- Can The Bank Take Your House Even If You Pay Your Mortgage? - January 30, 2023
- Reader Case: How do I Squeeze More Income From my Portfolio? - January 16, 2023
- Our 2022 Portfolio - January 3, 2023
Today’s reader case is a member of two demographic groups that particularly resonate with me: immigrants (for obvious reason) and fans of our book (for even more obvious reason).
We are fellow Canadians currently residing in a small town in Ontario. Family of 3 – ages 46, 42 and 12.
While skimming through your blog materials looking for specific DIY info, we came across your book. We picked it up and instantaneously fell in-love with Kristy’s life story! Specifically, with her being a Chinese immigrant, the atrocities she faced at a young age, how her upbringing shaped her mindset, what made her who she is today, her transitioning to a new life in Canada etc. These were some of the values that resonated with us as a family. It is relatable and mirrored that of our own challenges. By reading about Kristy’s journey, we came away with a greater sense of pride, appreciation and motivation that if she can make her “life lessons” work out to her advantage then perhaps so can we!
Firstly, about myself and personal background…,
I am a proud family man, husband and father. I am happily married to my lovely wife of 17+ years (since October 2002) as well as a devoted father to my son who is currently in 7th Grade. I am a Filipino-Canadian who immigrated to Canada in the summer of 1985 when I was still 12 years of age. My family and I decided to return to the GTA area after college, held several office positions, before finally landing a permanent role as an Auditor in the fall of 1996.
In the summer of 2017, I was unfortunately laid off. I went through a transitional phase of trying to land a comparable employment with no such luck before coming across your remarkable story last year. I have recently come to terms with accepting the lifestyle of the F-I-R-E methodology and doing so at the prime earning age of 46. I am looking forward in exploring new opportunities albeit as an entrepreneur, downgrading to a less stressful job, dedicating time to volunteering in community service programs that I can be passionate about or simply living the rest of my days in F-I-R-E mode once we align and iron out all the necessary kinks!
Secondly, about our household finances…,
We are and have always been a single income family household. This is mainly attributed to our strong Filipino heritage where the husband takes the role of the“provider” along with the wife’s traditional role as a “caregiver”. Our average household gross earnings were at $45k pre-1996, $60k post-1996, $80k by 2003 and breaking six-figures plateau by 2009. Yes, we can admit that having an above average auditor salary could also be the driving force behind this particular family arrangement but we have always lived within our financial capacity and have operated from a sound perspective of necessity (not luxury).
Currently, we are operating at a cash-flow positive and essentially debt free. We do own a residential and a investment property. The only caveat is that we are carrying a debt associated with the acquisition cost of the investment property for taxation related write-offs. Outside of this however, we own every other household assets with absolutely zero liabilities.
Additionally, we were also continuing to build a sizeable investment portfolio (all registered within an RRSP, LIRA, TFSA and RESP) totalling over $615k. Presently, the family has a combined household “NET CASH WORTH” north of $1.325 million.
Unfortunately, the investment portfolio is currently situated in an “actively” managed mutual funds. In our defence, we were totally unaware index investing even existed but we comprehend the dilemma and are now trying to address the situation to reduce the MER component and limit ROI erosion. The family is in agreement of what must be done but unsure as to how to transition the funds with ease and confidence due to our limited knowledge in self-directed index investing. Considering the size of our nest egg, we are simply not at all comfortable in our execution and are incapacitated with fear of making an even bigger mistake in our due process!
Kristy/Bryce…, there is a ton of moving pieces that we are trying to address as a family, all at once and equally important. We feel we must act (while we are still able) to ensure we attain a favourable retirement outcome at the end. The only problem, we clearly see the finish line but are having issues getting ourselves off the ground, plotting an actual course (as in truly connecting the dots sequentially), to get there and back! We Do Have Options but NOT at all Confident!
Thirdly, the detail breakdown of the numbers…,
1- Current NET Income – average income post-termination and figures are reflected on the low side
Employment – $2,250.00 (Wife’s salary)
Property – $1,725.00 (rental income)
TOTAL – $3,975.00 (Monthly) OR $47,700.00 (Annualized)
2- Current GROSS Expenses – average expenses post termination and figures are reflected on the high side
Residential – $1,985.00 (operating expenses – includes build-in cushion/allowance)
Investment – $1,715.00 (operating expenses – includes acquisition cost via mortgage and HELOC)
Incidentals (for both) – $ 800.00 (both properties – slush fund for discretionary and incidentals)
TOTAL – $4,500.00 (Monthly) OR $54,000.00 (Annualized)
3- Assets and Liabilities – All NET figures
Chequing – $ 11,500.00
Savings – $ 15,000.00
Liabilities – $ 0.00
TOTAL – $ 26,500.00 (All Cash)
My vehicle – $ 10,000.00
Wife’s vehicle – $ 5,000.00
Liabilities – $ 0.00
TOTAL – $ 15,000.00 (All Vehicles)
Residential – $645,500.00 (conservative equity value net of commissions and fees)
Investment – $366,625.00 (conservative equity value net of capital gains, commissions and fees)
Liabilities – $269,125.00 (all acquisition cost – combined mortgage at $162.6k @ 3.80% and HELOC at $106.5k @ 4.45%)
TOTAL – $743,000.00 (All properties)
RESP – $ 35,100.00 (Kid’s – at 1.78% MER with 2019 ROI at 15.04% at 60/40 balanced allocation)
TFSA – $ 24,700.00 (Wife’s – at 1.78% MER with 2019 ROI at 16.78% at 70/30 growth allocation)
TOTAL – $ 59,800.00 (to be allocated for Justyce’s education – $35.1k RESP guaranteed with $24.7k TFSA optional)
Breakdown- RBC US Dividend Fund – 20%
(RRSP/LIRA) RBC QUBE Low Volatility US Equity Fund – 20%
RBC QUBE Low Volatility Canadian Equity Fund – 20%
RBC QUBE Low Volatility Global Equity Fund – 20%
RBC Select Balanced Portfolio – 15%
RBC Emerging Markets Dividend Fund – 5%
RRSP – $521,175.00 (Mine – at 1.78% MER with 2019 ROI at 17.65% at 90/10 aggressive allocation)
LIRA – $ 36,150.00 (Mine- at 1.78% MER with 2019 ROI at 17.65% at 90/10 aggressive allocation)
TOTAL – $557,325.00 (allocated for F-I-R-E purposes)
GRAND TOTAL NET CASH WORTH – $1.325+ million (does not include vehicles or RESP/TFSA funds)
The options we are seriously considering to attain F-I-R-E ready status (and in priority sequence)…
1- Transition all “actively” managed registered mutual funds into a self-directed registered index funds
2- Liquidate both properties, take the $743k and allocate $450k in a dual income (top/bottom) investment property generating $3k in total rental income, invest the remaining $293k in non-registered self-directed index funds, live nomadically on a $40k max budget. My wife’s most likely preferred choice should we initiate F-I-R-E.
3- Exactly identical in every facet as stated in point #2 but invest the entire $743k in a non-registered self-directed index funds, initiate a 4% SWR to fund for the living expenses and live nomadically using geographic arbitrage on a $40k max budget. My preferred choice should we initiate F-I-R-E.
4- Liquidate only the residential property, move to the investment property, take the $338k ($645k less $38k capital gains for the investment property less mortgage and HELOC liabilities) and invest in non-registered self-directed index funds, stay locally mortgage free, downgrade to a single vehicle which further reduces car related expenses such as insurance, gas, maintenance etc, exercise F-I-R-E, initiate a 4% SWR to fund living expenses on a $36k max budget and live exactly no different than what we have done post-termination. Our son’s (not so) preferred choice should we initiate F-I-R-E.
As always, we really do appreciate all the time and effort that you have afforded to us. My 12 year old son has read your book and so I am positively sure he would love to meet you both someday and so I am hopeful we can either meet abroad at one of your summit gatherings or get an opportunity to entertain you both for dinner if and when you are back home. Do keep up the great work and stay safe in your journeys!
–Take Care and God Bless,ImmigrantOnFIRE
First of all, one thing that never gets old is hearing about how our blog & book have so drastically influenced someone’s life. It’s gratifying and humbling at the same time, and it’s an absolute honour that we get to have that kind of impact.
But our reader has a lot of decisions to make, so let’s get to it because this article’s word count is already nutso.]
Transitioning Your Portfolio
ImmigrantOnFIRE has over $500k in actively managed mutual funds, all with an MER between 1.7% and 2%. We’ve definitely got to fix that, but he’s intimidated at such a daunting task and afraid of screwing up.
Fortunately, two of the biggest ways he can “screw up” just don’t apply to him. All his funds are held in an RRSP or TFSA, so there’s no tax consequences of anything he does. And rather than sitting on his money in cash and trying to find a good entry point, his money’s already invested, so there’s no market timing needed. The only thing he could do wrong is pick the wrong ETFs, but we got you, boo! Just use the ETFs we already vetted from our Canadian portfolio.
To start, take your RBC Canadian equity fund, sell it, and immediately buy VCN, the Vanguard Canadian Index ETF. Then, do the same to your RBC US equity fund and buy VUN, which is the Vanguard US Index ETF. Finally, take your 20% allocation in the RBC World equity fund and split it 16% XEF (the iShares EAFE ETF) and 4% XEC (Emerging markets). You can do this all in one go, or do it piecemeal. Whatever’s comfortable for you, just set a deadline (like, say, in a month from now) to get it all done. Your portfolio’s makeup hasn’t changed, but it’s just gotten cheaper.
Next you’re going to need to sit down and figure out how much fixed income you want. A 90/10 portfolio is fine when you’re 10+ years away from retirement, but if you’re transitioning to RE soon, you’re going to want to be more conservative. If I were you, I’d take the rest of your portfolio and plough it into VAB, which is the Vanguard Aggregate Bond Index, leaving you with a 60% equity/40% fixed income split.
And remember that whatever you do now can always be changed later. If you later want to increase the yield of your portfolio by implementing our Yield Shield strategy, you can do it with no tax consequences (because, again, everything’s in a tax-sheltered account), but do the simple stuff first and get comfortable with managing your own portfolio before getting too fancy. And as always, check out our Investment Workshop for more details!
Buying Another Investment Property
I have to confess, I’m a little worried about our reader’s track record on real estate investment. While their instincts were correct to keep their house leveraged using a combination of a mortgage and a readvanceable HELOC to keep their ROE high, their investment house right now is costing them $1715 a month in debt servicing costs. All this to make $1725 in rent, for a grand total of…$10 a month in profit. Yay?
Being able to deduct their interests to save on taxes helps, but tax deductions alone can’t turn a bad investment into a good one. And this is before all the other costs like maintenance, property taxes, insurance, etc. which would turn this property into a net money loser. This is technically not an investment property, it’s a liability property.
So when our reader says he wants to sell his existing property to buy another one for $450k expecting to make $3000 a month, I have to ask, is that $3000 net? Because if it is (meaning, after expenses), that would mean an ROI of $3000 x 12 / $450,000 = 8%, which ain’t bad. But if it’s gross, I wouldn’t bother because after expenses your ROI would likely fall into the 5% range, at which point you’d be better of just buying a REIT.
I was surprised by how enthusiastic our reader was on going nomadic. Typically real estate investors are pretty attached to the idea of owning property, so the fact that he so casually proposed selling everything (including his primary residence) and going travelling is rare. And good thing too, because this path is way easier than the others.
If they liquidate both properties, they’ll net $743k (they reader claims this value is after selling fees and commissions, so we’ll take that at face value). Combining this amount with their existing investments will bring their portfolio to $1,300,325. If their max budget will be $40k, then according to FIRECalc, this plan has a whopping 100% success rate. I like them odds.
Moving Into Your Investment Property
In this scenario, our reader ells their current primary residence, pays off the debt on their investment property, and then moves into their investment property whie lowering their living expenses to $36k. Does this make sense?
First of all, I’m really confused by the sentence “take the $338k ($645k less $38k capital gains for the investment property less mortgage and HELOC liabilities)“. Why would you subtract $38k of capital gains of a property you haven’t sold? The correct number would be $645,500 (home sale price net fees) – $269,125 (outstanding loan balance) = $376,375.
Add this to their existing retirement portfolio and we get $933,700. Plug this number (plus spending of $36k) into FIRECalc and you get a success rate of about 97%. Not as good as the nomadic option but still pretty damned good.
So laying out all the math for each scenario, I am throwing my weight behind the “sell everything and go nomadic” option (after COVID is over, of course) (Here’s an example of a Chautauquan friend who moved his family of 6 to Spain for inspiration. And since we don’t know how long it’ll take borders to open again, local arbitrage is also an option for being nomadic within Canada). Moving into the investment property is a close second but I wouldn’t bother with the “buy another investment house” option. You have better options that don’t involve being a landlord forever, so why bother?
WELP, that’s my take. What do you think ImmigrantOnFIRE should do? Let’s hear it in the comments below!
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