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financial facelift

-Fred Lum/The Globe and Mail

Like many big-city millennials, Daisy has embarked on a promising professional career and now is looking to buy a condo to rent out.

She earns $65,000 a year at her day job and another $7,500 a year working part time. She is 29. Because Daisy lives with her boyfriend, who owns his own home, her living costs are low and she is able to save money. Her folks are willing to help her with a down payment of $50,000 to $100,000.

"I paid off my student debt last year," Daisy writes in an e-mail. With that out of the way, "I travelled and bought things and just lived a little," she adds. Now she figures she can save $2,000 a month – more if she tries harder.

"Everyone is telling me to get into the real estate market, and I'm looking at buying a property – a condo or small townhouse – to rent out," Daisy writes. If she buys, she hopes to put down 20 per cent of the purchase price.

"Is real estate my best bet given my age, the extra help from my parents, and my current finances?" Daisy asks. "What else should I be thinking of in terms of investments – RRSPs, stocks, bonds?" She's also thinking of going back to school at some point.

We asked Josh Miszk, vice-president of investments at Invisor of Oakville, Ont., an online investment adviser (robo-adviser), to look at Daisy's situation. Mr. Miszk holds the chartered financial analyst (CFA) designation.

What the expert says

If Daisy buys a property and puts 20 per cent down, she will save on Canada Mortgage and Housing Corp. insurance costs, Mr. Miszk notes. But there are other expenses – lawyers' fees, bank charges, home inspection costs – that could add up to 3 per cent to 5 per cent of the purchase price. He warns against going overboard.

"Most of us have a tendency to want to get the largest thing we can afford given the opportunity," Mr. Miszk says. "The problem with that is you end up dancing dangerously close to the line where it becomes too expensive for you to maintain on an ongoing basis." He recommends setting aside three to six months of carrying costs to cover major repairs or vacancies.

"As a simple rule of thumb, after your 20-per-cent down payment, you should have an additional 5 per cent (of the purchase price) for closing and updating costs and a 5-per-cent emergency fund for any expected events down the road," Mr. Miszk says. On a $400,000 condo, for example, that would mean having $120,000 saved up ($80,000 down payment, $20,000 closing costs and $20,000 contingency fund).

If she decides to go back to school, Daisy estimates it would cost between $15,000 and $20,000 in fees for two years. She would take a one-year leave from her professional job and study part-time for the second year. Even working part-time at her second job, she would face a cash-flow shortfall of at least $16,800 for the year she takes off work, the adviser says. "Given her current savings of $20,000, Daisy will need another eight to 10 months' worth of savings to build up enough for her school program."

She could save the money for school in her tax-free savings account or in a registered retirement savings plan where she could withdraw up to $10,000 a year ($20,000 maximum) under the Lifelong Learning Plan, he says. If she decides not to study further, she could withdraw the money under the Home Buyers' Plan to help with her down payment. Either way, the money should be invested short-term to match the short-term nature of the goal.

Is real estate her best bet? Or should she be thinking about other investments?

Key to building a solid long-term foundation is to have a diversified portfolio to help reduce risk, Mr. Miszk says.

"When home prices are rising, real estate can be a lucrative investment due to the leveraged nature of your investment," he adds. "In a negative or volatile market, on the other hand, it can be a bit of a risky bet" because your equity can shrink or even vanish.

While real estate can certainly play a part in Daisy's portfolio, she should invest at a price level where she would be comfortable if prices drop, mortgage rates rise and tenants prove scarce. He also recommends Daisy build up an emergency fund in her TFSA. Mr. Miszk looks out beyond the prospective real estate purchase. Once Daisy has taken full advantage of her TFSA contribution room, she should shift her focus to her RRSP and begin saving for the long-term. Because she has a "relatively high tolerance for risk, and her time horizon is long," a portfolio of 90-per-cent stocks or stock funds and 10-per-cent fixed income would be a suitable asset mix for her retirement investments, he says.

Daisy has a defined-benefit pension plan at work to which she contributes 7.5 per cent of her income and her employer 9.5 per cent. If she stays in the plan to age 65, she can expect to get between 62 per cent and 78 per cent of her average annual salary, the adviser estimates.


The person: Daisy, 29

The problem: Should she invest in a condo in Toronto to rent out? What other investments should she consider?

The plan: Weigh carefully the full cost of buying a condo, including closing costs and a contingency fund. Buy only if she would not be disturbed by a fall in value or rising interest rates.

The payoff: Starting off her investing life on the right foot.

Monthly net income: $5,000 (variable)

Assets: Savings account TFSA $20,000; estimated present value of defined benefit pension plan: $22,500. Total: $42,500

Monthly outlays: Auto insurance $140; fuel $120; car maintenance $100; parking, transit $40; groceries $300; clothing $35; gifts $100; vacation, travel $100; dining, drinks, entertainment $500; grooming $100; sports, hobbies $100; cellphone $65; group benefits $70; pension plan contributions $400; miscellaneous $330. Total: $2,500. Surplus $2,500

Liabilities: None

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