# Please Help - I need a plan!!



## OmzT (Jun 1, 2012)

Thanks in advance for all the excellent advice I am sure to receive!!! Your time and effort is greatly appreciated!!

I have read for hours upon hours on this forum in the last week and have learned a lot. I also have a keen interest in investing which goes beyond the pursuit of money itself. I have read many financial books for leisure (most of them regarding the psychological aspect of investing).
I have been in and out of real estate since 2005 when i bought my: first fixer-upper (some huge ups and downs but thankfully i have just recovered from the huge loss during the bust a few years ago). I currently have no desire to be in the residential or multi-family real estate market. I am only interested in the commercial real estate market. I dabbled in stocks around 5 years ago and lost a lot of money ouch!! mid to high 5 figures.

I am 27 years old. 
Married with 2 children. Wife is stay at home mom with no intentions of rejoining the workforce
1st child will be starting kindergarden this fall.


I have a had a rocky last few years, but lets skip that part and get to the important part...where I am now.

RRSP: zip zero
TFA: nada
Savings: zilch

Renting:
$1650/month + utilities/bills 

No plans on buying a home till i have the the full purchase price in cash and can write a cheque!!

This is the part where i will receive CMF's wrath:

2 vehicles

Vehicle #1:
Bought New for ~39,000 in fall of 2010 
financed at 0% for 3 yrs. no downpayment
~$1100/month

Vehicle #2:
Bought New for ~50,000 in fall of 2011
leased at 0% for 4 years, no downpayment
residual value around $21,000 which i plan to pay in cash when due
payment is ~615/month

Monthly Expenses are pretty heavy as i dont really hold back on the family :0
Ive just signed up for Mint.com and im running around $7000/month spending including everything.




Now to the interesting part...

I have basically been raising a family for the last 5-6 years on no income at all except whatever i could make flipping houses on the side. and have just started making a salary for the last 2 years at around $4/month after tax. (we've been spending more than i make every month)

I will start work this summer and have many job offers. None of these are salaried and i can run as much as i want through a PC of course.


I basically have a 1.1 mil commercial property with no equity in it 
which makes 90,000$ net before payments/taxes
My options are staying close to home and making about:
~$300,000/year net to the corp/personal income before taxes
I can make more if I work harder.


I have no idea where to start or what to do.

This all stemmed from being approached by a private banker who offered to arrange plan all my finances and invest my future money for a fee of course!

I have an excellent Accountant who i just started seeing a few months ago and after reading this forum heavily i have a long list of questions for him.

Im also thinking about hiring a hourly fee-based financial planner to do a comprehensive short-medium term financial plan.

Please feel free to advise, critisize and scold!!! but please make it constructive as i am born again as far as finances are concerned!!! and wanna start this all off the right way.

an easy exit would be just working like a dog for a year or two and just paying everything off and holding the commercial property free and clear. but i want to do it the most efficient and effective way and make this a learning experience that will help me develop good habits that will continue for the rest of my life.

Thanks in Advance


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## 0xCC (Jan 5, 2012)

I think some minor clarifications are probably required before any meaningful advice is given.

Are you still in Alberta?

What was the initial reasoning behind the commercial property? Was it intended as a long-term asset or something that you were looking to flip? If you were looking to flip it what were your initial return expectations vs. where it is right now.

All of the loan stuff is a little bit hard to decipher but it looks like if we take away the student loans and the one small loan your total loans add up to 1.0175M (that includes the $520k mortgage as a separate loan from the list of personal loans but it isn't totally clear to me that they are actually separate). If those loans are all against the commercial property and that property is valued at $1.1M after commissions it doesn't look like you have any equity in that property.

Do you really need both of those cars? They are costing you about 20%-25% of your monthly spend just in payments not to mention gas, insurance and maintenance.

I have more questions but I a little short on time right now and the answers to those questions should provide some fodder for others. I guess the last set of really important questions are about where you want to end up and how long do you want to take to get there? Do you want to do stay with the real estate stuff? Do you want to buy a house for you and your family to live in (edit: sorry, you answered that but are you really prepared to wait until your kids are in high school before buying a house with cash)? Do you want to set up a medical practice? Do you just want to do locums and stuff like that instead of having your own practice? Do you have any thoughts on how long you would like to work?


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## 44545 (Feb 14, 2012)

This may not be what you want to hear but you asked, so here goes.

Investing is what you do after you have cash flow issues worked out. My opinion: a "plan" isn't your biggest priority. Changing your attitude toward money is.

I won't berate you for the cars. I will tell you to get rid of them and buy reliable beaters. Two $15,000, late model used cars paid for with cash makes way more sense than two cars averaging $44,500 each.

Boil it down for us: What's your net, take home pay, NOW? ACTUAL, not "could make." 

Ditch the idea of what you "could make if you work like a dog." If you go that route, it could also end in divorce when your spouse never sees you because you're at the office all the time. Then, you'll be coming here with a lot more serious problems and fewer resources to fix them with.

Scale back your lifestyle, pay off the debt, _then_ think about the investing side.


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## Helianthus (Oct 19, 2010)

Plan? This...



CJOttawa said:


> Scale back your lifestyle, pay off the debt, _then_ think about the investing side.


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## Four Pillars (Apr 5, 2009)

I'm not sure if you really need a financial planner at the moment. Once you start working as a physician, you should be able start paying off your debts. How fast you want to pay them off is up to you, but certainly paying off all the personal loans should be a priority.

Considering your earning potential, you are not in bad shape at all. I think the key is to make sure that you start spending a lot less than you earn, once the big dollars start rolling in.


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## Sampson (Apr 3, 2009)

How did you amass the wealth to buy a million dollar property, while going to med school?

Do that!

Don't dabble into areas you are not comfortable or familiar (additional real estate, or stocks). And as F_P suggests, pay off your debt using your high income.


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## 0xCC (Jan 5, 2012)

Sampson said:


> How did you amass the wealth to buy a million dollar property, while going to med school?


It doesn't appear as though he did. I suspect that the "complicated partnership structure" is what allowed the purchase of that property and the left-over "personal loan" with a 0% interest rate payable "whenever" and the 8% personal loan also payable "whenever" are the leftovers from that. Seems like maybe (and this is probably being a little bit harsh) these are loans from the bank of Mom & Dad that may have been used to get out of the partnership structure or were part of the original partnership structure.


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## OhGreatGuru (May 24, 2009)

This is kind of above my paygrade. But I think you have to decide if you want to be a doctor or a real estate developer. 

For your family's sake I hope you are well-insured, because your whole financial position seems to depend on your future earnings potential.

My advice: Sell the property and pay off your debts; focus on establishing your medical practice for a few years; get a grip on your household expenses; start saving; and if you have money left over buy REITs if you really want to keep dabbling in commercial real estate.

PS: The fee-based financial planner to help you prepare a comprehensive plan is a good idea. I would stay away from making any commitments to a private banker or other money manager until you have at least come up with a plan and have some idea how much spare change you are willing to turn over to someone else's control.


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## Charlie (May 20, 2011)

I think you're in pretty decent shape as a new physician with a family. The asset that's missing from your 'net worth' is your education. And the $300K a year it will help you earn.

To flow your numbers another way.....you have $500K of 'personal' debt and $240K of student debt. And $580K equity in the building. Your 'negative net worth' is student debt. The good kind.

I'd keep the cars too. You wont get much for them, and they're not that bad if you keep them a while. Resist the doctor temptation of trading up though.

I would stay away from the 'private banker' or anyone else who wants to sell you product. 

I would:

1) put yourself on a strict, monitored budget for a while. The $7K including rent and cars is probably fine. Just don't up it without planning to do so. It will be very easy to up your lifestyle once you start hanging with other doctors.
2)get life and disability insurance. Check with your professional bodies as they sometimes have the best rates. Keep it simple. Stay away from UL unless you understand it and want it.
3) review your debt with your accountant. It may be possible to pay some off with corporate earnings from your practice -- depending on how it's been structured and who owes what to whom. Its important to separate your business/building/student and personal debt.
4) plan for the due dates of your debt. Some are very soon. Make sure they can be renewed, and plan for that now.
5) decide if you want to own the building. It may be a good investment if you do....or possibly not worth the hassle. Just know what you're doing. Seems it's generating about $30K/yr -- before all the extra debt payments. Is this where you want your investment to be?

If you earn $300K/yr as a proprietor, you'll pay about $130K in tax. With $84K for living, that leaves $86K/yr principal repayment, plus the excess $30K from the building. Could be much less through a corp -- or possibly not (depends on where the debt is). Your accountant can crunch the numbers. If you are on a personal debt repayment quest and looking to save for a home it may not make sense to even incorporate. Again -- let you accountant crunch. But either way...worse case you're still doing well with about $100K of debt repayment each yr (with owning the building) or $86K if you sell (and wipe out $500K of your current debt). 

Congrats and good luck.

And the most important bit: Be sweet to your spouse. Nothing messes up a doctor's financial plan more than marital strife. Plus it's more fun.


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## CadMan (Apr 16, 2010)

Charlie said:


> And the most important bit: Be sweet to your spouse. Nothing messes up a doctor's financial plan more than marital strife. Plus it's more fun.


I love this, it made my day. I'm a lawyer, so can relate and might just have to change "doctor" to "lawyer" and put it up in my office.


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## londoncalling (Sep 17, 2011)

Charlie said:


> And the most important bit: Be sweet to your spouse. Nothing messes up a doctor's financial plan more than marital strife. Plus it's more fun.


Probably the best advice for anyone that wants to stay married of any profession.


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## Helianthus (Oct 19, 2010)

I'm curious as to how you plan to pay back the $287,500 that is due within the first 14 months or working (or $290,000 within the first 18 months of working). Even if you make that $300K/year estimate right out of the gate, you still have taxes, $7K/month in expenses, likely additional expenses related to starting up your practice, and come January 2013, you must start making principal payments on your Student LOC of $200,000 and your Alberta Student LOC of $41,000 (+ 6 months x 5.5% interest). If you are planning on doing it without any further assistance from the magic, interest free, no terms of repayment loan fairy, your only option will be to sell off the property, and selectively repay the mortgage and any debt that is due within the next 2 years.


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## marina628 (Dec 14, 2010)

May I suggest if you are flowing all income via the business that you pay your wife a small salary so she may also grow her retirement account.She will also be taxed at a lower rate than you. Another piece of advise don't contact the spammer ,there are many great people here who can help you with a debt repayment plan.You are fortunate to have great earning ability so the situation looks a bit desperate now but noting you cannot knock out in 5 years with some discipline.Have a look at your refinance options as your interest rate is very high ,I would be rolling that $100,000 @ 8% into the mortgage if possible as that rate sucks.
I have a feeling you bought the cars with little down and probably you would lose if you sell them now so probably have to deal with that now


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## OmzT (Jun 1, 2012)

*Thanks!*


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## OmzT (Jun 1, 2012)

Thanks Charlie

Just reread your post.
Everything you've said makes sense.
I'm meeting my accountant soon and I think after the debt allocation between personal/corp/student debt is clarified and the tax ramifications of each is clarified that will help with my debt restructuring plan.
In terms of the building I think its a good investment and something I'd like to keep. I think most of the stress at this point is not knowing the best approach to the debt and realistically how long it will take me to pay down. But after my meeting with the accountant this should be cleared up I hope.
With a plan of attack and a spending/savings plan I think I will feel much better about all of this.

Thanks for your input. Its very much appreciated.





Charlie said:


> I think you're in pretty decent shape as a new physician with a family. The asset that's missing from your 'net worth' is your education. And the $300K a year it will help you earn.
> 
> To flow your numbers another way.....you have $500K of 'personal' debt and $240K of student debt. And $580K equity in the building. Your 'negative net worth' is student debt. The good kind.
> 
> ...


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## 0xCC (Jan 5, 2012)

Ok, starting to get a slightly more clear picture now.

So inside the corp the building is held and so are the loans related to the building, correct? And this is the bulk of the debt. So to put some numbers on it we have:

4. Personal Loan: $110,000 @ 0% due whenever
5. Personal Loan: $170000 due in full march 2013
6. Personal Loan: $100,000 @ 8% due whenever (interest only payments)
7. Personal Loan: $117,500 @ 0% due in full Sept 1, 2013 or add $2500 to balance to make due Jan 1, 2014
= $497.5k + ~$520k on the 6.57% mortgage = that $1.0175M I calculated before.

You say that you will be able to generate $650k in revenue directly to the corporation. Is this before or after the $90k that the building itself generates? For now I will assume that it is after so that is your total revenue. Out of this you have your mortgage payments of 4800 and your interest only payments of around $670 for a total of $65650 which brings your remaining revenue down to around $585k.

Assuming that the majority of the mortgage payments are interest which you should be able to deduct as an expense you shouldn't be paying corporate income tax on that (your accountant can confirm the details of that) so you are probably left with paying corporate income tax on the remaining $585k. Assuming a 20% corporate tax rate (I'm sure AB is a little bit lower than that but it makes for a round number estimate) you have $468 left to play with. You want $84k for personal use but one way or another it is going to cost the corporation or you more than that to get it into your hands. I'll assume that you'll pay 30% to get that into your hands although you might be able to do it for cheaper than that in Alberta. That means that the $84k in your hands will require $120k out of the corporation so now you have retained earnings of $348k in the corporation.

So if you can do that $650k in revenue for around 3 years you should be able to knock the debts down to a very manageable level and then you can reduce the revenues as well.

I'd be interested to know if the above numbers are anywhere close to what your accountant comes up with.


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## OmzT (Jun 1, 2012)




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## 0xCC (Jan 5, 2012)

So there are two corps involved here, one for the medical income and one for the commercial property. That probably complicates things since getting income from the medical side of things to the real estate side of things will likely involve a tax hit. As OGG said this sort of stuff is above my pay grade but if there is any way to get some of that $650k revenue into the real estate corp in order to work on eliminating those debts (or get the debts out of the real estate corp and into the medical corp) that would probably be ideal. I'm sure your accountant can give you all the information you require to be able to get that stuff figured out.


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## OmzT (Jun 1, 2012)




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## Causalien (Apr 4, 2009)

I opt for selling the commercial RE. I've seen a lot of balance sheets and this one is pretty messed up.

The others have touched upon the necessary areas. So I'll pitch in on the asset allocation part.
As an investor there are things I don't do in your case. Budgeting on future income and any one assets weighting that is greater than 20% of net worth. Especially if they are on loaned money. 

At this scale you are experiencing compound interest from the negative side. With all the worries piled onto you and shared by no one else. The psychological impact is another negative compound interest that affects both personal and professional well being.


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## OmzT (Jun 1, 2012)

I hear you and I'd love to sell it and still considering it. The property is in a period of transition and I think it would be selling at a $150,000 discount because of this. I think I could sell it for $150,000 more when I get through this period but is that worth the next year of headaches?? Thats the question in struggling with


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## 0xCC (Jan 5, 2012)

It looks like if you are willing to dump all the corporate revenue (minus the $120k for distribution to you and your wife via salary or dividends) into paying off the debt and you get the level of income that you are estimating then you don't really have an issue. Whether you sell the property or not should not be dictated by the amount of debt that you have now (given the assumptions in the previous sentence). It looks like you currently don't have any equity in the property anyway so by selling it all you would be doing is paying real estate commissions to make your balance sheet look basically the same (no real estate asset but some left over debt from the real estate experience, just a lot less debt than you have now).

All of this hinges on the assumptions that your revenue estimates are accurate and that your personal spending will stay in the range you have specified. At the end of 3 years you can take a step back and see where things stand. At that time you should be pretty close to corporate debt free but you could still have some personal debt.


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## OmzT (Jun 1, 2012)




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## Charlie (May 20, 2011)

Glad to see you work this out.

Looks like our job here is done!

(FWIW -- I'd keep the car. $615/mo isn't going to break you. You do get to spend some money on yourself -- and I'm not so sure you'll be ahead much, if any, once you pay out the lease and spend another $15K on a car for which you don't know the history and will be in much worse shape 3 yrs down the road when you get the chance to buy out your current one. The time to forego the fancy car was before you signed the lease. That's already done....so enjoy).


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## sharbit (Apr 26, 2012)

Am I the only one besides Causalien that sees the the property in the corporation a totally screwy situation? Like if the tax accounting is being done properly you should be paying like 46% within the corp and the dividends would be eligible with even more tax. It's not operating as a proper commercial entity so it would be subject to something called ART unless you have 5 employees. You can't incorporate property income to avoid tax otherwise everyone would have a corporation to act as a fake RRSP.

You're also yielding 6.75 and borrowing at 6.5 on half the asset. The only advantage would be the cashflow situation which may get canceled out by tax rules.

If I'm incorrect about any of this please let me know.

For those that stay awake at night reading the tax code:

Paragraph 11. A "specified investment business" carried on by a corporation in 
a taxation year is defined in subsection 125(7) to be a business the principal 
purpose (see paragraphs 12 to 14) of which is to derive income from property. 
Such income includes interest, dividends, rentals from real estate (including 
subrentals) and royalties. Specifically excluded from the definition is any 
business carried on by a credit union or a business of leasing property other 
than real property. However, the business of the corporation will generally be 
considered to be an active business rather than a specified investment 
business when either: 
(a) the corporation employs in the business throughout the taxation year more 
than five full-time employees (see paragraphs 15 to 17); or 
(b) an associated corporation, in the course of carrying on an active 
business, provides managerial, administrative, financial, maintenance or other 
similar services to the corporation in the year and it is reasonable to assume 
that the corporation would have required more than five full-time employees in 
its business if those services had not been provided.


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## OmzT (Jun 1, 2012)

The debt situation is what was stressing me and looking back after going through the last few days organizing my situation and talking to banker and accountant - I feel like selling now is the worst possible time in terms or the fact that I've already put in all the sweat/time equity into the property and all that's left is just putting the extra capital into it in a few years and in the mean time just letting it keep running and making what it makes till then.


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## Dave (Apr 5, 2009)

How much of your time do you spend on average on all things related to this property and how much income does it bring to you per month ? Compare this to an estimate of your average hourly rate as a physician. From a strictly mathematical point of view, this should give you an idea if it would be better to sell it and spend the extra time doing locums or not. Although you might enjoy a more low key work related to your business even if it does not pay as much. 

Dave


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## OmzT (Jun 1, 2012)

Dave I've spent countless hours on in the last years but for the last 3-4 months it's at a point where I probably spend about a max of 5 hours per month tending to it ie: talking to bookkeeper, approving improvements or big decisions. But multiply that by 10 for time stressing about what to do with it!

If it was one year ago totally not worth the time.
Now its running smooth.
Makes 90k/yr minus payments and tax.
Now that I have an approach to the debt and can see the end in sight I'm feeling a lot better about.


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## sharbit (Apr 26, 2012)

Ok, this makes a lot more sense now.


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## Helianthus (Oct 19, 2010)

I'm still astonished by the $650K figure...I do year ends for experienced Cardiologists who barely bring in that kind of dough, before paying assistants and other expenditures, let alone a 27 year old with no specialization (just a guess, but you seem too you to have specialized in anything). Is Alberta really that different from Ontario in terms of compensation?


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## OmzT (Jun 1, 2012)

Let's just say its a special case


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## Helianthus (Oct 19, 2010)

Well, that certainly is consistent with the rest of your situation.


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## OmzT (Jun 1, 2012)

yep


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## OmzT (Jun 1, 2012)

Thanks to all who replied and encouraged!!

I removed some of my posts as you can see, and edited a few others.

I'll give newcomers the short version and what I learned from this experience:

2 weeks ago I was overleveraged, (read: leveraged to the hilt), heavy spending person completely careless and clueless of my financial situation with no real concrete plan to move forward. I thought I would just keep winging it and things would be fine. I met with a private banker who wanted to sell me on his services and thought to myself "hey! i should google private banking and see if I can find some reviews or something" (concierge services sounds pretty sweet though!)

anyways i ended up at CMF and started browsing the forum and basically spent the next week reading everything I could find on personal finance on this forum and elsewhere. I realized that i needed to wake up and get my financial house in order and start planning for the future. 

I read and instantly agreed with the basic concepts of budgeting, becoming debt free and saving for a rainy day and even some stuff on passive investing.

I have now developed the first budget i have ever had in my life and have spreadsheets documenting my financial situation. I'm still overleveraged, but I now have a plan and realistic goals to move forward.

Its crazy how when you have everything organized and your looking at it - it becomes very obvious what changes you have to make.

Thanks to everyone who commented on this thread and the members of CMF in general for making this forum a great resource.

The only thing left to do is put the plan into action!!!! especially the budget


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## Dave (Apr 5, 2009)

OmzT said:


> Thanks to all who replied and encouraged!!


I am glad for you that the property is running smothly because the first year of practice is though. I have physician firends and it can be overwhelming at the beginning to figure out your billing, permits, continuing medical education, conferences, locum schedule (you will be away and travelling a lot I assume), etc. And you will not be as fast as someone with 10 yrs of experience. So it will be a stressful year and troubles with real estate would not help. At least, it will be a non brainer about what to do with the money - reduce debt.

Good luck to you !
Dave


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## 44545 (Feb 14, 2012)

OmzT: thanks for the thread cleanup and follow-up post. Often, we don't see the tangible result of advice given. Much appreciated. :encouragement:


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