Critique Financial Planner's Plan

[Smith1776]

Hey guys. I recently sat down with a local financial planner for a free consultation. It was actually quite extensive, totaling some 3 hours. The first 90 minute meeting consisted of fact finding regarding my situation. The second 90 minute meeting consisted of recommendations.

I wanted to get your guys critique of one particular aspect of the plan.

Initial balance sheet position:
1) Townhouse worth $900,000, no mortgage
2) $500,000 cash

Proposed new balance sheet position:
1) Townhouse worth $900,000
2) $100,000 line of credit against townhouse
3) $300,000 traditional mortgage
4) Purchase of $400,000 new house in Alberta financed by items 2 and 3. House will have rental unit with the goal of having the house be cash flow neutral.
5) $500,000 invested in ETFs/mutual funds

I'm kind of nervous about the idea of having a rental property 100% financed, even with still relatively low interest rates. There's also the possibility that I may live in the rental unit of the house while renting out the main levels (more cashflow this way). Or I could simply rent out both the rental suite in addition to the main levels.

What do you guys think overall? Especially about the financing piece for the rental property?

[snedgar]

Hey Mr. Smith.

It sounds like that was an interesting meeting. Those are pretty drastic recommendations.

Just a few questions for your consideration:

o How does the "financial planner" make his money?
o Do I remember correctly that you live in B.C.?
o Do you want to be a landlord? If so, why do you want to be a long-distance landlord?
o How do the rental property and new portfolio of ETFs fit within your investment strategy?
o Where is your significant emergency fund to cover your rental house and the rest of your life?

Never a dull moment!

Steve

[Smith1776]

Hey Mr. Smith.

It sounds like that was an interesting meeting. Those are pretty drastic recommendations.

Just a few questions for your consideration:

o How does the "financial planner" make his money?
o Do I remember correctly that you live in B.C.?
o Do you want to be a landlord? If so, why do you want to be a long-distance landlord?
o How do the rental property and new portfolio of ETFs fit within your investment strategy?
o Where is your significant emergency fund to cover your rental house and the rest of your life?

Never a dull moment!

Steve

Thanks for taking the time to answer.

It is indeed pretty drastic. I was thinking of moving to Alberta due to the cheap housing out there (mom would take care of the house in Vancouver, BC). If I can prudently acquire real estate using 100% bank money, I'm all for it. I'm not opposed to having this much leverage per se, but just wanted some outside perspective.

I think I'm leaning towards buying a house out there, living in the basement rental suite, and actually just renting out the main level. This should offer more cash flow than just renting out the basement suite and living on the main level.

Getting to your queries more specifically.

- The financial planner charges 1.50% on AUM. I haven't signed to work with him (and probably won't), but he was kind enough to offer up a bird's eye view of this potential plan without charging me any money.
- Yes, Vancouver, BC.
- I don't mind being a landlord if it's a rental situation in my primary residence. At the very least, I don't mind taking this on as a challenge.
- The majority of the $500,000 will likely be put into the golden butterfly portfolio
- A small cache of the $500,000 (say, $50k) will likely be put into a simple bank savings account as an emergency fund

What really gets me is this idea of using a line of credit to finance the down payment for the new property and then mortgaging the rest of the balance.

Has anyone on the forum done such a thing?

[Hal]

What really gets me is this idea of using a line of credit to finance the down payment for the new property and then mortgaging the rest of the balance.

Has anyone on the forum done such a thing?

A "what if" scenario... If you cannot service the loan for some reason, what happens? In Australia you can have a limited recourse loan via a self managed retirement fund. Can you do this in Canada?
https://www.superguide.com.au/smsfs/sms ... -investing

[dualstow]

I’ve never been a landlord. I took out a home equity loan once that I didn’t need. Other than that, I’ve never had a mortgage. I know that rich people like to use debt, but it’s just not my thing.
i would get a second opinion from another professional financial planner.

[whatchamacallit]

Of course a financial planner wants you to take out a loan to invest with them.

Use the cash position to your advantage to buy the house cheaper. All cash offer quick close to get 10% discount on the house you want.

End result

900k townhouse
400k house
150k cash

[vnatale]

Of course a financial planner wants you to take out a loan to invest with them.

Use the cash position to your advantage to buy the house cheaper. All cash offer quick close to get 10% discount on the house you want.

End result

900k townhouse
400k house
150k cash

Yes, if their fee is based upon assets under management. That would be why none of them advise paying off a mortgage.

[boglerdude]

Evictions were banned for 2+ years in LA, how was it there. And Canada is going communist. If youre going to live in the house it might be OK. Make sure you dont mind confrontations over music, unauthorized guests and pets, consistent late rent with no recourse, refusal to pay until every little thing is fixed (as a method to stall)

https://www.reddit.com/r/canada/comment ... _to_evict/
https://www.reddit.com/r/canada/comment ... s_savings/

[Kbg]

A general rule of prudent real estate investing is to never invest in anything that isn't cash flow positive on day 1....that's kind of the point of investing and you need it to bankroll the inevitable maintenance costs that will come with owning physical property.

Then there's the whole do you want to be a landlord thing, no advice there other than understanding what your rights are as a landlord when it comes to tenant/landlord conflicts.

People don't think of this often...but an alternative is to take out as much as you can for a line of credit against your current home and buy a REIT. At least with a REIT you are diversified and your returns are quite likely to be similar after a decade or so...without the landlord hassles.

[Smith1776]

We've just had the biggest rate increase in over 2 decades here in the Great White North: 100 basis points. I am waiting to see how this will impact our real estate markets in particular. If I go through with this house purchase I am hoping that this works out via a depressed price

Interestingly, our bond market didn't move at all. Looks like it was all priced in.



https://www.cbc.ca/news/business/bank-o ... -1.6518161

[Smith1776]

Of course a financial planner wants you to take out a loan to invest with them.

Use the cash position to your advantage to buy the house cheaper. All cash offer quick close to get 10% discount on the house you want.

End result

900k townhouse
400k house
150k cash

Yes, you are right. There's definitely a conflict of interest there. He doesn't have any incentive to tell me to buy the house in cash, even if that's the best financial move... I am still interested in this idea of being able to buy the place with OPM though.

I still don't know what to do. I think I just need to crunch some numbers more precisely.

[I Shrugged]

There are some caution flags for sure, but most of them just depend on your goals and disposition.
However, starting out as a landlord with a place a long way from home is a bad idea, from my experience. Unless you find a good management person or company that doesn't self deal you too badly. But that messes up the numbers.

There are so many good books on rental houses and landlording, I'd suggest you read a couple or three before deciding.

[joypog]

Your tenant in BC just called and said there was a burst pipe / Heat Stopped working / Dryer doesn't turn on.

How do you handle it?

[boglerdude]

Then they claim the guy you sent never showed. Now you dont know how much damage is being done. Then they call the city inspector and claim negligence and they can stop paying. Dont ask how I know.

[vnatale]

Your tenant in BC just called and said there was a burst pipe / Heat Stopped working / Dryer doesn't turn on.

How do you handle it?

I knew that I was never cut out to be a landlord when I realized my response to a tenant calling me and telling me that there was a problem with their toilet would be having a response of..."So what? I also have one with mine!"

[dualstow]

Give them some jars, Vinny.

[vnatale]

Give them some jars, Vinny.

You have an EXCELLENT memory!

Just emptied some this morning into my garden compost.

[Mountaineer]

Give them some jars, Vinny.

You have an EXCELLENT memory!

Just emptied some this morning into my garden compost.

Sure hope it was Number One! Or, maybe you have an Asian style rice paddy.

[Xan]

Give them some jars, Vinny.

You have an EXCELLENT memory!

Just emptied some this morning into my garden compost.

That's not the kind of thing one just forgets.

[Smith1776]

I talked with the advisor yesterday and he was, of course, excited to move forward with having our funds invested with his institution. I demurred and said that I would think on it. He then mentioned that his company offers a cash savings account with a 2.9% interest rate compounded daily. He offered it as a great place to park cash in the interim while contemplating our next move.

Undoubtedly this offer is a kind of "gateway drug" to move money into his institution, but it is nonetheless enticing.

He seemed annoyed that I hadn't committed on making a move yet (understandably).

[Smith1776]

Give them some jars, Vinny.

Uhhhhh...

[vnatale]

Give them some jars, Vinny.

You have an EXCELLENT memory!

Just emptied some this morning into my garden compost.

That's not the kind of thing one just forgets.

If you do a (Bing) search on it you will see that there is much on the internet regarding it:

http://nwedible.com/how-to-use-pee-in-y ... Sexism.%20

[boglerdude]

Just what I was looking for. You're a mind reader Vinny

[vnatale]

Just what I was looking for. You're a mind reader Vinny

Far from it! Many times this year I have had to tell the women on the coed softball team that I coach that I am NOT a mind reader, that they have to directly tell me when they are unhappy with how I have been handling their playing time.

But glad that you found what I provided of value to you.

[Xan]

Just what I was looking for. You're a mind reader Vinny

Far from it! Many times this year I have had to tell the women on the coed softball team that I coach that I am NOT a mind reader, that they have to directly tell me when they are unhappy with how I have been handling their playing time.

But glad that you found what I provided of value to you.

Vinny, I'm afraid your sarcasm detector broke on this one.