# Personal finance question



## Rickson9 (Apr 9, 2009)

Hi,

My name is Jim. My question is: (when?) should my wife and I move to a new home?

My wife Natalie and I are in our mid-30s with a dog and no children. Our combined income $250k per yr. We have 2 break-even rental properties valued at $600k and mortgages of $300k. Our primary residence is a $300k townhome in Mississauga with no mortgage; it has a secured and unused $200k LOC on it. We have $225k in retirement savings (mostly stock), $225k in a non-registered stock trading account (mostly stock), $12k in our TFSA (mostly stock), and $100k in cash. Our net worth is approximately $1M.

We would LIKE to move somewhere into the GTA, but we don't NEED to. Should we: a) stay in our Mississauga townhome, use our $100k cash to pay down the mortgages on our rental properties to make them profitable, b) sell our townhome and move, or c) rent out our Mississauga townhome and move, or d)???

And if we decide to do c) should we use the LOC on our Mississauga townhome for a down payment?

Our fears are:
1) Mortgage rates are uncomfortably low (ie. there is a higher chance that rates will ratchet higher rather than lower during the amortization period of a new mortgage)

Our fears are NOT:
1) Stock market declines. We relish declines in any asset class. We made huge purchases in stock over the last year during this meltdown (as well as the last 2002 meltdown). We LIKE stock market meltdowns.

Our tendancy is:
1) Continue the status quo.

Our reasoning is:
1) The government is printing money to prevent the collapse of financial institutions. In economics nothing is 'free'. Inflation is a very real possibility over the next half decade. This will result in a large spike in mortgage rates sooner or later.

PS: We do not want to consult a financial planner with regards to investing. Their knowledge is very bad.

Best regards,
Jim


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## stephenheath (Apr 3, 2009)

Jim, first off my hat is off to you, you have incredible finances... I'm sure there are a lot of us who would kill to have your income and net worth in the mid 30's, and at this point, financially it would appear that any route you take would be a success.

That being the case, are you sure it's a financial question and not a lifestyle question? The reason I ask is that normally when I've seen similar questions it's always been "This is what we would like to do, does it make financial sense?". In this case you mention that you would like to move to the GTA (a very broad area), but that your tendency is to stay put. How about if we turn this around and ask... "Without considering finances, where would you LOVE to live and why?". Because to be honest, I can't see any reason why your finances would restrict you to where you are, it just sounds like you aren't too sure what you want.

PS: In regards to mortgage rates going up, that would imply high inflation, and that we would expect to cause your stocks and related dividends to increase as well, not to mention that it would be understandable in those circumstances to increase the rent you charge. Over time, the mortgage balances will decrease whether you dump cash on it or not, so either way in the long term the properties should move from break even to profit naturally, and even if they don't, your diversification should keep you going up whether rates are low or high.


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## Rickson9 (Apr 9, 2009)

stephenheath said:


> Jim, first off my hat is off to you, you have incredible finances... I'm sure there are a lot of us who would kill to have your income and net worth in the mid 30's, and at this point, financially it would appear that any route you take would be a success.
> 
> That being the case, are you sure it's a financial question and not a lifestyle question? The reason I ask is that normally when I've seen similar questions it's always been "This is what we would like to do, does it make financial sense?". In this case you mention that you would like to move to the GTA (a very broad area), but that your tendency is to stay put. How about if we turn this around and ask... "Without considering finances, where would you LOVE to live and why?". Because to be honest, I can't see any reason why your finances would restrict you to where you are, it just sounds like you aren't too sure what you want.


Hi Stephen, you bring up an excellent point.

Sometimes I catch myself saying that I would "love" to live in Toronto, but truthfully it is more a "like" than a "need". We like the GTA because of all the activities, bike trails, beaches area, downtown shopping, etc that the city offers. 

However, our fear is that our current 'comfortable' lifestyle would be compromised, or worse, if the RE market tanks, we would find ourselves regretting the move. I guess, as you insightfully mentioned in your post, we just need to make a decision about what we want.

Here is a more accurate summary: we would LIKE to move into the Avenue Rd. area, but we CRINGE at the 600k+ price tags most of these homes command.

How about the LOC question? If we move, should we use the LOC or sell the townhouse?

Another consideration is that, God willing, we would like to start having children so this is another issue in the mix...

Inertia is such a difficult thing to overcome...


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## CanadianCapitalist (Mar 31, 2009)

Rickson9 said:


> My wife Natalie and I are in our mid-30s with a dog and no children. Our combined income $250k per yr. We have 2 break-even rental properties valued at $600k and mortgages of $300k. Our primary residence is a $300k townhome in Mississauga with no mortgage; it has a secured and unused $200k LOC on it. We have $225k in retirement savings (mostly stock), $225k in a non-registered stock trading account (mostly stock), $12k in our TFSA (mostly stock), and $100k in cash. Our net worth is approximately $1M.


Wow! You are doing a really good job Jim. What I'm most impressed with is your net worth is around 4x your income and you are only in your mid-thirties



Rickson9 said:


> Our fears are:
> 1) Mortgage rates are uncomfortably low (ie. there is a higher chance that rates will ratchet higher rather than lower during the amortization period of a new mortgage)


My feeling is that your fears are unfounded. Because of your solid financial position, any route you choose should work out just fine.


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## stephenheath (Apr 3, 2009)

Jim, I think maybe this is what is causing you difficulty (aside from needing to decide what you want):



> if the RE market tanks, we would find ourselves regretting the move


Is maybe the issue that you are considering your home as an investment and your desire to maximize profit/returns is conflicting with your desire for more personal amenities and a desire for change? And hey, if I'm way off, just chalk it up to me not knowing you and trying to bounce ideas of you, I'm not trying to psychoanalyze you 

For example.. let's say there's a house downtown Toronto that is your dream house, absolutely perfect. Without thinking of it as an investment, your instinct is to snap it up while it's available because it's your dream house... but thinking of it as an investment you start thinking "there are lots of signs that the market might have more to drop, maybe I should wait and see if the price goes lower". Maybe you've always wanted a house with a pool, but you know that houses with pools generally have lower resale value or are harder to sell in the future. You have plenty of other assets to cover everything else you want in life... retirement, travel, investment, etc... so why not indulge yourself when it comes to your primary residence?

That said, at this stage in your life, considering the expectations that RE will still continue to go down a bit, and then remain stagnant for quite a while, I personally wouldn't jump from a place you're satisified with to a "step up" home... I'd wait to find your dream house in your dream location, and then when it's available, grab it for the best price you can. I'm biased when I suggest that, because that's exactly what we did recently, but I have to admit it's made us quite happy.

PS: You added "How about the LOC question? If we move, should we use the LOC or sell the townhouse?"... Personally, selling the townhouse or renting would be a decision you're much more qualified to make. If you decide to rent it, then generally I'd think a mortgage would be cheaper than the LoC, so you could mortgage your new house secured with the townhouse and the new house, which should get you a rock bottom rate without needing to mess around. For example, if the new house was $600,000, you'd want 20% down to save money, which is $120,000. So you mortgage $120,000 from the Mississauga home and $480,000 from the new home.


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## Bullseye (Apr 5, 2009)

Your rentals are only break even with 50% equity in them? If so, these are terribly performing investments, and you should sell them immediately.

Use the $300k equity and go buy your dream home. No mortgage worries, no worries about a housing crash, no tenant issues.


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## lazy cdn (Apr 3, 2009)

I thought rickson9 was doing great until i read bullseye reply. All i can say is lots of dollars, not enough cents !!


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## Rickson9 (Apr 9, 2009)

stephenheath said:


> Jim, I think maybe this is what is causing you difficulty (aside from needing to decide what you want):
> 
> Is maybe the issue that you are considering your home as an investment and your desire to maximize profit/returns is conflicting with your desire for more personal amenities and a desire for change? And hey, if I'm way off, just chalk it up to me not knowing you and trying to bounce ideas of you, I'm not trying to psychoanalyze you


Your accuracy is uncanny! This is exactly how we are thinking. We find it difficult (if not impossible) NOT to consider our current townhome and the potential new home as an investment; something for us to resolve within our personalities I suppose 



stephenheath said:


> PS: You added "How about the LOC question? If we move, should we use the LOC or sell the townhouse?"... Personally, selling the townhouse or renting would be a decision you're much more qualified to make. If you decide to rent it, then generally I'd think a mortgage would be cheaper than the LoC...


This is good to know! We didn't know (generally) how a LOC would stack up to a new mortgage.



stephenheath said:


> ...so you could mortgage your new house secured with the townhouse and the new house, which should get you a rock bottom rate without needing to mess around. For example, if the new house was $600,000, you'd want 20% down to save money, which is $120,000. So you mortgage $120,000 from the Mississauga home and $480,000 from the new home.


Actually we didn't even consider mortgaging our current townhome as an option (I'm not sure why since it is staring us in the face). Our idea with the LOC was to use it as a 'release-valve'; if things got tough we could reduce our debt load in a hurry, but I guess an open mortgage could accomplish the same thing.

Thanks for the ideas!


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## Rickson9 (Apr 9, 2009)

Bullseye said:


> Your rentals are only break even with 50% equity in them? If so, these are terribly performing investments, and you should sell them immediately.
> 
> Use the $300k equity and go buy your dream home. No mortgage worries, no worries about a housing crash, no tenant issues.


A few comments:

1. Upon purchase, we only had 25% equity in the properties. The bulk of the gained equity is from how the real estate market has performed over the last decade.

2. The rentals are at below average rents. I have friends staying in there that I've known since I was a teenager. (approximately 25% less than market), so we have absolutely no tenant issues at all. If we have money (which we do), we like to do what little we can to help our friends who don't have as much.

3. We don't care about asset crashes; stock or real estate. We actually WANT a crash. We WANTED a stock market crash (and we got one) and we WANT a RE crash. We don't actually 'worry' about crashes - we wish form them to happen (often).

4. My wife and I earn high incomes. The interest from our mortgage helps reduce our taxable income quite a bit.

5. My wife and I don't like to sell assets. We believe that 30 years after selling, any 'profit' we would reap would be insignificant. In addition, all the appreciation is tax-free money.

No offense, but we think that the idea of selling an appreciating investment that is not losing money and providing tax benefits in exchange for a personal non-investment property with no tax benefits is actually a very bad idea that would deteriorate our net worth substantially over time. We would rather see how are assets are doing a quarter century from now when the mortgages on them are a distant memory.


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## FrugalTrader (Oct 13, 2008)

Rickson9,

This may be off topic, but I noticed your link at the bottom. Were you featured in Moneysense magazine a little while back?



Rickson9 said:


> Three background points:
> 
> 1. Upon purchase, we only had 25% equity in the properties. The bulk of the gained equity is from how the real estate market has performed over the last decade.
> 
> ...


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## Rickson9 (Apr 9, 2009)

FrugalTrader said:


> Rickson9,
> 
> This may be off topic, but I noticed your link at the bottom. Were you featured in Moneysense magazine a little while back?


It was awhile ago, but yes I was.


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## Bullseye (Apr 5, 2009)

Rickson9 said:


> A few comments:
> 
> 1. Upon purchase, we only had 25% equity in the properties. The bulk of the gained equity is from how the real estate market has performed over the last decade.
> 
> ...


If you're getting tax benefits from your rental, it would be because you're losing money on it, no? Your costs are exceeding your revenues? Assuming you're doing it all above-board.

Not sure what you mean about appreciation being 'tax-free' money...only your principle residence gains are tax free, investment property gains are taxable. Maybe you meant it's tax-free because you'll never sell it??

You say it's not losing money, but are you considering the lost benefit of the $300k in equity? If that $300k is earning you no cash flow annually, that would be the case.

I'd be interested to see your detailed numbers on the rental, if you want to post them. Sounds more like a charitable endeavour than an investment? Might be more effective to sell, invest the money in something profitable, and then just give the money to your friends. They'd probably get more benefit from it that way.


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## Rickson9 (Apr 9, 2009)

Bullseye said:


> If you're getting tax benefits from your rental, it would be because you're losing money on it, no? Your costs are exceeding your revenues? Assuming you're doing it all above-board.


As far as I understand, interest expenses on loans made for investment purposes can be used to reduce taxable income.



Bullseye said:


> Not sure what you mean about appreciation being 'tax-free' money...only your principle residence gains are tax free, investment property gains are taxable. Maybe you meant it's tax-free because you'll never sell it??


Yes. It is tax-free because we will never sell it. There are other (more advantageous) ways to pull the money out of an appreciated investment property.



Bullseye said:


> You say it's not losing money, but are you considering the lost benefit of the $300k in equity? If that $300k is earning you no cash flow annually, that would be the case.


I am assuming that you are speaking about the opportunity cost of not using the equity in our principle residence. Your suggestion (unless I'm mistaken) was to simply convert this into another principle residence. We don't see any benefit to do this.



Bullseye said:


> I'd be interested to see your detailed numbers on the rental, if you want to post them. Sounds more like a charitable endeavour than an investment? Might be more effective to sell, invest the money in something profitable, and then just give the money to your friends. They'd probably get more benefit from it that way.


It is mutually beneficial. I suppose you could view it as charity. It would probably fit the definition. From our point of view, our friends are getting good rents that cover all the costs of our appreciating investments; investments where the interest on the mortgages are being used to reduce our taxable income. 

It is likely that in the near future we would refinance the properties to pull money out, maintain break-even cash flow, and continue to reduce our taxable income. 

I don't have the ability to understand the benefits associated with your suggestion of selling. If you are concerned with raw profitability another suggestion to selling would be to find new tenants, jack the rent to market and/or reduce or avoid refinancing the debt (or a combination of the above); and still keep the assets.

Considering the market value of $600k and having only 25% of real money tied up into these properties, we really don't understand how selling would make any sense? 

Also, seeing 'detailed numbers on the rental' make no sense? Just to verify that they break even? I am looking for game tactics not jersey colours. If you could let me know how seeing the financial statements on the rental properties could help us, please let me know. I'm sorry if I'm clueless on this request.

Again, I apologize if I haven't been able to communicate the benefits of our rental properties, but selling assets has never been a good plan for building wealth for us.


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## Bullseye (Apr 5, 2009)

Rickson9 said:


> No. Interest expenses on loans made for investment purposes can be used to reduce taxable income.


Interest costs are one expense of a rental. They don't reduce taxable income, per se, but can be used to offset rental income. If your interest, property taxes, insurance, etc are greater than your rental revenues, then yes, you'd receive some tax benefit. You said your properties are break-even, though, not cash flow negative. 




Rickson9 said:


> I am assuming that you are speaking about the opportunity cost of not using the equity in our principle residence.


No, I was referring to the $300k of equity you have in the rental properties. If you are break even, that means you are earning nothing from that $300k but the potential for capital appreciation?



Rickson9 said:


> I don't have the ability to understand the benefits associated with your suggestion of selling. If you are concerned with raw profitability another suggestion to selling would be to find new tenants, jack the rent to market and/or reduce or avoid refinancing the debt (or a combination of the above); and still keep the assets.
> 
> Again, I apologize if I haven't been able to communicate the benefits of our rental properties to suit your level of understanding, but selling assets has never been a good plan for building wealth for us.


I'm saying that if your investment is giving you a poor return, you should consider selling and investing in something else. For example, I no longer hold any real estate investments, as prices grew so high in recent years that my capital was better reallocated elsewhere. Ie. I sold real estate 'high', and bought stocks 'low'.


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## Rickson9 (Apr 9, 2009)

Bullseye said:


> Interest costs are one expense of a rental. They don't reduce taxable income, per se, but can be used to offset rental income. If your interest, property taxes, insurance, etc are greater than your rental revenues, then yes, you'd receive some tax benefit. You said your properties are break-even, though, not cash flow negative.


Ah I understand now. Thank you. We consider the mortgage interest offsetting our rental income to be a benefit.



Bullseye said:


> No, I was referring to the $300k of equity you have in the rental properties. If you are break even, that means you are earning nothing from that $300k but the potential for capital appreciation?


Correct.



Bullseye said:


> I'm saying that if your investment is giving you a poor return, you should consider selling and investing in something else. For example, I no longer hold any real estate investments, as prices grew so high in recent years that my capital was better reallocated elsewhere. Ie. I sold real estate 'high', and bought stocks 'low'.


This is a failure of ours. We do not sell assets regardless of their run-up in price.

We will however, always buy assets 'low'; we just won't sell them.

For better or worse, we hoard. Do we max out our potential. Of course not.

In addition, I can't speak for my wife, but I am extremely lazy. They say that you should never avoid selling because of tax reasons, but I do. I don't want to deal with the tax implications of selling assets. Selling also requires quite a lot of thinking; at least more thinking than buy-and-forget. 

So is there a sensible way to keep everything and buy the new home in the GTA?


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## Rickson9 (Apr 9, 2009)

lazy cdn said:


> I thought rickson9 was doing great until i read bullseye reply. All i can say is lots of dollars, not enough cents !!


To clarify the situation with regards to the rental properties:

A person puts $100K down to purchase an investment property at a price of $400K (ie. 25% down). The investment is rented out and has neither positive or negative cash flow. The debt is $300K and the equity is $100K.

The market rises and the property is worth $600K. The debt is still $300K but the equity is now $300K. The property still breaks even.

The property has 'made' the individual $200K for doing nothing except collecting rent cheques. 

When the property appreciates $40K. Sell now? When the property appreciates $100K. Sell now? When the proeprty appreciates $200K. Sell now?

Fast forward 30 years. Would the $40K 'profit' look good? Would our $200K profit look good? Sure, better a profit than a loss, but we wouldn't consider this a successful outcome.

In general, we are a long term investors, and 'selling' (to us) is a bad idea because in a few decades, the (taxable) 'profit' that we gain will be inconsequential. 

Hundreds of dollars soon become thousands of dollars which soon become tens of thousands of dollars which soon become hundreds of thousands of dollars and so on and so forth. The problem is that the vast majority of individuals are seduced by thousands of dollars and as such, never go on to experience anything more. 

We have always been told by accountants and financial planners to sell. They are always very quick to sell. Over the last decade, if we had followed their advice, it would have been a horrible decision.


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## Bullseye (Apr 5, 2009)

Rickson9 said:


> To clarify the situation with regards to the rental properties:
> 
> A person puts $100K down to purchase an investment property at a price of $400K (ie. 25% down). The investment is rented out and has neither positive or negative cash flow. The debt is $300K and the equity is $100K.
> 
> ...


My issue is that as investor, I have a finite amount of investable capital. I want to allocate that to the highest returning vehicle I can find, with the least amount of risk. 

Housing long term grows at about the same rate as inflation, which makes it generally a poor investment, unless you have positive cash flow. When prices are such that CAP rates on properties are 7-10%, rentals can be a good investment. When prices get so high that CAP rates drop below that, my return becomes unacceptable, and I move on. 

Given that housing has just come off an extraordinary growth streak, far above historic norms, I also felt that the risk of a decline in prices is very high. 

As far as holding assets forever, no matter what, never re-evaluating, regardless of fundamentals...I have a number of friends who did that with Nortel.


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## Rickson9 (Apr 9, 2009)

Bullseye said:


> My issue is that as investor, I have a finite amount of investable capital. I want to allocate that to the highest returning vehicle I can find, with the least amount of risk.


I understand. We just have different opinions. Capital is like ideas, both are finite. We find that selling entails too much risk for our tolerance. We treat our capital like children - once we find them a happy home, we do our best to avoid moving them.



Bullseye said:


> Housing long term grows at about the same rate as inflation, which makes it generally a poor investment, unless you have positive cash flow. When prices are such that CAP rates on properties are 7-10%, rentals can be a good investment. When prices get so high that CAP rates drop below that, my return becomes unacceptable, and I move on.


I agree. In life, we bought places to live. When we moved, we never sold we just found ways to keep what we owned.

Our RE investing career will likely be a string of properties where we once lived.



Bullseye said:


> Given that housing has just come off an extraordinary growth streak, far above historic norms, I also felt that the risk of a decline in prices is very high.


As I mentioned before, my wife and I WANT market crashes to happen. We sincerely hope that your outcome comes to pass!



Bullseye said:


> As far as holding assets forever, no matter what, never re-evaluating, regardless of fundamentals...I have a number of friends who did that with Nortel.


Ignoring the fact that comparing our property with Nortel stock is silly, the fundamentals of the properties as far as the income statement and balance sheet are fine.

As the old cliche goes, there are a million ways to make a million bucks! Best regards.


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