Aspirations

As mentioned recently, this blog has an archive of 3,410 posts. That’s 2.5 million words, or the same as 42 books (remember those things?). Those posts have attracted over 610,000 comments – another 80 million words. And that doesn’t include the DELETED, the trashed or the ones telling me what to do with my orifices.

For a decade this pathetic site has yammered on about current affairs, housing, the economy, investing, canines and successful marital strategies. Someday it will end. Not quite yet.

No matter how often nor closely the topic is dealt with, there’s one eternal question: should I buy a house? Given the fact real estate is grossly inflated and Canadians have become the most indebted people in the world trying to own some, the best answer is ‘no.’ But alas, few listen. The property cult is too strong. The nesting instinct indomitable. Especially when people hook up and have kids. All of a sudden it’s Norman Rockwell-Brady Bunch-Leave it to Beaver-Little House on the Prairie time. And almost always, there are consequences.

So, here we go again.

Earlier today some dude named Dan asked me his special version of the very same question. It is presented here in the spirit of (a) education and (b) to irritate everyone over 45 without enough money.

Reader of your blog and wanted to get your thoughts on my situation. My fiancee and I are 30 years old currently renting in Toronto for a reasonable price ($2400 for a 2 bedroom). I am a software engineer making $200k and she is an analyst making $70k. Combined, we have assets worth over $700k. It is currently invested in maxed out TFSAs, RRSPs, and overflowing into non-registered investment accounts. We are currently on track to save approximately ~80-90k per year excluding investment growth.

We are getting married next year and I would expect to start having children in the next 2 years. I’m looking at property in Toronto and it makes me sick to my stomach. On one hand I am perfectly content with renting and investing, but on the other some piece of me wants to purchase a home (probably in the suburbs) and build equity. I have aspirations to retire early (at 40 or so).

Wondering if you have advice for someone in my situation. Should we sit out the market and continue saving/investing? Or jump in now?

There you go. Kids making $270,000 a year with $700,000 saved wanting to retire at 40. What should they do?

Simple. Decide what they desire most. Is it marriage, kids, mat leaves and a house? Or to retire in a decade (and do what?). Or have it all?

If they buy a typical detached for $1 million in 905 and put 20% down, the $800,000 mortgage and house costs will total $4,500 a month, and in five years debt will still be $735,000. So they’ll have doubled their occupancy costs, reduced their portfolio by two hundred grand and added over $700,000 in debt. If the goal is to be debt-free five years later for retirement (with two small children), then a big whack of the liquid nestegg would have to be thrown at the house debt.

But, after buying the house they’d still have $500,000 left. If new contributions were to total $80,000 annually for five years, in a balanced portfolio kicking out about 6%, the kids would have $1 million. Upon mortgage renewal they could reduce the debt by half, leaving $650,000. Five years later that would have grown to $1.1 million (if the big cash flow continued), allowing them to cash out the remaining mortgage amount of $320,000. Status: no mortgage and about $700,000. No pensions, either. So income from investments: about $45,000.

Can you live from age 40 to age 85 on forty-five grand a year, putting kids through uni and not go insane? Good luck.

So, if Dan & squeeze went another route – no house, yet luxury rentals – what might be the story?

Hmm. Let’s upgrade that $2,400 a bit – say, to $5,200. That would be enough to rent this pile of bricks in tony Oakville, arguably the jewel in the shapely navel of the 905.

That extra rent would come off the annual savings, reducing it to a little over $46,000. But, of course, the $700,000 portfolio would not be raided and no debt would be added to service. If the same investment returns were assumed as above, then after ten years the kids (now facing retirement) would have no real estate, but a liquid portfolio just shy of $2 million. That should yield an annual income of about ten grand a month, while maintaining the principal amount.

Under the second scenario, not only do these people have three times the amount of money by age 40 (yet no real estate) and three times the income, but they get to live in a house four times grander than the one they could reasonably afford to buy. Their kids get to look down on other children (a big plus) and they can bowl in the foyer. What’s not to love?

Well, as stated here yesterday – life’s about choices. Just stop asking me to make them for you.