Let go

Do parents ever stop being parents? Like, feeling they can bully you into stuff? Force you to obey? Even when you’re past forty? Does it ever stop?

Not for Alan, apparently.

His story: Married, no spawn, Victoria, public servant, DB pension, 41 years old, dog, happy renter, household income north of $220k and a nicely swelling B&D portfolio, currently at $550,000.

Alan’s parents want to be both generous and controlling. “They gave my sisters $200k each towards buying homes in Vancouver,” he tells me, “and they’ve indicated they would do the same for me, but only for a downpayment for property.”

“I asked about having that money to add to B & D portfolio so I could also benefit from appreciation over time but they said only for housing. My parents are very well off so this will not affect their retirement planning. They have indicated if I don’t take the money now, I can have the extra $200K off the top when they pass before the remainder of the estate is distributed amongst my siblings.

“Sort of interesting predicament that reinforces just how much home ownership is prioritised over everything else in this country. I like having income generating assets, have a great and cheap rental situation and don’t wish to buy property. At the same time, benefiting from the eventual appreciation of an extra $200K now does seem more sensible than waiting to receive those funds after inflation has eaten away at them.”

Do I take the money, he asks, and be forced to buy real estate? Or wait?

The issue is Victoria, of course. To be in a place remotely comparable to his rental, Alan & squeeze must spend at least $1.2 million. So obeying his folks means a $1 million mortgage – and a monthly nut of almost $7,000 (mortgage at 5.69% plus property tax), twice his rental cost – or eating into the portfolio and ending up with debt of about $850,000 with liquid assets Hoovered down to $175,000.

“This is relatively good situation to have and I feel very privileged but still don’t know what to do,” he confesses. “Maybe there’s no wrong answer? Although I really don’t want to be house poor.”

What to do?

If Alan and his wife acquiesce to his loving, house-humping folks they will get a piece of real estate which may appreciate and some day throw off a capital gain. Burt given the current price of homes, the level of profit is unknown. Maybe valuations will go down. Also unknown.

What we do know is that their accommodation costs will double. We know they’ll go from having zero borrowing to between $850,000 and a million in debt. We also surmise if they dip into their investment portfolio by $375,000 that in twenty years that could represent a loss of $1.24 million (assuming a 6% return). Additionally, paying off the mortgage over that period of time will require payments totalling $1.417 million to retire $850,000 in debt (at a similar rate).

In short, the total of monthly payments (above rent) plus lost opportunity cost to acquire a $1.2 million property can reasonably be pegged at $2.1 million – and that is after accepting a $200,000 gift. In other words, they would have at least two million more if they continued on their current course as renters, avoiding the extra accommodation costs and keeping their portfolio intact.

Of course, there are many variables. The Victoria townhome could be worth $5 million in two decades (which will never happen since it’s already unaffordable to a family earning over $220,000). Financial markets could crash (which has not happened in a century). The Canadian real estate bubble could implode (it will at some point. Victoria is vulnerable). Interest rates could fall to 1% igniting a new housing boom (only if economic disaster hits) or double, causing a real estate crash (unlikely but possible).

We don’t know. Alan doesn’t. Neither do his parents.

But at this point the guy is happy, debt-free, investing successfully with a flexible lifestyle and a sound financial future. He’s avoiding interest rate and real estate market risk, while being content to face long-term financial fluctuations. In a few years he will be up a million dollars instead of owing that amount. He’s made choices. They work.

So here’s the strategy, Al: get the wrinklies to read this blog. I have a message for them.

Dear Alan parentals.
Nice to meet you. Now listen up. First, what worked for you in the past may not work in the future. Are you really sure coercing your kids into serious debt at this moment in time is wise? Second, love and generosity should be unconditional. Alan’s happy. Support his choices instead of foisting your own upon him. Third, ask yourself, at forty years of age were you manipulated by your parents? Odds are, no. You likely charted your own course, making decisions that were right for the moment and your goals together. Finally, let go. Your son does not need you designing his life for him. He’d be grateful for a gift, of course. Even more, he would value your trust.

About the picture: “Many thanks to you and your colleagues for the daily dose of entertainment and education,” wries Trevor. “Here is Tama the GSP caught in a rare moment of relaxation. He is known for his aggressive friendliness (watch out kids) and his drinking problem (salty, fresh or frozen). We stay clean above deck, never wading into the comments section below. PS. I once had a part-time job scooping ice cream at the Belfountain General Store. I’m not sure if you were involved at that time (2007ish), but if you were, thanks for the scoops.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.