Rental Income Surplus - What to do?

Leveraging, renting vs owning, making an investment or buying a home?
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bugsy65
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Rental Income Surplus - What to do?

Post by bugsy65 » 28 Sep 2017 09:58

Hello everyone. I am new to the site and would like and appreciate some advice.

Recently, my wife and I sold our home and moved to a new area. The sale of our home reduced our mortgage to approximately 80K. We decided to purchase a rental property and did some renovations to it which created 2 separate units. We leveraged the value in our current home to produce the required 20% downpayment. The rental has a small mortgage and then the rest of the home on a LOC.

We've rented the property out as 2 units and get great rent. After all expenses, we are left with $1600.00 as surplus. With the recent increases in interest rates, it's affecting our surplus, not by much, but still enough for me to watch.

On the advice of my financial planner, he suggested using the surplus to pay off the 80K mortgage on the principal property, so we've been doubling up the payments. If we add the yearly 10% lump we should be done in approximately 3 1/2 years.

Recently, I was introduced to another adviser and they have suggested that I take the surplus and invest it into financial instruments, like RRSP's, etc. I have a great pension at work and already top up my account with bi-weekly contributions in to a separate OMER's AVC account.

I'm on my second marriage and well, my original RRSP's got consumed in the divorce, so I had to start again. I'm 52 and I know I will have a great pension, but I always worry about the future. This adviser also says that I should use the LOC to invest because of the interest write off opportunities. I get worried when advisers have different ideas. Just don't want to be putting my money where the first interest is the advisers commission.

Lastly, my wife and I may also have the opportunity to by a second rental property since we have so much equity in both the primary and secondary properties. I just don't want to over-leverage ourselves.

I hope someone can advise me on this. Much Appreciated.

Robert

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Pickles
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Re: Rental Income Surplus - What to do?

Post by Pickles » 28 Sep 2017 12:31

You already have a financial planner and a workable plan. Did you seek advice from the guy you were introduced to or did he just start offering ideas unsolicited? If the former, have you been unhappy with your current planner? And if so, why?

I agree with you that the 2nd advisor seems to be advising you to take a lot of risk while he lines his pockets with commissions. If you are seeking validation that overleveraging is not a good idea, you've got it from me. But I think you are smart enough to make up your own mind.

Perhaps you might consider saving allocating some of the monthly surplus for repairs or updates to your rental property (would this reduce your taxes? Maybe someone more knowledgeable about this might chime in) but reducing your home mortgage seems a solid and wise choice since the monthly rental surplus is possible because you leveraged your home to buy the rental property. Pay down your mortgage before looking for another investment is my advice!
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Pickles

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Re: Rental Income Surplus - What to do?

Post by Just a Guy » 30 Sep 2017 10:07

First question to ask is your surplus per month or per year? It makes a big difference in the advice I'd give you.

If it's per year, I'd suggest selling your property and try finding something that cash flows better as it's not a very good investment and the value of the property is probably higher than it should be. The risk is too high considering one bad tenant could put you underwater for several years between lost rent and damages.

Have you checked out www.easysafemoney.com?

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Re: Rental Income Surplus - What to do?

Post by bugsy65 » 02 Oct 2017 09:59

Thanks to both Pickles and Just a Guy.

Pickles, The only issue with my current adviser is that he thinks what I am doing is well financially, and I don't need to put a penny more into RRSP's or other investments. Just odd advice. Based on that, I spoke to the other adviser, on the advice of a friend, and their thoughts are to double up as I am, leverage the balance of the surplus after doubling up by increasing my contributions in RRSP and then utilize the LOC to invest in Growth Funds.

Just a Guy - The surplus is monthly so the rental property is doing very well. I haven't checked out www.easysafemoney.com but will. Thanks for the tip.

Robert

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Pickles
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Re: Rental Income Surplus - What to do?

Post by Pickles » 02 Oct 2017 12:22

Borrowing money to put in your RRSP is not saving for the future. It's increasing your debt and your debt payments now.

Investing borrowed money in a "growth" stock/fund is not a good strategy compared to paying down existing debt. Here's why:

If the growth fund loses money, you've:
1. lost money, 2. cannot claim a capital loss at tax time 3. increased your debt and 4. squandered the RRSP contribution room you used to buy that risky investment.

If, instead, you pay down your mortgage, your return is tax-free. EG. Your current mortgage is at 3% . Paying it down with surplus funds from your rental property is like investing at 3%. Because you are paying down debt instead of buying a 3% GIC, your "investment" is non-taxable, meaning that it's worth about 4%+ to you at the current time. That's a good return on a very safe investment.

You estimate you will have paid your mortgage off in less than 4 years by this method. That gives you plenty of time to "catch up " on your RRSP contributions if that is a priority for you. However, you mention you have a great pension plan already so RRSPs may not be as important as you think. You don't mention any TFSA accounts and whether you and your wife have maxed them out. You each have a potential contribution room of $52,000 (2009 - 2017), if neither of you currently has any $$ in a TFSA. You can use your post-tax rental surplus is to grow money tax free in your TFSA.

It should be noted, though, that if you lose money in a TFSA investment, you cannot claim the loss -- just like an RRSP.

If interest rates go sky high, it may become less important to pay down the mortgage, if its rate is low. You may wish to redirect the surplus to some other investment. But borrowing more money "to invest" is a mugs game. Don't risk your home to gamble on growth stocks/funds. You have a home, a job, extra income from a rental property and a good lifwstyle. Don't risk it for your own greed or that of a financial advisor who wants you to take the risk while he takes the commission.
Regards,
Pickles

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Re: Rental Income Surplus - What to do?

Post by AltaRed » 02 Oct 2017 12:30

:thumbsup: Strongly agree with Pickles. Pay down that mortgage on your principal residence. Rome was not built in a day, or a year. Be methodical and patient in your plan. You would be surprised at how fast the pieces of the puzzle come together.
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Re: Rental Income Surplus - What to do?

Post by bugsy65 » 03 Oct 2017 06:52

Thanks for your insight pickles. It's what my gut was telling me, but always like another perspective.

Robert

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Re: Rental Income Surplus - What to do?

Post by Just a Guy » 05 Oct 2017 09:30

With your "profits" are they calculated based on all numbers or do you have a really low mortgage that you paid down? For example, I know people who pay say 300k for a place, but only get a mortgage for $150k, paying the other $150k out of pocket. Then they rent it for say, $1200/month and say it cash flows, completely ignoring their $150k of dead money, not earning a return.

When I calculate my "profits", I use the entire amount of money I paid for the property (makes my numbers look much smaller, but is dealing with the actual money in the deal). Had I taken the down payment and invested it elsewhere, I could have been earning money on it, so you can't really ignore it.

Next, are you including things like maintenance (that roof will eventually need to be replaced, as well as the siding, furnace, hot water tank, windows, etc.). Many people ignore these costs until they happen and complain about "condo fees", realistically you should include some money to pay for these each month.

If you've done all this and are still making $1600/month (which is entirely possible, though rare in this market), why would you even consider wanting to pay down your personal mortgage and not expand your real estate holdings? If you can find a second property which cash flows in a similar manner, let's say even half as well, you could be making $2400/month with no difference to your lifestyle. If you find a third, you're now making $3200 and get more tax benefits.

Once you're at this stage, you're basically financially free. This is a much better state to be in than mortgage free, I know I've been in both states.

Of course, i suspect your numbers may not be accounting for everything they should be, but I do have a property I bought a while ago for $71500 (two suites on one title) that rents for over 2k/month, so I know such numbers may be possible (though it only clears about $1k/month).

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Re: Rental Income Surplus - What to do?

Post by kcowan » 25 Oct 2017 20:00

Just a Guy wrote:
05 Oct 2017 09:30
With your "profits" are they calculated based on all numbers or do you have a really low mortgage that you paid down? For example, I know people who pay say 300k for a place, but only get a mortgage for $150k, paying the other $150k out of pocket. Then they rent it for say, $1200/month and say it cash flows, completely ignoring their $150k of dead money, not earning a return...
A recent newsletter makes a similar point:
RE-Investment.jpg
or how to reduce annual returns by 5% without really trying.
For the fun of it...Keith

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