Saving for...downpayments or retirement

[Oli]

Hi all,

I`ve been trying to figure out what to do with my "extra" money for my paycheck and haven`t been able to come to a satisfactory conclusion so I`m hoping to get some good ideas/recommendations for you guys.

I`m 29, closing on my first investment property next week (yay!). I`m trying to decide what to do with my employment income (after paying for my own mortgage + food + entertainment). I see several possibilities:

• Direct all the money towards paying down my mortgage. This means I would have access to a quickly growing HELOC for investment purposes.
• "Pay yourself first" and save 10% of my income towards retirement into an RRSP. While this slows down the rate at which I would accumulate money for my next down payment, it would force to diversifyPay my own mortgage down a little faster (but not all the money) and put the rest in a savings account (e.g. TFSA) and let it grow for the next downpayment. This means using less of the HELOC for downpayments and as such as interest to pay.

I`d your opinions, even if you recommend me to a financial planner (in the Toronto area). What are you doing? What works, what doesn`t, etc?

Thanks

Oli

 

[housingrental]

This will depend on how much cash you have set aside

Assuming you have no other debt than your mortgage (if you do, generally desirable to pay off first)

Have a cash fund for emergencies - your particular fixed expenses and situation will determine the amount but I wouldn`t be too comfortable without at least 6 months of living expenses

After that I`d pay down the mortgage. Access the equity through a heloc for a future down payment on an investment property.

 

[Savard]

Hi,
I`m a real estate guy and never recommend a retail investor putting money into the "TSX Casino". Greg Hasbritt just wrote a book on this subject-- google "RRSP Secret"-- Read more before deciding what to do. Be sure to interveiw many sales people before deciding what to do.
Quick answer - I`d tell my kids to undertake your first option.
Definately pay down your mortgage to become mortgage free. Using a Heloc to invest with is a great idea.

 

[Al Verwey]

QUOTE (Oli @ Sep 23 2010, 11:44 AM) I`ve been trying to figure out what to do with my "extra" money for my paycheck and haven`t been able to come to a satisfactory conclusion so I`m hoping to get some good ideas/recommendations for you guys.

Oli,

Here`s my 2 cents` worth from reading numerous books and what I`ve learned from other sources, including REIN and the School of Hard Knocks.

Unless you plan to take advantage of one of the RRSP options (Lifelong Learning, First Time Homebuyers) or configure it as self-directed so that you can use your funds to invest in other people`s mortgages, I would not worry about contributing to an RRSP unless you plan to be in a lower tax bracket when you retire. Most of us real estate investors are working on establishing a level of passive income that will continue long after we quit the "rat race" and the employment paycheque and hope to not be in a lower tax bracket when we retire.

I would recommend that you structure your finances to be able to live on 60% of your take-home income. Devote 10% to debt reduction, focusing on consumer debt (credit cards, etc.) first. 10% to long-term savings (personal emergency fund - approx. 2-3 months of expenses). 10% to investments and 10% to charity.

Once you succeed in eliminating your non-tax-deductible debt (consumer debt), either devote that 10% to paying down your home mortgage or add it to your investment contributions. Consider implementing a Smith Manoeuvre as you pay down your mortgage.

There is no perfect solution, but you can educate yourself with many of the fine books that are recommended in other forums on My REINSpace. If you have a sound financial strategy, you should not need a financial adviser unless you want someone to pick mutual funds for you.

Al Verwey
Penta V Holdings
Newmarket, ON

 

[invst4profit]

I have always been a big believer in paying yourself the 10% first. This of course depends on your long term employment plans, if you have a company pension plan etc.
This plan should allow anyone wishing to retire at 55 to do so and live quite comfortably.

With the 10% method I discovered that in time you still have extra cash to pay down your mortgage, borrow on your HELOC and do all the things you want it just takes longer. It all depends on how fast you want to get to your goal and how much of a gamble you want to take getting there. Remember there are risks and losers even in real estate.

 

[JoeRagona]

Hi Oli,

I agree with leaving your funds out of your RRSP unless you decide to invest in seconds mortgages. I`m not a financial expert (which is why I have several on my team) but have been advised that many people are under the misconception they will be in a lower tax bracket when they retire hence a secondary reason to put money in. This is untrue and I would recommend looking for an independant financial advisor who can recommend ALL solutions to you , not just funds marketed by a company they may happen to work for.

Congratulations for stepping up to the plate at your young age to control your future!!!

 

[Thomas Beyer]

QUOTE (Oli @ Sep 23 2010, 08:44 AM)
... I'm trying to decide what to do with my employment income (after paying for my own mortgage + food + entertainment). ..


Grow your knowledge .. invest in the most important piece of real estate, namely the real estate between your ears !



Grow your ASSETs.



Grow your network.



Seek more .. read more .. listen more .. discern more .. think more .. love more .. pray more .. laugh more ..



Decide what you love to do .. and do more of it.



Decide what you don't like to do .. and do less or none of it !



Related posts:



5 ways to make money http://myreinspace.com/public_forums/General_Discussion/61-3347-5_ways_to_make_money.html



Do what you love: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-16722-Love_what_you_do_-_Do_what_you_love_.html



How to get started http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html



Prayer especially for RE investors: http://myreinspace.com/public_forums/General_Discussion/61-10209-A_Prayer_especially_for_Real_Estate_Investors.html



How did I get started: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-15422-Is_my_goal_of_200K_annual_income_feasible.html

 

[Oli]

@Joey, that`s why I mentioned that TFSA is another option: hold *some* mutual funds in it and the rest of my money towards real estate investments.

@Thomas, thanks for the links. I`ve been reading up as much as I can over the past year around taking control of my own financial future. Right now, I see real estate as my way out of the "rat race" and I get excited just talking about it. Don`s and Peter K`s books have helped a lot, along with the Toronto ACRE event earlier this year.
I`m really just trying to figure if successful people like yourself (congrats on being mentioned in the Canadian RE magazine btw) grew their money at first. I`m going to go read your posts that you linked

So far I`ve been reading about people saying real estate is the way to go, and some recommend mutual funds (esp Couch Potato investing through indexing). I for one believe real estate will provide me and my wife the income we`ll need in the future. I was simply wondering if having 100% of my investments in real estate is a risky move (most "typical" investors will of course say you should diversify).

Thanks for all your input!

 

[NeilUttamsingh]

QUOTE (Oli @ Sep 23 2010, 11:15 PM) @Joey, that`s why I mentioned that TFSA is another option: hold *some* mutual funds in it and the rest of my money towards real estate investments.

@Thomas, thanks for the links. I`ve been reading up as much as I can over the past year around taking control of my own financial future. Right now, I see real estate as my way out of the "rat race" and I get excited just talking about it. Don`s and Peter K`s books have helped a lot, along with the Toronto ACRE event earlier this year.
I`m really just trying to figure if successful people like yourself (congrats on being mentioned in the Canadian RE magazine btw) grew their money at first. I`m going to go read your posts that you linked

So far I`ve been reading about people saying real estate is the way to go, and some recommend mutual funds (esp Couch Potato investing through indexing). I for one believe real estate will provide me and my wife the income we`ll need in the future. I was simply wondering if having 100% of my investments in real estate is a risky move (most "typical" investors will of course say you should diversify).

Thanks for all your input!

Oli,

There is some solid advice for you on this thread from Thomas and Joe.
From the sounds of it, you are motivated and you are taking action.
As Thomas said, continue to educate yourself. That is the best thing that you can do. The more you read, talk to experienced investors, the more you will expand your horizons.

Another important piece of advice that I would like to share is...
Always listen to the advice of those people that are more successful than you, and that you are trying to become more like.
Further, never listen to the advice of people who are less successful than you, and who are in a position that you do not want to be in.

I hope that made sense!

 

[Thomas Beyer]

QUOTE (Oli @ Sep 23 2010, 08:15 PM) @Thomas, thanks for the links. ... I see real estate as my way out of the "rat race" and I get excited just talking about it. ..
Don`t overestimate it. make some money by WORKING too .. passive income/equity takes large cash upfront AND/OR loads of time !!

 

[gwasser]

QUOTE (Oli @ Sep 23 2010, 09:15 PM) So far I`ve been reading about people saying real estate is the way to go, and some recommend mutual funds (esp Couch Potato investing through indexing). I for one believe real estate will provide me and my wife the income we`ll need in the future. I was simply wondering if having 100% of my investments in real estate is a risky move (most "typical" investors will of course say you should diversify).

Thanks for all your input!


I`ll better put my 2 cents in as well. This forum is about real estate investing and on top of that it is on income producing real estate, in particular rental properties. So it`s a bit biased because many REIN members have first been burned on the stock market and then, when they learned about the REIN style of investing and became successful at it, they just stayed away from the stockmarket.

As Thomas said, invest in the real estate in between your eyes. Learn about all investment classes. Really there is a place for everything. In the end it is about safely investing your money to increase your net worth until you generate enough investment income to declare yourself financially independant of your career, whatever that is.

Never forget that you are an important asset and source of cash in your investment portfolio. In fact, it is often quite difficult to qualify for investment loans and in particular for mortgages and helocs without a reliable income base, which is typically a job. Especially if you were self managing all your own properties, your real estate profits should always be subdivided in proceeds from your investment and proceess from your own work and time put into the real estate project.

In my world, I have worked to create a truly diversified portfolio and it is a combination of real estate and paper security investments. These asset classes have all their own characteristics. One is more liquid, another is more suitable for using leverage, and numerous other features that are unique to each class. So live below your means and accumulate investment funds. Once you have educated yourself then work on a suitable investment portfolio that brings you to your financial and lifestyle goals. I have written a lot about diversification on this forum and on my blog. Others have posted and discussed all kinds of investment and savings strategies on this forum as well. Just use the search engine on this forum and you`re likely to find oodles of posting streams discussing investing in general as well as investing in real estate including literature references.

 

[Oli]

QUOTE (ThomasBeyer @ Sep 23 2010, 11:35 PM) Don`t overestimate it. make some money by WORKING too .. passive income/equity takes large cash upfront AND/OR loads of time !!

I wasn`t planning on "retiring" from my day job anytime soon...if I can retire in 15-20 years I`ll be happy. Like Don & Peter say, it`s a LOT easier to qualify for loans as a (stable) employee with a good paying job. I basically just don`t want to HAVE to work until 55 or 65. When my father turned 50 (on the Old Continent), he basically went from having a good paying job to nothing, and nobody wants to hire workers over 50 as they`re very often consider "over qualified". His predicament made me want to ensure I don`t end up in the same situation.

I`m looking for steady growth, learn with my own cash and having had to work hard for it...before eventually going down the JV route.

Thanks Thomas for the advice.

 

[Lucas]

I Love this post...very wise indeed!






QUOTE (ThomasBeyer @ Sep 23 2010, 08:41 PM)
Grow your knowledge .. invest in the most important piece of real estate, namely the real estate between your ears !



Grow your ASSETs.



Grow your network.



Seek more .. read more .. listen more .. discern more .. think more .. love more .. pray more .. laugh more ..



Decide what you love to do .. and do more of it.



Decide what you don't like to do .. and do less or none of it !



Related posts:



5 ways to make money http://myreinspace.com/public_forums/General_Discussion/61-3347-5_ways_to_make_money.html



Do what you love: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-16722-Love_what_you_do_-_Do_what_you_love_.html



How to get started http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html



Prayer especially for RE investors: http://myreinspace.com/public_forums/General_Discussion/61-10209-A_Prayer_especially_for_Real_Estate_Investors.html



How did I get started: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-15422-Is_my_goal_of_200K_annual_income_feasible.html

 

[Rickson9]

Speaking for myself, I would avoid financial planners, but I`m biased - I`ve never had a financial planner. I have done well in both real estate and stocks. Generally my modus operandi is to buy assets that the masses won`t, don`t or can`t.

With the way that I invest and from my limited experience, stocks are more buy-and-forget than real estate, and real estate provides more cash flow than stocks.

My advice is to learn how to read and interpret financial statements. This provided me with the ability to make better decisions regardless of whatever asset class I decided to invest in.

 

[Oli]

QUOTE (AlVerwey @ Sep 23 2010, 07:55 PM) I would recommend that you structure your finances to be able to live on 60% of your take-home income. Devote 10% to debt reduction, focusing on consumer debt (credit cards, etc.) first. 10% to long-term savings (personal emergency fund - approx. 2-3 months of expenses). 10% to investments and 10% to charity.

Once you succeed in eliminating your non-tax-deductible debt (consumer debt), either devote that 10% to paying down your home mortgage or add it to your investment contributions. Consider implementing a Smith Manoeuvre as you pay down your mortgage.

Hi Al,

Two quick questions:
- once I`ve built a 3-month emergency fund (done!), do I also divert that 10% to home/investment (which at this point is the same to me since I`ll keep using the equity built in the home as a source of downpayment)?
- this is actually a general question: where do you folks store your emergency fund? TFSA? Plain savings account (which would earn next to nothing since my marginal tax rate is 40%)? I was reading a blog on MoneySense about simply relying on the HELOC as the emergency fund.

Thanks and have a great weekend!

 

[DaveRhydderch]

QUOTE (Oli @ Sep 24 2010, 02:43 PM) Hi Al,

Two quick questions:
- once I`ve built a 3-month emergency fund (done!), do I also divert that 10% to home/investment (which at this point is the same to me since I`ll keep using the equity built in the home as a source of downpayment)?
- this is actually a general question: where do you folks store your emergency fund? TFSA? Plain savings account (which would earn next to nothing since my marginal tax rate is 40%)? I was reading a blog on MoneySense about simply relying on the HELOC as the emergency fund.

Thanks and have a great weekend!


I have my emergency fund in TFSA. I use my HELOC to buy properties, and mixing the two is a bad idea due to tax reasons. Its not a bad idea to use the HELOC as an emergency fund if you have no interest in using it to invest.

 

[Al Verwey]

QUOTE (Oli @ Sep 24 2010, 04:43 PM) Two quick questions:
- once I`ve built a 3-month emergency fund (done!), do I also divert that 10% to home/investment (which at this point is the same to me since I`ll keep using the equity built in the home as a source of downpayment)?
- this is actually a general question: where do you folks store your emergency fund? TFSA? Plain savings account (which would earn next to nothing since my marginal tax rate is 40%)? I was reading a blog on MoneySense about simply relying on the HELOC as the emergency fund.

Oli,

I keep mine in a TFSA but it does not necessarily need to be somewhere quickly accessible, so you could also keep it in some mutual funds that will grow at a better rate than the TFSA.

Once mine reached the level that I wanted to maintain, I kept contributing to it, since every year or few you will want to buy a big-ticket item (such as a car) or vacation and you should not be borrowing for those things if you can help it. This is the consumer debt trap that is easy to fall into. But you could divert the 10% to any of the other categories or to a seperate savings account for big-ticket items you want to buy.

But if you want to have a line of credit for such big-ticket items, keep it entirely seperate from the one you use for investment purposes. If you co-mingle your funds or your borrowing, not only will you incur extra accounting expenses, you will set yourself up for huge headaches if CRA ever wants you to prove a deduction years later. Many of the major banks` HELOCs allow you to have more than one line of credit within your total credit limit and this is a great way to keep the accounting seperated.

Al Verwey
Penta V Holdings
Newmarket, ON

 

[JohnS]

QUOTE (AlVerwey @ Sep 24 2010, 06:36 PM) ...you could also keep it in some mutual funds that will grow at a better rate than the TFSA.

I`m about 90% sure that this sentence is a bit misleading (or I`m just reading it wrong), but you can use mutual funds in a TFSA.

Have a good one!

JohnS

 

[Thomas Beyer]

QUOTE (Oli @ Sep 24 2010, 01:43 PM)
..

- this is actually a general question: where do you folks store your emergency fund? ..




Here's how I invest (personal or corporate) cash that I/we may need quickly:



a) some actual cash .. in 3 different banks

b) some very large publicly traded REITs (with a 4-5% yield assuming no value drop in stock price like 2009)

c) some high dividend yield stocks like canadian banks

d) pay my LOC (@ prime .. so 3% right now) down and draw from it

e) quality Canadian stocks with deep in the money covered calls .. more here: http://myreinspace.com/public_forums/General_Discussion/61-8913-What_else_do_you_buy__besides_Apartment_Buildings.html

f) quite a bit of real estate with good cash-flow and low leverage (some sub 50%)

g) GICs at 2 banks (with a whooping 1.5% yield)

h) corporate bond mutual fund (yields about 4-5% like a REIT also)