Monday, March 12

Long Range Housing Plans

Following on from yesterday's comments, I am going to start working on a gradual retirement plan. I intend to write this plan in several parts. I want to talk about future expenses, timing, income from work during phased retirement, income from real estate holdings, housing/mortgage, income from investments, income from government sources, taxation, RRSP's, my corporation and more. I would like to come back to the topic of Monte Carlo simulation for testing the resilience of the plan, but for now I will do simple spreadsheet mathematics to make it run.

Today's topic is going to be housing. For as long as I am alive, I will require some manner of housing so it's a critical foundation for being able to retire. Currently, I have a $262,000 mortgage on a $466,000 house. My monthly payments are $1600, property taxes are $210, utility costs are about $350 in the winter, so I expect about $200 in the summer for a monthly average cost of $280. On the plus side, I have $1000 in income from my basement suite. The overall cost of housing for me right now is therefore $1090 per month or $13,080 per year.

I have about 4.5 years left on my current mortgage term, and for that time I anticipate maintaining the same living arrangements. After that, it gets trickier.

In the long term I don't want to be living with tenants under me. So I would like to be able to buy a second place for me and keep this one as a rental. This house has great potential for cash flow, but the problem is buying the other place and when I can afford to do that. And real estate is very pricey where I live, so I will need quite a bit of savings to make this work.

I would like to a find a smaller place, maybe even an apartment, and I would hope to spend about 25% less than what my current house is worth (the market should remain internally consistent even though I can't predict the actual prices). If rents remain strong, it is possible that I would be able to remortgage this place and withdraw enough for a down payment on another place while staying cash flow positive here. The problem that I see is that my personal costs may rise substantially under that scenario.

One solution that I am thinking of is to buy a second place as soon as I possibly can so that I can lock in at today's prices and rent it out to cover the mortgage. But even that is tricky with house prices so high - you need both a large down payment and high rents. (I wish I had been able to keep my old house when I bought this one... but that's another story.) Additionally, there is more work involved in managing a second property and I want to tread carefully there after my experiences with this one.

Hmmm...This planning stuff is tricky! I can see where I want to go, but I can't see the path to get there yet. I think that I will need to ruminate on this more tomorrow....

Today's billable hours: 4.5
Today's contracted hours: 3.0


Recently Retired said...

Interesting blog!

Having had a rental property for a number of years I can relate.

Deborah said...

Ok, so this is an old post for you. The economic conditions are such that I think housing prices are peaking and there will be far better entry opportunities down the road.

The housing market does not go up in a linear fashion, it legs up and then flats and even falls, then it legs up again.

In my life that I can remember in Vancouver costs were rapidly rising in the late 70s, declined and flattened from 81-86, legged up from 87-93, declined and flattened from 94-2000, started legging up again around 2001 and I believe they are peaking again.

You are doing long term planning. Look for evidence of a peak. 4-7 after the peak are probably the best entry years.

Patience is your best friend in the housing market and it can have huge differences in terms of out comes to your financial planning strategy.