Kevin Van Paassen/The Globe and Mail
Norman has a good job in financial services, earning $110,000 a year, and a pension plan. Even so, as a single dad, age 39, raising three children ranging in age from 11 to 16, money is tight.
"We relocated to Canada 10 years ago due to a job offer, and I'm pleased over all with the progress that we have made financially," Norman writes in an e-mail. He and his children have discussed the idea of buying a larger house but decided against it because they felt they would have to move farther from the city, he adds.
Recently, a four-bedroom condo townhouse came up for sale in their suburban Toronto neighbourhood.
"This is an opportunity I certainly would not like to miss, except that we have recently remodelled our basement to create the fourth bedroom we needed," Norman writes. "So I'm considering buying the other house as an investment [rental] property."
His aim would be to have the rental income cover the costs with any surplus income – as well as the growing equity – going to fund the children's university education. He figures the house would cost about $430,000.
His short-term goals include saving for the children's higher education and building an emergency fund. Long term, Norman hopes to be debt-free by age 55.
We asked Barbara Garbens, owner of BL Garbens Associates Inc. in Toronto, a fee-only financial planning firm, to look at Norman's situation.
What the expert says
Norman already has a number of resources he could draw on in an emergency, Ms. Garbens says: cash in the bank, a tax-free savings account and a line of credit. He also has an investment program at work that allows him to buy his employer's stock with 2 per cent of his salary, which is then matched 50 per cent by the employer.
Norman is contributing $300 a month to a registered education savings plan for the children. Ms. Garbens recommends he take full advantage of the Canadian Education Savings Grant. The federal government gives 20 per cent on every dollar of the first $2,500 (for each child) saved in an RESP each year, up to a maximum of $7,200 for each child. If Norman is short of money, he could withdraw some from his TFSA to increase the RESP contributions.
The big question is the second house. "The numbers suggest that this is doable, although in the early years of ownership, cash will be tight," Ms. Garbens says. Norman would need to borrow about $390,000. He says he could rent the house for $2,500 a month. Condo fees would be about $375 a month and taxes about $2,300 a year.
If he bought, he might need to skip his TFSA and RESP contributions, at least for the current year, and his emergency funds would be used up for the down payment, the planner notes.
There are pros and cons to the purchase, she says.
The pros are that Toronto-area real estate historically has been a good investment. Once the mortgage is paid down, the income stream could become a cornerstone of his retirement income in future if he holds onto the property. Because the house is close to where he lives, he could keep an eye on it.
The list of cons is longer. Property prices might not rise further, she cautions. Not everyone is cut out to be a landlord. If vacancy rates rose and Norman couldn't rent the townhouse, it "could put huge pressure on his financial situation," Ms. Garbens says. Rent increases are controlled and there may be unforeseen maintenance issues that crop up and require significant sums of money. If the condo complex is not fully occupied, existing owners would have to pony up if a major capital project arises.
"All in all, Norman could purchase the condo, but I think it's a bit too soon," Ms. Garbens says. "Putting pressure on himself to pay for his children's education, while at the same time saving for his retirement and paying down his own mortgage is already a significant financial commitment," she adds.
"If anything were to go wrong with a rental property purchase, Norman could find himself in a very stressful financial situation."
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Client situation
The people: Norman, 39, and his three children, 11, 13 and 16.
The problem: Should he buy a second property to rent out?
The plan: Increase RESP contributions to take full advantage of the federal government grant. Consider putting off the purchase of a second property for now to avoid taking on too much potential risk.
The payoff: Financial stability.
Monthly net income: $6,600
Assets: Cash $22,450; TFSA $18,500; RESP $23,250; employee share ownership plan $22,100; estimated present value of DB pension plan $86,810; home $380,000. Total: $553,110
Monthly expenditures: Mortgage $1,545; taxes, utilities, maintenance $795; transportation $620; groceries, dining out, entertainment $800; clubs, pets, grooming, other personal $375; phones, TV, Internet $325; clothes, dry cleaning $200; gifts, charitable donations $100; life insurance $30; line of credit $150; car loan $355; pension plan $250; RESP $300; TFSA $400. Total: $6,245. Surplus: $355
Liabilities: Car loan $17,000; mortgage $223,000; line of credit $2,710. Total: $242,710
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