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Discussion Starter #1
Hi,

Our mortgage will be paid off this summer. My husband and I are about 10 years from retirement and have, between us, approximately $150,000 in unused RRSP contributions. Originally, we had thought to take our mortgage payment amount (approximately $2,000 per month) and buy RRSPS until we were caught up, as well as investing in TFSAs. But now we are wondering if we would be better off buying an investment property (either a condo in Vancouver or a house out in the suburbs). We would use a HELOC on our house to use for the 20% down payment on the investment property. Once we have paid off the HELOC (approximately 4 years), we would then take the $2,000 and start buying RRSPs and TFSAs. Any ideas on which is the better way to go?
 

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You will get a diversity of opinions from the posters on this site.

I'll tell you my thoughts, for what they're worth: a single investment property is insufficiently liquid and insufficiently diversified to provide appropriate risk-hedging for retirement income.

If you like real estate as a sector, I'd consider REITs. Or, if you could somehow buy a property with a bathroom in Kelowna, a kitchen in Toronto, a dining room in Montreal and a living room in Halifax, I might say "go for it."

In addition, if you buy in Vancouver, you are absolutely at risk of buying during a market high. This really violates the "buy low, sell high" maxim of investing...and at 10 years out from retirement, I don't personally think you have enough time to wait out a correction (should one ever arrive).

Just my thoughts; worth what you are paying for them. :)
 

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I really think anyone buying in Vancouver right now is off their rocker...

Don't get me wrong, Vancouver real estate has been wonderful asset to own for the past 8 years... a 50% return for us. But this market has to be tapped out.... makes no sense. :confused:
 

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J - is it worthwhile or just completely annoying to point out that yours is an unrealized gain?

I'm always curious about this - when people (in my neighbourhood, too; we bought in Toronto 9 years ago and we'd be totally priced out now) talk about the price appreciation on their personal residence as a gain...it isn't a gain unless and until you sell the asset. Or, it is only a paper gain and may be fleeting.

I put some approximation of the market value of my personal residence on my personal balance sheet and net worth statement, but in reality it is something of a contrived figure. YES, if I sold today I would realize an enormous gain. But I am not planning on selling. So...? Just curious to know why you or anyone would describe an increase in the value of your personal residence this way...

...back to the original discussion...
 

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MoneyGal, with the additional equity, you have the opportunity to use a HELOC to invest and grow (or decrease) your net worth even further. The additional access to funds should count for something.
 

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In my case, I own (outright) recreational property on which I will retire to in perhaps 8 years, so my city home will be sold at that point and the funds will become part of my retirement portfolio. Why wouldn't I want to keep track of this part of my assets in terms of its rising or falling value?
 

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Der. Yes, you could realize a return on the equity that way. I'm not suggesting it counts for *nothing* but just that (like in my case), when you have no plans to realize the gain, why people talk about the gain in that way. Make sense?

(For example, my neighbourhood is very hot right now and I, too, would see a gain of over 50% over my purchase price if I sold now. So, my neighbours talk about this from time to time. Except if you aren't planning to sell - OR use the increased value to stake your claim in another asset - this strikes me as a little...wrong-headed. It makes you FEEL good, but there's no real practical or tangible value to the new valuation.)
 

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x-post with Jon and I did not mean to take this discussion off the rails. I don't mean that you wouldn't keep track of an asset's value. I said as much for myself - I track the value of my house quite closely. I guess I just would not describe that adjusted value using the word "gain." I am wedded to the idea that the only real gains are realized gains. :eek:
 

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Discussion Starter #9
I know this post has gotten "off the rails" but all I want to know is what is the best use for the $2,000 per month we will have to invest in a few months. I know real estate is a "gamble" especially with prices here in the Vancouver area.....but if a tenant is paying off the mortgage for us, doesn't it still make sense...especially considering that after we pay off the HELOC being used for the down payment, we can then invest in RRSPs and TFSAs? We have been approved for a 3.75% five year mortgage on the "potential" investment property.
 

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Paying off the HELOC after four years means you are then six years away from retirement.

My questions would be, what is providing the retirement income stream? Does the investment property provide that? Will it provide enough income after expenses? When do you sell it? (Do you sell it?) What happens if prices move down by 20% at your preferred time to sell?

Whether or not you "should" do this will depend on lots of factors, including what other sources of retirement income you will have. If you have $150K of unused contribution room, though, I suspect you don't have a defined benefit pension in the mix.
 

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Yep home equity doesn't count for anything unless you utilize it.

Personally, I would celebrate paying off my house by going on a trip, then if I were in your position, I would max out the RRSP contribution room.
 

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Discussion Starter #13
To answer the questions:
My questions would be, what is providing the retirement income stream? I work for a school district and do have a defined benefit plan. My husband has a RPP where he works and his employer does contribute to that for him based on his salary (of course my husband contributes as well). And there's CPP and, hopefully, by the time we are 65 OAS will still be around.

Does the investment property provide that? No we would most likely sell when we retire unless it was providing us with a good monthly income by that point but our intent at this point would be to sell.

Will it provide enough income after expenses? We are anticipating that we would pay down the HELOC ourselves, with rental income going to pay the mortgage and property taxes, etc. I don't think, for the first few years, the rent would cover both HELOC and mortgage.

When do you sell it? (Do you sell it?) What happens if prices move down by 20% at your preferred time to sell? This is where I am confused....even if prices go down 20% by the time we sell (and I just don't think they will be down from current values in 10 years)....aren't we still somewhat ahead of the game as the renters will have built up all that equity in the house/condo? I know, obviously, it would be much preferable for prices to increase (and I do think they will...even if they go down in the next couple of years) but having someone else build your equity seems to good to be true (unless I am missing in the way I am thinking).

Whether or not you "should" do this will depend on lots of factors, including what other sources of retirement income you will have. If you have $150K of unused contribution room, though, I suspect you don't have a defined benefit pension in the mix. As stated above, I have a defined benefit plan (that's part of the reason we concentrated on things other than RRSPs), my husband has a RPP, I have some RRSPs and, of course, we have at least 6 years (if we purchase the rental unit) to "catch up" on our RRPS.

I must admit though the landlord aspect of rental investment does make me a bit nervous.
 

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Make it even cheaper by raising your deductible to $10,000! (or some other number beyond the standard $500 or $1000 deductible)
 

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This may sound like an arcane bit of terminology, but I think it is important. You speak about RRSPs and TFSAs as if they were investments themselves, just like the potential real estate investment you are considering. RRSPs and TFSAs are instead vehicles (think empty boxes) in which you can place investments for tax benefits. Those investments can be all sorts of stuff.

I agree with the folks who are saying to be careful in just investing in more real estate. That's a highly concentrated bet to make fairly close to retirement in an area where a lot of people are uncomfortable with how prices will behave. You could only be "a slight bit wrong" and end up with a lot of your capital gone just before retirement. That's not to say your property might not offer you income - but most valuations in B.C. (note: I don't live there) are quite elevated and if all you are after is income then you can get that with less capital risk elsewhere.

Instead, taking your free cash flow for the next 10 years and building a diversified investment portfolio of foreign and Canadian stocks and bonds, possibly with a bit of real estate exposure through REITs (though I would not do that: you have real estate exposure through your house already), I think will provide a better balance of risk and return. Assessing your risk tolerance and time to retirement will let you find the right balance between these asset classes.

Regardless, by having $150k unused RRSP and TFSA room, you are missing out on free money (in the form of tax deferred or sheltered income and gains) from the government. That's a shame. And that in itself would really mean that you'd have to be really firm believers that the B.C. real estate market will shine while financial markets will crash in the next 10 years - a belief which I don't think many others will share.
 

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I know this post has gotten "off the rails" but all I want to know is what is the best use for the $2,000 per month we will have to invest in a few months. I know real estate is a "gamble" especially with prices here in the Vancouver area.....but if a tenant is paying off the mortgage for us, doesn't it still make sense...especially considering that after we pay off the HELOC being used for the down payment, we can then invest in RRSPs and TFSAs? We have been approved for a 3.75% five year mortgage on the "potential" investment property.
Not necessarily

http://www.four-pillars.ca/2010/03/16/tenants-paying-my-mortgage/

Bottom line is that doing the real estate investment first is riskier than just doing RRSP/TFSA from the beginning. You are using a lot of leverage which increases the risk. It's impossible to know how it will turn out but it things go well then the real estate move will pay off in spades. If not, then...you might be kicking yourselves as you extend your retirement date.
 

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+1 to Houska and also: the issue for me is not whether real estate is "a good investment" or not (the phrases "good investment" and "bad investment" are often used in an incredibly vague and unhelpful way).

The issue for me is that 10 years away from retirement, you start to be in a fragile zone - and the impact of your choices is really magnified. Think of it like leveraging your human capital (for an imperfect example).

You have 10 years left in the labour force during which you will generate dividends from your human capital, and you will use those dividends to invest to create an income stream in retirement. By the end of that 10 years, your human capital will be largely depleted - certainly in comparison to where it is now.

If you make a mistake with your investments, at 10 years from retirement you do not have enough time left in the labour force to recoup it. You would need to "borrow" against your depleted human capital by remaining in the workforce. (If you have no other investments, what are your other choices?) Or alternately, you could sell your hard asset - your principal residence - to fund retirement at your preferred date (or, in the worst case, you both work longer AND sell your asset).

IMO as you draw closer and closer to retirement, the lens you want to look through is not "is this a good investment?" but "how am I going to create and generate an income stream for life in retirement?" - and the considerations are different than more generic "good/bad" investment considerations.

I know I've thrown a whole bunch of concepts into this post. But the main point I want to emphasize is that your current largest asset is your human capital, and its value is declining over time. From that POV, you need to carefully safeguard the dividends from your human capital, because time is depleting the value of your asset for you. The takeaway, from my POV anyways, is that 10 years out is NOT the time to invest in risky assets.

Editing to add that this post was created *before* the clarifying post from the OP, above, showed up...
 

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I'm with Cal and Moneygal on this one. Unless you both have good pensions, you need to be building up something more reliable (diversified) for retirement income than a single residential property. And you are letting those RRSP tax deductions go to waste in your remaining working years. Put the money into RRSPs, in balanced mutual fund or ETF portfolios suitable to your investro profile.
 
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