We’re building a new home and should have possession of it sometime in February. I’ve been asked a few times if we are going to hang onto our existing home and rent it out. After I stop laughing I explain why I have no desire to own a rental property.
I admit that I have a preference for owning a small slice of nearly every publicly traded company in the world through a low cost, total market ETF. I’d never want to get my hands dirty working for any of those companies, but I’m happy to share in their profits over time.
The thought of being a landlord and having to worry about finding and managing tenants, dealing with general upkeep and maintenance, and holding a contingency fund for larger renovations or repairs is not at all appealing.
Being a financial planner, I also have many clients who do own rental properties, and while some are happy to own and manage multiple properties, others have shared their horror stories about bad tenants, expensive repairs, cash flow troubles, and the lack of price appreciation in areas of the country outside of Ontario and BC.
Still, I like to explore my options. The risk our house doesn’t sell in a reasonable time and for a price we’re willing to accept is not 0%. If the local housing market dries up, it might make sense to take down our listing and rent out the home, at least temporarily (for a year or two).
A property appraiser determined we could fetch about $2,800 per month for our house. That sounds pretty good on the surface, but a closer look at the numbers gives me pause.
Let’s assume we extract a good chunk of the existing home equity for a down payment on our new house. That leaves a mortgage of about $390,000. Paid over 25-year, the mortgage payment would be $2,284 at an interest rate of 5%. Property taxes and insurance add another $650 per month. That comes to $2,934 per month in expenses. Tenants would pay for their own utilities.
Even if we managed to get $3,000 per month, we’d only make about $800 for the entire year, which is not nearly enough of a contingency for maintenance or minor repairs (let alone if something major breaks).
A smaller mortgage of, say, $340,000 would bring the mortgage payment down to $2,000 and make the numbers more palatable. But that’s just robbing Peter to pay Paul, meaning the smaller the mortgage on our existing home, the bigger the mortgage will be on our new home.
Then there’s the actual issue of being a landlord, even temporarily. It’s not for me. After all, I’m Canada’s worst handyman. I’d end up hiring out the property maintenance, further eroding the already razor thin profit margin.
Finally, there’s my faith in the local real estate market. Lethbridge seems to have more of a steady 2-3% a year housing market than a boom and bust housing market. So, likely no potential for a real estate lottery pay-off in a short-time frame.
Related: Was My House A Lousy Investment?
For those reasons, turning our existing house into a rental property after we move is a last resort option.
This Week’s Recap:
Last week we got the official word that the annual TFSA limit will increase to $6,500 in 2023. That takes the lifetime TFSA limit to $88,000.
Also of note, CPP recipients will get a 6.3% increase in their benefits in January based on the inflation numbers for 2022.
Many thanks to Paul Brent of the Globe and Mail for including my comments in this piece on tax loss harvesting.
Promo of the Week:
I didn’t take part in Black Friday shopping, but if you’re looking to take advantage of any online deals this weekend make sure to go through a cash back website like Rakuten first to earn a rebate on your purchase.
If you’re new to Rakuten (formerly Ebates), you’ll get a $30 cash bonus when you join today.
Weekend Reading:
In addition to a higher TFSA contribution limit and indexed CPP benefits, Erica Alini says most Canadians will get some tax relief as tax brackets also get adjusted upwards by 6.3% (subs).
What should you do with your mortgage in a rising interest rate environment? Jason Health at Objective Financial Partners shares some strategies.
Andrew Hallam says that by saving $500 a month, you could have $12,100,000 over 60 years if you keep asking this one question.
Should RRIF withdrawals be based on the younger spouse’s age? It depends.
A Wealth of Common Sense blogger Ben Carlson rights says the markets can’t save you if you can’t save.
Of Dollars and Data blogger Nick Magiulli turned 33 and wrote a great piece on learning to live.
Stop thinking about what you are retiring from and start thinking about what you’re retiring to.
Most investors are experiencing hefty double-digit losses. Andrew Hallam explains why we aren’t far removed from chimpanzees:
Smart investing isn’t about chasing past returns or coveting what others own. Instead, it’s about owning a globally diversified, low-cost portfolio. It’s about maintaining a consistent allocation through thick and thin. That means rebalancing as needed: selling pieces of “winners” and adding the proceeds to the “losers.”
Index investing as a theoretically optimal investment strategy works best in an efficient market, but if everyone turns into a passive index investor the market can’t be efficient. Ben Felix explains what this paradox means:
Rob Carrick on what the Algonquin Power debacle says about dividend stocks versus GICs (subs).
My Own Advisor Mark Seed shares his financial independence update. Inspiring stuff!
A Wealth of Common Sense blogger Ben Carlson again, this time comparing now disgraced FTX founder Sam Bankman-Fried versus The Match King Ivar Kreuger.
Finally, long-time Wall Street Journal personal finance columnist Jason Zweig shares his suggestions for the books every investor should own.
Have a great weekend, everyone!
It was a sobering week for crypto bros, as yet another epic collapse has exposed the supposed “future of money” as little more than a house of cards. Crypto trading platform FTX, which landed high profile partnerships with the likes of Tom Brady and Steph Curry, and signed a $135M agreement with the Miami Heat to rename their arena, filed for bankruptcy on Friday.
This comes less than four months after major crypto lender Celsius Network filed for bankruptcy, and less than six months after the collapse of major tokens terraUSD and luna.
Exactly one year ago (Nov 12, 2021) Bitcoin reached an all-time high of $80,827 CAD. Today, one coin is worth $21,118 – a 74% decline from its heights.
Ethereum (or Ether), the second most popular digital coin, reached a peak of $5,829 CAD at the same time last year. Today it trades at $1,583 – a similar 73% decline in value.
The space is so rampant with fraudulent activity and bad actors it makes the characters and events described in The Big Short look like choir boys running a small-time grift.
For regular investors, it’s a tale as old as time. It’s called the Greater Fool Theory. Asset soar in value, beyond any sensible metric or fundamentals. Investors pile in, thinking they can still make money as long as there is a “greater fool” behind them ready to buy at even higher levels. Soon, we run out of buyers and the price plummets.
The reasonable takeaway is to avoid this space. That includes mainstream coins like Bitcoin and Ether. That includes NFTs. That includes so-called stable coins and crypto savings accounts promising high returns. It’s quite possibly all a Fugazi:
This Week’s Recap:
No posts from me this week, but I received a lot of good responses to my Master List of Financial Goals post last week. I hope that has helped you think about your own financial goals and how to support that vision of your life.
It’s also timely to re-share this post on the trouble with GICs. U.S. inflation numbers came in lower than expected this month, and the S&P 500 responded with a massive 5.54% increase in a single day.
Reader: My stocks are tanking but I can get a 1-year GIC at 5%.
Stocks: pic.twitter.com/KFI9HKmXz3
— Boomer and Echo (@BoomerandEcho) November 10, 2022
Promo of the Week:
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I transfer Membership Rewards 1 to 1 to Aeroplan where I value Aeroplan miles at 2 cents per mile*. That means your initial 80,000 welcome bonus points can be worth up to $1,600.
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You’ll also get hotel perks and airport lounge access.
The $499 annual fee may be tax deductible as a business expense.
Weekend Reading:
We’re starting to get into Christmas mode now, but with a potential house sale on the horizon we’re looking for ways to simplify things this holiday season. I got some inspiration from a minimalism blog – 69 festive minimalism tips for a simpler Christmas.
Travel expert Barry Choi reviews the American Express Aeroplan Reserve Card – it’s one of our go-to cards for travel.
More on the FTX collapse, which wiped-out the founder’s entire $16B fortune.
Here’s Mike Drak on why we need to shift from traditional retirement planning, which focuses exclusively on how much an individual needs in retirement, to longevity planning, which includes the often overlooked non-financial aspects of retirement.
My Own Advisor Mark Seed takes a look at the cost of elder care in Canada:
“The range I suggest is $1500 to $4000 per month for eldercare costs, which includes everything from personal care, companionship, home maintenance (external and internal), personal response systems, home and personal adaptation accessories and transportation. The lower end of the range is for individuals with lighter needs (and likely a family caregiver nearby or a couple where one is caring for the other) and the higher end is for more complex needs and/or frailer seniors living alone.”
Fred Vettese has been writing up a storm at the Globe and Mail about CPP and OAS. The first is about what the expansion of CPP will mean for our retirement (subs). Note, it will take more than 40 years before the expansion is fully phased in.
Next, here are two ways that retirees who haven’t lived in Canada that long can increase their OAS benefits (subs). If you can’t access the article, the gist is that by waiting until 70 to take OAS you can increase either your “residency-adjustment” or your “age-adjustment” (but not both).
Jason Heath says it may be necessary or advisable to withdraw from your RRSP in your 60s. Here’s why (and how much you should take).
The always clever and creative Andrew Hallam explains what the psychology of rats can teach you about lump sum investing.
A question I’m seeing more and more. Should clients use home equity to help fund retirement?
A Wealth of Common Sense blogger Ben Carlson explains how you should choose your asset allocation.
I really enjoyed this piece from Rob Carrick on the right things a brutally honest advisor would tell you about fees, returns, and more (subs):
“You know how we told you that prudent portfolio diversification is the path to long-term investing success? Funny story. Those bonds and bond funds we put in your portfolio for stability dropped like a rock. Sorry about that, chief. Investing means getting punched in the face every now and then, even as you keep progressing toward meeting your long-term financial goals.”
Finally, we all know interest rates were sky high in the 1980s. But are Canadians worse off financially now than they were back then? The answer may surprise you.
Have a great weekend, everyone!
Most of my work as a financial planner boils down to helping clients use their resources to achieve their financial goals over time. But where do those goals come from? How do we know they’re the “right” goals?
The team at PWL Capital dug into the research around goal setting and found that, “people are empirically deficient at identifying what their objectives are,” and that, “participants consistently omit nearly half of the objectives that they later identify as personally relevant.”
Basically, we don’t think broadly enough about how many goals we’d like to achieve, and we don’t think deep enough to articulate which goals are the most meaningful to us and if any of those goals contradict other goals.
One example is a prospective client whose main objectives were to reduce his tax burden and to avoid OAS clawbacks. Yet he also enjoyed his work and planned to continue earning significant income well into his 70s.
Another prospective client wanted to “die with zero”, but also wanted to build a portfolio of income properties.
To help increase the probability of generating a more relevant list, research from Bond, Carlson, and Keeney suggest the following exercise:
- Independently generate a list of objectives without outside help.
- Approximately double the number of objectives that were initially generated.
- Consult categories that objectives for the decision may fall into.
- If it exists, consult a “master list” of objectives for the decision; this should only be done after completing the first three steps.
Master List of Financial Goals
PWL conducted a survey, collecting responses from their Rational Reminder podcast listeners, with the objective of creating a master list of financial goals. Ben Felix, the head of research at PWL, recently posted a summary of their findings.
The number one goal, by far, was to become financial independent – where work is optional. Anecdotally, that’s the most common goal I hear from my clients as well.
Here are the top 10 goals from the master list:
- Being financially independent – work is optional
- Feeling financially secure
- Affording travel / leisure time / experiences with family
- Maintaining physical health through sleep, diet, and exercise
- Financially supporting my community or causes that are important to me
- Finding and affording engaging hobbies
- Assisting children with education costs / early adulthood setup
- Owning a home and affording its operating costs
- Having the ability to be generous with loved ones
- Avoiding the hedonic treadmill, but not over-saving (“enough”)
Other goals that I found interesting (but that appeared lower in the master list) included:
- Finding engaging work and being in a financial position to pursue it
- Outsourcing unpleasant tasks
- Raising financially literate and responsible children
As a planner, I’m happy to see this research and plan to use it to help my clients think about their own financial goals. It’s true that we don’t think broadly enough about all of the goals we want to achieve – too often we focus on the one or two burning questions occupying our minds at the time.
We tend to just arbitrarily want “more” without stepping back to think about how we’ll use our financial resources to fund a good life.
My takeaway is that it’s hard to come up with a list of financial goals on the spot, but by thinking more broadly about what we want out of life, writing down those objectives (then trying to double the number of objectives), and then consulting a master list of financial goals, we can better articulate our own goals and how to use our financial resources to support that vision.
I also find it helpful to come up with a list of anti-goals – what you don’t want your life to look like now and into the future.
Readers, anything to add to the master list of financial goals?
This Week’s Recap:
I managed to write one post last week when I looked back at the last 11 years of home ownership and wondered if my house was a lousy investment.
Many thanks to Rob Carrick at the Globe and Mail for featuring that article in his latest Carrick on Money newsletter. Always appreciated! I also appreciate how kind you are in the comments section compared to G&M readers – so thanks for that!
Promo of the Week:
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Inflation is still running higher than usual, so it’s more important than ever to find ways to squeeze more savings out of your purchases. Rakuten has access to more than 750 stores, including The Bay, Sport Chek, Canadian Tire, Old Navy, and Sephora.
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Best of all, those three cards are all “First Year Free” with this promotion and have generous and easy to attain welcome bonuses on top of the $150 cash back from Rakuten.
Weekend Reading:
It has been a rough year for the classic 60/40 portfolio. Nick Maggiulli explains how it makes a comeback.
Why a highly diversified portfolio, even one that is down right now, is like having ground beneath your feet while less diversified investors are skating on thin ice.
Getting a head start on tax loss selling? Jamie Golembek says to beware of the superficial loss rule, currency implications, and more.
The most important decisions in your life may be whether to marry, who to marry, and whether to have kids. But none of those topics are taught in school. Morgan Housel’s latest looks at things that are very important but hard to teach.
Here’s the messy true story of the last time we beat inflation.
Rob McLister says mortgage shoppers are snapping up short-term fixed rates right now, and says, “that is exactly how yours truly would play it – assuming I were getting a mortgage today.”
Canada’s oligopoly of the skies is at it again, as Air Canada and WestJet launch a lawsuit to overturn orders to compensate passengers for cancelled flights. Good grief.
Gen Y Money travel hacked her way to the Maldives. It’s on my bucket list.
Finally, author Mike Drak says financial planning needs to be broadened to include longevity planning—how people can live their best life for as long as they can.
Mike also wrote a piece in MoneySense about what a retirement plan looks like today:
“Your first life was a quest for success and money; your second life is a quest for meaning and significance. If you approach it right, you can recreate the excitement and possibility you felt back in your twenties when you first started out. Remember how that felt?”
The above article was excerpted from Longevity Lifestyle by Design (September 2022). The PDF version of the book is available to download for free, or you can order the paperback version on Amazon.
Mike says if you are willing to buy a copy for $12.99 on Amazon and post a comment below, “I will send a free printed copy to the person of their choosing.” Thanks, Mike!
Have a great weekend, everyone!