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- Reader Case: Feeling Disheartened about FIRE.Please help! - August 15, 2022
It’s Friday and that means it’s time for another reader case! This family of 5 hails from the frozen white North and have just had their Muskoka dreams dashed. How will they get out of it?
Let’s find out:
“We are a family of 5 plus an au pair that helps with our childcare for our three young children. I am a pediatric critical care nurse and my husband works in technical sales for large industry. We are 33 years old. We make a decent family income of about $180,000, and thought we had things planned out when we left our jobs to move up to muskoka to raise our family. Unfortunately I left my dream job and we bought a house based on city wages. My husband couldn’t find well paying work so now two years in My husband works in Aurora 2 hrs away and loves his new job, I work an hour away in a job I loathe.
I want to go back to doing what I love in Toronto. He wants to cut 4 hrs a day off his driving time. We are only two years into our mortgage, and this is our third house! We keep making the same mistake. We feel like we are doing something backwards and have decided to rent in the uber insane mortgage GTA area. Our realtor is pushing us to sell our house and buy a rental property on the water here in muskoka while we rent (we have a lovely home about 2.5km from the lake). We are still a bit emotionally attached to our home and our muskoka dream and had thought we could just rent it for a year to give ourselves a parachute, while we rent closer to the city.
I am wondering what you think would be the smartest idea? Rent our current home for a year or two to get some equity and then sell? Buy a vacation rental that we could charge more rent on? Or sell our house, even though breaking the mortgage would be very costly as we are just 22 months in. We love this area so much but it just doesn’t seem conducive to rewarding careers in our field. We have also noticed that we love the idea of putting down roots but we get itchy feet after a few years in each spot.
We found a rental that fits all of us plus the au pair and our st. Bernard in the small town of Tottenham for $2300/month.
We are frustrated because we feel like we have good jobs and make good money. And have nothing to show for it! We are at a precipice of another change and want to do it right this time. Here is our basic monthly financial picture. We would love your input on what the smartest next move would be. We feel like we failed in trying to live our dream and don’t want to keep feeling that way. And everyone thinks we are nuts to go back to renting.
Car payments – 3 cars, one paid off, the other two are 387 and 337.
Car Insurance 288
Life insurance -70
Electricity -250-350 ( we are in the country so we pay more here)
Internet – 100
Cell phones – $200
Gas – $600 (I commute over an hour to work). My husbands gas is paid for.
Childcare – $1000
Natural gas – 100
Home insurance – 106
We put $250 per month to our line of credit.
Then about $50-150 for car repairs
Diapers/pharmacy – $140
We try to put $500/month aside in savings
The rest is general spending for house stuff, eating out, general purchases. Usually about $950
Mortgage/property tax – $1955/mo
• Line of Credit – 5.5% interest rate – minimum payment of $192/month though that fluctuates a bit. Balance of $40,409.28
• Car #1 – 4.5% interest – about $15000 left owing. This is our family van.
• Car #2 – 4.5% interest – $18000 left owing.. This car is my husbands work car he drives about 100,000kms/yr. We were stupid and had a lease and then racked up kms and bought it out. So we are upside down on a 2017 car with 100,000kms on it. This one is amazing on gas though.
• We have a third car that is older and paid off, but isn’t great on gas. It would be worth 5-8k likely. We are hoping to go to 2 cars once we are back in a town centre so our au pair isn’t stuck in the middle of nowhere with no way to leave with the kids.
• Mortgage – 2.74% interest, fixed rate. 5 year term.– purchase amount$375000. $359530 still owing. Our realtor said she would list the house at $450k now.
Investments or savings (cash, bonds, stocks, etc.)
• $1500 in emergency savings
• $25k in RRSP
• $2k in another RRSP
• $6200 in an RESP
• $1700 in a trip fund.
Hoo boy. I winced when I read this: “We have also noticed that we love the idea of putting down roots but we get itchy feet after a few years in each spot.
“Putting down roots” and “getting itchy feet” should never be in the same sentence. Pick one or the other. If you’re going to put down roots, put down roots. If you get itchy feet, don’t buy. Otherwise you’re just setting money on fire every time you buy/sell and get whacked with home closing costs. No wonder your realtor is encouraging you to buy. If this is your 3rd house, and on average your house prices is around your current mortgage amount of $360k, you’ve paid $360k x 5% x 3 = $54k in real estate commissions alone! Congratulation, you’ve just put your realtor’s kid through college. Damn, maybe I should get a realtor’s license…
“And everyone thinks we are nuts to go back to renting.” Well of course they would. If you rent, it calls into question all their life decisions and freaks them out. The fact they give a rat’s ass whether you rent or own says way more about them than it does about you. Stop giving a shit what other people think and do what’s right for you. Listening to them hasn’t worked out that great, has it?
Okay, now that I’ve got that off my chest, let’s figure out what the situation is.
To summarize your situation:
Income: $180,000 (assuming an estimated after tax income of $130,000 after taxes, giving your location)
Debt: -($40,409.28 + $15,000 + $18,000) = – $73,409.28
Mortgage: – $359,530
Assets: $1500 + $25,000 + $2000 + $6200 + $1700 = $36,400
Okay at first glance, your monthly expenses are scaring me to death—yeah, I get that you have 3 kids, but c’mon, do you really need 3 cars?! There are only 2 of you, sell one of the cars!
I also notice you haven’t included any maintenance cost in your monthly housing costs, so already that’s a red flag that you’re not giving me the full picture.
But assuming that you are giving an accurate picture, let’s figure out how you’re doing and what you should do in this situation.
As we always say on this blog, let’s Math That Shit Up!
Given your monthly expenses of around $8000, your yearly expenses are $96,000. Which means you’d need 2.4 million to retire by the 4% rule.
Given your current savings rate of 26%, it’ll take you 28 years to the age of 61. So not great.
So when you say “we are frustrated we feel like we make good money but have nothing to show for it”, yup, you are right. Your realtor, however, is making out a like a bandit! They’ve made more money off you than your entire net worth! If you’re wondering where your money went, they have it.
You’re up to your eyeballs in debt to the tune of $73,409.28, and because you’ve been moving around so much, any equity you’ve gained keeps getting wiped out by closing costs.
And looking at your current monthly cost, housing costs immediately jump out at me:
$350 (Electricity) + $100 (natural gas) + $106 (home insurance) + $1955 (mortgage + insurance) = $2511.
And this isn’t even including yearly maintenance ( 1% of the price of your home ), which would actually add another $300/month to that amount.
So by moving to Tottenham and paying a rent of $2300, you immediately drop your costs by $2511 – $2300 = $211/month.
This has the effect of reducing the portfolio size you need by $211/month * 12 *25 = $63,300.
There is also this miscellaneous spending category of $950, which needs to be broken down to see where the money is going.
On top of that the 3 car costs, line of credit debt, is also adding to the budget anguish. Cut unnecessary costs and pay off this debt ASAP!
And now onto your question about whether to sell the house or rent it out:
1) Rent our current home for a year or two to get some equity and then sell?
2) Buy a vacation rental that we could charge more rent on?
3) Or sell our house, even though breaking the mortgage would be very costly as we are just 22 months in.
Okay, #2) is out of the question. You’re already all over the place, unsure of whether you should settle or move around, while setting your money on fire on closing costs. Trying to add real-estate investing on top of that with no idea what you’re doing is a horrible idea. DO NOT take on any more debt! Figure out your finances first.
So the actual options are:
Option 1: Rent out your current Muskoka home.
Option 2: Sell your current Muskoka home.
1) Not knowing exactly how much your house could be rented out for, I can’t tell you specifically whether this makes sense. However, given that a place closer to jobs/the city is renting for $2300/month, likely you won’t be able to rent it out for more. You’d have to be able to rent it out for $2800/month at least just to break even. And then you’ll still have to pay taxes on the rental income. So best case, you break even, worst case, you’re losing money by renting it out. Plus, people generally rent in Muskoka in the summer, so you’d end up with a high vacancy rate in the winter. This will likely be a money-losing proposition.
2) Selling your home would mean (assuming you can actually get 450K), you’d lose $450,000 *0.05 = $22,500 in real-estate agent fees. So that gives you $450,000 – $22,500 – $359,530 = $67,970.
That’s IF you can actually get $450k. I have serious doubts about that since housing prices have already started to crash in Toronto, but if you can get that price, and you don’t have to pay massive penalties for breaking your mortgage (typically you don’t if you’re selling your house, but every mortgage is different so check with your bank), you could use the profit to pay a big chunk of your debt ASAP! You’d only have $73,409.28 – $67,970. = $5439.28 in debt left. You could easily kill that debt in a few months.
If you can do that, you’d be able to reduce your monthly expenses by $387 (Car Loan #1) + $337 (Car loan #2) + $250 (LOC) = $974!
So by selling the house, moving to a place for $2300 month, and using the proceeds to pay off your debts, you’d drop your monthly expense from $8000 down to $8000 – $211 – $974 = $6815/month. This would increase your savings rate to 37% and reduce your retirement age from 61 to 54!
And if your husband wanted to keep working because he likes his job and he brings in at least $65,000/year, you’d only need a portfolio to generate a passive income of $6815 * 12 – $65,000 = $16,780/year. Which means you only need a portfolio of $419,500. You could quit the job you loath and spend more time with the kids!
This would take you:
|Year||Starting Balance||Annual Contribution||Return||Total|
6.5 years + a few months (from killing off the remaining 5000 of debt).
So there you go. Your addiction to real estate and debt has completely siphoned off most of your wealth. But if you do the following:
1) Sell the house for $450K with no mortgage breaking penalty
2) Using the proceeds to kill off most of your debt
3) Reduce housing expenses from the current $2500/month down to $2300 by renting
4) Reducing monthly costs by $974/month by paying off all your debt
5) Don’t buy another house unless you’re SURE you’re going to stay in one place for at least 5 years. Better if it’s 10.
If you do all the above and drop your monthly expenses from $8000/month down to $6815/month, and your husband keeps working, you can leave the job you loathe in just over 6 years with a portfolio of $419,500 to spend time with your kiddos!
Or you can keep churning houses and work until your 60’s. But if you do that, can I be your realtor? I want some of that sweet sweet commission money you’re setting on fire with every home purchase.
What do you guys think? Chime in in the comments!
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