“It would be easy to envy Eve her lifestyle. She has a mortgage-free home in a sought-after part of downtown Toronto, work she loves and a rental property that throws off substantial cash flow.
Eve’s world has changed over the years. At 46, she is divorced with shared custody of her two children, ages 10 and 12. The erratic income she has earned as a freelance photographer is dwindling and could disappear altogether before long. She’s worried about finding employment at her age and uncertain about what she wants to do.”
Summary of situation:
Monthly net income: Net real estate income before income tax $2,500; average freelance income, $2,170 and falling. Net income after tax (average, variable), $3,750
Assets: Cash and short-term $6,050; TFSA $2,015; RRSP $44,000; home $700,000; rental property $685,000. Total: $1.4-million
Monthly disbursements total: $3,545
Debt: Mortgages on rental property $375,000; line of credit $20,400. Total: $395,400
“Eve sees her rental property as her pension. She has two mortgages on the property, one that will be paid off in more than 20 years, the other in about 16. Short term, she wants to pay down her $20,000 line of credit and wonders whether she should cash in her registered savings to do so. Longer term, her goal is not to have to work for a living any more.
“I don’t drive a car, don’t eat out at fancy restaurants, don’t take drugs, but play lots of squash, which costs,” she writes in an e-mail. She is apprehensive about the future. “Given that I am not keen to get a real job and don’t think anyone will want me now, how doomed am I?”
Eve wonders if she can afford to retrain for a new career and whether it would be worthwhile. “I’m working for peanuts. I love it but it’s going to run out,” she writes. “Or should I perhaps think about buying another rental property?”
Then, as if having second thoughts: “Am I in a position to have choices?” she asks. “When can I feel safe and retire?”
Many households recently featured in this G&M ‘Financial Facelift’ series involve individuals who are over-dependent on RE for their financial futures. This is not surprising, given how the housing bubble has drawn so many into buying more than one property. Also, the idea of not working and living off your RE gains has become a prevalent theme.
We have little doubt that ‘Eve’ will be better off in future if she decreases her exposure to RE as soon as possible. However, this likely won’t occur to her as a viable option until the market value of her home and rental property drop about 25% (at which point she will have lost 35% of her current paper net-worth, given her leverage). There are people in Vancouver in similar situations, only the numbers involved are usually larger.
Read the entire article: The financial planner, to his credit, advises against buying another rental property (!), but doesn’t bring up the idea of Eve decreasing her exposure to RE.