Stop Monthly Retirement Fund Contributions In Order Purchase Rental Property?

[eldub]

This is an idea that's been rattling around in my brain for a bit. It seems like it could be a smart move, but I'd like to get some feedback from those of you with more knowledge or experience than me. 

My husband and I own a small home in which we are currently building a basement rental suite. We also contribute to our RRSP (canadian retirement funds), which are tax-deductable. With 18 month old twin boys, I can forsee us needing a home with more space in a few years. The boys currently share a room that's about 80 square feet. I'm all for living simply in small spaces, but I just can't see stuffing two 14 year old boys in that room down the road, you know what I mean?

So here's my idea:

- Halt our monthly RRSP contributions and instead save that money in something short-term
- five years (or more) from now we take those savings plus accrued equity in our existing home (I conservatively estimate that in five years we could tap into anywhere from $60,000 to $76,000 from in our current house if we mortgage it back up to 80% of its value at that time) and use that as a down payment on a new family home that suits our growing boys better
- rent out our current house as two separate units. Again, a conservative estimate of monthly rental would be in excess of monthly expenses (mortgage + property tax) by about $400

So now we have our family home, and the rental home is carrying itself plus a bit extra. The mortgage gets paid off by tenants and we have it as a nest egg for retirement. We then have the option of keeping the rental for it's monthly cash flow in retirement, or selling it for cash.

Other things to consider:
- Our current home has been renovated and repaired by my handy husband literally from top to bottom. That sucker should not need any major work for a long time. I don't forsee needing a huge contingency fund if we rent out both main floor and basement units
- RRSP contributions are tax deductible. If we stop making these, we miss out on that tax break for the forseeable future. If we go ahead with this plan, we could resume contributing to our RRSPs once we make the move
- We have about $50,000 now in our RRSP account that we would not touch.
- We live in an expensive city where a decent home that has the room we'd like for our family (again, I'm not talking a lot, but more than our current 930 square feet for four of us) would be at least $550,000. Ouch.

So there are the basics. What do you guys think. Does it look like a solid plan or is there something I've failed to consider?

Thanks everyone for your thoughts

[totoro]

Hi Eldub.  I'm in Victoria too!  We are just finishing up a suite in our home :)

I would say that if you are handy it is likely far better for you financially in the long-term to save up for the next home and keep your current one as a rental.  It is hard to know for sure without running the RRSP numbers and knowing what you are contributing and what you are saving each year by doing this vs.  future ROI. 

Why?  Well, your RRSPs are tax deferred and not without tax.  When you get older and want to withdraw you will likely be paying tax on part of these savings.  You also trade current tax savings for tying up the capital in the RRSP which would generally have a lower ROI than an investment property in Victoria over the long-term if you put in sweat equity.

In addition, although prices might fall short-term in Victoria, I believe that they will be fine long-term and average appreciation over the last thirty years in Victoria has been more than 3%.  This is important because the appreciation (or depreciation) applies to the overall house value and you get this benefit even though most of the money is borrowed money.

I think your plan is a good one but just be careful what you buy and where.  Certain areas appreciate faster than others.  I own one property on the Oak Bay border and another near the Cedar Hill golf course.  Both areas are nice but I expect the Oak Bay border location will appreciate faster.

One thing you might want to get some advice on is remortgaging your property to obtain the equity to purchase the next one.  When you borrow to invest the interest is tax deductible (ie. look up the Smith Manouver).  When you borrow to buy a principal residence this does not apply.  You might want to find a way around that in advance.