# newb with personal finance and real estate Q's



## twowheeled (Jan 15, 2011)

Hello folks, 

I need some advice. I am a young professional moving out from home. I plan to be moved out by January of next year. I'm single, 26, living in Edmonton.

I've read some of the rent vs own articles and I don't fully understand how this applies to my situation. I need some financial advice on top of real estate advice. 

I've just started with a new employer which is why I have a few months to wait before I can be approved for a mortgage. My net income is around 90k per year with overtime. I am thinking of buying a condo around 250 or a house around 350. My plan is also to have room mates to help shoulder the cost of the mortgage. But there are a few wrenches to throw into the equation:

1. I have no idea how long I will stay in this house. I may decide to sell it as soon as 1-2 years if I decide to move away. If I get a job offer in a better location, I would not hesitate to pack up and go. 

2. I do not plan on staying at my current job for long term. I want to start a business or franchise next year and will need capital. I can do this with cash or a HELOC I figure. 

3. Long story short, I have $175k to put down on a purchase, and the plan is to aggressively pay down the mortgage asap. This money is currently not invested, as due to personal reasons and a recent bout of extended unemployment I sold my investments (index funds) mostly out of fear of a dip. 


I really need some help, what do you think?


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## Spudd (Oct 11, 2011)

Since you have, it sounds like, a fairly strong possibility of moving within 5 years, this would lead to saying that renting is preferable to buying. The reason is that you have to spend a percentage of your home's value to pay the realtor when you sell it - so the shorter time you stay there, the higher this fee is relatively speaking. If you live there for 20 years and the fee is $20k, then it's 1k/year. If you only live there for 2 years, it's 10k/year. 

The fact that you will want the capital to use for a business also would lead one away from owning. If you use cash, there's no interest to pay. If you use a HELOC, you need to pay interest. While it's true that the interest is tax-deductible this doesn't make it free. Cash is better. And you won't risk foreclosure on your home if the business doesn't go well. 

Finally, the fact that you had a recent bout of unemployment (I assume the bout of employment was a typo) would lead one to think that perhaps your job security will not be high - which again would lead one away from getting a mortgage.


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## Butters (Apr 20, 2012)

You sold your investments on fear. What about housing fear? They are 10x more articles saying our housing markets are overvalued than stock market articles. 

I don't think you should buy a house if you expect to move within a few years. Simple as that.

Where do you plan to start your business? In Edmonton? How much $$ will you need? I think that money should be the priority, you wouldn't want to take out a 6% loan to start a company.

If you are planning to stay more than 5 years buy a place with at least 50 foot lot, maybe even a corner lot. They are condensing edmonton so the more land you have the bigger your return. 50 foot duplexes are becoming popular. 

Cash is king don't spend it all in one place


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## twowheeled (Jan 15, 2011)

SheaButters said:


> You sold your investments on fear. What about housing fear? They are 10x more articles saying our housing markets are overvalued than stock market articles.
> 
> I don't think you should buy a house if you expect to move within a few years. Simple as that.
> 
> ...


I'm very new to this so let me know if any of this sounds silly..

housing market drops - does not affect me. I just keep the house and rent it out to cover my expenses until the market recovers. I can stay in it or move elsewhere since I have a lot of equity, the payments will be low. In other words, I can comfortably let the house sit as a long term investment. 

stock market drops - my savings are down, I lose my income and my startup capital. I still have to pay rent. The reason I'm afraid to invest this money right now is because I don't know when I will need the start up capital or how much I will need. At this point I don't know where my life is going or where I am going to settle down. I'm flying by the seat of my pants. I don't even want to commit to a one year bond because if a business opportunity comes up next month I would want all my money ready to go. I know I'm missing out on returns. In the mean time I'm spending all my free time off work researching small business and franchises I could get into.


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## Just a Guy (Mar 27, 2012)

Have you ever been a landlord? Let me assure you it's a lot of work. Have you ever managed a property long distance? That adds a multitude of problems. As an investment, 250-350k probably won't cash flow (make you enough to cover expenses, let alone make a profit). 

Buying a place to live is different than buying a place to invest. 

Real estate, or investments in general, can stay low longer than you can stay solvent.


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## Eclectic12 (Oct 20, 2010)

twowheeled said:


> ... housing market drops - does not affect me. I just keep the house and rent it out to cover my expenses until the market recovers. I can stay in it or move elsewhere since I have a lot of equity, the payments will be low. In other words, I can comfortably let the house sit as a long term investment.


Maybe it does and maybe it doesn't affect you ... if it drops low enough, you might have renters leaving as they figure out they can buy for the same or lower prices.

Then too, if you've cranked up the equity, can you cover payments (heating, property taxes, mortgage etc.) until another renter is found?
What about repairs to the furnace in winter or a new roof?

... I'm not trying to scare you but make sure you've thought of what can happen.




twowheeled said:


> ... stock market drops - my savings are down, I lose my income and my startup capital.


Maybe you do and maybe you don't.

The 2008/2009 period for some of the stocks I held had drops of 45% for the share price, where I can think of two that cut their dividends/cash payments.
The rest paid out the same dividends/cash distributions and in several cases increased their payments.

So in my case, my income stayed the same, or might have been up a bit. 

The share prices eventually recovered so similar to the "housing market doesn't affect me", the paper drop didn't affect me either. Note that I didn't need to sell unless I doubted the company was going to recover ... so I didn't lock in a loss by selling. Co-workers who had seen such drops before sold for a loss.

I also purchased some bargains. The big winner paid back 40% of the purchase price in cash distributions before I sold it when it was up 205%. The proceeds accelerated paying of my mortgage.


So YMMV ...




twowheeled said:


> ... The reason I'm afraid to invest this money right now is because I don't know when I will need the start up capital or how much I will need. At this point I don't know where my life is going or where I am going to settle down...


The need for flexibility is a better reason to avoid risk than assuming the worst will happen, IMO.

Though it does confuse me ... if you are maxing out your equity in a condo/house that is bought, I am guessing that the HELOC is the source of money for the franchise/business. If there is a steep enough drop in the house value, the amount available to borrow on the HELOC could also drop. If this happens, the "not affected by housing market drop" might not be true.


Cheers


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## Butters (Apr 20, 2012)

Let say you get a job in Winnipeg, you move there and rent out this house.

You need either Family or Real Estate company to look after the place for you. Real Estate companies will charge you about $400 dollars to find some eligible clients for the place, then $300 dollars any time your renters have a problem, like the oven not turning in because the cord came loose (you will have 2 of these calls minimum a year). After a year they leave and you'll have to find new renters. It will cost you at least $1000 a year just to keep the real estate company happy. Then if you have a bad roof, bad foundation, furnace break... you are distant, so you are calling any random person to get this done quickly at a premium. The headaches won't end.

Part B, is you really like your new job and Winnipeg, you have no cash to buy a new place in Winnipeg, so you are forced to rent a place there. Defeating the purpose...


You should first find out which city you are going to start your business, how much it will cost... and go from there.. that seems to be your priority, you have lots of years to buy a house, don't get tied down yet!
Or find a job in which ever city you want, determine if you'll stay, then settle down.

_housing market drops - does not affect me._ ---> same could be true of the stock market, ride it until it recovers
a problem with your house price dropping, is the bank could reassure your house value, lets say it goes from 400k to 200k, now you can only have a HELOC of 80% of 200k... your business start up price could be 200k, now you don't have enough, etc...

Take it from me, I bought a house in Winnipeg, I now live in Edmonton. My house in Winnipeg is 1650 sq ft, here in Edmonton I'm renting for the same price but for 700 sq ft. It makes me feel sick!
Difference is, you expect curve balls, I didn't expect to move... got to hate girlfriends 

Save your cash, PC financial is offering 3.1% interest, park it there until December when you have a better grasp of things.
In a year from now you might know which city you're staying in... you're be better to decide to buy a house then!

House prices aren't going to double in a year, you won't miss much... be patient


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## MRT (Apr 8, 2013)

just an FYI on mortgage qualification, if you do decide to buy instead of rent...

unless the overtime is 'guaranteed' and an employer will put that in writing, with pay stubs showing consistent OT thus far (and even then...), the vast majority of lenders will not count it as income, given the short job tenure. Typically, lenders want at least a 2yr history of any variable income (overtime, commission, bonus, etc)...so if it has only been a few months, your base salary/hours would likely be used.


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## twowheeled (Jan 15, 2011)

thanks, you've given me a lot to think about. I should mention that one big reason why I'm considering becoming a landlord is because my parents built their current house. Dad is semi retired and a tradesman, so he can handle just about all maintenance issues apart from a full blown new roof. But in any case I will always have a contact in the city that can arrange to bring a contractor in or just to fix a leaky faucet.

Reason two for considering real estate is that I have about 50k of that money parked in my RRSP and can take advantage of the first time home owners loan. If I pull that money out for a business startup it would be taxed quite heavily. 


I will look into a HSA, never considered that for the short term.


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## Just a Guy (Mar 27, 2012)

So, you benefit and your father is expected to do all the work...nice plan.


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## MRT (Apr 8, 2013)

Just a Guy said:


> So, you benefit and your father is expected to do all the work...nice plan.


So, you just make assumptions regarding any arrangements that would be made between OP and his father...nice work.


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## techcrium (Mar 8, 2013)

26 with $176,000? I am interested in how you achieved that


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## twowheeled (Jan 15, 2011)

techcrium said:


> 26 with $176,000? I am interested in how you achieved that


honestly, speculation and dumb luck in the stock market, which I stopped immediately when I left my last job and was unemployed for about 1 year. Same reason I don't feel comfortable putting money back in stocks right now, my fundamentals are poor, I have a short time frame, and I believe the market has peaked and will correct itself pretty soon. Although I can't help but feel the same way about Edmonton's real estate.


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## Plugging Along (Jan 3, 2011)

Real estate is meant to be a long term investment. If you are thinking as short as a year, you speculating. You may as well be in stocks, at least that is more liquid and you don't have all the realtor fees.

Also, I believe you were the poster a few years back that worked a lot up north, made large amounts of money, but didn't save anything. Is that you? If so, have you developed more of a longer term strategy?


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## LBCfan (Jan 13, 2011)

twowheeled said:


> honestly, speculation and dumb luck in the stock market, which I stopped immediately when I left my last job and was unemployed for about 1 year. Same reason I don't feel comfortable putting money back in stocks right now, my fundamentals are poor, I have a short time frame, and I believe the market has peaked and will correct itself pretty soon. Although I can't help but feel the same way about Edmonton's real estate.


You admit your stock market win was "speculation and dumb luck". Is there a reason you think the RE market is poised for take off, or do you expect another round of "speculation and dumb luck"? Be brutally honest with your answer. Being lucky once is a good thing. Being lucky twice is against the odds.


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## twowheeled (Jan 15, 2011)

I don't believe the real estate market is going to take off, I am not planning on this house to appreciate but hold its value. But I do need a place to live in the interim and it seems like the rent I would charge from having roommates or a basement suit would offset realtor and legal fees for a short term ownership. I'm assuming around 7% in fees when I sell which is 17.5k of 250k. Renting would cost me ~1200 a month, at 16-17 months of rent it would be close to a wash. Am I missing something from the math here? Besides property tax and home insurance?

The main draws for buying the house is a place to live, a bit of passive income, the added benefits of an interest free $25k loan from my RRSP, and low interest rates for HELOC right now.


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## twowheeled (Jan 15, 2011)

Plugging Along said:


> Real estate is meant to be a long term investment. If you are thinking as short as a year, you speculating. You may as well be in stocks, at least that is more liquid and you don't have all the realtor fees.
> 
> Also, I believe you were the poster a few years back that worked a lot up north, made large amounts of money, but didn't save anything. Is that you? If so, have you developed more of a longer term strategy?


I did work up north and saved everything, I've been renting for the last 2-3 years. I left my job to travel for 1.5 years which luckily I was able to fund primarily on the return of my savings. I don't have much of a long term stratergy, my RRSP's are set up on the couch potato portfolio. My other savings have been mostly buying index funds trying to time the market.


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## Just a Guy (Mar 27, 2012)

twowheeled said:


> I don't believe the real estate market is going to take off, I am not planning on this house to appreciate but hold its value. But I do need a place to live in the interim and it seems like the rent I would charge from having roommates or a basement suit would offset realtor and legal fees for a short term ownership. I'm assuming around 7% in fees when I sell which is 17.5k of 250k. Renting would cost me ~1200 a month, at 16-17 months of rent it would be close to a wash. Am I missing something from the math here? Besides property tax and home insurance?.


Well, assuming you get the same out as you put in, you pay the realtor fees, the legal fees (twice, once to buy, once to sell), depending on your mortgage there may be penalties for breaking it, there is the maintenance, and the all important interest rate.

Now, in my experience, the amount of rent you'll get from roommates won't cover even the interest rate. If you add in the amount you'll "save" from not paying rent, you may cover he interest rate, maintenance, taxes, etc. but with the short term nature of the investment, you won't be able to recoup the realtor fees, bank penalties and the legal fees most likely.

Add to that your down payment hasn't earned you anything over that time period, and I'd say you've got a good chance of losing money. Real estate generally needs 5 years (assuming no appreciation) to break even if it is cash flow positive. 

Real estate is not a short term play, unless you can quickly flip a property for significant gains...


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## My Own Advisor (Sep 24, 2012)

I guess after reading all the threads I would say this, if you plan to be moving around, don't know if you'll be moving around, etc., continue renting.

If you know where you want to live, keep that place for a long(er)-time, i.e., 5+ years, then buy.


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## Cal (Jun 17, 2009)

twowheeled said:


> honestly, speculation and dumb luck in the stock market, which I stopped immediately when I left my last job and was unemployed for about 1 year. Same reason I don't feel comfortable putting money back in stocks right now, my fundamentals are poor, I have a short time frame, and I believe the market has peaked and will correct itself pretty soon. Although I can't help but feel the same way about Edmonton's real estate.


Sounds like a bit of fear, and trying to time the market. RE and stock. Also sounds like you are pretty intent on buying RE.

IMO, if you aren't buying with the intent of being a LL, nor to live in long term, you should consider renting.

Also consider the tax consequences of the rental income, as well as the loss of the investment growth drawn from your RRSP.

Also, if you have a short time frame, it was probably best to take some money off of the table in regard to your stock holdings.


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## leslie (May 25, 2009)

1) Experience renting before buying. You won't know what the issues are. 
2) Rent first when you leave home so that you experience the cash flow realities of your independent life. There are many variables. E.g. you may find that you prefer the cheaper renting that allows you to take vacations. E.g. you may find you have all kinds of expenses you never thought of.
3) A mortgage is usually a very long term commitment. Thinking you can fund it with a roommate is ....??? The whole roommate dynamic deteriorates when one person is 'the owner'. And sharing is fine when you are young, but most everyone grows out of that feeling - usually when a significant other arrives.


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## twowheeled (Jan 15, 2011)

can anyone recommend a good calculator or spreadsheet online for me to compare the scenarios? I've found a few that seem to reflect my intial thoughts, that buying a house is the better choice.


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