- Reader Case: Choosing Between Health and FIRE - September 25, 2020
- Let’s Go Exploring! Singapore: Futuristic Foodie Paradise - September 18, 2020
- Will COVID Change The Nature of Work Permanently? - August 31, 2020
TGIF ‘cause it’s time for another Friday Reader Case! This reader writes to us from the GTA, Canada, and is having a dilemma about whether to sell her house and rent, or stay in her house. Without further ado, Take it away ScaredInGTA!
Hope all is well. I have been following you and find you very inspiring. My husband and I own 2 properties; one is being rented and the other is our main residence. We are planning to sell our rental property in the near future and are open to selling our house and rent. The problem is that we looked intensively for 1 year and couldn’t find anything that would make sense for us to sell. We also love our area, good school for the kids and very nice community. We love our house, not for pride of ownership but because we love to have a place to call home and stability.
Without being on the market we have people come to knock at our door to take a look at our house and we actually got a decent offer. I know it is probably the thing to do at this time because all the arrow is pointing towards the direction of real-estate going down. There is always a possibility that the opposite can happen. I am scared to take the kids away from the house they grew up in for leaving such a great community. I guess what I am asking since you are so good at it, is to help me calculate and show me that selling my house now is the way to go vs keeping it and view it as a long-term investment. We plan to rent for less than our current allocation for housing expenses.
Property #1: value $1.5m mortgage $680K weekly payment $735 for another 24 years at a variable interest rate of 2.9% property tax $7K
Property #2: value $700K mortgage $300K after all fees, we have a positive rental income of $150
We have some RRSP, RESP, TFSA ($100K). Some company stocks that are worth about $150K and one of us have a pension plan
Summary of our finances:
Monthly Family income (after-tax): $11K/month
|Transportation||1881 (car lease + gas + insurance + maintenance)|
Debt: $980K mortgage for 2 properties
Investible Assets: $100K (RRSP, RESP, TFSA). $827 for RRSP and $416 for RESP each month.
Please let me know what your thoughts are. We just want to make sure that we are going to be able to retire in 20 years if we want to.
Good God, ScaredInGTA, with a spending of $9636.81/month, you are spending 88% of your income! Which is fine when times are good, but what if one of your were to lose your job? If you’ve never lived through a recession, you have NO IDEA how painful that would be. It’s not fun. Trust me.
Looking at your housing situation, I can see that you have $680K + $300K = $980K in mortgage payments. So you’re in debt to the tune of almost a Million dollars! And given the new B20 rules, when it comes time for renewal, you may have to re-prove that you can afford the current Bank of Canada 5-year benchmark rate (5.14%) or 2% above your contractual mortgage rate.
Since you’re spending almost everything you make, so much of your wealth is locked in housing, you owe almost a Million dollars, and with tightened mortgage rules now in play, I can see why you’re scared. I’d be scared shitless too.
And now you have someone willing to take it off your hands for $1.5 Million? And you’re hesitating on this?
So you want to see the numbers? Okay, let’s see what happens if you were to sell both properties.
Property 1: $1.5 Million * 0.95 = $1,425,000 (after 5% agent fee). After paying off your mortgage: $1,425,000 – $680,000 = $745,000
Property 2: $690,000 * 0.95 = $655,500 (after agent fee). After paying off your mortgage: $655,500 – $300,000 = $355,500
Total net: $745,000 + $355,000 = $1,100,500
So all of a sudden you’d go from being almost a Million dollars in debt to a net worth of over $1.1 Million!
When you add your investible assets of $100,000, you’d get $1,200,500, which by the 4% rule would support a yearly living expense of $48,020/year!
But given your yearly spending of $9636.81 * 12 = $115,641.72, you’d need at $2.9 Million to retire. And at your current savings rate of 12%, that would take you almost 50 years!
Even if you kept your primary residence for emotional reasons–to keep your kids in the same school district, etc–just by freeing up the $355,500 you have trapped in the rental property, that would generate a yearly income of $14,220, or $1185/month using the 4% withdrawal rule. Right now, your cash flow is a measly $150/month. That’s only $1800 for the whole YEAR, which means you’re getting a return of $1800/$355,500 = 0.5%. I could get a higher return digging around in my couch.
This is exactly why I say people need to MathShitUp when they invest in rental properties. Seriously, do not do this if you have no idea what you’re doing. The cash flow on this rental property is abysmal. Invested in a diversified portfolio, your return for just one month is 8X what you’re getting in cash flow from the rental property.
Hell, even if the markets tank, just the DIVIDENDS of 3% on $355,500 gives you $10,665! And right now you’re taking a huge risk by locking $355,500 in one asset without diversification. If the housing market tanked or you get a bad tenant that screwed up your house, you’d be shit outta luck. THAT much risk for a measly gain of $150/month in cash flow? WHY, SIGTA? WHY?
So the choice is yours. Be almost a million dollars in debt or end up with $1.2 million in your pocket.
But the thing I really don’t get is why you need to spend $1881 on transportation AND $5762 on housing? If you’re spending that much on housing, you’re already close enough to everything you wouldn’t NEED a car—that’s what the subway is for. Either move farther away and spend on transportation or stay where you are and cut it. Don’t do BOTH.
Also, $469 a month for life insurance? If you sell the house and get passive income from a portfolio, you won’t need life insurance because your portfolio IS your life insurance. So that gets rid of the $469/month.
If you can cash in on the houses, and move to a less expensive area (I’m seeing 3 bedroom homes for rentals for $1900/month in Mississauga—near the airport) or downsize to a smaller house, that would cut $3800/month or $45,600/year, dropping your yearly costs from $115,641.72 to $70,041.72.
Drop the transportation costs by going down to 1 car, and you could save another $11,286/year. Replace the insurance with the portfolio, and save another $5628. Now, we’re looking at $70,041.72 – $11,286 – $5628 = $53,128! This would raise your savings rate from 12% all the way to 59%.
Now let’s combine that with the money you’d raise selling sell your properties. All of a sudden, you’d have $1.2 Million!
This brings your TTR down to:
|Year||Starting Balance||Annual Contribution||Return||Total|
Holy crap. You’d be done in 1 year!
This one’s a no brainer guys. Would you rather keep spewing money, freak out about the housing market and be 1 Million in debt? Or cash out now, downsize to a lower cost area and be retired in a year? I know which one I’d choose.
What do you guys think? Chime in below!
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Earn a 1.7%* everyday interest rate. No Everyday Banking Fees.: Open up an EQ Bank Savings Plus Account! (Canada only, excluding Quebec)
LIMITED TIME OFFER: Earn up to 4% cash-back (Canada): With Tangerine's Money-Back Mastercard!
Travel the World: We save $18K a year by using AirBnb. Click here to get $40 off your first booking!
Don't Pay FX fees: We used the Scotiabank Passport Visa Infinite card to eliminate foreign exchange fees around the world! Plus, we got 35k points in the first year, and free airport lounge access too! Click here to sign up!
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.