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

More on mortgages...

There was another post I read today about mortgages, in which a young person was considering saving $200K as downpayment for a $350-$400K house. I had to restrain myself from writing a novel in response because I think that this is so misguided.

One of the biggest advantages of mortgages is that it is almost the only time that ordinary people experience the power of leverage. For example, I put about $35,000 down on my first house. When I sold it less than two years later I got back $212,000. Now some of this was due to the payments I made on the mortgage but most of it was from crazy house appreciation in my area. It will probably be the only time in my life that I make 500% in two years, and it has had a profound effect on my financial standing.

The benefit of leverage is something that I didn't mention in my post yesterday, and perhaps I really should have. Right now, I am actually under-leveraged in my home. I have about 43% equity in it and almost any bank in the country would give me a 75% mortgage. So there is about $85,000 in equity that I could access at a very low interest rate and long amortization if I was willing to make payments on it. (if I got the same rate as the rest of my mortgage it would be about $510 per month)

If I took this money out of my mortgage and invested it, the following would occur:

• I would still get the same appreciation from my house. No change.
• I would have an extra $85,000 in investments appreaciating. :)
• I would owe an extra $510 per month. :(
• BUT, the interest portion of this would be tax-deductible. (Unfortunately, my tax rate is pretty low so I don't get the maximum benefit from this.) So my net cost might be around $400 per month (very approximate). :)

If I make more than $400 per month after taxes on the $85,000 investment then I should be ahead. A 7% return would acheive this and anything more would be gravy.

Of course, these numbers are all approximate and there is risk involved, but there is opportunity as well. I'm not rushing out to do this tomorrow, but I do consider it to be a valid option, and a good argument against paying down a mortgage.

Today was Saturday. No hours worked.

Should I try to be mortgage free?

This is one of those questions that puzzles me somewhat. I had dinner tonight with a friend who is aiming to have her mortgage paid off in just three more years. I know of two other friends who had their mortgage paid off by age 30. And another friend hasn't told me her timeline but I know that she considers it a high priority and I wouldn't be surprised if it was by 35 or at latest 40.

Now, I didn't buy my first place until after my 30th birthday, so obviously I'm not in the running for the youthful payoff title, but I do sometimes wonder if I should be accelerating my mortgage and trying to get rid of that debt and expense. There are two complicating factors for me. One is that my salary is very low since I try to leave as much money as possible in my company. The other is that I now have income from my basement suite which allows mortgage interest to be at least partly written off. Both of these are essentially tax planning questions.

In the first case, if I withdraw additional income from the company to pay down my mortgage I end up paying more tax on it. So I need to balance the tax savings and investment growth within my company against the interest savings and early paydown. This is a pretty complicated calculation and I do not have a model for it. So the truth is... I just don't know what the right thing to do is.

And then there is the second factor. By leaving my mortgage higher I have more interest that can potentially offset my rental income. By paying down my mortgage I lose a tax deduction - it will be lower in this year and all future years and disappear entirely much sooner. In other words, having a mortgage is not only a liability to me. It can provide tax deductions that are an asset. And again, when it comes to the right thing to do... I just don't know.

So it seems that I have questions but no answers. I am going to add this to my list of questions for my accountant and hopefully gain some insight into this question soon.