The choice

Tom’s not unique. I have no idea how many folks there are like him. Lots, likely.

So he did the Canadian thing. Bought real estate during his career, shovelled all his savings into reducing the financing on it, and saved/invested zip. “Everybody I ever talked to said the same thing,” he told me. “And that was a house is safe, stocks and such are a risk and all I needed to do was to try and pay this thing off. So I did.”

He’s 76 now. Always worked at low-paying jobs around Vancouver Island, and has recently been laid off. With the disappearance of a paycheque comes the hard realization he’s, well, pooched. There is now no way he can even pay the property taxes, upkeep and utilities on this property – which needs work.

“I did not invest in my future,” explains Tom, “and now here I am in the future wondering about my future.”

We talked. The house is worth maybe $700,000. There’s still a mortgage of $195,000, plus He had to take a line against it of $40,000. The monthly on both amounts to just over $1,300. “My only income at present is the cpp/oas combo of $1331 and I am waiting for EI to begin in a week.  I have no credit card debt.”

In short, he can’t carry the place, let alone buy food or gas the truck. He can’t afford to renew the house insurance. He’s behind on property tax. The mortgage will refinance next year at a higher rate. There are no funds to pay it down. On paper he’s doing okay – with a net worth of more than $400,000. But his bank account and the fridge are empty.

“I am thinking that I should sell my home and rent for the rest of my years. If I did that,” he asks, “what would be the best strategy for investing the proceeds of the sale?”

Well, first, the real estate market on the Island (like a slew of places at the moment) sucks. Last month barely 150 houses sold in teh entire area, down 23% year/year and a 36% crash from November. Realtors blame high rates, plus the BC government’s rapacious and crazy ‘spec tax’ which is being extended to a clutch of new communities, depressing demand along with higher mortgage rates.

In short, a sale may not even be feasible for months to come, unless Tom prices it aggressively. As for finding a rental, it’s another struggle. One-bedders in Nanaimo are available for about $1,800 or less – more than his current monthly, but cheaper than the house when all the costs are included. And he worries constantly about repairs he cannot afford.

Anyway, it’s academic. Tom can’t afford to stay where he is. Without income, he can’t borrow more against the equity in his property. He may not even be offered a mortgage renewal. He cannot have financing without insurance. But he cannot pay the premium. Pooched.

How can Tom’s life be improved? Selling would net about $415,000. If he sticks it in a monthly-pay GIC the return would be (as of yesterday) south of 5% paying out about $1,600 (taxable interest). If he opts for a B&D portfolio, a reasonable (but not guaranteed) return should be at least 6%, or $2,100 a month (less taxed dividends and cap gains). Add in his $1,331 from public pensions and it equals an income of just over $42,000.

Not a princely amount, by any measure. But at least the proceeds from the house would take care of the rent, and Tom would still have the four hundred grand as a security blanket for his future – in contrast to possessing none, while carrying debt and trying to met the ownership costs of an old house.

Is there a scenario that retains the real estate and Tom’s solvency?

He could apply for the GIS poverty payment of about $1,000 a month, so long as his total income stays under $21,624 – or just $1,800 a month. That would cover financing charges and some food. But the slide into subsistence living would continue once EI payments ran out. There’s still the mortgage renewal to fret over. The unpaid insurance. Deferred maintenance. Utilities. And what happens in an emergency when the cupboard is bare?

So Tom’s in a trap. The way out is to sell, grab the remaining equity and use it to generate what everybody needs a lot more than real estate, which is income.

There are three lessons here.

You can always rent a roof. You cannot rent cash flow.

It’s okay to be young and poor. It’s a crisis when you’re old.

And Tom’s wise words. “I did not invest in my future and now here I am in the future wondering about my future.”

It’s coming.

About the picture: “Please meet 15yrs and 6months and counting the Goodboy!” writes Alice in Montreal. “He is known as Whitie from a Chinese name of ‘little White’ for the white patch on his chest. The name I realized later would be not so polite in certain situations…he is happily being called ‘Goodboy’. He enjoys cold winter especially heavy snowy days. He loves beef equally as crunch vegetables. (Please don’t share the name on the blog, I guess it would be sensitive, but Good boy will do,) I stared reading your blog on and off for many years. Definitely learned a lot and it helps living through FOMO. Thank you.”

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