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I know everyone’s doom-scrolling the news right now about what’s happening in the Ukraine, so I thought we’d all take a break from the daily news by doing a reader case.
I can’t even say I chose this reader case because honestly, this time, this reader case chose me. I simply couldn’t look away. A slow moving train wreck that’s impossible to ignore, this reader case serves as a warning for other’s not to get into the same situation because, as the reader says, “I’m embarrassed at my financial mistakes …but…maybe it can help others.”
Dear Firecracker and Wanderer,
Firstly ty, ty, ty for creating this blog! I found you last night and couldn’t stop reading. I intend to read your free investment DIY course. You are fabulous human beings!!! I also hope you and your loved ones are doing well during this time.
OK, I’m embarrassed at my financial mistakes after reading your blog but here goes maybe it can help others.
I live in a condo with my hubby, a kid, and dog.
I had an unexpected injury years ago and have chronic pain that has left me disabled, immunocompromised with depression.
My hubby is the sole supporter.
He loves his job and is fine working full-time.
The lockdowns were tough and I made a crap load of financial mistakes for some dopamine hits thinking I was in control.
All of them were real estate related.
I got FOMO reading all the news about Canadian real estate and wanted a piece of that pie. Now we are locked in for 5 years!!!
I’m scared I screwed up my family’s future and my hubby’s hard work.
I re-financed our mortgage and bought not 1 but two pre-construction condos (2025), moved my RRSP and some of my hubby’s to a property management company (locked 5 years) and moved some of my TFSA to a developer’s project (locked 5 years).
Part of me thought, I could be a landlord since its very part-time. Nope, I just added more stress to my life. I also found out that I was a so called (air quotes) accredited investor because of my hubby’s income. Hook, line and sinker, I took the ego bait and invested more into real estate.
I just created more stresses and wasted years.
That my hubby, who is in his 40s, and wonderful father can retire early and possibly just do very part-time work.
To give my child all the experiences to know themselves and become a well rounded autonomous adult.
To not be or leave a financial burden because of my health expenses.
• Your gross/net annual family income
• Your monthly family spending
Property Tax $200
Condo Maintenance $572
Storage Rental $138
Piano Lessons $167
Dog food/treats $94
Vet visits/Vaccines $56
Home Ins. $56
Life Ins. $174
Car Ins. $145
Pet Ins. $89
Amazon Prime $9.03
Google Storage $2.67
• For any debts you have, please include:
Mortgage $1370/mo, variable 1.45%, end Nov ’26, current balance $397,207.53
HELOC $0, $100,000 available
PrePlanning Cemetery $260/mo, 0% interest for first year (pay off full ’23), current balance $6,112
• Any fixed assets you have (house, car, etc.)
1) $493,290 – deposits due: $24,665 Nov ‘22
2) $634,900 – deposits due: $15,873 Apr ’22, $15,873 Oct ’22, $31,745 Mar ’23, $31,745 May ‘25
• And investments or savings you have (cash, bonds, stocks, etc.)
Chequing account: $338,700
Emergency savings: $15,597
Work Stocks $114,991
Please HELP us!
1) Our current investments are all over the place. Can we slowly move all our investments with so many institutions to DIY investing (I’m guessing there are penalties/fees)?
2) The re-fi deposited an advanced mortgage. Wow did our account look rich even though it wasn’t ours. We plan to put the deposits for the condos into a high interest savings account/ GICs. With the remaining balance (for closing costs of condos) can we invest in ETFs for a short time?
3) When can my hubby retire? Any optimizations to make it sooner?
4) Any Canadian resources for charity giving investments?
Going forward I will keep my eye on the prize and avoid real estate investments. Going to start your free DIY investment course. Thanks again for sharing your stories and advice to the world.
The more I see the numbers I realized we haven’t been saving enough for retirement. We always just maxed out his RRSP, but that’s not enough.
I really screwed up with buying the pre-constructions and doing the re-fi. I was greedy and was all emotions. I’m scared. Hope you pick this email to give advice, crossing fingers and toes!
Also, congrats on the book!
Yikes! Given her situation of having only one income to rely on, having to support a child and a dog, and betting hard on housing without diversifying their investments makes this as terrifying as hell. As soon as I read the words “accredited investor” my heart stopped. That’s basically code for “I’m gullible idiot, please scam me.” So, PandemicMistakes is right to be scared. I would be too if I were in her situation.
Now let’s see if we can get you out of this mess…
|Income||$140,000 (gross), $106,491 (assuming they live in Ontario and max out their RRSPs)|
|Expenses||$5,861.77 + $1370 (mortgage) = $7231.77 per month or $86,781.24 per year|
|Debt||$397,207.53 (primary residence mortgage) + $493,290 (condo 1) + $634,900 (condo 2) + $6,112 (cemetery) = $1,531,509.53|
|Investible Assets||$338,700 (savings) + $15,597 (emergency) + $259,377 (RRSP1) + $10,071 (TFSA1) + $221,171 (LIRA) + $48,114 (RRSP2) + $70,118 (TFSA2) = $963,148|
Looking at the debt line, $1.5 Million is a stomach-churning amount of debt to be in. Especially given that they are relying on one salary. What happens if that person loses their job? As we’ve seen from the pandemic, your job is not secure. Anyone can be laid off at any point. And I would be terrified to be in $1.5M of debt if I’d lost my job.
They could potentially liquidate their $700,000 condo that they’re current living in and go back to renting. But, as we know, unlike a portfolio, real estate is illiquid. Meaning you can’t get out of it within 5 seconds by clicking a “sell button”. Plus, you can’t just sell off a window or brick to cover your expenses if you lose your job. It’s all or nothing. Not diversified and illiquid.
And the really sad thing is, they had a healthy net worth of $963,148 that could’ve generated a yearly passive income of $38,525.92 if invested properly. But now they have $1.5 Million in debt and they can’t sell the pre-construction condos to pay it off because they don’t exist yet. AND they can’t walk away from the deal without losing their deposits because they are past the 10 day cooling off period.
They literally took their winning hand of $963K in retirement savings and gave it to the real estate industry. *sigh* Real estate bites another one.
I’ll never understand why people can have over $300K sitting in a chequing account and afraid to invest in index funds while comfortably taking on $1.5 Million in debt for real-estate without batting an eye.
It’s like they think the $300K is their own hard-earned money and a mortgage is just risk-free “other people’s money.” News flash: You do not own the house. The bank owns the house. As a result, they also own your ass. Leverage is all fun and games until it suddenly turns on you. Just ask anyone who’s ever had to experience an underwater mortgage.
Given that PandemicMistakes wishes are for her husband to retire early, their child to have a good life, and themselves to not be a financial burden, I’m seriously worried whether those dreams can still become a reality.
But feeling things out aren’t how we make decisions on this blog, so as we always say, it’s time to Math Shit Up!
Based on their yearly expenses of $86,781.24, they’ll need a portfolio size of $86,781.24 x 25 = $2,169,531 to retire early.
Assuming he maxes out his RRSPs, they have a yearly savings of $106,491 + $25,200 (maxed out RRSPs) – $86,781.24 = $44,909.76
If they hadn’t bought the pre-construction condos, they would’ve had investible assets of $963,148 – $6,112 (debt on cemetery plot, which is weird but whatever) = $957,036. By saving $44,909.76 per year, their time to retirement would’ve been…
Around 9 years!
But, with the 2 condos they just bought, they’ve taken on an additional $1,128,190 of debt. She plans to rent it out to generate a passive income, but that’s unlikely given the rental environment in Canada, and here’s why.
With a 20% down payment, the monthly mortgage on the condos alone will cost $1,786 (condo 1) and $2300 (condo 2) respectively. But on top of that there’s also monthly condo fees, property taxes, and insurance.
In Toronto, one of the most expensive places to rent in Canada, at an average of $900 per square foot, $493,290 (condo 1) will get you a 548 sq. ft. studio and $634,900 will get you a 700 sq. ft. one bed condo. With average condo fees at $0.65 per sq. ft., she’s looking at $356/month for condo 1 and $455/month for condo 2. Tack on property taxes, that’s another $251/month and $323/month respectively. Then another $50 for insurance each and we have monthly carrying costs of $2443 for condo 1 and $3128 for condo 2.
So even in a city with unbearably high rents and near-100% occupancy, these puppies will be bringing in a negative cashflow of -$993/month and -$1228/month.
A good investment pays you to own it, in the form of rental income, dividends, or interest. It’s not dependent on the whims of capital gains or appreciation. You shouldn’t have to predict when to sell in order to lock-in your gains. That’s gambling, not investing.
Rather than earn them money and help them get to retirement, because of the negative rental cashflow, these condos cost them money and make retirement even harder. Their yearly costs would increase to $86,781.24 + ($993 + $1,228) x 12 = $113,433.24
Which means they would need a portfolio of $113,433.24 x 25 = $2,835,831 to generate the necessary passive income required to cover their expenses. It would also reduce the amount they’d be able to save every year down to $106,491 + $25,200 (maxed out RRSPs) – $113,433.24 = $18,257.76 per year. They will also need to pay for the 20% downpayment of $98,658 and $126,980 respectively, reducing their starting portfolio.
If they held on to these negative cashflow investments, they would reach FI in…
So by buying the condos, she’s more than doubled his time to retirement! And that’s assuming he never gets laid off, develops a health issue that prevents him from working, gets a pay cut, or has to switch to a lower paying job if the existing job turns stressful. So if everything went perfectly, he could’ve retired in 9 years if she hadn’t gotten them into an addition million dollars in debt!
In order to get back to their initial 9 years to early retirement plan, they would need to either a) sell both condos at some point or b) break even on rent by renting the condos out for at least $2443/month and $3128/month.
A tall order, given that the rental laws in Canada greatly favor the tenant over the landlord. God help them if they get a nightmare tenant who is incredibly difficult to evict. Unlike index investing, real-estate investing isn’t passive. It’s a ton of work and not for the faint of heart. There’s no way I’d do it just to break even or end up with negative cashflow.
They could bet on appreciation and rising rents but as we’ve seen during the pandemic, rents actually went down and so did condo prices. Gambling on continuously gains isn’t reliable. If your investment doesn’t pay you to own it, get rid of it.
Does Buying with Cash Help?
But what if they paid off the mortgage on the 2 rental properties? How does that change the math?
If they paid off the $1,128,190 mortgages, that would take up their entire $957,036 net worth, plus require another $171,154 which would require an additional 3.5 years to save up based on their current savings rate.
However, with the mortgages gone, their monthly carrying costs for the 2 investment condos would drop down to $657 per month for condo 1 and $828 per month for condo 2. They could potentially net $793 per month and $1072 per month in cash flow respectively if both condos were rented out.
This would drop their monthly expenses down to $7231.77 – $793 – $1072 = $5366.77 per month, or $64,401.24 per year. Which would reduce their FI number to $64,401.24 x 25 = $1,610,031 and increase their yearly savings number to $106,491 + $25,200 – $64,401.24 = $67,289.76. But having used their entire investible net worth (and then some) to pay for the investment condo mortgages, they would start at $0, meaning they would reach FI in…
…around 15 years, plus the 3.5 years they need to save up the shortfall needed to pay off both mortgages, giving us 18.5 years until retirement.
So, paying off the mortgages doesn’t help much.
By making this emotional decision of buying these negative cashflow condos, she’s extended her husband’s time to retirement by a whole decade! If he’s in this early 40s, by the time he retires, he’ll be around 60 years old, which is just regular retirement.
What Can She Do?
We don’t have a ton of options here, to be honest.
In order to achieve her dream of having her hubby retire early, she’ll need to at least break even on the rental properties by charging around $2400+ and $3000+ per month respectively in rent or sell them to get their money back once construction is completed.
Another option is cut her expenses, but these would be some pretty drastic cuts. In order to offset the damage these condos did to her finances, she’d have to cut her monthly expenses by about half. This would entail pulling her kid out of private school/daycare, losing the car, getting rid of the pet, stopping all charitable donations, and abandoning the cemetery plot (which again, is so weird! Is this a thing that people actually do? Pre-pay for a cemetery plot?).
They could also sell their primary residence to unlock their equity and go back to renting, but again, that’s a big lifestyle change.
Making all these changes would obviously drastically alter her lifestyle, so I’m expecting this idea to go over like a lead balloon. But the reality of the math here is, there are 3 things you have to choose between:
- Preserve your lifestyle
- Keep your condos
- Your husband’s early retirement
You can only have 2 out of the 3. Which will it be?
OK with that…er…rosy assessment, let’s move on to other questions:
Our current investments are all over the place. Can we slowly move all our investments with so many institutions to DIY investing (I’m guessing there are penalties/fees)?
The funds held in “real” financial institutions like Fidelity, Tangerine, or Wealthsimple should be relatively straightforward since they’re regulated by the government from doing shady things, but I’ve never heard of some of these others. Equiton appears to be a private REIT, Primerica is an insurance company, and Greybrook is private equity firm of some sort. Call each one and ask how to get your money out. If you’re lucky, you’ll be able to do it with some fees or penalties, but if those companies start stonewalling and saying you can’t get it out, they might be giant Ponzi schemes for all I know.
The re-fi deposited an advanced mortgage. Wow did our account look rich even though it wasn’t ours. We plan to put the deposits for the condos into a high interest savings account/ GICs. With the remaining balance (for closing costs of condos) can we invest in ETFs for a short time?
No. Index investing is a long-term investment strategy. If you need the money in 5 years, don’t invest.
When can my hubby retire? Any optimizations to make it sooner?
Any Canadian resources for charity giving investments?
I applaud you for being charitable but I think you should pause charitable giving until you get your financial situation under control. As the saying goes, “secure your own mask first before assisting others.”
For those of you who are thinking of buying a condo as an investment, read JLCollin’s new book first “How I Lost Money in Real Estate Before It Was Fashionable“:
Don’t make the same mistakes as PandemicMistakes.
What do you think? What can PandemicMistakes do to improve their financial situation?
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