Author Topic: [CAN] To FIRE or Not to FIRE, that is the question  (Read 2307 times)

MooseMustache

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[CAN] To FIRE or Not to FIRE, that is the question
« on: November 22, 2018, 12:54:43 PM »
Life Situation: Husband and wife, baby on the way. Both 31. Living in Canada. Initially read Rich Dad Poor Dad, got interested in personal finance, found MMM a few weeks ago, and pleased that we seem to be broadly in-line with FIRE, although possibly less frugal than we could be.

Gross Salary/Wages: Salary 1 = CAD$235k, salary 2 = CAD$200k. Total CAD$435k

Other Ordinary Income: Interest on cash in bank and peer loans: $2-3k

Rental Income, Actual Expenses, and Depreciation: CAD36k in rental income per year comprising 4.5% yield of CAD$680K property (old investment with significant capital appreciation) and 7.6% yield on $70k property (newer investment).

Adjusted Gross Income: CAD466k per year

Taxes: c.$140K Federal and Provincial Income Tax. 

Current expenses:
Rent: CAD$2,400
Bank fees: CAD$13
Vehicle Insurance: CAD$245
Internet: CAD$55
Electricity: CAD$50
Cleaner: CAD$150
Restaurants: CAD$600
Healthcare: CAD$60
Personal care: CAD$50
Groceries: CAD$400
Hobbies: CAD$400
Travel: CAD$700
Gas and Fuel: CAD$183
Gym membership: CAD$86
Clothing: CAD$165
Electronics: $40
Entertainment: $50
Car Maintenance: $25
Home Improvement: $25
Miscellaneous (Cash): CAD$230
Total Monthly Expenses: CAD$5,527

Rental Expenses:
$240 estate agent fees per month
$200 maintenance allocation per month

Assets:
Current assets: CAD277K (Cash:CAD235K, TFSA:CAD$42K)
Non-current assets: CAD996k (Rental property: CAD$750K, Vehicle CAD$13k, Stocks CAD$78.5k, accrued work bonuses CAD16.5k, P2P loan principle CAD$23K, retirement accounts CAD$115.5k).   

Liabilities:
Current liabilities: CAD5K (working balance on credit card, paid off in full each month)
Non-current liabilities: None

NET CURRENT ASSETS: CAD$272K
NET NON-CURRENT ASSETS: CAD$996K
NET WEALTH: $1,268K

Specific Question(s):
Current plan is to both work full time until baby arrives during which time we intend to (1) build an additional CAD$120k bringing NET Wealth at intended time of FIRE to CAD$1,388K and (2) convert the current assets, stocks, accrued work bonuses, P2P load principle into passive property income (hence the high cash %). We think that if we can build the passive income from CAD$2,560 per month to >CAD$5,100 per month, we’ll have enough to live on including allowance for renting a property in a location we choose that is roughly equivalent to the spend on our existing rental (c.CAD$2,400 per month). Post fire, we may work part time initially and then seek to FIRE completely and start a property development business through releasing equity from existing property investments and leveraging. The intention would be to work towards CAD$10,000 per month in passive income. We may later go back into paid employment, expand the property business, set up a different type of business, or spend time travelling depending on what we feel like doing. Specific questions are:
•   Does this plan sound realistic? We’re concerned we may be missing something that leaves us with egg on our face. My wife is concerned she’ll be eating beans on toast.
•   Are we optimized for success? I find the low yield on the main property concerning and I’m toying with the idea of selling it to reinvest into higher yielding investments. There would be a cost to doing this (capital gains tax + purchase taxes and buying fees). I also question whether it’d be worth making better use of retirement investment vehicles such as RRSPs but I hate the idea of putting my future in someone else’s hands (self-directed RRSP could be an option). Also, we may opt to move overseas at some stage in which case there’s a 30% withholding tax for RRSP withdrawals (or leave it in-situ and at the mercy of exchange rates).
•   Is a strategy that focuses almost entirely on property too risky? We’ve been landlords a while and have a reasonable feel for, and have researched extensively, property investment strategies. We’re much less savvy when it comes to income from dividend paying stocks.

« Last Edit: December 08, 2018, 12:03:57 PM by MooseMustache »

Freedomin5

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Re: To FIRE or Not to FIRE, that is the question
« Reply #1 on: November 27, 2018, 08:01:51 AM »
If your rentals can generate enough net income to cover your expenses, then it sounds like you are good to go.

Personally I would split between property investment and index funds. I tend to prefer multiple income streams, but many people also prefer a simpler approach of doing just index funds.

With regard to RRSP, you could always put a portion of your savings in there, to lower your current taxable income. Put the rest into TFSA and taxable accounts. Then if/when you move overseas, live off your TFSA and taxable accounts, until you move back and re-establish residency.

With such high incomes you may also want to employ the services of a tax accountant to help minimize the tax implications.

Once baby is born, do you plan to start an RESP for him/her?

To learn more about Canadian-specific investing, the following might be helpful:

Millennial Revolution https://www.millennial-revolution.com
Canadian Couch Potato https://canadiancouchpotato.com

As a aside, if you put [CAN] in your post title to stipulate a Canadian post, it will likely catch the attention of the Canadians on the site and get you more Canadian-specific responses.


waltworks

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Re: To FIRE or Not to FIRE, that is the question
« Reply #2 on: November 29, 2018, 09:23:02 PM »
Personally, I would get the F out of all the property ASAP, but I don't know the Canadian market or your area at all. Here in the US the writing has been on the wall for the housing market for some time and I sold my last rental last year.

But basically, you're good.

-W

slow hand slow plan

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Re: To FIRE or Not to FIRE, that is the question
« Reply #3 on: December 04, 2018, 12:39:32 PM »
Personally, I would get the F out of all the property ASAP, but I don't know the Canadian market or your area at all. Here in the US the writing has been on the wall for the housing market for some time and I sold my last rental last year.

But basically, you're good.

-W

Hi Walt,

What makes you think the "top is in" on real estate?

SwordGuy

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Re: To FIRE or Not to FIRE, that is the question
« Reply #4 on: December 04, 2018, 07:00:48 PM »
Personally, I would get the F out of all the property ASAP, but I don't know the Canadian market or your area at all. Here in the US the writing has been on the wall for the housing market for some time and I sold my last rental last year.

But basically, you're good.

-W


Don't rents go up when lots of people lose their homes?  More demand, less supply because their old homes are in limbo for awhile.

tralfamadorian

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Re: To FIRE or Not to FIRE, that is the question
« Reply #5 on: December 04, 2018, 07:17:13 PM »
Let's not thorsach the real estate market. If your rental(s) appreciate to the point where the funds would be more productive in the stock market after taking selling costs and real estate tax benefits into account, then sell. If not, then keep them. Or buy if the numbers make sense. All real estate is local.

2Birds1Stone

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Re: To FIRE or Not to FIRE, that is the question
« Reply #6 on: December 05, 2018, 04:38:43 AM »
Looks like you are in a decent spot. Much of your plan relies on RE. Considering your incomes, you have very little liquid assets.

Lews Therin

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Re: To FIRE or Not to FIRE, that is the question
« Reply #7 on: December 05, 2018, 08:12:22 AM »
I`m getting that you have close to a 750k in the value of the rentals?

Are these paid off mortgages, or appreciated values?

If they are paid off, I`d highly recommend you re-mortgage them, and invest the money you`ve taken out into index funds for A)diversification, B)liquidity, C) Tax optimization. Currently that money isn`t working for you, but could. This is a huge amount of money we`re talking about (i.e. worth about half the value of your rents)

And second the (CAN) in the title, that`s how I usually spot them.

waltworks

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Re: To FIRE or Not to FIRE, that is the question
« Reply #8 on: December 05, 2018, 05:00:06 PM »
Hi Walt,

What makes you think the "top is in" on real estate?

Wander over to Calculated Risk and check on the sales (both new and existing) and price numbers that have been coming in for the last few months. Inventory in all the "hot" markets is WAY up. It's grim (assuming you want house prices to rise) or alternately awesome (if you want better affordability for people).

Even in a situation where we don't see a recession or any further interest rate hikes, meaningful appreciation is over for a while, IMO. And that result is unlikely - we'll either get more interest rate hikes, or a recession (or maybe both).

I mean, I could easily be wrong. But the housing market is a lot more amenable to timing than the stock market and I think you'll find a lot of RE people who have been through a few cycles are thinking the same way as I am.

IMO, price declines would be *good* news. People need houses, and they cost way too much relative to earnings right now.

This is the US I'm talking about but the Canadian RE situation looks to me even more overpriced to the extent that I'd call it bubbly. I don't expect huge 2007-9 style declines in the US, but I wouldn't be surprised to see them in Canada. Australia...whew. If you can sell your house in Australia, sell it ASAP.

-W

 

Freedomin5

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Re: To FIRE or Not to FIRE, that is the question
« Reply #9 on: December 05, 2018, 09:56:36 PM »
The Canadian market tends to follow the US market, with a bit of a lag time. There have been rumblings of the market softening even in such robust markets as Toronto (which I monitor somewhat closely).

Prairie Stash

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Re: To FIRE or Not to FIRE, that is the question
« Reply #10 on: December 06, 2018, 08:47:27 AM »
RRSP is cheap money. You put in $22,000 each ($44,000) and get $20,700 back at tax time - out of pocket cost is $23K and your NW shoots up $44k. You can do more or less, remember you can do catch up contributions in Canada.

If you have a baby on the way, are you both planning on continuing work? RRSP contributions are only a smart idea when you have wage income. If either of you takes time off to be with the kids then the time is now to do catchup on the RRSP. A really cool trick is to contribute now, then pull it out in 2 years if one of you is a SAHP. You get a massive tax break now (varies between provinces, its up to 50%), pay a small tax amount in 2 years, and pocket the difference as profit.

TFSA - Max that beast out with US ETF. You have $50k of room thats not in use, between the two of you. The TFSA, especially for high spenders in retirement, does funny things to NW, since you don't pay tax on the withdrawals it allows you to have higher spending at lower NW. For Example if you spend $60k per year, is that $60k including taxes or not? Imagine if you didn't pay taxes now, then imagine future you not paying taxes because of the TFSA.

RESP - set aside $2500/year/child for 14 years and you will get $7000 in matching grants. With growth that will fully fund most CDN universities including living expenses. Thats the simplest way to pay for education.

Withholding tax on RRSP is a misnomer, often misunderstood as something nefarious. Your job has a withholding tax on your income too, thats the $140k you two pay every year. If you earn less or contribute to RRSP you get a large chunk of that withheld tax back as a tax refund), otherwise it goes towards your tax bill. Remember I mentioned earlier you get 45-50% back today, that goes towards paying the 30% in the future...so you want to skip a 15% net return because of a future tax bill that's less then your current refund? Hopefully that sways your opinion a bit.

Welcome to the forums, I hope we can help. Theres a lot of fine details to work with here, you are an excellent case study that has massive potential for optimization. You did all the hard stuff, now its time for some easy work.

The nest detail you need is an up to date amount of RRSP and TFSA contribution room. Get it at your CRA account:
https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/account-individuals.html

It takes 2-3 weeks to get a passcode sent by snail mail (thats their security feature). You both need accounts, then you both need to set up accounts with Questrade or a bank for investing. You each need an RRSP account, TFSA account and self directed investing accounts. Get all of them at the same time to avoid future paperwork (I'm lazy, I hate repeating paperwork).

slow hand slow plan

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Re: To FIRE or Not to FIRE, that is the question
« Reply #11 on: December 07, 2018, 11:16:45 AM »
Hi Walt,

What makes you think the "top is in" on real estate?

Wander over to Calculated Risk and check on the sales (both new and existing) and price numbers that have been coming in for the last few months. Inventory in all the "hot" markets is WAY up. It's grim (assuming you want house prices to rise) or alternately awesome (if you want better affordability for people).



Even in a situation where we don't see a recession or any further interest rate hikes, meaningful appreciation is over for a while, IMO. And that result is unlikely - we'll either get more interest rate hikes, or a recession (or maybe both).

I mean, I could easily be wrong. But the housing market is a lot more amenable to timing than the stock market and I think you'll find a lot of RE people who have been through a few cycles are thinking the same way as I am.

IMO, price declines would be *good* news. People need houses, and they cost way too much relative to earnings right now.

This is the US I'm talking about but the Canadian RE situation looks to me even more overpriced to the extent that I'd call it bubbly. I don't expect huge 2007-9 style declines in the US, but I wouldn't be surprised to see them in Canada. Australia...whew. If you can sell your house in Australia, sell it ASAP.

-W

 

Thank you for the reply. I am always curious to learn more and most of your advice on this forum i have seen has been great.

waltworks

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Re: To FIRE or Not to FIRE, that is the question
« Reply #12 on: December 07, 2018, 01:32:28 PM »
OT a bit, but a random sampling of "hot" market numbers for November are out:
https://www.calculatedriskblog.com/2018/12/lawler-some-early-realtormls-based.html

Standouts include Seattle (25% fewer sales, 210% more inventory!) and Denver (25% fewer sales, 47% more inventory).

Party's over. Prices are sticky so don't hoard your pennies expecting a massive crash in 2019, though.

-W