Single parent with saving of $60k, what will be my next step

[KimAlex]

Hi there,
Have been following the REIN thread for years, am not a member yet however I have learned and pick up a lot via this forum, bought my first and only primary resident home here in Edmonton in an old neighborhood, living with my 12 year old son on the main floor and rented the basement since 2011. Spent $25K on reno and has turned it into a legal basement suite.

I have saved about $60k cash and my house has an equity of approx. $80k. I am ready to move on to buy another property but am not sure of my options: I have the following ideas:

1) Buy 2 duplex side by side, live in one and rent the other
2) JV partner with someone on an investment property
3) Buy a fourplex, live in one and rent out the rest
3) Buy a condo and rent out
4) Tear down my primary home which is a RF3 and build a new infill duplex, live in one and rent out the other. Not sure if this is worthy, on how the cost will be like based on $140/ft. Some of the new infill project here are crazily priced from $500k to $750k.

If someone can throw me some suggestion here, will be much appreciated.

 

[Thomas Beyer]

Assuming you live in an appreciating city, buy a bigger house as the gain is tax free and your son and you will enjoy it.

Is your RRSP maximized ? What is your marginal tax rate ?

Grow your RRSP. Make 40-66% by reducing your taxes. If your marginal tax rate is 33% and you invest $10,000 into an RRSP you will get a $3333 rebate. Thus, you made 50%! You invested $6667 and it is now worth $10,000 !


Then, within the RRSP, buy a few REITs.

Investing in real estate with only 60,000 is far too concentrated, thus risky and far too much work. A townhouse ( TH ) might work for you though. Once you have 150-200,000 consider a few more THs or up/down duplex.

 

[KimAlex]

Thomas, thank you so much for your tips. Always look forward to hear your thoughts. Indeed, I have thought about bigger house for us but the work to maintain the house/yard work and higher property tax and moving cost to a newer/nicer neighborhood and change of school and all somehow deter me from taking this path of at least till my son is in Grade 10 (need to change to a high school, regardless).

And yes, I will explore RRSP as I have not actually make use of it fully and TH really makes sense to me. Guess, will keep saving until a good opportunity pops up. Thank you !

 

[Cory Sperle]

If it was me I would keep your existing place as a rental, and then buy another one with 5% down CMHC. With RBC you can go up to a 6 plex with residential financing (5% down) assuming you qualify and have the down payment. This depends on how involved you wish to be in management however, a duplex may suffice.

I don't buy RRSP's period. It makes sense if your planning to be poor and live off of it as your sole income source later, however if you have substantial income later in life it works against you the same way. Our new Liberal government has made sure those in the highest brackets are punished the hardest. Put your cash in a TFSA until your ready to buy and use that for your down payment.

 

[KimAlex]

Thank Cory, sounds like a plan too. Do I need to pay 20% down for an investment property which am not residing in. Am not sure ? Am all for such 4 or 6 plex opportunity too. Actively looking out for opportunities like these at the same time, should you have any or come across any please let me know, ideally in Alberta Edmonton. I actually do not mind doing some hands on property maintenance work on my own in exchange for learning more on the real estate business.

 

[Cory Sperle]

Yes, you can only get in for 5% down if you reside yourself. Therefore if you are willing to move every now and again, you can drastically increase your net worth quickly. You can sometimes do 10% with a vendor take back, possible in Alberta right now, otherwise it's 20% down.

 

[Matt Crowley]

It makes sense if your planning to be poor and live off of it as your sole income source later, however if you have substantial income later in life it works against you the same way.

RRSP's are one of the best risk-free investments out there.

How can you make more money once you are retired? Get rich quick nonsense. Plus lots of employers RRSP match. Tax deferred. Excellent way to save. Other great options like RRSP Home Buyers plan and education plan. Best way for Canadians to save. I hope I can go back to school in my 50s or 60s. That would be awesome. Go get a masters or doctorate somewhere.

TFSA's are good too but you are investing with after tax dollars. Good for saving for a DP though, very flexible.

Best way to save is not to put all your eggs in one basket, especially with real estate as is noted above. Real estate investing is fine but lots of ways to make money and your job is already highly correlated with the local real estate market. Good to have some money earning in other investments as well. Putting 10 - 20% of your paycheck into RRSPs is a totally legitimate plan and solid retirement planning if you start early enough or work through the budget.

Many paths.

 

[Cory Sperle]

Some good thought. I do have paper assets outside my RRSP, TFSA and non registered investments.

How can I make more money once I retire? By continuing to do real estate and draw income from my non registered investments and TFSA. I am in a medium tax bracket now, however (hopefully) I will be in the top tax bracket when it would be time where I must start taking out my RRSP, and thanks to the liberals that tax bracket could be 50% or higher.

Yes there are some benefits, but detriments as well such as working negatively on a net worth statement as most banks will only use half your RRSP value as an asset, and also lack of access to that cash if you needed it. I don't prefer eggs in many baskets, only a few that I watch closely.

Many paths indeed

 

[Thomas Beyer]

Any RRSP debate needs to be had within a context of assets avaliable, current incomes, current marginal tax rate, future incomes available, plans for retirement, age etc.

To repeat my earlier comments and adding some more math:


Grow your RRSP.

Make 33-81% by reducing your taxes. .. in one year.

If your marginal tax rate is 25% and you invest $10,000 into an RRSP you will get a $2500 rebate. Thus, you made 33%! You invested $7500 and it is now worth $10,000 !

If your marginal tax rate is 33.33% and you invest $10,000 into an RRSP you will get a $3333 rebate. Thus, you made 50%! You invested $6667 and it is now worth $10,000 !

If your marginal tax rate is 40% and you invest $10,000 into an RRSP you will get a $4000 rebate. Thus, you made 66.67%! You invested $6000 and it is now worth $10,000 !

If your marginal tax rate is 45% and you invest $10,000 into an RRSP you will get a $4500 rebate. Thus, you made 81%! You invested $5500 and it is now worth $10,000 !

Then buy a few REITs, covered calls, spreads or dividend paying stocks that yield 4-9%, or more in some years.

A modified strategy is to put money in RRSPs only when you have a banner year (say when you received a big bonus) and take it out in lean years when you are older.

You can make more in a levered real estate investment, of course, but it is slightly more risky as you take out debt and it is far more work. As such, both are recommended. Both strategies assume a decent income to start with. So work on that, too.

RRSPs cannot be levered via margin like cash investments or real estate. Not everyone is comfortable with debt. With directly owned real estate you can control upgrades and thus, rent levels/increases far more directly than say a REIT or a dividend paying stock.

You can also determine the leverage level, say 0, or 25 or 50% or 65% or 80% even. Thus you can determine cash-flow or higher ROI, as explained further here: http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/

Money is cheap cheap cheap .. sub 3%.

Other thoughts by others on "why real estate" http://blog.reincanada.com/2013/03/at-what-point-does-real-estate-income-actually-start-to-flow.

 

[Rickson9]

RRSP is tax deferral. You may have "made" x% in one year but don't be fooled - that gain isn't all yours to keep.

 

[Thomas Beyer]

RRSP is tax deferral. You may have "made" x% in one year but don't be fooled - that gain isn't all yours to keep.

Indeed it is tax deferral. You assume you make less in old age than when you're in your peak earning years.
In my examples you made 50%, say because you're in a marginal 33% tax rate, but if you are in a 20% tax rate in old age you pay less taxes AND the gain (say 6%/year on your initial investment, swollen by 50%) is on a larger base.

 

[Cory Sperle]

In my example I'm in the 20% tax rate now, but plan to be in the 33% tax rate in old age so it's actually a negative return.

 

[DanW]

Kim,
I personally would do the following...

Keep living in the place you have now. You get income from the basement unit which is great. If you sell it you lose so much money in transaction costs(realtor fees, moving etc)
Get a line of credit on your current residence. Combine that with your savings and buy a property with as many units as possible.

Once you are running the first property well get a money partner and buy another 4 plex (or whatever makes the most sense)
Then repeat this process. Once you have more money saved you can also buy more properties for yourself as well.

I am not saying I would invest in Edmonton because the cash flow is not enough for me, but this is just the strategy I used.

There are many ways to invest and I am not saying my way is the best it just worked for me. The main thing is to do what works for you and give it 100% of your effort.

As for RRSP... I have zero dollars invested in it and don't plan to. I think doing the opposite of what everyone else does is the most profitable.
You can't buy real estate in RRSP so what is the point? If you want to be rich or quit your 9-5 job the RRSP is not the way to do it since it is locked in. I don't debate that there are tax advantages to it, but that doesn't help me now. RRSPs are for people that want to keep working a job until they retire. That does not appeal to me.

 

[Thomas Beyer]

In my example I'm in the 20% tax rate now, but plan to be in the 33% tax rate in old age so it's actually a negative return.

Yes it probably does not make sense for you then. The issue is the marginal rate, on the last $ earned, not the average.

 

[Thomas Beyer]

RRSPs are for people that want to keep working a job until they retire. That does not appeal to me.

Slight correction: RRSPs are for people that ARE working. You should stop contributing when you stop working.

Very few are lucky enough to be rich when they are young, or merely invest their money, or live off their dividends.

Real estate is work too. Not as much as a 9-5 job for sure, but real estate does not manage itself, raising money is work too, and even monitoring and managing an existing asset base, or selling it, is work.

Perhaps you are in the wrong business today if "work" does not appeal to you.

 

[DanW]

Slight correction: RRSPs are for people that ARE working. You should stop contributing when you stop working.

Very few are lucky enough to be rich when they are young, or merely invest their money, or live off their dividends.

Real estate is work too. Not as much as a 9-5 job for sure, but real estate does not manage itself, raising money is work too, and even monitoring and managing an existing asset base, or selling it, is work.

Perhaps you are in the wrong business today if "work" does not appeal to you.

Yes, you are correct Thomas. You are right I don't refer to real estate as working although it is work. I guess it is because my day job was not appealing to me at all. I enjoy real estate and if I do things correctly I will able to do this for a long time to come and living off of dividends doesn't appeal to me. The lifestyle real estate has afforded me is great. Not in that I live in luxury, but being able to control what I do on a daily basis is what appeals to me.

 

[Matt Crowley]

How can I make more money once I retire? By continuing to do real estate and draw income from my non registered investments and TFSA.

That is just false savings.... if you have savings to draw on in the future that you saved today then you actually made more today and are paying yourself more tomorrow.

Sure you earned interest in the meantime. But you are earning more today. You will earn less when you stop working. Period.

Yes there are some benefits, but detriments as well such as working negatively on a net worth statement as most banks will only use half your RRSP value as an asset, and also lack of access to that cash if you needed it. I don't prefer eggs in many baskets, only a few that I watch closely.

A big part of this is philosophical preference. Most "control" real estate buyers buy in their backyard (not sure if you do) and actually overleverage on the city and main economic driver of that economy.

RRSP's are not the home run but they are definitely part of the solution. They are just a tax deferral but you can invest with that money and pay tax on the gross amount when withdrawn. Liquid but not without penalties.

TFSA's are great due to versatility but invest after-tax dollars and while returns are interest-free, investment choices limited. Very liquid.

Control RE: very concentrated investments, highly dependent on local economy, very sensitive to political changes. (Density, rental regulations, building regulations). Reward is commensurate with ability to speculate as every asset has virtually same yield (4.5 - 7%)

 

[Thomas Beyer]

..Reward is commensurate with ability to speculate as every asset has virtually same yield (4.5 - 7%)

True if you do not add value.

RE offers the option, unlike a stock or REIT held in a TFSA or RRSP, to add value through active improvements. That is were the potentially very large upside lies.

 

[Matt Crowley]

^ Yes.

The challenge of adding value is scale and capacity. Most SFH "flips" are just false profits. They made $20,000 but if they paid themselves $25/ hour they made $1000 profit. Not worth the risk.

As a development manager, it is difficult / impossible to add value on tiny scale projects. There just isn't enough profit in the deal. If you want to flip a house, duplex, townhome, or fourplex and hire a GC you will often end up paying the full retail price for comparable product that was already fixed up. Same problem if you try to upgrade and refi.

On larger, decrepit projects there is a profit to be earned by creating value where you can hire professional GCs and do something innovative to respond to the market: add some retail, change the unit layout. Profits and value can be strong if you are willing to rezone and go through council. That is value-add.

Not a viable strategy with $60,000 I believe, unless you want to participate in a larger project (which will often provide a lot more certainty in achieving profits).