Author Topic: What to do with extra income?  (Read 3732 times)

Ty Webb

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What to do with extra income?
« on: April 30, 2014, 11:45:41 AM »
I find myself in a good position where I am looking at making about an extra $150k this year above what I usually make. I live in Canada. I owe about $250k on my $500k house, no other debts, vehicles are owned outright. I have about $75k in my RRSP with $100k in contribution room carried over from previous years and $50k in my TFSA with only this years contribution room.  I will certainly max out my TFSA but that's only $5500.  I am interested in buying an investment property as well. I'm having a hard time figuring out where to put the extra money. What would you do?

nereo

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Re: What to do with extra income?
« Reply #1 on: April 30, 2014, 11:55:24 AM »
Hello Ty

First - what is your mortgage rate and when will your term end?
Buying an investment property could be an option, but it involves a lot more information.  Are you a generally handy person who has the time to take care of rental issues?  What's the cost breakdown of properties in your area and how much could you rent them for?

Personally, I would put most of it in an index fund while making some sizable contributions to my mortgage, but my situation is undoubtedly differnet since I don't qualify for a TFSA or other canadian tax-advantaged accounts.  Sigh...

Truckman

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Re: What to do with extra income?
« Reply #2 on: April 30, 2014, 12:00:06 PM »
I'll take some. :D

Ty Webb

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Re: What to do with extra income?
« Reply #3 on: April 30, 2014, 12:08:28 PM »
@nereo I have a variable rate mortgage at 2.6% and almost 5 more years term.
The average house in my market is about $500k with a large percentage over $1 million. It is hard to find cash flow positive properties in this area. I would be fine with the maintenance/landlord issues.

nereo

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Re: What to do with extra income?
« Reply #4 on: April 30, 2014, 12:26:11 PM »
@nereo I have a variable rate mortgage at 2.6% and almost 5 more years term.
The average house in my market is about $500k with a large percentage over $1 million. It is hard to find cash flow positive properties in this area. I would be fine with the maintenance/landlord issues.
Well in that case I wouldn't pay down your mortgage too much.  If you're ready to do the maintanence/landlord part I'd say start looking for an unloved property that you can spend some time getting functional/nice and then rent to be cash-flow positive.  $100k+ down plus a renovation budget of a 20-50k on a property at/around $500k.  Hopefully you could get a similar interest rate and rent it out for $2500/month after a bit of renovation.

Eggman111

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Re: What to do with extra income?
« Reply #5 on: April 30, 2014, 12:37:44 PM »
Good for you for coming out way ahead this year!

That sounds a lot like Vancouver prices. If you're looking at rental real estate to cash flow, you'll probably have to go far into the suburbs.

Since you have so much in your house already, I think it makes more sense to stick with an index fund. Otherwise you'll have a large chunk of your money in one asset type. Do what you can in RRSP/TFSA; however, if you're serious about saving money, at some point you'll have to look at taxable accounts.

Ty Webb

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Re: What to do with extra income?
« Reply #6 on: May 01, 2014, 10:29:33 AM »
Is it best to just spread it around between TFSA, RRSP, mortgage, and down payment for a future rental property or to agressively target one area?

nereo

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Re: What to do with extra income?
« Reply #7 on: May 01, 2014, 10:43:35 AM »
Is it best to just spread it around between TFSA, RRSP, mortgage, and down payment for a future rental property or to agressively target one area?
well, it depends on what you are comfortable with.  It's always good to max out your tax-advantaged accounts (TFSA & RRSP).  Since you are paying <3% on your mortgage with almost 5 years left on your term I wouldn't pay extra on that right now - you are likely to get a better return investing it elsewhere.
Which leaves you with the question "where else do I put the remaining money."  The most simple approach would be to invest it i a low cost index fund.  Historically you'll get ~7% real-adjusted returns over decade+ time frames.    But if you have the time and inclination then buying a rental property is something that can generate returns every month to infinity.  The worry there is 1) you won't really have the time/desire/handiness to do it (only you can answer that question), and 2) that having a ~$500k rental property will skew your AA so far towards real estate that you will be severely punished if the housing market in your area goes south.

Personally, I'd favor the index fund, and save owning a rental property until you are pretty close to your FI number (maybe 80% of the way there).
But that's just me.

 

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