Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
rentals/ Mortgage Financial advise
Old 03-04-2019, 04:37 PM   #1
Dryer sheet wannabe
 
Join Date: Apr 2016
Location: winnipeg
Posts: 10
rentals/ Mortgage Financial advise

I an not retired yet, just counting the hours (57 months)
My target is 2M in assets
Right now, i have several rentals and some money in etfs

To follow my stury, i lower the 2M into 200K investments and them i will multiply everything by 10

I am thinking in two optionsafter having the 2M)
option 1-To have 100% of a rental property (no mortgage) that will give me around $9K per year after canadian tax.
option 2- to have the same property, 80% mortgaged and invest the 160K into etfs. The mortgaged house will give me around 6K yearly (after withdrawing principal paid every 5 years) and expecting a 4% yearly return on the 160K. So the total for option 2 will be 6K+4%x160k=14.4K

after multiplying everithing by 10, i have
option1 9K*10=90K
Option2 (4% return) 14.4K*10=144K
The beauty of option 2 is that i can sell anytime the etf and pay the mortgage balance (if they are in variable rate) with almost no penalty.
Also, if the real esta market increase (that is what eveyone expect in a big city) at least 2% per year my kids will inherit a bigger chunk of capital (but the same quantity of properties)

Am I missing anything to opt for option 1?
winpplui is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-05-2019, 06:51 PM   #2
Recycles dryer sheets
 
Join Date: Dec 2016
Posts: 439
Your post is wicked hard to understand, but I'll give it a try.

If I understand you...Option 2 says you want to mortgage your 10 paid-off properties and use the money for ETFs that give a 4% return to you; plus $6K/yr. in paid-in equity that you can get when you refinance and pull cash out in 5 years. Or not, and just rent them, which is Option 1. Right? So here's why Option 1 is far better...

Option 2 is gambling that your ETFs make a consistently adequate return. The risk is that you still have to pay the mortgage regardless of ETF performance.

Your 4% income from ETFs is net of mortgage interest, so you need more like a 8.5-9% return on your ETFs given today's interest rates. If you don't make 8.5-9% then you're behind schedule. Then there's the capital gains taxes...don't know how that works in Canada.

In Option 2, you also only get your $6K/yr. after 5 years, when you refinance and pocket the principal, assuming you can get the right loan. (I suppose you could take it from the loan proceeds each year and pay it back in year 5, but it lowers the amount of invested ETFs that produce the 4% income.)

In Option 2, all of your income is subject to significant external risks that you can't control, and a [potentially] large portion is theoretically inaccessible for 5 years. You could easily make a negative return from this approach. This is not a strategy for entering ER.

(Here in the U.S. we can lock in interest rates for 30 years. IIRC, you don't have that advantage in Canada; so it adds a lot to your risk since rates are much more likely to increase than to decrease over the long-term.)

In Option 1, all the risk is manageable and your income is much more secure. Option 1 FTW. I'm sure there are better options that will do what you want. Arbitraging ETFs is not one of them.
Starsky is offline   Reply With Quote
Old 03-05-2019, 07:10 PM   #3
Thinks s/he gets paid by the post
CaliKid's Avatar
 
Join Date: Apr 2016
Location: Cali
Posts: 1,130
I need to have a few drinks before I can get this.
__________________
______________________
Hoping to get out around September 1, 2022... I hope, I hope, I hope. Until then off to work I go....
CaliKid is offline   Reply With Quote
Old 03-05-2019, 07:21 PM   #4
Thinks s/he gets paid by the post
Dash man's Avatar
 
Join Date: Mar 2013
Location: Limerick
Posts: 3,104
They both have risk. The ETFs will vary with the markets. Rentals may have vacancies and repairs. Can you meet somewhere in the middle?
Dash man is offline   Reply With Quote
Old 03-06-2019, 02:54 PM   #5
Dryer sheet wannabe
 
Join Date: Apr 2016
Location: winnipeg
Posts: 10
Quote:
Originally Posted by Dash man View Post
They both have risk. The ETFs will vary with the markets. Rentals may have vacancies and repairs. Can you meet somewhere in the middle?
sure , there are middle points.

I like to study the extremes to see if it is worthy,

my big problem is that i am tired to manage rental properties.
But i was mad also with how the stocks dropped last year.

Stock are not guaranteed, if i had entered in 1999 i would be working again to offset the market crash.

my problem is that i can assume that etfs will return around 6-7 average per year, but after paying capital gains it will lower the ROI to less than 4%,

If ETF (after tax) return more than 3% would be better (financially) than having a paid house

but again, assuming that i have $1.6M in etfs and market crash by 20%, i would loose 320K in a year. I never had that kind of drop in real state (i live in Winnipeg, Manitoba, Canada, and 2008 marker crash was not noticeable here)
winpplui is offline   Reply With Quote
Old 03-06-2019, 03:27 PM   #6
Thinks s/he gets paid by the post
Dash man's Avatar
 
Join Date: Mar 2013
Location: Limerick
Posts: 3,104
Quote:
Originally Posted by winpplui View Post
sure , there are middle points.



I like to study the extremes to see if it is worthy,



my big problem is that i am tired to manage rental properties.

But i was mad also with how the stocks dropped last year.



Stock are not guaranteed, if i had entered in 1999 i would be working again to offset the market crash.



my problem is that i can assume that etfs will return around 6-7 average per year, but after paying capital gains it will lower the ROI to less than 4%,



If ETF (after tax) return more than 3% would be better (financially) than having a paid house



but again, assuming that i have $1.6M in etfs and market crash by 20%, i would loose 320K in a year. I never had that kind of drop in real state (i live in Winnipeg, Manitoba, Canada, and 2008 marker crash was not noticeable here)

Iíve had that kind of drop in real estate and stocks. The stocks came back because I didnít sell, except for some planned tax loss harvesting. My real estate didnít come back all the way. We ended up selling one for $55k less than we bought it for ten years earlier. The others we still own and arenít thinking about selling anytime soon, are well above our purchase price from years ago, but below the crash in 2007-8.
Dash man is offline   Reply With Quote
Old 03-07-2019, 10:57 AM   #7
Recycles dryer sheets
 
Join Date: Dec 2016
Posts: 439
Quote:
Originally Posted by winpplui View Post
sure , there are middle points.

I like to study the extremes to see if it is worthy,

my big problem is that i am tired to manage rental properties.
But i was mad also with how the stocks dropped last year.

Stock are not guaranteed, if i had entered in 1999 i would be working again to offset the market crash.

my problem is that i can assume that etfs will return around 6-7 average per year, but after paying capital gains it will lower the ROI to less than 4%,

If ETF (after tax) return more than 3% would be better (financially) than having a paid house

but again, assuming that i have $1.6M in etfs and market crash by 20%, i would loose 320K in a year. I never had that kind of drop in real state (i live in Winnipeg, Manitoba, Canada, and 2008 marker crash was not noticeable here)
According to your post, you're making 4.5% on your property now. ($9K on a $200K home) That's not a terrible return and is higher than the 4% you want to earn on ETFs. The only difference is that you want to withdraw some of your equity every 5 years. (It's not gone, it's still your equity and you are building it up each year.)

When the market is hot it's easy to get a higher than average return. In this market, it's not that easy or predictable. If you are tired of the landlord business, how much is it worth to you? With multiple properties, you can negotiate much better rates from property mangers - on whatever terms you need (i.e. you can choose to outsource whatever tasks you want to them). If you go that route, you don't even have to live near your properties and may be able to find a market with better rental ROIs. (One thing I've learned is that each city's rental market is very different. Where you own property - and when you get in - can make all the difference. Toronto, Calgary and Vancouver come to mind.)

You could always sell your properties and use your proceeds to find a more agreeable investment that spins off regular cash; you could refinance what you have to lower your monthly payments; or you could sell underperforming properties for newer ones with better numbers and pull cash out in the process.

You are fortunate to have lots of assets and lots of options. I don't know if now is the time when you would want to make major moves, but if the market crashed out, maybe your ETF strategy would make more sense for awhile. It sounds like you've been burned by stocks/mutual funds but have lots of faith in ETFs. I wouldn't go overboard in depending on them as a way to avoid risk. If you buy in at the top of the market and hold, ETFs could be an even harder slog to recover from.

Good luck with whatever you decide to do!

P.S. If you're doing all the work, are you incorporated? When I lived in Canada, that was the primary method everyone used to avoid taxes, even employees somehow. They would pay themselves a salary, expense things like cars and phones and offices, and the corporation could retain whatever earnings were unused which were taxed at a lower rate. I think the corporations could even make loans to their owners. There were all kinds of clever tax things going on. I was suggested to do it, but it seemed like too much trouble for an ignorant expat like me. There may be much more you can do as a landlord.
Starsky is offline   Reply With Quote
Reply

Tags
etf, mortgage, rentals


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
If rentals cover living expenses, how much in financial assets needed to Fire? BreathFree FIRE and Money 41 08-04-2016 08:45 AM
Long term financial advise sought Mulligan FIRE and Money 19 01-31-2011 12:46 PM
Selling Residential Rentals, Going Liquid Craig FIRE and Money 64 09-02-2005 11:30 AM

» Quick Links

 
All times are GMT -6. The time now is 12:45 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.