# I don't know what to do next...any suggestions?



## flygirl (Apr 28, 2010)

My husband and I are 28 and 29 and good savers. We purchased our first house a year ago with 20% down. We have a mortgage of $370,000 at a 10 year fixed rate of 4.9%. Between the two of us, we have $40,000 in RRSPS. We also have $8000 in TFSA and about $35,000 cash. We have had trouble in the past investing in mutual funds (have been losing money since 2000 and never made anything) and don't know what to do with our money now. We are torn between paying down our mortgage with extra lump sums, investing more in TFSAs (maybe trying ETFs since we have had bad luck with mutual funds), and buying investment property in the states (Phoenix or Florida) to rent out since the prices are so low and the dollar is almost on par.
Basically, we have some money to invest, but we don't know what to do with it. Any suggestions would be appreciated.


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## OhGreatGuru (May 24, 2009)

It sounds to me like your best investment, which has a guaranteed return, would be paying down your mortgage. Unless you are able to analyse why you have had no luck in mutual funds in 10 years, it's hard to advise you on investing in anything else. (ie. If you lost money in mutual funds in 10 years, don't expect to do better in ETFs until you figure what went wrong with your investing strategy.)

Since you have so much in cash, you should at least be keeping your emergency fund in TFSAs, even if it is just in high interest savings. Between the 2 of you, you should have $20K in TFSA contribution room by now, so it doesn't make sense to be using only $8k when you have all that cash in unregistered accounts.


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## Taxsaver (Jun 7, 2009)

I think what OhGreatGuru is telling you is that before doing anything, you should learn -or relearn- money management. After that, I'm sure you'll conclude that the best place to put your money is on mortgage. On every extra dollar you give, you save 4.9% (your mortgage interest rate) every time. And that return is GUARANTEED and there are no commission fees!

To give you a good idea, assuming your marginal tax rate being 40%, saving 4.9% is like earning 8.2% ( 4.9% divided by (1-0.40))) in interest! So keep an emergy fund and your RRSP as they are, and get rid of this mortgage faster.


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## andrewf (Mar 1, 2010)

Indeed. Repaying your mortgage is like getting a (risk-free) GIC paying something like 8% yield. Sounds like a no-brainer!


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## Taxsaver (Jun 7, 2009)

The only people who will advise you not to pay down mortgage with large amounts of money are financial advisors who makes money with commissions by giving it to them and the banks that will make LESS money if you pay down your mortgage more aggressively. You will never see TV ads saying, "Pay down your mortgage as soon as possible!". Why? Because the only ones who will make money is YOU!


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## MoneyGal (Apr 24, 2009)

Especially in the early years of a mortgage, the "return" from making additional payments is MUCH greater than your mortgage rate - and much greater than you could expect to find anywhere else. 

Here's an example. Let's say you are one year into a 25-year mortgage of $200,000 at 3%. If you make a one-time pre-payment of $20,000 now on that mortgage, you will save $18,870.73 in interest over the life of the mortgage. This is a return (really an interest savings - not a "return" _per se_) far in excess of the 3% mortgage rate. 

Even if the return from paying down your mortgage was only your mortgage rate, it would still be a good idea. But unless you are late in your mortgage, the return will ALWAYS be greater than your mortgage rate. 

I used the Canadian mortgage calculators at dinkytown.net to build this quick model.


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## Four Pillars (Apr 5, 2009)

Just to add nothing to the discussion... 

Pay down the mortgage!

I don't care if it is the best investment or not - $370k is pretty huge. You don't mention income but unless you have far-above-average incomes - that mortgage is fairly risky.


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## Berubeland (Sep 6, 2009)

Please do yourself a favour and don't buy a rental property in the States. 

1 - The vacancy rate in Phoenix is over 20% 

2 - There's a bunch of people just waiting to scam investors.

3 - Buying rental property is not something you just do as an alternative to investing in ETF's

I am by the way pro investing in real estate but just like the stock market buying the "sure" bet is a recipe to certain disaster. I really don't like what I am seeing coming from the states trying to suck in Canadian Investors these days. There's even seminars going on to try to lure people in. 

With any investment due diligence is key so unless you and your hubby can take a month off to go check out the market you're likely to fall prey to hucksters who don't give a crap about you. They just want to separate you from your hard earned cash. 

A friend of mine bought a house cash in Florida a few months ago. She paid twice the value of the property as she found out after she talked to her neighbours. She paid cash for the whole deal. 

So buyer beware and remember these con artists are a lot better at lying than most people are at detecting. They'll say anything to anyone to get their deal.


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

Thanks Berube, good post. I've heard of these ultra-cheap properties in Florida. My mom asked me a couple of years ago about buying one of those places and I smelled a rat. It sounded way too good to be true. $25K in Florida? What's the catch? Are they ghetto houses?

At the same time though, are there not a lot of GOOD properties on the market down there for cheap, due to the crisis? How do you know the difference?


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## Berubeland (Sep 6, 2009)

You are right Royal they do have cheap properties down there. 

The problem as I see it is that as any market you have to have knowledge about the market you are buying into. 

Let me give you an example: 

In the town where my parents live up north there are house for sale for very cheap compared to Toronto prices. Does that mean they are good investments ? No it does not, there is no rental market to speak of and the tenants are generally poor risks due to lack of employment in the area. 

So it is the same with Florida, it's a large state, and area matters a lot more there than here. Some areas are crime ridden and that's not something the guy leading you down the garden path will tell you. 

A lot of the US is overbuilt currently. 

In Pheonix the reason some condos are so cheap is because they made a law that if a certain percentage of owners are not paying their maintenance fees you cannot get a mortgage on the condo. Why is this bad? Well it's bad because if the building is not collecting maintenance fees it will not be able to pay bills etc. 

Also 20% vacancy rate is a very hard rental market. 

So not to say that these cannot be good investments but.... a lot of due diligence is needed. 

If you want to buy a vacation property thats fine but investments must pay you not the other way around. 

My recommendation if you were to try to get into doing this is....

1 - Spend a month where you want to invest
2 - Learn local tenancy laws
3 - Learn the different areas
4 - Look at many places
5 - Make an educated guess about what will increase in value
6 - Avoid Florida and Arizona just because when people are trumpeting great things and sharing it with you as a sure thing it usually is a scam, trap. If it were really great they would buy it themselves. They wouldn't have time to waste giving seminars
7 - Find a good property manager

I guess what I'm saying is that there are scary similarities between the way Bre-X was marketed and what is going on there with "cheap" properties. IMHO if i am holding an investment and it becomes water cooler talk that is an indication to sell.


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## break_thru (Jan 22, 2010)

I respect what some of the senior members on this post are saying about paying down your mortgage with the cash you have on hand. 

Their advice is good advice its just not the BEST advice. You can get a far better return on your money utilizing it in other ways. 

I am a big fan of buying investment properties, and with the new mortgage rules for investment properties (min. 20% downpayment), you can still buy a $200k property with your 40k. 

Assuming you are able to rent that property at a rate which is able to cover the costs (mortgage, insurance, property tax and maintenance), in 15-20yrs time you will be significantly ahead of where you would be if you just paid down your own mortgage early. 

By saying this I am not advocating going to buy property in the US, that is a high risk investment for any buyer never mind a first time investment buyer. There a plenty of good deals to be found here at home.


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## brad (May 22, 2009)

MoneyGal said:


> Especially in the early years of a mortgage, the "return" from making additional payments is MUCH greater than your mortgage rate - and much greater than you could expect to find anywhere else.
> 
> Here's an example. Let's say you are one year into a 25-year mortgage of $200,000 at 3%. If you make a one-time pre-payment of $20,000 now on that mortgage, you will save $18,870.73 in interest over the life of the mortgage. This is a return (really an interest savings - not a "return" _per se_) far in excess of the 3% mortgage rate.


I've been puzzling over this and can't quite figure out what you're getting at here: if I take a simple savings calculator and enter a one-time $20,000 deposit at 3% interest (compounded monthly) and let it sit for 24 years, I come out to $41,052, which would be my $20,000 plus $21,052 in interest...a bit more than the $18,870.73 in savings you show here for paying down the principal of a 25-year mortgage by $20,000. How is the interest savings higher than the 3% mortgage rate? I'm sure you're right, but I'm just not understanding what you're saying.


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## MoneyGal (Apr 24, 2009)

brad said:


> I'm sure you're right, but I'm just not understanding what you're saying.


I just needed to repeat that. Wish I could hear it around my house more often, lol!

Brad: I am mixing a couple of things together in that post. I should have gone back and clarified when I realized I'd done it, but ... I forgot. 

Yes, you are correct that if the choices are: (1) deposit money in a high-interest savings account and (2) prepay mortgage, the way you've structured the problem has the first option win (presumably because of compounding; I didn't actually run the numbers). 

The reason I say the mortgage pre-payment wins relates to the time value of money. Here's why: when you let the $20K sit in the high-interest savings account, over a 20-year period at 3% you will have the gain you've set out. But that ignores the time value of money - you need to discount the interest you will receive in future years, because it has less value than a dollar received today. Depending on the discount rate you use, the value of that (future) stream of income can be quite low. 

However, in the mortgage prepayment example, you actually "gain" the shortened mortgage/lessened interest payments right away. They are no longer owed on your mortgage. There's no TVM discounting required...you don't have to "wait" for the return. Right?

So given that option (2) gives you the gain at the moment you make the prepayment, what you are comparing is the present value of the foregone interest payments (i.e., the value you have gained by no longer being required to make those interest payments) and the PV of the stream of income received over 20 years (in the example I originally used). 

Put another way, you could structure the problem to answer the question, what is the internal rate of return I would need to earn on my $20,000 of available cash to "beat" the NPV of paying down my mortgage by $20,000 today? 

If I have time tonight I will run both calculations. I know that in the second case, the answer will be more than 3%. That's what I was alluding to when I said the available return is "more than 3%" - but I didn't provide the rationale. 

Finally, the IRR on the mortgage prepayment is "guaranteed" in the sense that it is available now and not conditional on other outcomes or factors. So ideally you would compare the IRR on the mortgage prepayment to another guaranteed investment.


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## brad (May 22, 2009)

Wow, thanks for that detailed and clear explanation (as usual)! None of that would have occurred to me, which is why I flunked economics (well, actually I didn't flunk it at all, I think I got an A or at least a B+, but I flunked it in the sense that absolutely nothing I learned stayed with me after I took the final exam).

I understand the concept of discounting but always have a hard time totally accepting it or perhaps I just have trouble wrapping my head around it -- it's like "limits" in calculus -- a simple enough concept but for some reason my brain always got clogged with cobwebs whenever I started trying to visualize them.

Anyway, I look forward to your calculations.


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## MoneyGal (Apr 24, 2009)

Understanding discounting: 

which would you prefer: $10,000 today - or $10,000 in 20 years? What has more value to you right now?


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## jamesbe (May 8, 2010)

Not to take this too off topic but what if the interest rate on the mortgage that the OP had was more like 1.65%.

I've been putting off paying down the mortgage because at my current 1.65% interest rate I don't see much value compared to what I could gain investing in simple things even like Bonds or GICs.

I had this dilema last year I put $30k down on a rental unit, turned out great so far as home values went up around 10% in the area and I have a good tenant with income == expensses.


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## brad (May 22, 2009)

MoneyGal said:


> Understanding discounting:
> 
> which would you prefer: $10,000 today - or $10,000 in 20 years? What has more value to you right now?


Or as the English say, "would you prefer jam today or jam tomorrow?" Yes, I get it, but I still fight it: I think of all the reasons why I might actually prefer $10,000 in 20 years. Maybe I'm being too literal about it, but in 20 years I'll be at retirement age and $10,000 would be more useful to me than than it would today.

But still, I've seen this process in action: I ordered a wooden flute from a maker who has a waiting list of 10 years, and he was complaining to me that a few people had gotten on his list, received their flute after 10 years, and then immediately sold it on eBay for a considerably higher sum than they'd paid, because they knew people were willing to pay more to have that flute today than to have to wait for it for 10 years. I suppose that's the "time value of flutes" as opposed to the time value of money!

So I totally understand it conceptually, and yet there's something about it that I can't quite accept.


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