# Advise wanted



## Future Millionaire (Mar 8, 2010)

Hello,
After just reading here for so long I wanted to ask for your advise on what you'd do in our situation...

Married with 1 child (2yrs) living in Ontario looking for some guidance to make better financial decisions. We are currently 31 and 32 yrs old. House hold net income $105,000. We are usually able to save $2,000 per month after all other expenses.

Current Financial Standing:
House valued at $440,000 with outstanding mortgage $250,000 and heloc of $91,000 at 4% interest rate (I used it to pay off a loan). We pay only the interest at this time each month ($350 per month)
Condo Rented, valued at $270,000 with outstanding mortgage of $140,000.
Another condo currently being built (will be rented), scheduled to close in Sept 2011 valued at $225,000 but will have a mortgage of $160,000
We have 2 used vehicles valued at approx. $5,000 - paid for.
$50,000 in RRSPs and TFSA
$16,000 in DB Pension
$70,000 in savings
No other debts and our mortgages are at variable rate less than the heloc's.

Our goal is to have at least $1M in networth by the time we turn 40.

Would you take the saving and pay off the heloc loan or invest it else where? Any other comments or advise would be appreciated.


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

Well this is interesting. It doesn't seem to add up. How can someone with a household income of $105K have built up all that equity AND convinced banks to mortgage you for all those expensive properties? Further, how were you able to save $70K plus $2K every month??

Did you win the lottery at some point?? I don't get it.


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## Sampson (Apr 3, 2009)

TRM, It isn't fully unbelievable, some people are able to do it. There used to be a time when our family savings rate was like 50-60% of our after-tax. That combined with fortunate timing in the housing market (i.e. getting in before 2005) and one can build equity very quickly.

@ OP
60% debt load is pretty high, and with that much exposure to variable rate debt, I would focus on paying down your debt, not 100%, but maybe 70% of your $2k/month towards debt, the rest into long term investments.

Also, $70k of cash is a lot to sit on, I would use some of it, ~$20k to pay down the HELOC.


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## Future Millionaire (Mar 8, 2010)

the-royal-mail said:


> Well this is interesting. It doesn't seem to add up. How can someone with a household income of $105K have built up all that equity AND convinced banks to mortgage you for all those expensive properties? Further, how were you able to save $70K plus $2K every month??
> 
> Did you win the lottery at some point?? I don't get it.


That would've been nice but no, we held 2-3 jobs each in our 20s to accumulate all that we've got. Living with our parents for a while helped too while the house was being built. As for the banks, they want to see that the rental properties are positive caseflow and are rented.

First rental property has gone up in value by over $100K since we bought it in 2004. Second one also by 27K since 2009. The house went up by also $90K since 2008 and the basement being done. We just got luck with that. I listed the prices other's recently sold for.

Since the baby, the employment income has gone down by a few thousands as well. Regardless, we are still able to save $2000 with monthly income of approx. $8500 after tax and all expenses paid. We budget very carefully.

We know may friends who's household income being $140K and got mortgage for $600K...not sure how the banks actually look at risks but at least ours is rental so they just asked to see the lease agreement.


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## andrewf (Mar 1, 2010)

Look into cash damming with the rent on your income properties.


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

Wow. Must be the new math. I need to have another chat with the bank. The most mortgage they would give me was $135K. As long as I put 20% down and give up my LOC. 

Without getting into specifics, I do feel I have a decent enough income but am certainly not rich.

I appreciate the explanations.


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## Future Millionaire (Mar 8, 2010)

the-royal-mail said:


> Wow. Must be the new math. I need to have another chat with the bank. The most mortgage they would give me was $135K. As long as I put 20% down and give up my LOC.
> 
> Without getting into specifics, I do feel I have a decent enough income but am certainly not rich.
> 
> I appreciate the explanations.



We've been dealing with one bank since we bought our first place in 2001, never had any issues with mortgage approvals.


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

Do they not put a limit of your debt service ratio?? Mine won't exceed 40%.

Hard work can certainly help. Working 2-3 jobs and living rent free with parents would also help.

We've heard many people around here TALK about what you want to do, but few have gotten as far as you have. Really well done. We should be taking advice from you.


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## Four Pillars (Apr 5, 2009)

It wouldn't hurt to pay down the HELOC.

If that $105k of net income is mostly from one income, then you should really be looking at putting more into your RRSP.

You are very leveraged with real estate - I certainly wouldn't say that's the wrong approach, but not the way I do it. 

One other thing - you have $8,750 of net income each month but you only save $2,000? That's perfectly reasonable, but if you really want to be a millionaire anytime soon, you should consider cutting your costs. $6,750 is a lot of spending money.


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## Sampson (Apr 3, 2009)

Four Pillars said:


> you have $8,750 of net income each month but you only save $2,000?


Not surprising when they are servicing $640k in mortgages. Pay those down. I also wouldn't get myself that much under in real estate debt. We have a rental, and combined with our residence, our mortgages only add up to about 2-2.5X annual gross income - not 5-6X as is the case here.


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## Future Millionaire (Mar 8, 2010)

Four Pillars said:


> It wouldn't hurt to pay down the HELOC.
> One other thing - you have $8,750 of net income each month but you only save $2,000? That's perfectly reasonable, but if you really want to be a millionaire anytime soon, you should consider cutting your costs. $6,750 is a lot of spending money.


Actually of the $8500, we put away $2000 in savings and the $6500 covers morgages as well as another $1500 towards the 20% downpayment that will be closing this Sept. After sept, we'll have additional $1500-$2000 to add to our savings. We will then be increasing our mortgage payments by possibly changing to accelated bi-weekly. 

After reading all the replies so far, it is even more clear that we should look at bringing our mortgage amount down.


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

This is interesting. I'm thinking about it as the posts come in. You do have $70K in savings. Even if you were to move the whole shot to paying one mortgage or another, you would still not be paid off AND you would have no money in case of emergency (ie. disability, job loss). I'm not sure the excellent idea of mortgage reduction is worth the vulnerability of having no cash. 

Remember, in this case you need more extra/spare cash than most people because of your high monthly liabilities. If you both had a crisis tomorrow, your $70K will give you 10 months of sustained living at best. 

So I would tend to keep that money. If these are cashflow-positive properties, I'm not really sure you need to change anything? Are you feeling pressure somehow? Are you worried about anything?


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## Future Millionaire (Mar 8, 2010)

the-royal-mail said:


> Are you feeling pressure somehow? Are you worried about anything?


I just don't like having 91K over the regular mortgage so I keep thinking if we should pay that off and start building again.

The one condo we have rented does have a positive cashflow, the second that will be closing in Sept already have someone who would like to rent and will also be positive cashflow. We just want to make the right decision with the cash we've got right now. It is just sitting in a hight interest savings account not making much. 

We both work and just not sure if it's worth paying $350 in interest for heloc trying to keep emergency funds accessable or to pay towards it and just save the extra $350.


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## Four Pillars (Apr 5, 2009)

With your savings rate and the available HELOC credit, you probably don't need $70k in cash.

I would take at least $50k and pay down the LOC.


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## Four Pillars (Apr 5, 2009)

FM - I'm a bit confused - is the $105k of net income, employment income only or is that including rental income as well?


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## Future Millionaire (Mar 8, 2010)

Four Pillars said:


> FM - I'm a bit confused - is the $105k of net income, employment income only or is that including rental income as well?


105K includes the following:
$7000 Employment income per month (sometimes more)
$2000 Rental Income per month (not including the 2nd condo closing in sept) That should bring in another $1000 but I didn't add that in.


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## steve41 (Apr 18, 2009)

Can you break things down.... gross income (each per spouse) net rental income and savings RRSP/txble/txfree.... again, per spouse?


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## Future Millionaire (Mar 8, 2010)

steve41 said:


> Can you break things down.... gross income (each per spouse) net rental income and savings RRSP/txble/txfree.... again, per spouse?


Spouse 1
Employment Income: $4000 net ($5260 gross)
RRSP: none
TFSA: none

Spouse 2
Employment Income: $3000+ net ($4800 gross)
RRSP: $40000
TFSA: $10000
DB Pension: $16000

Current Rental Income: $1175 condo1
$800 primary residence basement


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## steve41 (Apr 18, 2009)

OK, this comes with the standard warning.... In all likelihood, I possibly missed something, so check it.

This is meant to give you an overview, that if you both continue working until 60, your jobs stay on course (salaries indexed at 2%) and you keep the condo and it's rental income intact all the way i.e. forever, then you should look to a lifestyle (after inflation) of roughly $85,000. That is your "magic number" and will vary only slightly if you chose to pay down your loans faster, were more ambitious saving to your TFSAs, etc. As I said.... only slightly. It is just the beginning of the planning process. From this point forward you would play with rates (I picked 5%), retirement age (I picked 60), sell the condo at 60.... etc.

Mrs Advise
Mr Advise

Oh. I just realised.... I didn't ask about the DB pension. Are you sure it is not a defined contrib pension? If so, what is employer's contrib and is it matched by employee. Sorry about that.


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## Future Millionaire (Mar 8, 2010)

steve41 said:


> OK, this comes with the standard warning.... In all likelihood, I possibly missed something, so check it.
> 
> Mrs Advise
> Mr Advise
> ...


Thanks Steve,

I am pretty sure it is DB but I'll double check on that.

Much appreciated.


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## Plugging Along (Jan 3, 2011)

Awaiting quoting police...


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## canehdianman (Apr 7, 2009)

Plugging Along said:


> Awaiting quoting police...


+1


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## Charlie (May 20, 2011)

to the original question --- I'd use the cash to pay off the HELOC.

If the HELOC is approved, why have ready cash sitting earning a piddling rate of taxable interest while at the same time pay non deductible interest on a drawn LOC? Consider your LOC your 'cash reserve' and don't draw it for other purposes. How are you better paying $350/mo to have your cash reserve available through a bank account rather then a LOC? Just be comfortable the LOC is not in danger of being pulled.

Another consideration would be to use the pending closing of condo 2 to shift as much of your debt there rather then on your home. If you've a cash call beyond the mortgage on closing, do this through debt (and debt reduction elsewhere!) rather then through tax paid monies.


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## Pigzfly (Dec 2, 2010)

Side Note to Royal: Banks will often treat rental income as income, but only at a rate of 50%; at least, that's what I've been told by friends with property investments. ie: $1000 a month rental income will be treated as $500 income.


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## KaeJS (Sep 28, 2010)

Pigzfly said:


> Side Note to Royal: Banks will often treat rental income as income, but only at a rate of 50%; at least, that's what I've been told by friends with property investments. ie: $1000 a month rental income will be treated as $500 income.


I would tweak this a little.

If you are buying a property and dont have previous rental income: Banks will not treat rental income as income, as it is risky, not secured, not gauranteed, and can be cut off at any time and has the ability to never be paid.

But, if you are buying a second property and can show proof of $1000/month cashflow from said original property, then they may count it as supplemental income.


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## Sampson (Apr 3, 2009)

KaeJS said:


> If you are buying a property and dont have previous rental income: Banks will not treat rental income as income, as it is risky, not secured, not gauranteed, and can be cut off at any time and has the ability to never be paid.


This wasn't our experience.

Our lender did exactly as Pigzfly described.


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