- Reader Case: A Waiter’s Story of Financial Independence - October 22, 2021
- Let’s Go Exploring! Atlantic Provinces Part 2: Cape Breton Island - October 19, 2021
- The Tang Ping Movement: Asia’s First Steps Towards Financial Independence - October 4, 2021
I can’t believe I’m saying this, but as of this moment, we’re STILL in a lockdown in Toronto. While the US, countries in Europe, and the UK are gradually re-opening, we’re stuck waiting for vaccines. So much for our Canadian moral superiority over the Americans.
I guess what’s bad for us is good for you, because that means we have time for another reader case!
Hi Kristy & Bryce,
I just finished reading devouring Quit Like A Millionaire and loved it. Thank you for creating a finance book that is a legit good read.
My husband (dangerously close to 40) and I (mid-30s) are at a crossroads with what our future is going to look like and I thought some readers might be able to relate to parts of our situation.
First, the details:
> Our gross/net annual family income: $114K net
> Our monthly family spending: $3K
> Our debts:
…..Husband’s car has a balance of $7K owing; he bought it from his parents and pays zero interest
…..No other long-term debt; credit cards are paid off monthly
> Our fixed assets: two cars (the aforementioned husband’s car, plus mine that I own outright)
> Our investments/savings:
…..15K in cash
…..875K in investments (mix of low-cost index ETFs and dividend stocks); portfolio has a 3.71% yield, currently
Second, the situation:
Housing: We live in a small Canadian city. We grew up here and our families are here or near. We rent an apartment currently. Our province has been experiencing a housing crisis, and before the pandemic, our city had a 1.2% vacancy rate, the lowest in the country at the time (after having a near-0% rate in 2018). There is no sign that current infrastructure plans will meet the demands of future population growth.
We love living here from July-September, and sometimes June and October if we’re lucky. We live for summer and despise winter, despite our best efforts to try to find enjoyable winter hobbies (we’ve discovered there are none, ha!).
Career: Husband is at the top of his career ladder and LOVES his job. When we first met, he said that he would never retire, not because of money but because he genuinely enjoys what he does.
I am at the end of one career and pondering options for the next. In the meantime, I have a full-time desk job with benefits and a defined benefit pension plan. The pay is decent for where we live but it is still “meh” compared to my old job. It’s not thrilling but it’s also not stressful. My old career was both of those things. I am fortunate that I have a steady job and have turned my old career into a lucrative side hustle without the stress. I would retire tomorrow…… BUT….
Third, future plans:
Starting in 2024, we want to semi-retire, skip out on winters here, but come back in the summers. I mean, who doesn’t? Our province is the best place to be in the summer in Canada, and that’s not hyperbole.
Ideal Year #1 of semi-retirement looks like this (places are examples):
– 4 months in Panama
– 2 months in a sunny southern US state in their low season for tourism
– 6 months in our hometown, working part-time at fun jobs that we know will be available to us
With a combination of dividend income and earned income, we would have enough to cover our projected annual expenses and would still be able to contribute to our nest egg.
Caveat: If Husband is offered, say, a one-year contract somewhere, we would take it if it is something that he would enjoy. Living somewhere new is kind of like living that vacay life anyway. Staying in the game also means that, if something happens to negatively impact our finances in the future, we will have maintained a network of employment options and shouldn’t be up Schitt’s Creek paddle-less.
THE BIG QUESTION:
Our biggest impediment right now, that we can see, is housing.
Staying in our apartment means that we have rental expenses year-round here and would need to find a subletter for a specific period of time each year. Our rent for 2021 is just under $1400 per month. The annual increase is 1%, on average. We would have to okay the subletter with our landlord each year. If we can’t find a subletter for the entire timeframe, we are still on the hook for the rent.
With the ongoing housing crisis, I think we would be able to find a subletter.
We have looked at moving to a cheaper apartment to both lower our current expenses and perhaps ease the burden of having to cover a month or two without a subletter in semi-retirement. But again, the housing crisis means there are few apartments available, and it seems our apartment is actually quite well-priced; comparable places rent for $1500-$1600, so to save a little bit of money, it would be quite a step down in quality of life.
Moving out altogether and finding a temporary rental when we come home during our semi-retirement would not work, unfortunately. We would be here during the height of tourism season when places rent at a premium.
We have considered buying (yes, buying, yikes) a condo. Since we plan to spend time here regularly for years to come, a condo would provide the same stability as keeping our current apartment. We could still find a subletter for the time we are away, and if it was empty at any point, it would psychologically feel better to be paying down a mortgage instead of paying to hold our place in an empty apartment.
We would anticipate paying off the mortgage in 15 years or less, after which that rental income while we’re away would increase our cash flow. By buying in a new building, we shouldn’t have many large maintenance bills during those first 15 years anyway. Condos in our city start at $220K and go up to seemingly infinity. We would likely be looking in the $300K range.
As you can see, we are leaning toward buying a condo. This is not us jumping on the “But we’re building equity!” bandwagon. It seems to be the most secure way for us to execute our semi-retirement plan and not be homeless at any point. We are not looking to build a rental empire.
Maybe our semi-retirement plan isn’t well hashed out though and I would gladly welcome some critiquing to make sure we have a solid plan in place.
In our calculations, we have:
– Estimated an annual 6% ROI on investments.
– Used a 3.71% yield to calculate future dividend income (this is our current yield and we will continue to track so we can update our plan).
– Opted for a 15-year mortgage; we would select a 10-year mortgage if we can make it work, but also don’t want to overextend ourselves. We have also done our calculations with a downpayment of between 20-25% – enough to avoid the CMHC insurance, but nothing that will crater our portfolio.
– Not dipped below $20K in our cash flow forecast, in any year. By continuing to work part-time in jobs that we enjoy, we will be able to cover all of our expenses and still maintain contributions to our nest egg. If for some reason, we are both unable to make earned income, our projected cash flow is never less than our projected earned income, meaning that we should at least break even.
While paying the mortgage, the average projected cash flow per year is $45K. (Therefore, our projected earned income, dividend income, and rental income should exceed our projected expenses by $45K, just to be clear.)
– Not included selling investments to cover expenses. We do not want to start drawing down our assets in semi-retirement. If at any point we show a negative cash flow, we would prefer to increase our earned income.
Will you please help us to determine the best way forward so that we can look forward to year-round summer and not lose our shirts in a housing crisis?
Thank you, Kristy & Bryce!
The Sun-Chasing Semi-Retirees
Right away I can see that SCSR have a lot in common with us. They’re sun-worshipping travellers, they live in Canada, and are considering buying a condo in the $300K range . Wanderer and I’ve always said, if we were to lose our minds and *gasp* buy real-estate, it would be in a small town where housing affordability hasn’t gone the way of the dodo. But damn, Canadian winters really suck so I can see why they would want to escape and only be here in the summer. Would buying a place help or hinder that dream? Let’s find out.
|Spending:||$3K/month = 3000*12 = $36,000/year|
|Investible Assets:||$875,000 (investments) + $15,000 (cash) = $890,000|
With a yearly spending of $36,000, your FI number is 36,000 * 25 = $900,000.
Taking your net worth of $890,000 minus the debt left on your car of $7000 gives you a total net worth of $883,000.
Option #1 Continue Renting
With a savings rate of $114,000 – $36,000 = $78,000/year or 68%, you will reach financial independence in less than 3 months!
So you’re pretty much FI. Nice work! And given that you plan to continue working part time and only semi-retire, and plan to be in Canada for 6 months of year, you can keep your sweet sweet Canadian health care! Which means you won’t have to budget for expat insurance like we do.
Overall, this is a pretty safe plan. Now, let’s see if housing will blow it up.
Option #2: Buy the Condo with Cash
If SCSR liquidates $300,000 worth of equities in their portfolio, that would bring their current net worth down to $583,000, which by the 4% rule will generate $23,320/year in passive income.
However, since they no longer need to pay $1400/month in rent, that takes their yearly expenses down from $36,000/year to $19,200/year.
With their portfolio spewing off $23,3200/year, this should give them $4120/year surplus for any unexpected home ownership expenses, right?
Well, not so fast. On the surface it might seem like this is an amazing money saving move. But keep in mind that being mortgage free doesn’t mean you’re free from paying property taxes, insurance, and maintenance, which all go until perpetuity (ahh, the joys of home ownership).
So, on a $300,000 condo, they’ll be expected to cough up another 1% ($3000/year) in property taxes, $1200/year in insurance, and on average we’ll say maintenance is only 1% or $3000/year (though depending on the condo, maintenance fees can vary wildly) So SCSR is looking at an additional $7200/year even after buying the condo outright.
In reality, their expenses would be $19,200 + $7200 = $26,400/year, so they would need a portfolio of $660,000 to afford owning the condo.
So, they would need to save at least $960,000 in order to buy a $300,000 condo, conservatively speaking, which would push out their FI date by about a year. Not too bad, as long as they stay within their $300K price range.
Just don’t get complacent thinking “buying in a new building, we shouldn’t have many large maintenance bills during those first 15 years anyway”. This assumes a naïve level of confidence for building managers and other owners.
If you don’t believe me, check this out:
Option #2: Buy the Condo with a Mortgage
But with interest rates so low, why use your own money? What if they were to get a mortgage? How would that change the math?
Right now, SCSR can get a 5-year fixed rate mortgage for 1.68%. Now, I find it weird that SCSR is considering getting a mortgage with a 15-year amortization period instead of the max of 25. Why would you do that? If you have enough cash to buy the condo, the only reason you’d get a mortgage is because you think your cash would give you a better return in the stock market. In which case, you’d pick the longest amortization period in order to reduce your monthly payment rather than trying to pay it off sooner.
So, with a 20% down payment of $60,000 and an amortization period of 25 years, put that into a mortgage calculator and you get a monthly mortgage payment of:
Adding in the additional cost of property taxes, maintenance, and insurance that we calculated in Option #2 of $7200/year or $600/month, we get $1580/month.
That would change their expenses to $36,000 (original base cost) – $1400 x 12 (saved rent) + $1580 x 12 (cost of mortgage + other expenses) = $38,160/year. Also, they would need to liquidate $60,000 of their portfolio for the down payment.
Their portfolio would then need to be $38,160 x 25 = $954,000.
At their savings rate and subtracting $60,000 from their current net worth for the down payment, it would take:
Around 1 year!
Now the caveat for this is that it’s under an unbelievably low interest rate of 1.68%, but interest rates will go up, so you can’t rely on this low mortgage payment forever. After the 5-year term is over, if interest rates have spiked up so much that the math no longer makes sense, kill the rest of the mortgage with cash.
SCSR can also consider renting out their property for 6 months while they’re living abroad. For example, if they find a place in Panama for only $800/month in rent and can rent their condo for at least $1400/month, assuming their monthly maintenance/taxes/insurance cost is $600/month, they can break even.
I would be very careful about vetting the tenant though. All you need is one bad tenant to destroy your condo or stiff you on rent. If you can find a friend you trust to swap with you every 6 months (because for some crazy reason they love being in Canada in the winter?), then geo-arbitrage can save you money.
The difference in time to financial independence for SCSR is 3 months if they keep their current rental, and around one year for Option #2 and #Option 3, with buying a house with mortgage inching slightly ahead because of the insanely low 1.68% interest rate.
If I were them, I would continue renting since they’re getting below market rent and rents are only going up by 1% a year in their area. I also don’t want the hassle of owning a condo (again, see TikTok video above) but given that they’re planning to only spend $300K, it’s not a huge financial gamble.
So there you have it. Even at rock bottom interest rates and a reasonably priced condo, I’d personally still rent, but if our reader buys, I guess it’s not the dumbest idea in the world.
That’s as close to an endorsement of real estate as I’m ever going to give. Take it or leave it.
What do think? Should SCSR buy a condo? Or stick with their below market rental?
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