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Tracie wants to buy a Montreal duplex and rent it out before they move back to the city, but it’s a risky plan

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A couple we’ll call Tracie and Kevin moved to northern Quebec two years ago in search of a fresh start. Both of them had tried their hand at living in Montreal and failed.

Tracie, 31, had wrapped her Master’s degree but couldn’t find steady work in the city. Between her substitute teacher roles and the work that she’d put in at youth centres, she was barely making enough to live on. “It was paycheque-to-paycheque for me,” she said. Kevin, 40, was running a small business and wasn’t doing much better.

Together, they had accumulated more than $100,000 in debt, $80,000 of which belonged to Tracie. The rest was brought on by Kevin.

“You can’t be good with money if you don’t have it,” Tracie said.

In March 2018, Tracie made the move up north when she heard about the opportunity to not only teach full-time but earn a decent living doing so. Her $3,002 after-tax income, which already had rent payments deducted from it, is higher than anything she could expect to receive in Montreal. Kevin, despite having no experience, got a job as a gym teacher where he earns $2,769 after-tax.

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In two years, the couple has already cut their debt by half. They focused on paying off Kevin’s first and Tracie now only has slightly more than $50,000 in student debt left to cover on her end. Suddenly, they can see daylight.

The added flexibility received from paying off Kevin’s debt allowed them to start cobbling together an emergency fund in a TFSA ($18,077) for the first time in their lives. They’re speaking about their long-term goals — well, at least Tracie is — and looking into what the next steps could look like after Tracie’s student debt is paid off.

The move north may have given Tracie her second chance, but she doesn’t want to live there for the rest of her life. Eventually, she wants to venture south again, back to Montreal perhaps. And if she did make that move, she’d like to already have a property there to come home to.

Over the next two years, Tracie is aiming to save enough to buy a duplex in Montreal for about $500,000. The couple would stay up north for a third year, where they could continue to pay off Tracie’s student debt and would rent out the duplex in the meantime. Rather than just cover the mortgage bill, Tracie hopes she can make some extra income off her tenants too.

If they could manage that kind of setup, it would alleviate some of the pressure of investing their money into the stock market — a move that Tracie dreads. Neither Tracie nor Kevin are very financially literate. I cracked a smile when Tracie referred to ETFs as “EFTs” and RRSPs as “RSSPs” in our interview, remembering a time when I had the same limited knowledge. They’ve never had the money to invest before and so they never did their own homework.

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But there’s a trust issue here for Tracie as well. She’s not knowledgeable enough to do her own investing and she doesn’t have the complete confidence that a financial advisor that she’d be paying would have her best interests at heart. That same skepticism is ingrained in her thoughts about investing in stocks.

“I think it’s the unknown of my money being wrapped up in something I don’t know,” she said. “You hear stories where the CEOs are doing something with the money and everyone has lost their pension and that freaks me out. I feel like there’s more control over my own property versus trusting these people I don’t know with my own money.”

I asked Richardson GMP director of wealth management Serena Cheng how Tracie can approach the next three years as she saves for a duplex and whether she’d have to get over her fear of investing to get there.

The good news for Tracie and Kevin is that they won’t need to change their spending habits in order to fund a downpayment. In a recent month, they earned a combined $5,771 after-tax and managed to put away $1,958 of it. They spent a bit more than they usually do, mostly on two plane tickets to Montreal for a Christmas vacation ($827.29), but they also received a $785 reimbursement from their workplace. The two nearly cancel each other out.

Their food spending only hit $380 because of a number of subsidies they receive for living up north, while their combined shopping bill was only $400. The largest costs came from diverting another $1,500 towards Tracie’s student debt — double the minimum payment — and the “other” category due to a $492 CRA tax bill and Kevin’s child support payments of $400.

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The reason no change is really needed here is because if they save $2,000 per month, Tracie and Kevin will have hit $48,000 in 24 months. In one more month, they would hit $50,000 — a 10 per cent downpayment on a $500,000 home that would still leave them with their TFSA as an emergency fund, Cheng said.

The best way for them to save up for the downpayment would be to do so within their RRSPs, Cheng said. That way, they can take advantage of the Home Buyers’ Plan and each withdraw up to $35,000 tax-free to put toward the downpayment.

Of course, the best thing they could do is invest that money as they’re accumulating it, said Cheng, who suggested a conservative portfolio to match Tracie’s risk profile. With little knowledge to go on herself, Cheng said it would be best for Tracie to offload this work to an advisor.

“It would be strongly advisable for those two to become comfortable with the idea of starting a relationship somewhere with someone in the financial world they can trust,” Cheng said. “It’s like finding a doctor.”

There are a few potential flaws in Tracie’s plan, Cheng said. Student debt isn’t one though. You might ask why Tracie should rush into adding a mortgage before she’s fully paid off her student debt, but at her current pace, within two years, she’ll only have little more than $10,000 left. If they can wait until they’re debt-free, that would always be better, but Cheng wouldn’t be fussed if they didn’t.

“What I’m more worried about is if they can handle the fixed costs of owning that house if something goes wrong,” Cheng said.

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And a lot of it can.

On a 25-year amortized mortgage with a five-year fixed rate at 1.64 per cent, they’d be paying about $1,886 per month, Cheng calculated. Essentially, that would mean that the money they’re putting away for savings in their monthly budget morphs into a mortgage payment.

Cheng can’t say whether the rent Tracie could collect from two tenants would generate any income. At the very least, she suspects that tenants could cover the mortgage and utilities payments while they are up north.

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But for this plan to work, it hinges on the couple finding those tenants, Cheng said. There’s the risk that they won’t be able to do so right away and it may not be sustainable for them to cover mortgage payments and student debt payments for very long.

The even more concerning issue is the possibility Tracie and Kevin can’t find jobs right away when they move back to Montreal or if the jobs they do find pay them far less than what they earn in the north.

So can they do it? Yes, but there’s a lot of risk involved.

Tracie zoned in on those risks when I explained Cheng’s conclusions to her. She’s now less-willing to put her plan into action. That doesn’t mean that she won’t buy in a home in Montreal, but she’ll wait until she and Kevin are back in the city and have found work before pulling the trigger on one.

Financial Post

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Victoria, for her part, makes her qualifications clear. “In terms of my credentials, I’m a financial coach, not a financial advisor. So my goal is to help you find the resources around topics, but I do not provide individual investment advice.”

Victoria later said her social media manager took down the video about how to invest $1,000 because it could potentially be misconstrued as giving advice.

“It (was) a fine line between showing people what is available and what I personally like versus what people could take as advice,” she wrote in a follow-up message.

Fulmore said she is currently working towards getting certified as a financial planner.

Heath, for one, takes no issue with the lack of credentials.

“Just because somebody is older or even holds a certain regulated financial title, it doesn’t mean their advice is necessarily good or is necessarily better,” he said. “There are plenty of baby boomer financial planners, with plenty of experience, who give bad advice.”

As well, he was impressed by Victoria’s video on how to invest $1,000.

There are plenty of baby boomer financial planners, with plenty of experience, who give bad advice

Jason Heath

“A lot of people in the financial industry do a poor job of communicating complex topics to consumers and that creates a void that these TikTokers are filling,” he said.

Relying on generic advice when personal finance is supposed to be, well, personal is a drawback, but not one unique to TikTok.

“Nobody should be getting all their financial advice from any one source,” Heath said.

Oriana Gomez, a 23-year-old barista at an upscale Italian cafe in Toronto, heeds that message. TikTok, for her, became one of the many tools in her arsenal she uses to achieve financial security.

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Grouni is cutting back Michael’s food and drink spending to $1,253, his entertainment spending to $181, his shopping budget to $388 and his spending at spas to $256. That frees up an additional $2,078 of monthly savings.

For every year between now and when he turns 45, Michael should look to spend no more than $115,000 between expenses and debt, with $84,000 going to the former and $30,000 going to the latter. Grouni also wants Michael to top off both his RRSP and his TFSA every year until he’s reached 45, meaning he’ll have to set aside $33,000 in savings per year.

Grouni expects Michael will be able to save even more once he sets up a professional corporation. “It’s a fantastic tax deferral vehicle,” she said. Of the $300,000 per year Michael would earn in his PC, Grouni said he’d need to withdraw about $235,000 or $146,000 net to pay for his expenses, savings and debt. Once he pays for his business expenses ($32,000 per year), he’ll have about $32,000 left to save and invest within his PC.

Right off the bat, a 50 per cent reduction in discretionary spending is in order

Nancy Grouni, financial planner, Objective Financial Partners

When Michael turns 45 and switches to part-time work, he can begin withdrawing $150,000 so that he can continue paying his expenses and debt and funding his TFSA. This is where Grouni’s plan deviates from Michael’s wishes. Between 45 and 60, he didn’t want to still be saving for retirement. And while $6,000 per year is almost a pittance in comparison to his income, Grouni said Michael’s original plan just wasn’t feasible.

“It’s unrealistic to think you can cram all your savings from now until age 45,” Grouni said. “You’d have to be a lot more aggressive with his savings and I felt already reducing discretionary expenditures by 50 per cent was a pretty big feat, but he’d have to reduce his expenses even further.”

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“When I looked at the situation and the opportunity for them to do it now — it wouldn’t be advisable,” said Lucreziano. “They’re close, but they need that extra push.“

So why doesn’t Adam just make up the difference with an extra pay raise? Well, Lucreziano calculated that even if Adam boosted his salary to $165,000 per year — a number not likely sustainable for him — that still wouldn’t make up the difference.

The couple has about $63,000 between their TFSAs, chequing and savings accounts. After the pay boost, Lucreziano estimates their savings could hit $140,000 by 2022. And although they would be able to harvest some capital from the sale of their current home, on which they still owe $224,277, Lucreziano calculates there would still be a shortfall over $30,000.

When I looked at the situation and the opportunity for them to do it now — it wouldn’t be advisable

Carissa Lucreziano, CIBC vice-president of financial planning and advice

Amelia and Adam have to think about more than the $154,534 downpayment they’d need, she said. There would be closing costs of $15,759 and property taxes of $7,354.

There is also the $12,608 Lucreziano has estimated the couple will spend on their second child to consider. It’s generally estimated that raising a child in Canada costs between $10,000 and $15,000. That figure includes all the basics: food, clothes, health care, transportation, school supplies, etc. Child care would likely cost them an additional $6,000 per year (although in some provinces, such as Ontario, that number can climb well above $10,000).

Amelia and Adam shouldn’t consider buying a $750,000 home and having a second child before 2024, when they’d comfortably be able to afford both after more than three years of accumulating savings, Lucreziano concludes.

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“This goal is important to him and it’s a worthy goal, but there has to be sacrifice,” Burlacoff said. “And that sacrifice is living with mom and dad.”

It’s not even worth it for Burlacoff to attempt to go through the rest of Nelson’s expenses and trim $50 in food or $100 in shopping. None of that will make a difference. What would is giving up the apartment and pocketing the $1,850 per month that he would otherwise spend on rent. That’s it. That’s the plan.

Here’s why: If he doesn’t spend a cent of his rent money, Nelson will have saved $111,000 over the next five years. That sum would allow Nelson to live in Los Angeles for more than two years, according to Numbeo, a crowdsourced cost-of-living database.

This goal is important to him and it’s a worthy goal, but there has to be sacrifice

Brian Burlacoff

Numbeo calculates the average rent for a one-bedroom in L.A.’s city centre to be about $2,212, while monthly costs, excluding housing, are about $1,393.

There are additional expenses he’ll have to consider as well, Burlacoff said. The application fee for a green card costs close to $1,000. Health insurance is another necessity, Burlacoff said. In 2020, the average American pays about US$456 per month for health insurance, according to insurance company eHealth Inc. 

“If you’re in the U.S. without health insurance and something happens to you, it will bankrupt you,” he said.

The last major cost Nelson will have to consider, Burlacoff said, is a car that will likely run him another $3,000. Overall, the living costs and the additional expenses Burlacoff outlined will run nearly $103,000.

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Having a child will complicate things. Parmar said it could easily cost between $2,000 and $2,400 per month if we’re accounting for not just food, clothes, diapers and toys, but also child care, life insurance bills and RESP contributions.

A further decline to $5,000 per month still seems like it would leave the couple with more than enough, right? It is, until you factor in that Tina would be on maternity leave and would only be able to earn a maximum of $54,200. That means that the couple could quickly find themselves in a scenario where they only have between $1,000 and $2,000 to put away each month.

“It would be tight,” said Parmar who added that the couple would also have to do away with vacations, unless you count driving to Banff in a minivan. “They’re not going into debt, but they’re not going to have the big nest egg either.”

When I called Tina and Drake to relay the new budget, the first thing Drake did was pull up his spreadsheet on his laptop so he could follow along. I could tell some of the numbers hit him hard. He nervously laughed after double-checking that he could be spending a combined $3,900 per month on hydro and a child.

“That’s three times more than what I was expecting,” Drake said. “I still don’t know what the hell I would spend $3,000 on for a child.”

Drake also isn’t sure he needs the extra money in discretionary spending and admitted that he’d be tempted to cut it back down.

Even with far less at their disposal though, neither one is ready to do away their budget-based minimalist lifestyle.

“I’m confident in saying we’ll remain dedicated to the budget even if we’re saving less, if anything at all,” Drake said.

Financial Post

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