not too the level of comfort that I would like or where you set that bar to but here's a quickie.
3K in bank account
2K in TFSA(adding every month), 6K in Emerg fund-high interest savings.
5K in RRSP & currently enrolled in a DBP at work.

I agree about involving family. However, it was them who offerred to "be the bank"

We still do not know how much it will cost. We've calculated somewhere north of 300K but we won't consider 350K or higher.


----------



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

Fair enough.

With the sorts of expenses and value of property you own, IMO you need to significantly beef up those 3 tiers of savings, all of them. Personally, I would establish the following before I consider purchasing property:

$20K in TFSA ($10K for each of you for 2009 and 2010) - some TFSA's offer up to 2% - how much is your esavings? Right now you have $8K in this tier 2, so you need to save a minimum of $12K more for this.
If you have a DBP that is great and you may not necessarily need the RRSP. The trouble is we don't know that right now. So, I would consider beefing up the savings in your RRSP to another $20K. If in 10 years something happens to your job and you didn't save for your RRSP, you will have lost valuable growth time for your retirement money. That will be critical if you want to retire before the age of 65.

What I'm basically saying is you first need to fortify yourself with a SOLID savings barrier BEFORE buying a house.

After you've saved this money, THEN save to buy the house and pay for it on your own. There is NO rush (there will always be houses available) plus remember that just because family offers something, there is no obligation to take it. 

I realize I'm spoiling your party here but I really do feel strongly about this. And remember that the only beneficiary of you implementing this is you.


----------



## FrugalCanuck (Jan 28, 2010)

LOL! No party going on over here. I know housing can be emotional and it's the last thing we want to base our decisions on. 

The reasons it is much lower is because I learned some financial lessons the hard way after graduating college and since then I've paid off a large amount of debt over the past 5 years (10K in student and more recently a 20K car loan) 

Now, my savings is growing every two weeks. My target is pretty much the same as what you listed but I stopped contributing to my RRSP as my priority was to get the other accounts up to par. 

My gf and I have been talking more and more throughout today as well. And another thing that keeps popping up is NEED. If we get it we need this, or need that. And it's all stuff we don't need now. Seems like a real budget drainer.


----------



## Cal (Jun 17, 2009)

My concern would be whether or not the 'other' offer is legite. It is pretty easy to get a co-worker or friend to write up a bogus offer, with some sort of easy out. Believe me. Do your homework, you should already know what the house is worth before you are shown the offer.

Second...will you be using a RE agent? If not, sometimes when you buy privately no agent, you can reduce the price by 4.5%. As that is the fee that the agent would have taken/split with buying agent, and the seller would have lost in equity anyways. Again, been there before too.

Third, you potentially could be buying at the top of the market, depending upon who you listen to. Yeah, you will eventually come out ahead if you buy at the top, but who wants to wait 20 years to be up in equity.

Fourth, more home = more work. Sometimes it is tough to keep up with all of the stuff, other times, it is like everything is on cruise control.

Fifth, on the other hand, if it is your dream home....


----------



## GeniusBoy27 (Jun 11, 2010)

I would figure out what fair market value is, and see if I would be willing to buy the property. Is it a deal or not, and can I afford it?

I think if your offer with your family is good, then the typical considerations of building wealth, down-payments, etc., may not apply to this circumstance.

I would do my homework, and see what fair market value is. What am I willing to pay etc ... and take it from there.


----------



## Four Pillars (Apr 5, 2009)

FrugalCanuck said:


> Thanks 4P,
> 
> We're both not keen on a big price tag. And if it is too high we are prepared to walk away. I just wanted to point out because of the lack of interest in our payments the over all cost of purchasing the house even if higher could still be less then if you lumped in all the interst.
> 
> ...


I should have probably said need/want rather than just need. Of course you don't "need" it. 

It almost sounds like you aren't 100% sure if you want it - yes, it might be perfect, but is it worth the extra money etc?

I imagine the house would help with long term wealth, but of course you have to think of short term cash flow, risk, stress etc. You haven't mentioned income numbers but it sounds like you guys can afford it.

This could be one of those decisions where both options are good, but in different ways.

Let us know what you decide!


----------



## FrugalCanuck (Jan 28, 2010)

We had another discussion last night and figured this kind of investment, and this point in our lives is not for us. Maybe 3-4 years from now it would be ideal but now it is not.

We enjoy our lifestyle as it is and the flexibility it provides. It is still a good opportunity for us but there will be more in the future.

Thanks to everyone for all the advice. While it's great to consult with ourselves and Family, outside opinions from people who are passionate about finance and wealth are welcome words to our ears!


----------



## MoneyGal (Apr 24, 2009)

Hey FC, just chiming in (now that your decision is made!) to say it was really a pleasure to read this thread, with you and your spouse thoughtfully considering a large purchase and really contemplating how it fits (or not) with your lifestyle and goals. 

I've been feeling frustrated lately at some of the financial mishaps some of my peers and acquaintances seem to be up against in life. It was great to get some exposure to your decision-making process via this thread. And I'm secretly thrilled (well, not so secretly any more) at the decision you ended up with. Way to go!


----------



## kcowan (Jul 1, 2010)

The other aspect is to try and imagine what life will be like in 20 years. My friend has a B&B with attached empty lot. He is trapped into this lifestyle even though it was fun 20 years ago. He cannot sell the combined property for what he thinks its worth.


----------



## Berubeland (Sep 6, 2009)

I have one thing to add...

In a situation like this where a bogus offer might be presented and it sounds kind of fishy because why would the seller even offer this? He has an offer but wants you to match? 

You'll want to get an appraiser to determine the value of the property for you. Not a real estate agent but a honest to god appraiser. The cost is minimal, the results are shared only with you for about $300. 

in your situation, where you are perfectly happy where you are but might want to buy an investment property, it has to pay you... even if you don't have to pay interest on the loan, the property should pay you as though you were getting a conventional mortgage. This is your edge to make money in the real estate game don't give the money away! 

Just like appreciation is the icing on the cake of real estate by buying to speculate and paying more than the property is worth as an investment, you are giving your icing away! Keep your icing on your cake!


----------

