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It’s Friday, and you know what that means: Reader Case Time!
Today’s reader writes to us from our old stomping grounds of Toronto, and as with all things Toronto, her questions centre around that all-encompassing topic that every Torontonian is obsessed with: Housing. Also Bitcoin. Anyway, there’s a lot going on here, so let’s jump in! It’s going to be a fun one.
I have to say discovering you site was probably the best thing that could have happened to me. It was right along the time I was waiting for my house to be closed and I was looking at where to invest my money. My original steps before I discover your site was to buy bitcoin with the profits from the sale of my house. You pretty much stopped me wth your blog from doing that.
I still invested some money in cryptocurrency. but it was only 10% not the 100% from the profit as I had originally planned.
I was lucky to be able to invest quite a bit while the stock was falling in December 2018. Buying ETF’s on Christmas Eve was a stroke of insane luck haha. So much so, I have $20,000 increase in my portfolio right now… not bad for 2 months of investing only.
Anyway back to the real reason why I am contacting you. I recently just found a trick for Canadians to make mortgage tax deductible like the Americans. I was wondering if you heard of the Smith Manoeuvre?
This guy have a really detailed explanation of it at his site https://edrempel.com/smith-manoeuvre/
You see I always like getting some other people to pay for my expense for me in one way or another. When I had my house I was renting out the basement out on airbnb so I pretty much was able to put down alot of expenses down against the profit from airbnb income. The new rules for airbnb for Toronto suck (private airbnb units are illegal now)… and pretty much made my airbnb operations illegal, so I sold my house and move into my condo (which was on airbnb unit previously before too).
I really like the idea of slowly turning the mortgage I have on the condo into a tax deductible debt and slowing build wealth on it in the long term. Its very attractive to me as I plan for this investment to not be withdraw for at least 10 years.
Here”s some of my numbers if you want to help me math some shit up. I’ve never calculate this with the Smith Manoeuvre in mind, but I am thinking of using the dividends method to pay for the condo mortgage when I reach Fire.
Between my partner and I we make a combine income of $110,000 annually in 2018. This will change in 2019. Cause when I found you site, I started plotting tricks to reach FIRE even faster… saving money is too hard since we were kinda saving pretty aggressively already, so I went looking for a higher paying job, and found one that pays me additionally 16k more right now.
Cost of Living Monthly
Condo Fees/Property Taxes 737.49
Car Payment 367.8
Eat Out 300
Car Insurance 234.16
Eat Out Breakfast 70
Cellphone x 2 140
Condo Insurance 56.87
x 12 months 42,785.88
That’s our cost of living. After taxes, our income is 82,800. Car payment should drop off in 2021, as it should be paid off fully. Currently we are on 0% finance for the car payment.
I know you’re probably rolling your eyes at the eat out cost, but that is from my partner and I got to do this slowly with him to make FIRE happen. Eating out breakfast is his cost for the morning coffees from MacDonald on his way to work. It was not negotiable. I’m working on the eating out cost right now, but man sometimes its hard to cook dinner coming home from work.
Our total invested asset is $392,000 from the sale of the house and 20k profit from stocks last 2 months! Cypto currency asset is 56k, slowly going to 0 but who’s counting.
I brought the 2BR condo at an incredible deal for 279k in 2017. Condo fee includes everything, maintenance cost, all utilities(water, gas, electricity, sewage).
I figure I can hit FIRE within 8-10 years. If cryptocurrency can hit 500k profit, maybe even sooner! I am aiming for FAT FIRE, so I would leave the car payment cost in the cost of living in case we need that money for eating out 🙂
I religiously check you blog every week!
Your hard core fan,
Well, that’s a lot of stuff to parse, but I’m going to have to go ahead and agree with one statement you made:
I have to say discovering you site was probably the best thing that could have happened to me.
And I ain’t just tootin’ my own horn here. This next statement gave me heart palpitations just reading it:
My original steps before I discover your site was to buy bitcoin with the profits from the sale of my house. You pretty much stopped me wth your blog from doing that.
Yikes. OK, so here’s the thing. I’ve been monitoring the cryptocurrency space, and certain events in the past few months have caused me to completely lose confidence in the entire thing. My rant on that got so long that I’ve decided to split it off into its own article, which will be posted on Monday. But suffice it to say, I was intrigued by Bitcoin at one point and now I won’t touch it with a ten foot pole. Details on Monday, but to address our reader’s other questions…
What the Hell Is the Smith Maneuver?
Condos&Crypto alluded to something that I suspect most people aren’t familiar with, and that’s the Smith Maneuver. Let’s back up a bit and explain what that is.
Our American readers have, for a long time now, been able to deduct their mortgage interest from their taxable income. This makes mortgages cheaper, and is one of the most popular tax deductions available to the general public.
We Canadians don’t have that. Only interest for loans taken out to purchase investments like stocks and ETFs can be deducted. Loans taken out to buy residential real estate don’t count. The Smith Maneuver tried to address this.
How it works is you take out a readvancable mortgage on your property, which is basically a conventional mortgage tied to a home equity line of credit, or HELOC. As you pay down the mortgage, the amount you can withdraw from your HELOC increases by the same amount.
So what you do is as you make mortgage payments, you withdraw the same amount from your HELOC and then shovel that into the stock market. And because the HELOC loan was used to buy investments, qualifying it as an investment loan, this converts your non-deductible mortgage into a deductible investment loan, allowing you to save money on your taxes and generating a tax refund when you file!
So here’s what I don’t like about the Smith Maneuver:
Issue #1: You never pay off your mortgage
Under this system, every time you make a payment, you take it right back out. So basically, you never make any progress on paying it off. Over time, your mortgage balance just turns into a HELOC balance. If you’re OK with being in debt for your entire life, then go for it, but I don’t even like owing my friend $10, so for that reason alone I’m out.
Issue #2: HELOC’s can be called at any time
While mortgages are paid off gradually over a set period of time, HELOC’s are issued as demand loans, meaning the issuer can simply demand (see what they did there?) their money back at any time for any reason. If this happens, and you’ve put all that money into the stock market, you can be forced to sell your assets to pay back the loan, or they’ll take your house. Here’s a short list of people who aren’t OK with that: Me.
So yeah. I’ve read up on the Smith Maneuver before, but I’m not a fan. It sounds fancy, and on paper it might make sense, but being perpetually in debt to someone who can just call you up and force you to screw up your retirement portfolio is not my cup of tea.
Time to Math Shit Up
OK onto the main event: Mathing Shit Up!
To summarize, here are CondoFIRE’s top-level numbers.
|Income||$110,000 gross, $82,800 net|
|Expenses||$3,565.49 monthly, $42,785.88 annually|
|Debt||Mortgage (unknown balance)|
|Net Worth||$412k ETFs, $56k crypto (sigh)|
We’re going to use Condos&Crypto’s current reported gross/net income rather than their projected one at their new job, since we don’t know for sure if it’s going to come true. That might make our projection conservative, but that’s fine.
We’re also going to include only the ETFs when looking at their investible net worth. We won’t touch the crypto for now, but we’ll deal with that in a bit.
So given these inputs, Condos&Crypto’s savings rate is $82,800 – $42,785.88 = $40,014.12, or 48%. That’s pretty damned good!
At their current spend rate, their FI target will be $42,785.88 x 25 = $1,069,647. So how long does it take?
A little over 9 years. So their estimate of 8-10 years to FIRE is pretty accurate!
Condos, Cars and Crypto, Oh My!
CondoFIRE thought I’d be rolling my eyes at her partner’s coffee habits, or their eating out, but to be honest who really cares about $70 a month? Cutting that out’s not going to move the needle, and if it’s such a “non-negotiable deal-breaker,” or whatever, fine. Just let him have his dang coffee.
And this may surprise you, but I’m not even rolling my eyes at the condo. Yes, the condo fees are a bit nuts, but add that together with the mortgage and insurance and we’re talking $1731.96 a month. In the downtown core, that’s not that unusual if you were to rent a similar unit. And at a total sticker price of $279k, it’s not even swamping their finances too badly.
What I do roll my eyes at is the car. If you live in a condo in Toronto, you don’t need a car. The downtown core is kind of like Manhattan. The roads are so congested during rush hour and it’s so well connected via public transit that it’s actually faster to take the subway than to drive, and it’s a hell of a lot cheaper, too!
So if we were to eliminate the car related expenses and add 2 metropasses, that would bring their monthly expenses to $3,565.49 – $367.80 (car payment) – $234.16 (insurance) – $125.19 (gas) + $151.15 x 2 (metropass) = $3,140.64, or $37,687.68 per year.
This increases their savings rate to $82,800 – $37,687.68 = $45,112.32, or 54%.
And their FI target comes down from $1,069,647 to $37,687,68 x 25 = $942,192.
Oh and also…the crypto. Again, I am so not a fan of crypto, especially after recents events which I will elaborate on Monday, but suffice it to say that you should get rid of that $56k in crypto you’re currently holding ASAP.
So with these two changes, how does that affect Condos&Crypto’s time to retirement?
7 years. There, I just saved you two years.
There’s actually a lot in this email to digest, but those are the main points I wanted to focus on. Again, I have a LOT to say about crypto, but that’ll be the topic of Monday’s post.
Other than that, Condos&Crypto’s tax rate seems rather high. If that combined salary of $110,000 was relatively evenly split amongst two people, their average tax rate should be lower. And I’m not convinced they’re contributing anything into their RRSP’s, but I don’t have enough info to definitively prove that one way or another. If they don’t have RRSP’s, they should definitely set one up and start contributing. Lower taxes = more money for you = faster time to retirement!
What do you guys/gals think? Let’s hear it in the comments below!
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