# My Parents' "Interesting" Financial Situation



## theyoungentrepreneur (Nov 24, 2016)

Hey all,

So my parents are both 60 years old. While they certainly have some assets - they are in a bit of a struggle financially and Im trying to help out a plan for them to help them get back on track throughout the next five years.

Here's their deal:

They have a home in the Niagara on the Lake region - and its worth about $900k. They have a little under $400k in mortgages remaining (2 mortgages - one being a very high interest mortgage of around $85-90k). Thus - their equity in the home is about $500k. They also have about $350k in a fund that has dividends being reinvested into the fund. 

Income wise - this is where they are struggling. My dad had to sell his business because it wasn't doing well and he couldn't handle it. They are barely making an income and currently are renting out their home in Niagara to pay the home-related expenses. Renter is just covering the total costs (mortgages + utilities + misc.). They are currently living in the GTA and renting a townhouse - Im living with them to help cover some of the rent.

Im trying to step in and help them - Im a 28 year old entrepreneur with 2 businesses - Ive done well for myself to this point and I really dont like seeing my parents struggle. I know that I can help them out. I own a few condos in Toronto and I'm renting them out and living with the parents so I can help them pay for their rent cost. I personally think that there is a higher level problem that we need to tackle though. Without them making an income - I am advising that they sell their home in NOTL - liquidate their equity so they can use that to generate an income in addition to their $350k in funds. 

My proposal is that they purchase 2 1 bed condos in Toronto - both with about 35% down - that would lead to some income generation. Each property would require about $135k downpayment (assuming 35%) and would then total $270k. Assuming they can get $450k from their home (after real estate fee) - they'd be left with $180k + the $350k in funds. Im advising that the two properties be rented out - leading to an income of about $800-$1,000 per month beyond the mortgages (Its currently what I'm netting off my properties per month) - and then invest the remaining money into funds - with the intention of buying a third property in a year or two. The funds would then provide a yearly return which they could use a portion to take out each month from the dividends. We would then move into a home in the GTA and split the rent - thus significantly cutting their rent costs per month. For me - I like living at home and I dont like living in Toronto - but I love my investment properties because they provide nice cash flow.

But thats just my proposal and that has a few assumptions and variables. It assumes that they can get mortgages for those properties once they sell. It assumes that they can sell the home for $900k. 

Where I would like your advice is - what do you think of my plan? 

Alternatively - do you have any other suggestions on what they should do? I feel they are flat out house poor right now - and my dad is always seemingly in a down mood because he's not making income - but I feel they could significantly improve on their situation if they sell the home - and instead focus on income generation with the wealth they have - obviously with the intent on growing that wealth - but at least providing them with that passive income they are not getting right now.

Any suggestions would be MUCH appreciated.


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## mordko (Jan 23, 2016)

I agree with the selling part. Leveraging and putting everything into the real estate in Toronto right now... Seems very risky, particularly so for someone who is 60. If it was me in their place, I'd be looking for a job.


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## james4beach (Nov 15, 2012)

It sounds to me like your family is very heavily exposed to GTA region real estate (I'd consider Niagara almost in the same zone). I really don't think it's a good idea to take on more property exposure. This is an undiversified, leveraged portfolio. Purchasing more condos in Toronto is a plan I'd call "going for broke". Yes it could work out, or it could ruin you.

I strongly encourage deleveraging, which means liquidating property and reducing the overall leverage ratio = assets / net worth.


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## theyoungentrepreneur (Nov 24, 2016)

*st. johns bay*



james4beach said:


> It sounds to me like your family is very heavily exposed to GTA region real estate (I'd consider Niagara almost in the same zone). I really don't think it's a good idea to take on more property exposure. This is an undiversified, leveraged portfolio. Purchasing more condos in Toronto is a plan I'd call "going for broke". Yes it could work out, or it could ruin you.
> 
> I strongly encourage deleveraging, which means liquidating property and reducing the overall leverage ratio = assets / net worth.


Hi James4beach - thanks for your reply. Not sure if I wasn't clear enough - but just wanting to confirm that my proposal involves selling the Niagara on the Lake property - and then buying 2 properties. They would only have $270k of their $850k investable assets invested into real estate. I personally dont see ho that is "Heavily exposed" - would agree with you if you were assuming they kept the NOTL home though.


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## OnlyMyOpinion (Sep 1, 2013)

It is very commendable that you are willing to help out your folks.
It is difficult to give a thumbs up to your plan when there are so many unknowns. As mentioned, is your Dad able and intending to work again? Why did they not sell their house and why are they renting in GTA when St C or Niagara Falls would be cheaper? Most importantly - what do they want to do? Maybe they would sooner have the $850k and rent, work a few more years, then live a modest retirement collecting CPP, OAS and dividend income? That is not a bad nest egg.
Your bias is clearly to do more of the same that you have had success with so far - but what are they comfortable with? 

I agree with the posts above that express concern about the timing re/ property prices, interest rates and their age. It sounds like they would be counting very heavily on you for exertise and success. Is that something you are all ok with?


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## theyoungentrepreneur (Nov 24, 2016)

OnlyMyOpinion said:


> It is very commendable that you are willing to help out your folks.
> It is difficult to give a thumbs up to your plan when there are so many unknowns. As mentioned, is your Dad able and intending to work again? Why did they not sell their house and why are they renting in GTA when St C or Niagara Falls would be cheaper? Most importantly - what do they want to do? Maybe they would sooner have the $850k and rent, work a few more years, then live a modest retirement collecting CPP, OAS and dividend income? That is not a bad nest egg.
> Your bias is clearly to do more of the same that you have had success with so far - but what are they comfortable with?
> 
> I agree with the posts above that express concern about the timing re/ property prices, interest rates and their age. It sounds like they would be counting very heavily on you for exertise and success. Is that something you are all ok with?


I'm helping them out in terms of trying to devise a plan - with or without me. It doesnt matter what I think - Im just trying to help give high level advice. Im having us all sit down with their financial manager/fund manager to get his thoughts. I dont want my bias to play a role here - so Im trying to get outside opinions (hence posting here) - as well as professional outside opinions. My dad definitely wants to work again - but Im trying to advise a plan that they can be generating more of a passive income (regardless if they invest in properties or not) - so that they can generate said income in addition to my dad making a small income from a job - but so that he doesnt feel stressed that he needs to pay the bills through the job - rather knowing that he's generating a passive income and the job can be additional deplorable funds to invest/save.


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## mordko (Jan 23, 2016)

Yes, deplorable funds are always a good idea. 

Putting that aside, he doesn't need extra risks which the suggested path involves. Putting all eggs in one basket combined with high leveraging after Toronto RE has had a few stellar years isn't my idea of a safe investment. 

Personally, I would sell the house, buy something small or rent and invest in a Couch Potato which would provide diversification between different asset classes and regions.


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## Karlhungus (Oct 4, 2013)

You could rent out 2 properties and net $800-$1000 per month, (assuming everything goes fine, no special assessments or vacancies). But why have the headaches when you could invest the $270k and pull out $900 per month essentially stress free? (4% rule).In fact, invested properly, the 800k (350+450) would spin off $32,000 per year. Add in CPP and OAS and even GIS, and their income could be around 60k. With a little tax planning, they would pay very little tax if pulling out of TFSA and RRSP. Hence the possible GIS. 60k divided by 12 months would be $5000 per month gross income. 

I would suggest they look at renting. They also wouldnt be tied down anywhere and could really open the doors to find a nice, but cheap rental. They could each find a part time job if they really wanted to, to occupy their time for additional 10k each for a total of 80k per year. There are many options. Being a condo Landlord in GTA at 60 seems to be too risky to me. Find a fee based advisor in the GTA


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## theyoungentrepreneur (Nov 24, 2016)

Karlhungus said:


> You could rent out 2 properties and net $800-$1000 per month, (assuming everything goes fine, no special assessments or vacancies). But why have the headaches when you could invest the $270k and pull out $900 per month essentially stress free? (4% rule).In fact, invested properly, the 800k (350+450) would spin off $32,000 per year. Add in CPP and OAS and even GIS, and their income could be around 60k. With a little tax planning, they would pay very little tax if pulling out of TFSA and RRSP. Hence the possible GIS. 60k divided by 12 months would be $5000 per month gross income.
> 
> I would suggest they look at renting. They also wouldnt be tied down anywhere and could really open the doors to find a nice, but cheap rental. They could each find a part time job if they really wanted to, to occupy their time for additional 10k each for a total of 80k per year. There are many options. Being a condo Landlord in GTA at 60 seems to be too risky to me. Find a fee based advisor in the GTA


Yes absolutely. I think this is a good strategy and I agree - the condos may be too stressful for them at this age.

In terms of return - would the 800k still be growing in value outside of the dividend income its providing? Could they expect capital appreciation on that $800k in 10 years? Thus leading to a higher dividend income for them?


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## OnlyMyOpinion (Sep 1, 2013)

theyoungentrepreneur said:


> ... Im having us all sit down with their financial manager/fund manager to get his thoughts...


This is the really really important part! Who is their FM, what are their qualifications and experience, and what do they have your parents money invested in and how has it performed? I.e. is their money in high MER mutual funds? If you have researched this, you already know that their 'advisor' may be doing them more harm than good as far as their investment returns. When they see the prospect of another $500k they may try very hard to sell them more 'funds' and they may suggest they be aggressive to try to grow their savings. Be very careful.
As noted above, with a good plan, where all of their income sources are considered, their nest egg properly invested and a reasonable withdrawl rate established - they could retire modestly. But their money needs to be working for them - not the FM's. By all means meet and see what they say, but use that mtg to determine whether they are the right advisor.
To answer your Q above, it is unlikely they can live only on the income of their investments and grow or keep their $800k intact. Most of us plan/need to draw down their savings over time at the same time that it is invested to make a reasonable return. Sources of income, including RRSPs and max'd out TSFA's are important to consider as well.
Your reality is likely to be the same as mine - my parents sold their home to rent and live their retirement, l helped them get set up and I expect them to use up pretty well all of their savings. But that's ok, they are happy, and it is their money.


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## theyoungentrepreneur (Nov 24, 2016)

OnlyMyOpinion said:


> This is the really really important part! Who is their FM, what are their qualifications and experience, and what do they have your parents money invested in and how has it performed? I.e. is their money in high MER mutual funds? If you have researched this, you already know that their 'advisor' may be doing them more harm than good as far as their investment returns. When they see the prospect of another $500k they may try very hard to sell them more 'funds' and they may suggest they be aggressive to try to grow their savings. Be very careful.
> As noted above, with a good plan, where all of their income sources are considered, their nest egg properly invested and a reasonable withdrawl rate established - they could retire modestly. But their money needs to be working for them - not the FM's. By all means meet and see what they say, but use that mtg to determine whether they are the right advisor.
> To answer your Q above, it is unlikely they can live only on the income of their investments and grow or keep their $800k intact. Most of us plan/need to draw down their savings over time at the same time that it is invested to make a reasonable return. Sources of income, including RRSPs and max'd out TSFA's are important to consider as well.
> Your reality is likely to be the same as mine - my parents sold their home to rent and live their retirement, l helped them get set up and I expect them to use up pretty well all of their savings. But that's ok, they are happy, and it is their money.


Yeah agreed - Ill get that information from the meeting and relay it here in terms of the management fee. I think he mentioned to them that he can have their money generating 8-9% - and when I heard that I thought that sounded a little too far fetched and would mean they would be taking on a riskier portfolio. I think the 4% is a more conservative and less risky assumption. 

In terms of the 800k - yeah I see what you're saying. There are a few other sources of income I have not mentioned in my initial post - as well as both parents receiving an inheritance in the next 5-10 years (possibly sooner since my grandparents are all in their 90s - but thankfully still alive!). The income sources I left out would roughly total $3000+1200=$4200. In addition - the inheritances will total about $200-250k. So if we add that $200-$250k - they can add that to their $800k nest egg and that will create a bit more income off of the 4% return.

However at 65 the $3000+1200 would no longer be there and would be replaced by $2500 in old age combined - so they would need to make up for that difference somehow - however I think its important they plan based on that income source amount - rather than the amount for the next 5 years.

Just to clarify - do you mean that they will likely use up their entire $800k + inheritances? I would have thought that would have created an income and they would not have to use that $800k + inheritance base to live - rather use the return from that base to provide a long term, sustainable income. Thanks!


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## My Own Advisor (Sep 24, 2012)

re: They have a home in the Niagara on the Lake region - and its worth about $900k.

Excellent.

re: They have a little under $400k in mortgages remaining...

Not good for anyone is their 60s unless they have millions.

re: ...sell their home in NOTL....

I would do this, yes. By selling the house in NOTL, they will have equity they can use to invest. They can add to their $350k in funds, to churn out income.

Sell house worth = $900K.
Kill debt worth = $400k.
Sell rental in GTA? = $x. Wasn't clear on this...

re: We would then move into a home in the GTA and split the rent.

If you're OK with that?


I would basically try and liquidate real estate, and rent, using the income generated from their portfolio for rent. They are in not bad shape, thanks to their NOTL asset but it's not churning out income they can live from....that's pretty important, to have income you can live from.


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## OnlyMyOpinion (Sep 1, 2013)

theyoungentrepreneur said:


> Just to clarify - do you mean that they will likely use up their entire $800k + inheritances? I would have thought that would have created an income and they would not have to use that $800k + inheritance base to live - rather use the return from that base to provide a long term, sustainable income. Thanks!


Yes or no - the answer depends entirely on your earning/withdrawl/#years assumptions. We are moving into an entirely different topic. That is why having a retirement income plan is a good idea. That is also why it can be a bit intimidating, and why many probably just enter retirement blindly. An inheritance would obviously shift the numbers, but I would not depend on something like that. You might include it as an 'upside' scenario. Better late than never - it is actually easier to plan as you begin your retirement 'decumulation' years because you don't need assumptions about saving and returns over your 'accumulation' years - they are behind you. 
Even for your own purposes it is useful to have a financial plan and understand compounding, withdrawl scenarios. There is oodles of info "how much do I need to retire" "retirement calculators", "4% rule", etc. Remember, you need to consider all sources, CPP/OAS or a company pension will reduce the amount of your own savings that you need to have.

On-line calculators (there are many) can be helpful to give a general understanding of withdrawing your own savings portion. If I use a simple online calculator where I retire at 60 with $800k and live till 95 and earn a 2% real return throughout (4% nominal - 2% inflation), it says I can withdraw $32,000/yr ($2666/mo) and die broke. But if I earn 4% real and spend only $32k/yr, I actually grow my savings and die with $1.6MM. This might be a taxable amount or not, depending whether it has come from an RRSP/RRIF (taxable) or a TSFA (nontaxable) or an unregistered account (will depend on nature of investement and whether tax was paid annually on earnings). There is also a sequence of returns risk that you come across in withdrawl discussions that is not considered here.
(http://finance.yahoo.com/calculator/retirement/ret02/?bypass=true )
The gov't also provides a calculator that incorporates CPP/OAS as well as other sources of income. I haven't used it for a while. (http://www.esdc.gc.ca/en/cpp/cric.page)

P.S. I would be wary of anyone who claims they can get you 8-9%. They may be able to point to some period of past performance for a fund where that was true but no one can promise that for the future. There is in fact a lot of discussion about a 'new normal' of lower future returns in light of the global economy. But no one knows, so it is best to consider several scenarios, including a base case to understand what you need to cover your necessary expenses and leaves no money when you die.

P.P.S. Perhaps there is an opportunity in a few years for you to own a house that has a self-contained 'parent's' apartment and have that inheritance passed on to you in consideration. Thinking 20yrs+ down the road, such an apt should have walker/wheelchair navigatable access, washroom, etc. (Very seldom seen, usually washrooms and rooms are too small. I think there is actually a niche opportunity here for someone building legal apts in homes to meet a future demand).


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## redsgomarching (Mar 6, 2016)

whoa sell their niagra property for gta real estate? Its great that you are helping out but them owning a rental property is not the best idea (they would still have to manage it and it sounds like they want to retire).

Instead, sell the niagra on the lake house, hopefully they can deem it as principal residence to earn full capital gain exemption on the 500k.
That gives them a nest egg of approx 850k. You said they are 60? Are they collecting CPP? Pension? anything? 

500k invested at 4% (conservative) can yield them another 20k per year. At this point they need to decide what type of retirement they want and how much they are going to be spending.


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## Eclectic12 (Oct 20, 2010)

redsgomarching said:


> ... Instead, sell the niagra on the lake house, hopefully they can deem it as principal residence to earn full capital gain exemption on the 500k.


I am not clear on how much of the capital gain exemption is possible. The OP stated that they are renting the NOTL house with a rental in the GTA so the NOTL house is likely not their principal residence.

Hopefully they have an estimate (or three) of what the NOTL home was worth when the renting started to ensure the cost base is as large as possible so that any growth that is taxed is minimal.


Cheers


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## redsgomarching (Mar 6, 2016)

Eclectic12 said:


> I am not clear on how much of the capital gain exemption is possible. The OP stated that they are renting the NOTL house with a rental in the GTA so the NOTL house is likely not their principal residence.
> 
> Hopefully they have an estimate (or three) of what the NOTL home was worth when the renting started to ensure the cost base is as large as possible so that any growth that is taxed is minimal.
> 
> ...


it depends on if they report the NOTL address on their returns. If not, i would start doing so, and depending on how long they've been renting is probably how many years they would lose out on. if its 1 year, not a big deal because of the +1 rule


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## naysmitj (Sep 16, 2014)

What ever you do "keep it simple".
Mortgages with low proven annual earnings are challenging to obtain.
Sell the NOTL house and either rent or buy a retirement home. Niagara / St Catharines / Welland still has affordable housing.
Apply for CPP.
Talk to a professional financial adviser and an accountant regarding the best way to handle the house proceeds along with the investment funds.
You don't want to make a mistake at this point in their lives.


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## Eclectic12 (Oct 20, 2010)

redsgomarching said:


> it depends on if they report the NOTL address on their returns.


I am not sure the address matters ... tax tips says:


> The property will qualify as a principal residence if the taxpayer, taxpayer's spouse or common-law partner, or any of the taxpayer's children *lived in it at some time during the year*


http://www.taxtips.ca/filing/principalresidence.htm

This also lines up with the recommendations for renting a room where the advice was to be sure the space rented was a small percentage of the overall space. Otherwise one risked CRA declaring the renter's portion as a business that was not eligible for the principal residence exemption.




redsgomarching said:


> If not, i would start doing so, and depending on how long they've been renting is probably how many years they would lose out on. if its 1 year, not a big deal because of the +1 rule


True ... hopefully the renting in NOTL has not been going on for long.


Cheers


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## redsgomarching (Mar 6, 2016)

thanks for looking into that. i see this all the time a lot of older folks are so attached to their homes that they would rather use their cpp money to pay their property taxes and utilities just to keep the house because they think the next year they can get another 50-100k and when then get declined for financing because their income is so low. in this i think you need to be advise your parents they have to let go of real estate and go for a nice portfolio that gives them a decent yield.


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## Lost in Space 2 (Jun 28, 2016)

Two thoughts. Finding a good advisor, unlikely that will happen But it's worth keeping in mind. More likely if they are new to investing is that panic during a correction and sell everything. Garth Turner shared a story about that a while ago. She sold everything in the 2008 crash and evenually ran out of money. I'd highly recommend buying them a copy of Millionaire Teacher, best investing book out there for a noice.


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## Karlhungus (Oct 4, 2013)

theyoungentrepreneur said:


> I'm helping them out in terms of trying to devise a plan - with or without me. It doesnt matter what I think - Im just trying to help give high level advice. Im having us all sit down with their financial manager/fund manager to get his thoughts. I dont want my bias to play a role here - so Im trying to get outside opinions (hence posting here) - as well as professional outside opinions. My dad definitely wants to work again - but Im trying to advise a plan that they can be generating more of a passive income (regardless if they invest in properties or not) - so that they can generate said income in addition to my dad making a small income from a job - but so that he doesnt feel stressed that he needs to pay the bills through the job - rather knowing that he's generating a passive income and the job can be additional deplorable funds to invest/save.


Yes, in theory. Remember, collecting dividends or selling shares has the same net effect. But, if you feel emotionally better just collecting dividends, the capital should grow over time as well. Even if you sold off 4% per year your parents nest egg should still grow over time.


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## OhGreatGuru (May 24, 2009)

Let's see:
Parents are both 60 years old.
they are in a bit of a struggle financially
Need to get get back on track throughout the next five years (presumably until they take CPP & OAS?)
Rental income on Niagara home is just meeting expenses
Buying & renting out two properties in GTA would produce a net income of about $9600- $12,000 per year. 
I take it they have no experience at being landlords as a business.

OTOH - They can get $450k from their home and have another $350k in investments. $800k invested in any good balanced monthly income fund would generate $32k per year - 3 x their anticipated net income from the 2 rentals, with little risk and no work.

_"my dad is always seemingly in a down mood"_ - understandable after a failed business and no earned income on the horizon

_"I'm a 28 year old entrepreneur with 2 businesses - I've done well for myself to this point and I really don't like seeing my parents struggle. ... I own a few condos in Toronto and I'm renting them out and living with the parents so I can help them pay for their rent cost.... I love my investment properties because they provide nice cash flo_w"

Being a landlord in the GTA sounds like your dream, not theirs. You still have 2 businesses and your youth to fall back on. They don't. If you were planning on managing the rentals for them, they could just lend you the money at 4%. But lending money between relatives is usually a bad idea. And it still leaves them exposed to the real estate risk in the GTA.


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## OrganicRain (Nov 27, 2016)

*Big Screen*

Liquidate real estate, assemble a couch potato portfolio and rent a cheap apartment and live off the investments plus CPP and coming OAS. Done


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