Friday Reader Case: My Mortgage Is Underwater. Am I Screwed?

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Greetings, readers! Today’s Friday reader case is actually pretty surprising (and surprised even us), because despite where you THINK it’s going, it takes a surprising turn.

Read on to find out:

Big Hello to FireCracker and Wanderer:

I am so frickin enamored by your story. I found your blog about a month ago and I’ve just been binge reading the posts. I’ve fully convinced my husband that we need to take your advice and get our shit together to become Financially Independent and Retire Early… I feel so late to the game and behind.

I have some questions to ask… and I’ll submit my situation to possibly get picked for a reader case Friday.

Most times you are mentioning after tax income to be that after maxing out tax deductions with RRSPs and/or contributing to TFSAs (I’m Canadian as you can now tell). But if you’ve got debt and not much disposable income to start with – investing in RRSPs/TFSAs for tax purposes takes a back seat, right? Or is there a sweet spot on the amount to put towards debt and amount invested to have more net income?

Are you able to access RRSPs before you’re 60? I have a small locked in RRSP (with a bank) and I can’t seem to get a straight answer from them on this. They just say that I can only access in financial hardship or medical issues, etc.

Since you mentioned paying into RRSPs to lower taxes, how do you guys access them now? Or are you using income from other parts of portfolio for right now… then once you’re older you’ll tap into the rrsps? I find this part very confusing (I swear, I went to University! I just wish I learned more personal finance about this sooner).

Do you ever recommend accumulating debt in order to get real estate off the books? See story below.

My story:

I’m turning 33 in July, husband almost 36. We’ve got very little to show for ourselves in the 12+ years of being in the workforce. Our earning potential is a bit one sided, as I’m working in health care and my husband often works in customer services based jobs. Sadly, I amassed a lot credit card debt ($20k) in my early 20s which we’ve just gotten a better handle on, but its impact is apparent.

We had spent the previous 2 years up North working but then recently we relocated to New Brunswick for my work, mostly to be closer to home (Nova Scotia). My husband hasn’t found work yet. We own a house in NS which we’ve been renting out, since we’ve been moving around a lot. The market where the house is has fallen dramatically in the 7 years we’ve owned the home. We bought the house for $135,000 and still owe $108,000. Although the market value is only $100,000, with our realtor is suggesting $90,000 for a quick sale (fuuuccck….).

Our renters have given notice and leaving end of June and our mortgage is up for renewal in August, so we are trying to figure out what we should do: Put some extra money in to make house more appealing to hopefully sell, but knowing we will take a loss… or keep renting it and hold onto it for now in hopes that the loss won’t be as much in two years?

Another complication is that we own two vehicles, but my sister drives one. We bought it just before something came up where we moved away but had financed the car and couldn’t take it with us, so she took over the majority of the payments. Our original plan was to put all extra money to the car to get it out of our name (but then she would continue making payments).

Here are our stats:

Mine: annual gross $74,000 (current take home: $45,500 annually) (which will eventually go up to $82k in 3 years, then top of pay scale)
Husband: [Currently on EI, $450 weekly until end Dec 2017], but hopefully finds a job before then… and hopefully makes ~$30-35,000/year before taxes).
Sister: $300 monthly car payment (kind of ‘income’) (will pay until Sept 2019)
Renters – $1000/mth… but current renters leaving in June. Maybe $900 is more reasonable.

Expenses (total: ~$3400/mth) :
Rent: $840 monthly
Mortgage $385 biweekly (includes property tax and insurance)
Home Insurances $100 ($65 house, $35 tenants)
Car 1 $149 biweekly (in my name but my sister drives it… she is paying me $300)
Car 2 $220 biweekly
Car Insurances $183 monthly ($98 for sisters car, $85 our car)
Electricity $85 monthly
Cell phones $175 monthly
Cable/Internet $125 monthly
Food/Entertainment $850 monthly
Student Loan payment $125 (minimum)
Gym $62 biweekly for us both

Credit cards: $0 (yay! Haha… but that’s not much to celebrate)
Line of credit $5700 (12.4% interest)
Car 1 $8500 balance (terms out August 2019)
Car 2 $25,000 (terms out Sept 2022 – ugh… 7 year term, such a bad idea)
Mortgage $108,000 (up for renewal, 18 years left; considering doing another 2 year term, current rates 2.19%)
Student Loan $5000 (can’t remember the interest rate… maybe 4%?)

-$20,000 in locked in RRSP at a bank
-paying into company pension plan… current value $60,000 (but when I leave I will cash out: a portion is taxed, a portion is cash and a portion must be transferred to a RRSP). So depends on how long I stay…
savings $0 (we just cashed out $4500 in TFSAs to finish paying off credit card debt).

What do we tackle first? Get rid of the house? Get rid of Car 1? And once we finally get rid of all the debt… where do we put our money? RRSPs plus index funds? Can we ever retire???


Now this is one meaty reader case! How I could say no to this?

My first thought was “Holy Shit, your house was only $135,000 and you’re renting it out for $1000/month?” That’s pretty good! Especially given how close it is to the 1% rule of real-estate investing.

When the house is that cheap, how could you possible lose?

But then I read the part about a) the property being underwater and b) the tenants moving out, and I felt this sinking feeling in the pit of my stomach.

Then I got to the 12.4% LOC interest, car loans, student loans, and let’s just say, there is some seriously messed up shit going on here.

But before we jump in to figure out how to fix this financial mess, let’s first tackle their questions since we’ve gotten the same questions from quite a few readers:

1) If you’ve got debt and not much disposable income to start with – investing inside RRSPs/TFSAs for tax purposes takes a back seat, right?

  • In your case, it makes no sense to put after-tax money in TFSAs if you have high interest debt. Murder that debt monster first.
  • However, with RRSPs, since it’s pre-tax money, you put money into an RRSP, get a tax refund and use THAT to pay off your debt. What this does is take money that you were going to lose to the government anyway and instead use it to kill that debt monster.

2) Or is there a sweet spot on the amount to put towards debt and amount invested to have more net income

  • Not in your case. Pay off your debt first. Especially high interest debt. You won’t be able to beat a 12.8% interest rate with market returns.

3) Are you able to access RRSPs before you’re 60?

  •  Yes. The government would put a holding tax on it (10% if you withdraw 5000K, 20% if you withdraw $5,001 to $15,000, and 30% if you withdraw over 15,000), but you get the withholding tax back when you file your taxes.
  • Any RRSPs you withdraw gets added to your salary. That’s why it makes sense to withdraw once you retire, because your income goes to 0, and you can shelter it under the basic amount. That’s how you get it out without paying taxes.
  • Your company may lock in your RRSP and prevent early withdrawal (Wanderer was in this situation). However, this is a per-company rule, not a federal rule. Wanderer got access to his money once he quit, so you should too.

4) Since you mentioned paying into RRSPs to lower taxes, how do you guys access them now? Or are you using income from other parts of portfolio for right now… then once you’re older you’ll tap into the rrsps?

  • Since our salary went to 0, we can withdraw 10,000 each tax-free. There is a withholding tax of 20%, but we get that back when we file our taxes.

Hope that clears things up.

Now, in order not to bore the American and other international readers to death with all this Canadian tax talk, let’s jump straight into the numbers.

Okay, so other than the underwater house, the other big red flag that jumped out at me was your spending.

Even though you say you’re spending around $3400/month, when you actually add up the expenses you’ve listed (excluding your sister’s car payment which is covered), you get:

$840 + ($385 + $220 + $62)*26/12 + $183 + $85 + $175 + $125 +$850 + $125 = $3828/month.

This means you’re spending $45,938/year! Somehow you are currently spending MORE than your take home pay, and not only that you’re spending more than we did living in Toronto! And 15% more than how much we spent travelling THE WORLD?! And you’re in freaking Nova Scotia. A place where houses cost only 10% of what they cost in Toronto?!

I suspect this is because you had dual income before your spouse lost their job, so this would’ve been okay previously, but with only $975/month coming in from EI and only lasting until the end of year, it’s time to buck up, and get those expenses under control.

But I’m seriously curious about how the heck are you spending so much in a low cost province like Nova Scotia. Let’s pull back the curtain, shall we?

The biggest expenses you have, outside of housing costs, is your cars. You mentioned that your sister pays you $300/month, but that only covers the car payment for car 1. It doesn’t cover car insurance, which you are paying for her.

So that means, outside of what your sister pays you, you are spending $660/month on cars. If you get your sister to pay her fair share, that should bring the cost down to $560/month. Still not great, but better.

On top of this, you’re also blowing $300/month on cell phone and TV/internet. Do you really love Bell or Rogers THAT much? When we lived in Toronto, we were paying $40 for internet and $20 (Wanderer) and $30 (me) for cell phone. That’s only $90. So you should be able to cut this bill to $100 by shopping around. One option is is to use VOIP. We switched Wandere’rs parents from Rogers media package to VOIP, and that easily saved them $80/month.

A bill of $850 for food and entertainment is reasonable. I don’t want you to be miserable and only eating Kraft dinner all the time, so I wouldn’t cut too much from this.

The gym membership may need to go or be suspended temporarily until your spouse finds a job. You live in Nova Scotia, there’s nature all around you. Work out by hiking or biking and that’ll save you $134/month.

So if you make those cuts, you’ll end up saving $100 + $200 + $134 = $434/month. And since these are reoccurring costs, you’d be able to decrease the portfolio you’d need to retire by $130,200!

In fact, given that $434/month * 12 = $5208, these savings alone would be enough to kill your $5000 student debt in just 1 year.

And by reducing your overall yearly expense from $45,938/year down to $40,728, which means you’d be going from a savings of $-438/year to $4770 /year! That’s only a miniscule 10% savings rate a year, but it sure as hell is better than going into red every year.

You know what else? Your spouse’s EI payments are around $975/month. With your salary covering the expenses, just by using his EI payments, you’d be able to murder the LOC in just 6 months.

So you’re not actually that knee deep in debt. But what confuses the hell out of me is why the heck your LOC is 12.5%? I could walk into any Canadian bank right now and get an LOC for 7%. So the correct thing to do is to get a lower interest LOC, pay off the higher interest LOC and then murder that LOC debt at a lower 7% or less interest rate.

But what about the house? Should you keep it and continue renting it out? Move in? Or sell it?

Back when you had a tenant, you were making $1000 – ($385 * 26/12) – $100 = $66! A whopping $66 a month?! And this is assuming you aren’t paying any taxes on the rental income. So you decide to be a landlord for the privilege of making only $66*12 = $792/year? Over your investment of $35,000, that’s a 2.3% return. WOW. I could easily beat that with a high interest savings account, without taking any risk or bending over backwards to take care of tenants.

In fact, all it takes is 1 month of vacancy (which is what’s happening right now, since your tenants moved out) to wipe out your investment gains for the whole year.

This is a terrible investment. Despite the fact that the house only cost you $135,000 and you were able to rent it out for $1000/month, your carrying cost ate up 93% of the your rental income.

Normally, I’d since ditch this investment, BUT now that your mortgage is underwater, it might make more sense to ditch your rental and move into the house instead. I know you say you’re “moving around” a lot, and I’m not sure what that means, but the only way it makes sense to hang onto the house is to actually live in it and save the rent.

By ditching your $840/month rent and $35 home insurance for the tenants, that will save you $875/month. This would reduce your monthly cost from $3828 – $875 = $2953. And if you make the $434/month cuts I mentioned above, that would bring down your cost to only $2519/month or $30, 228/year. That decreases the portfolio you’d need to retire from $1.15 Million to $755,700.

At your current trajectory, since you have no tenants and are spending MORE than you make, your time to retirement is:


But, what would happen to your TTR (Time to Retirement) if you bring down your costs to $2519/month and pay off your student debt and LOC in 1 year?

You would increase your negative savings rate to 33.56%. And investing the $80K of your RRSP and yearly savings at a conservative return of 6% would give us:

YearBalanceSavingsPortfolio GrowthTotal

19 years + 1 year to pay off the LOC and the student loan. Which means you’d be able to retire in 20 years at the age of 53. Which is still 12 years ahead of the normal age of 65.
Now, that’s assuming that you’ll be down to 1 salary for the next 19 years. If your husband ends up getting another job paying $30K, but you kept your expenses the same, and he maxed out his RRSP, he would get an after-tax return of $27,000 (including RRSPs). This means you’d be able to ramp your savings up to 58%, decrease your time to retirement from 20 years to 12 years, and retire at the age of 45 instead of 52:

YearBalanceSavingsPortfolio GrowthTotal

So even though your situation looks dire, it’s really not THAT bad. But because you have debt, an investment property that’s underwater with a bad ROI, and high expenses, you’re currently looking at a negative savings rate on one salary and no tenants.

So don’t even THINK about investing or retirement until you pay off the high interest debt, reduce your expenses, and move into your investment property.

You can still retire in 19 years, 12 years ahead of the normal 65, if you do the following:

  1. Lower your expenses by $434/month by cutting your cell phone and cable/internet bill, getting your sister to pay for her car insurance, cutting out the gym and switching that for jogging or hiking.
  2. Open a lower interest LOC, transfer the existing debt from the 12.5% to a lower interest LOC. Pay this off ASAP with the monthly savings above.
  3. Pay off your student loan with your husband’s EI pay check.
  4. Move into your investment property to save $840 in rent and $35 in tenant insurance.

And if your husband manages to find a job paying $30K, in addition to the above mentioned changes, you’ll be able to retire in just 12 years!

So when I initially read this reader case, I thought this was a cut and dry case where the person is SCREWED with a capital S…but because their housing price is pretty low, even though their mortgage is underwater, they still have debt, AND the husband lost his job, they can still turn it around by making a few changes and getting him a job that pays just $30K a year.

What do you think? What would you do if you were UnderWaterInNS?

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77 thoughts on “Friday Reader Case: My Mortgage Is Underwater. Am I Screwed?”

  1. I love these Friday Reader Cases for two reasons: One, these are a perfect way to answer the age-old millennial question: how in the world are they affording their life? Two, you can see that we are really all in this together. We are all pretty much the same an in need of the same help.

    Of course, FIRECracker’s penchant for cutting right through the complicated to make it simple is also awesome!

    1. “We are really all in this together.” This says it all 🙂

      I’m glad you find them helpful! We all make mistakes. No one is perfect. So kudos to all those people who are brave enough to write in and get help.

    1. That’s certainly the gut feeling that many people have. Have you ever read about Long Term Capital Management? This was a hedge fund in the late 90s that was full of some very smart guys that bought and sold bonds based on non-sense moves in the market.

      Long story short, these guys ended up buying Ruble Bonds while the Russian economy was not doing so well. They kept buying on margin (by borrowing money) knowing that the market will improve one day.

      It did, but they were no longer in business. The moral of the story is: the market will outlast you if you are in an untenable position.

    2. I feel for them too. The small upside is that they’re mortgage is relatively small, so that’s why it helps to not buy too much house. You can’t blow yourself up too badly. Had they followed the FOMO advice of “buy as much house as you can afford”, this situation would be WAY worse.

      If they can find a way to move into the house and save themselves rent, that would help.

  2. Making $74k in a place where a house costs $135k sounds like a sure-fire recipe for early retirement. Seriously, even if the house is sold at a loss, you should be able to make up that difference within a year or two. Or, as said, just live in it while paying peanuts in housing costs.

    Bring the car spending in line. Even as a guy who loves cars – I have two, despite living in a city where I need none, myself – I can’t understand the kind of money that a lot of people spend on cars, when even used economy cars offer features, safety, speed, and reliability that some luxury cars of twenty years ago would envy.

    If money is tight, you don’t need a high-prestige car. If you went with a 7 year term and the car is fancier than a Honda Civic (a car which now needs an electronic limiter to keep it from being able to exceed 210 km/h, btw, and I’m not talking about the high-performance version), you’re doing it very, very wrong. Don’t forget that, in general, the more prestigious the car, the more frequent and expensive the maintenance will be.

    1. I totally agree with this. There is no sense paying for a fancy car if you are debt or cannot buy it outright. If you are living in the arctic and need a truck, maybe… but not in New Brunswick / Nova Scotia, not even in most of Ontario.

      I could “afford” a better car but why the heck would I want to spend more money on something that takes me from A to B that hardly anyone sees? NOPE!

    2. “Don’t forget that, in general, the more prestigious the car, the more frequent and expensive the maintenance will be.”

      Insurance is often higher too.

    3. If they lived in a big city, I’d recommend getting rid of the car and using public transit or AutoShare, but this may not be an option where they live (given the housing price, I’m pretty sure it’s a low population area that is pretty remote).

      It would’ve been ideal if they had bought a used car outright instead of expensive car loans, but the damage has already been done. I’m not sure what the term agreement is for the car loan and how easy it is to get out of it. But it’s something worth looking into.

  3. Hi, FireCracker – love the reader case studies so please keep doing them for as long as possible. One question I have about this one is the following:

    The LW will no longer have to pay her rent of $840/mth, but won’t the former rent money simply go towards paying the mortgage on her house?

    At $385 b/w, I calculate her monthly mortgage payment at $834 (=$385*12/26).

    I don’t see that she’ll be gaining back the full $840 by moving into her house. I see that she’ll simply be transferring her former rent payment towards her mortgage obligations.

    If I’ve missed something, please clarify for me.

    Thanks again for all the effort you put into educating the masses about personal finances.

    1. Right now, she’s paying both the rent ($840) and the mortgage ($834), which totals $1,674. If she moves out of the rental, the rental payments go away, so she’s just paying the mortgage. Instant savings of $840.

    2. Thanks for reading and I’m glad the Reader Cases have been helpful! I will continue doing them as long as they are adding value.

      To answer your question, she’s currently paying both the costs of carrying the investment property AND rent at a 2nd place. Since BOTH the mortgage cost of the investment property and the rental she currently lives in are counted in the $3828/month cost, if she gets rid of the rental and moves into the investment property, we would leave in the $834 mortgage cost, and subtract the $840/month rental cost. Does that make sense?

      1. It makes sense to do that, but then you also need to account for the loss of rental income on the other side of the balance sheet so it becomes a moot point. She is not saving anything by doing this unless she is paying a high tax rate on the net rental income (including principal pay down), which is very unlikely on the facts.

  4. It looks from the email that they are living in New Brunswick now, but the home is in Nova Scotia. Not the easiest email to follow. So… both parties would need to look for employment in Nova Scotia. This is not an enviable position to be in. I see this as either a 2 or 3 prong approach: 1) that debt needs to be attacked, 2) expenses need to be reigned in and, 3) if possible, a move to NS should be arranged. Best of luck!

    P.S. I wish I could find a decent house in the GTA in that range!

    1. Yeah, you’re right, CanadianLawyer. Good catch. In that case, moving into the house may not be feasible (unless the employer is okay with remote work). They would need to try harder to find another tenant…maybe make the place look nicer or drop the rent.

  5. Man, that was a LONG case study. All I will say is some of their spending seriously needs to be reined in if they want to retire early. What happened to you FireCracker, you went soft? These guys are in an EMERGENCY. When one of your household has no job, you don’t spend $300 on phones & cable, $125 on gym memberships & $850 on food and entertainment. You think $850 is reasonable? It could easily be more like $500, and that’s generous!

    Overall, these guys could easily shave off at least $500 in spending per month, if not more. That’ll go a long way to an early retirement.

    They’re actually not doing that bad on a cash flow basis considering one isn’t working, but they could be doing much better. “Not that bad” isn’t going to get you an early retirement.

    1. The way I see it is if you are in a situation of job loss, you tighten the reins so to speak. Cut spending wherever possible until you get a new source of income. I am petrified of losing my job and being on EI again and have probably put too much into an emergency fund. Not a fun situation to be in.

      1. Exactly! My wife lost her job earlier this year and we cut back on all sorts of things. Any variable costs you can live without should be gone. This isn’t time for entertainment budgets, expensive cable/cell phones, gym memberships and paying insurance for your sisters car you have on finance. ALL of that can go or be significantly lowered until you both have a job again. Even then, they should consider reducing these anyway if they plan on an early retirement.

    2. As much as I would like to spank them for their $850 food and entertainment costs, that would make me a pretty big hypocrite considering how we regularly spend $900 – $1700/month on those 2 categories.

      Hey, what can I say? I love food and I get bored easily. And Wanderer needs his booze 😛

      That being said, you do have a point, since they are down to 1 income and need to tighten their belts. They could try to temporarily cut down their food/ent costs by $200-$300 until he finds a job. I do know that cutting food and entertainment is PAINFUL and feels like a diet. Switching internet/cable providers don’t cut into happiness, but those categories do. If they want to get to FI in 12 years, it has to be something sustainable and not feel like a diet.

      1. Firecracker, I actually don’t think this advice would make you a hypocrite. You worked your a$$ off to save a pile of money. That money allows you to have the freedom to live a certain lifestyle. You both saved a ton of cash when you were working in order to get to where you are today. What would you have done if during your working years you were laid off and you didn’t know when you might be gainfully employed again? Would you still spend at the same level? I know I wouldn’t, even though my partner could pick up most of the expenses, I would just naturally tighten my belt until the money started coming in again. Once her partner is gainfully employed, then I think you’re right, they can spend again at a certain level. But until he finds a job, then a certain financial diet I think is necessary.Just my two cents 🙂

  6. Hi All!
    I’m the subject of this reader case. (So exciting, but also quite scary to have people weighing in on your life/financial choices – but here we are).

    -Just wanted to note that moving into the home in NS is not an option… as we currently live in NB (not NS). And yes… it ends up costing more to live in the house than renting it (the $1000 charged helps to cover water, mortgage, taxes and insurance costs when rented), mortgage has since been renewed and payments now slightly increased to $400 biweekly. That said, I don’t want to own it at all… We definitely didn’t want to have this as an investment property, just happened that when we bought and had new job opportunities elsewhere, the market for selling the house was very poor. My hope was to have someone else pay the mortgage until the market was more favorable to unload it. Or at least have money saved up to absorb the loss. (Fingers crossed we can do in two years time)

    -100% agree that we spend too much on phone/internet/cable. I’ve not heard of VOIP… definitely something for me to look in to… I do find that some of the low cost providers of phone/internet services are harder to find outside larger city centres… so I’ll need to research services in NB to figure out options (if anyone reading knows, let me know!).

    -Yes… we could also get rid of the gym membership too.

    -We currently have a renter now. So some financial pressure is relieved. We knew not having it rented wasn’t an option (as it put us in the negative). It was either rent again… or sell. So, now that we’ve rented it, more of my salary can go towards debt repayment (woohoo!).

    -It’s comforting knowing that when we get our shit together, there’s potential to retire in 12 years… and this could be even less time dependent on husband’s employment situation. I know things don’t look great now… but I think there’s potential!!

    Thanks again FC for taking a look at my case. And hopefully I can give an update on any developments down the road 🙂

    1. Thanks for responding!

      Now that you’ve clarified that it’s not possible to move into the rental, I’m SUPER relieved that you found another renter. *phew*

      And yes your situation is not as dire as it seems (especially now that you’ve found some to cover the investment rental). I’d say get rid of that shitty investment as soon as the value comes back up. It’s a terrible investment and will be a drag on your finances going forward.

      On the plus side, if you can decrease your expenses and pay off your debt, you’ll be back on track towards early retirement within a year! Keep us posted!

  7. Very sensible advice FC, it all makes sense. Definitely pay down that debt. One thing that worries me about this case study is the couple didn’t really know how much they were spending annually.

    With some basic addition you figured it out of course, but my concern here is that they didn’t have their ‘eye on the [financial] ball’.

    Finances didn’t seem to be a priority for this couple in the past, and it shows in the debt levels. They’ve clearly been living it up, and I believe this is the *biggest* change that needs to be made, even though it’s non-financial.

    Attitudes about finances are important!

    1. Good point on attitude!

      At the end of the day, you can succeed financially even if you don’t know a thing about finances as long as you understand one simple thing: you have to spend less money than you make. 6 year-olds can understand the concept, but many people choose not to adopt an attitude that accepts this.

      I make almost exactly what the subject of this case makes, and even when I lived alone I didn’t have to make a detailed budget; like others who are much more successful than I, I simply decided up front how much was going into my savings, and then didn’t spend any more than the money that remained afterwards – the old “pay yourself first” strategy.

      This becomes considerably easier once you implement another skill that pre-teens can learn, but many people never do: identifying the difference between needs and wants. Hint: $300 a month on cable and phones is not a “need,” nor is $850 (?!) worth of food and entertainment.

      1. Yes, attitude makes a huge difference! I have a friend who just consolidated their debt by getting a 2nd mortgage on their home. Through doing this they ended up also getting like $40k extra sitting in their bank account as a cash cushion and to “have fun with” and keep talking about all the things they want to spend it on. SMH

        A lot of people have this attitude of “I’m going to have the things that I want so long as I have the means to get them, even if it gets me into debt, I’ll just pay the minimum payments and I’ll be fine” with this YOLO perspective where they refuse to be deprived of all the things they think they need and living within their means is below them.

      2. I agree. Attitude determines where you’ll end up in life more than aptitude. The good news is that attitude can be changed. And I’m pretty sure after the wake up call of the job loss, the couple’s attitude will change. It’s easy to ignore your finances when everything is going well. But once you realize job security is a myth, you have no choice but to change. Sometimes it’s gradual, and that’s ok. No one can become a different person overnight.

        Hopefully, they will gradually change their attitude about money overtime. Admitting you need to improve is the crucial first step and they’re doing that already.

    2. Sometimes it takes a wake up call (like job loss) to get your financial shit together. The couple made financial mistakes in the past, but it’s not so bad. They could easily get back on track within a year and learn how to scrutinize their finances and double-check the numbers. So I’m hopeful 😀

  8. On the rental property, you are only looking at it from a cash perspective. Here is how I look at it. Their $385/month also includes repayment of the principal (which is most likely around $3000/year based on the info provided). So if you add this amount to your calculation –$3000 + $792, they are now actually making $3792/year. You use $35,000 to calculate the investment return but really all they put in is the 5% down payment (only % that makes sense based on their payments) and legal fees so let’s assume $7K in legal fees and LTT (probably too high) and 5% down payment – $7000 + $6750= $13750 for a return of 28%! Am I totally off on this or does it make sense? Of course they still have a big loss on the property and it doesn’t help them with their current cash flow problem. Great analysis overall.

    1. Okay, whoa…hold it right there, tiger. That is A LOT of funny math going on there.

      You don’t add principal as “money they made”. That’s money that which gets locked into the house until they sell and it’s their OWN money. Counting equity as earnings is like putting away $1000 into a savings account paying 2% and saying you just MADE $1020. No, you made $20. You don’t count the base value as a gain.

      And no, they didn’t just put in 5%. They’ve been paying off the mortgage and have put in $35K into equity so far. This is money they PAID into the house, not money that magically appeared.

      So no your calculations don’t make sense. It’s not your fault though. Mortgage websites and real-estate agents deliberate make it confusing so you THINK you’re making money when it’s your OWN money you’ve paid into the house. That’s not a gain. Only appreciation is gain. And from that you have to subtract costs of ownership and closing costs when you sell.

      1. How could they buy a house for 135k seven years ago and still owe 108k, but have put 35k into equity so far of their own capital when they have rental income paying the mortgage?

        The math doesn’t work unless you meant something else like a major repair they funded and not equity as they have had seven years of rental income paying down the mortgage.

        Here is how I and every investor I know analyzes rental RE.

        1. How much did it cost to buy the property and prepare it to rent all together? That is your invested capital.

        2. Appreciation, principal pay-down and rental income less expenses are your return on your investment.

        a. Appreciation is actually depreciation right now, you don’t crystallize it until you sell and deduct selling costs. I estimate this as I go along based on current values, but it is not a real number until sale date. Just like with stocks.

        b. Principal pay down is counted as part of your ROI when it is paid by income generated by the asset, not your other capital invested.

        3. You calculate your ROI by looking at your annual after tax return on your initial cash investment and this does include principal paid by rents.

        Assuming they put 15,000 down on the house initially including closing costs, I calculate their cash flow on initial investment at somewhere between 10-17% based on the calculator referenced here and depending on the taxes they pay on the net rental income – which does include principal pay down – only interest is deductible:

        and their cap rate is about 6% – which is okay – but not great unless there is some eventual hope of appreciation.

        If they can increase the income a bit their ROI goes up a lot. I’d look for ways to do that as the cheap buy-in price and depreciation means that the best bet for making money is generating cash flow and this property has the potential to meet or beat stock market returns if it is fairly good shape – albeit with a lot more effort than a stock.

        1. God, I love “real estate math.” Take something that’s obviously true, like the fact that this person is underwater on their house, owes more than their home is worth, and is barely cash-flow positive every month (after taxes they’re likely cash flow negative), then add all this unnecessary complexity to obfuscate the truth, then conclude that this house is a smart investor and is making money. Only real estate math can turn a negative return into a positive return. Real estate math = alternative facts.

          1. Yes, you look at the after tax income. Based on their numbers their net each year is around 5k. After tax and other expenses that might be more like $4k, perhaps a bit more given the husband generally earns a lower income and claims half the gain.

            As always, you need to ask the OP for more information to get a more accurate picture.

            For RE it makes sense to use an online calculator – much easier to understand.

            “How can you count principal payments as gains? This is just money paying for the house.”

            Because it is paid with income generated by the asset and eventually it does result in greater ROI as the mortgage is paid off and you can borrow against the equity to invest elsewhere and this is money from rental income, not your income.

            Overall the house may be a loss but you don’t know this until you crystallize it via a sale. You can track this and there are different calculators to identify your current position, but hopefully prices rise before the sale.

            One of the worst things you can do is sell a house in a down cycle, but employment in NS is really down in some areas and has been for a long time – prices might not rise in, ex., Sydney, like they have in Halifax or Dartmouth.

          2. Yeah, that is just objectively untrue Wanderer. And their property taxes are included in their mortgage payment. Probably not underwater based on the 1000/month rent and expenses each month unless they incur large maintenance costs. In fact, it comes close to the US 1% rule.

            And no-one has said this is a good investment. It is objectively not based on the math when you account for depreciation unless they can increase their income from the home (under their control), or unless the property goes up in value (not under their control but can be projected based on long term stats unless local conditions have changed dramatically).

            What is true is that selling now accrues a capital loss that they are hoping to avoid by selling later when prices recover. That is not certain, but is probably more likely than not based on the stats in many areas of Canada. Where they live might well remain depressed – not sure as they have not clearly identified the market but some places in NS have lost local industry.

            This is similar to looking at ups and downs in the stock market. Are you suddenly going to believe that they are a terrible investment if the market declines? You would not based on the historical data. Same with real estate – once you can evaluate the historical data and local conditions for that particular area.

            They may be better off selling now and crystallizing the loss if they do not believe the market will recover if they find the place to be a hassle to manage or there is deferred maintenance.

        2. How can you count principal payments as gains? This is just money paying for the house.

          If I buy a car which costs 10,000$ in 10 equal payments of 1,000$, I most certainly can not state that I am “earning” 1,000$ a month.

          If I buy a house and make payments every month, interest of course is money going to the bank, but principal is not money “earned”, this is the money that the investor PAYS to the previous owner in order to buy the house in the first place. sure, the bank mediates this and spreads the cost over many years, but it is certainly not a gain, it is the cost.

          The only way to look at the yearly ROI is:
          1) Count all the money flowing in (rent, and only rent)
          2) Subtract all the money going out (all mortgage payments, taxes, upgrades etc)
          Divide this by your immediate cost of purchase (down payment, lowyer fees etc).

          Years down the road when you sell you can either gain or lose money depending on capital gains/loss.

          RE “math”…

      2. Hi FIRECracker, no I don’t think there is any funny math going on there (maybe just a little) I just suck at making my point. Indigo was much better at explaining what I was trying to say.
        “Principal pay down is counted as part of your ROI when it is paid by income generated by the asset, not your other capital invested”. I have three rental properties and except for the initial down payment, I haven’t invested much of my OWN money over the last five years, the rent payments usually cover all expenses. I couldn’t have done it with the stock market since I didn’t have the money to start with. My tenants are building up my equity. But in all fairness I did forget to add depreciation in my calculation.

        1. Okay, I see what you’re trying to say now. Did you also forget to include taxes? If the property is not their primary residence, they’re subjected to taxes on the rental income as well.

          Another point is that we don’t know whether they had those tenants on day 1 as soon as they started paying the mortgage and whether there was 0% vacancy this whole time. If this is true, then the rent went towards the equity. However, at any point if there was vacancy, or it took some time to set up the investment property before the renters moved in, that’s equity they paid into the house, not the renters. We also don’t know how much maintenance costs they’ve paid over the years.

          So it’s not as black and white as just take the downpayment they put in, assume all the equity is paid from the renters, assuming 0% taxes and 0 maintenance costs, to get their gain. Also, it’s not a gain, if they’re underwater and the bank can call the loan when it’s up for renewal. Be careful about looking at only the positives of real-estate investing without looking at the risk.

          1. I do understand the risk and you are correct so far there is a big loss on the property so any rental income applied against the principal will be totally eliminated if they were to sell now. I didn’t add taxes or loss of rental income or accounted for any other major expenses because I was just using your numbers. I just had a tenant from hell, and trust me I do know the risk! this is also something they should keep in mind if they keep the house as a rental.

  9. I’m confused how there is any savings in rent if they then have to pay the mortgage costs which don’t seem to be accounted for? Plus wouldn’t she lose her job if she changed provinces? Presumably she’d be in Nova Scotia in the house if that was possible given that they have moved to be closer to Nova Scotia already.

    Best thing for them might be to cut expenses and some of their losses and press restart. Sell both cars and buy one inexpensive car. It is not only the insurance that is going to cost them daily on the car the sister is driving, it is depreciation and wear and tear. Get rid of it. In 2019 it will be worth far less than it is today.

    It is already September so presumably they’ve figured out what to do with the house already and either renewed their mortgage (August) and got new tenants (last ones left in June) or sold. Did you ask them this? Once you find out then you can do an analysis.

    Given the numbers and the fact that part of each month’s mortgage payment is going to equity I’d be tempted to keep the rental and look at ways to increase rents through furnishing the place. Airbnb is quite popular in Cape Breton (I’m guessing) in the summer and there are lots of university students to rent to during the rest of the year.

    1. She did come on and explain that she has since found a tenant.

      I agree the cars are expensive. However, that being said, they may live in an area where they don’t have public transportation or AutoShare so going without a car may not be an option. I would’ve rather they didn’t buy it in the first place and bought a cheap second hand car but the damage is already done.

      Airbnb is an option, but since they did find a long term renter, they’ve managed to fix that problem so that’s good. I don’t think the situation is too dire. Since they didn’t get into too much debt, they should be able to get back on track within a year by decreasing their expenses.

      1. The damage keeps accruing. Once you look at depreciation and interest on the payments over the years it is definitely better to cut the losses now because you’ll incur more losses. Financially it is better to sell and buy an inexpensive but reliable second-hand car.

  10. This was a complicated case study. If it were me, I’d simplify my life and sell a car or two, take the bus, try to aggressively AirBNB the house in NB to make a bigger profit or try to get a job near the house and move into the house to save on rent. Failing that, sell the house at a loss possibly. Cut expenses much more than Firecracker recommended (you were being too sweet and gentle Firecracker) and live MMM style or even Jacob Fisker ERE style until you are in the black. Bring on the beans and rice and lentils (see Jason’s recipes.) Cut out the gym membership and get the husband working out doing some paid day Labour jobs. What is a young unemployed guy doing with a gym membership? Cut out the entertainment budget to $0 and entertain yourself reading financial blogs to learn more. Cut the grocery bill to $300 monthly and lose weight by not eating so much and you won’t need the gym membership. Make more money and entertain yourself looking for ways to make money. Sorry this all sounds harsh but I am trying to help. Firecracker was too lenient this time! I think she felt compassion for you and didn’t want to sound rough. You can do it! You aren’t in that much debt and you’re young. Go for it! You’ll do fine and can easily retire early if you get aggressive for even a few years and then you can ease up somewhat. Good luck! Time is on your side youngsters!

    1. “you were being too sweet and gentle Firecracker”…not a phrase I’ve ever heard until now 😛

      It’s less about compassion and more about not being a hypocrite (Don’t believe me? See my world travel post to find out how much I spend on food and entertainment every month :P)

      But yes, you caught me. I have a soft spot for food and entertainment spending. (What? I get bored easily and I love food :P). But hey, if they want to be more badass and cut those expenses too, who am I to stop them? *hands them a machete*

  11. In regards to the locked in RRSP (or LIRA) I had one at my old job where even when you quit you had to either keep the money with GWL and transfer it into an individual LIRA or transfer it to another financial institution but it had to be locked in. I pretty much got the same answer as far as early withdrawals being that you can if you face some sort of financial hardship but no specifics. The only advice I can give for that is once you leave, put it in a self directed LIRA with Questrade or another online brokerage where you at least have control over what investments are being bought so you can keep your MERs low. As my LIRA is only a small portion of my portfolio it doesn’t really matter that I can’t access it for another 3 decades or so.

  12. Very good comments here. Key is to get rid of/reduce all the debt starting with the higher interest rates first, then reduce transportation expenses, and ideally live if possible in the house. Max the RSP contributions with the pre tax dollars. I love what FireCracker and Wanderer are doing…keep spreading the good word! And advice!

    1. Thanks, Jeff! I agree. Lots of good comments and good advice from the readers. Number one priority is to reduce expenses and pay off debt, as many wise commenters have said.

  13. May I propose an alternative to cutting out the gym, because hiking and jogging don’t work in the winter time… there are many lower cost gyms that are anywhere from $10-$40 per month, including city community centre gyms. Look into that. Or, depending what kind of workout you like, it might be worth buying some workout equipment for you to work out at home. You can buy used to save some money, or see if any of your friends/family might have some laying around.

    May I also suggest your husband possibly take some courses or go back to school in order to boost his earning potential? Just a thought.

    Overall, good suggestions from Firecracker!

    1. Low cost gyms are worth looking into for the winter. Hopefully they can find a community center to work out in.

      Buying work out equipment could work too…though in my experience, I found that I tended to ignore them and just not do it. If I go out and get some fresh air, I’m more likely to workout. Could just be me though.

  14. FR I know how much you LOVE food…but I only spend $5-600 per month for a family of three in Toronto including eating out and any entertainment. We even buy organic when available. I feel there’s some room for improvement there.

    1. Yes, I agree with you, Mei. Other readers have also mentioned there could be improvements in those 2 categories as well. At least temporarily until the spouse finds a job.

  15. To my fellow canadian readers, the LIRA (locked-in RRSP) can be withdrawn If you were (and can prove it) out of Canada for more than 2 Years, and when you withdraw the fund, it will be added to your income at that time (and taxed).

    1. Interesting! Thanks for sharing.

      Do you know if you have to declare you’re no longer a resident of Canada for this to happen? Because the downside to that is you’d have to sell all your assets and pay capital gains tax.

      1. Yeah. It’s up to your financial institution to accept your proof of non-residency. But for the Revenu agency, for you to be deemed as anon-resident in Canada, you have to cut ties on your canadian income (you can keep though the TFSA and other RRSP). I don’t have a clear answer with the taxable account but it’s worth asking the Revenu agency.

  16. Dear FIREcracker,
    I lost my way when I was half-way thro’ the case. Its a complicated user story. But you managed to make sense out of the chaos to provide a constructive proposal.
    The proposal to first destroy debt, while proactively reducing ongoing expenses and then to move-back into their own home are foundational aspects. Otherwise, they’ll face a deepening personal debt crisis. If they execute your proposal with discipline and passion, it won’t be long before they start sailing smoothly towards early retirement.

    1. Thanks, Manjo! It’s is a long and complicate story, but after digesting it, I realized that when you dive into the numbers, the situation is not as bad as it seems from first glance.

      I’m glad this couple didn’t get into too much debt or buy too much house…that’s what makes this case not as complicated or as dire as it could’ve been.

  17. From what I read I understood they live in New Brunswick so can’t move into house. I wouldn’t sell the house, since at best after all the costs they may end up with 90000, 18000 less than they owe! So while they are not making much in rental income, at least they can break even on it monthly while paying towards the principle. Firecracker I know you love food but 850 on food and entertainment…..while one is unemployed? That is soooooooooo unreasonable. 400$ is plenty. They need to learn to cut out all unnecessary expenses. Also they pay by weekly on sisters car, but she pays monthly. That leaves two payments they r making extra per year.

    1. Good catch about the sister’s car, Suzq400! You’re right. She needs to pay them bi-weekly not monthly. Thanks for bringing this up.

      And as other readers have mentioned, they could probably improve on the $850 expense on food and entertainment as well…at least temporarily.

      The good news is she has since found a tenant to cover the cost of the rental property so things are looking up!

  18. VoIP is a HUGE savings; our VoIP cost averages $2.77/month. Yes, $2.77/month! Part of that cost is the OPTIONAL 911 service fee of $1.50/month (without it, you can’t call 911.) It piggy-backs on your Internet connection but doesn’t require much bandwidth or speed, and in 3 years I don’t recall a single outage or call quality problem (but this is subject to the reliability of your Internet connection.) We use a Montreal-based company: but there are others out there. We even ported our old land line number over to the service (the fee was around $10), so we didn’t have to get a new number. Read through all the sections on the left side of this page to get more familiar with their service:

    The easiest way to use VoIP is to get an adapter that plugs in to your home phone line, that way all the phones in your house will utilize it. Before plugging it in, make sure you disconnect it from the line that comes in from the phone company. Then get a splitter or use an empty phone jack and connect the adapter to your phone line. Now all your phones in your house will get the dial tone from the adapter (after you configure it.) You also need to plug it in to your Internet modem/router.

    Here’s a cheap adapter:

    Configuring the adapter is the difficult part. If you’re somewhat technically inclined, you can set it up yourself using the help pages. Worst case scenario, find a techy friend or IT guy from work and pay them a few $ to come over and set it up for you. has instructions for many common adapters:

    1. Thanks for sharing all this awesome information on your VOIP service, Jason! It’ll definitely help them a lot with their expenses if they can get it in NB.

  19. I love this particular reader case, the reason being that you initially calculated a TTR of infinity, and then looked for ways to change that. I feel like I have a TTR of infinity (or rather, until regular retirement age, no earlier) and it was nice to see you taking a case like that and trying to see how to get something done there. I find those cases the most inspirational and relatable.

    Quick question/comment regarding what to do with the house: Currently the house costs 800$ bi-weekly according the provided numbers, and is 18,000$ under water. I am trying to think whether it is not easier to just sell, take the loss and slowly pay it back? On the face of it it doesn’t make sense since there is no reason to take a loss if you can find a tenant that at least keep you paying your mortgages so you don’t have to take a loss.

    However, sometimes there is value in simplifying aspects of your life and in getting predictability for the future. For example, at the current rate, 22 months of vacancy over the life of the mortgage will even out the loss – meaning, if the house stood empty for 22 months in the next 18 years (remaining mortgage) they lose 18,000$, equal to what they lose now if they sell. However, to that you need to add any upgrades (new roof, furnace, what not). So, over the next 18 years they will incur more costs that will mean that if the house stands empty for even less than 22 months they will have lost those same 18,000$. There is also the hassle of managing a property in a different province, and, what was not mentioned, is whether they declare the rent income and pay taxes on it! If they do, then they are losing money every month anyway (depending on husband income now and in the future).

    So, they don’t actually know moving forward how much it will cost them to keep the house, and there is the hassle of managing it. Is it not sometimes better to take the loss and know where you stand? That will obviously depend on the magnitude of the numbers, but just a thought to consider.

    1. In some cases, it does make sense to pull off the bandaid, rather than continue bleeding. In this case, since her spouse has lost his job, and she’s barely making ends meet with her salary, selling the house and taking the loss wouldn’t make sense. Renting it out will help her stay afloat while he looks for another job. If the vacancy stays for too long, it makes sense to take the loss, but luckily she did manage to find a tenant, so things are looking up.

  20. This was probably already stated, but if I was them I would sell the car like yesterday (the one that is more expensive. Even if they are underwater getting a smaller loan for like a 5k car is better than 22k. They could be out of debt within a year or two. That would reduce their expenses even further.

    1. Yes, another reader also mentioned selling the car. I don’t know the terms of the car loan they would need to figure out what that entails. But yes, if it makes sense to get rid of the car and get a cheaper, used car, that would help their expenses.

  21. “I feel so late to the game and behind”

    I was 53 when one day I innocently clicked on a MMM article – not because of the retirement advice but because who the HELL is this Mr. Money Moustache?

    I went down the FIRE rabbit hole, and WOW! I’ve learned things I could never have imagined. You’re not too late. Seriously. You’ve got this.

    1. Absolutely right, SteveK. You are never too late to the game. The time will pass anyway, so it makes sense to start, no matter how long you think it’ll take.

  22. I don’t know if anyone else commented on this already, but in addition to getting $66/month out of their house investment, aren’t they also getting the value of the house equity out of it as well (assuming they eventually sold the house when it was no longer underwater to focus on hitting FI)? Maybe I missed it, but it seemed that wasn’t taken into account in that part of your analysis?

    1. “assuming they eventually sold the house when it was no longer underwater”. That’s the key. No one knows when it’ll stop being underwater. Whatever equity they have in the house (whether from their own money or from rental income) has already been eroded by the plummeting real-estate value. On top of that, the bank WILL demand that they cough up the difference because of the B20 regulations when they renew their mortgage. You can’t turn a negative number into a positive no matter how hard you try.

  23. I’m a little bit confused by your analysis that $850/month for food+entertainment is reasonable. I live with my wife in southern Ontario and our grocery bill is $200 and entertainment is $50. My sister (who lives nearby on dual-income minimum wage) is about the same for grocery and triple for entertainment. Even *that* is $450/month for both… around *half* of the quoted $850. I know everyone’s lifestyle needs are different, but I question the assumption that there are no improvements to be made in this number.

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