spot_img

Reader Case: We have an Infant and are House Horny. Help!


FIRECracker
Latest posts by FIRECracker (see all)
Photo by Maria Ziegler on Unsplash

Guess what? Today, we’re going to do a reader case because the title caught my eye, and it was simply too tempting to pass up. I saw this: “we had our first baby 8 months ago and now we’re house horny…help!” while breastfeeding my son and scrolling through my phone (story of my life these days) and just had to read the rest of the e-mail. I mean, how you could not? It’s basically entrapment. So, without further ado, let’s get to it!


Hi Kristy and Bryce,

Hope you’re well today in the life of being new parents and a big congrats on welcoming Little Matchstick! Thank you for all the financial content you share! It’s very helpful. I recently opened a TFSA because of reading your book and blog. I’ve invested the money in my TFSA using your investment series workshop and am now working to do the same with the money in my RRSP.

We can relate to being new parents. My fiancé and I welcomed our first child in May 2023. Being a new parent can be incredibly stressful but watching our son grow has been so much fun! Your breastfeeding blog post really spoke to me. It is framed up by society to be something so easy and natural, but it’s not. We’ve had many bumps in our breastfeeding journey as well and pumping for 10 minutes after every feed the first few weeks helped build and regulate my supply. My partner also bottle-fed our son once a day (so I could get a longer stretch of sleep!) and our son was fine, no nipple confusion. Every baby is different but the consistent thing for parents is how overwhelming it is to wade through so much varying advice. Glad you guys figured out a solution that is working for your family! 

Anyway, reaching out as since we had a baby, it feels like we need to buy a house (help!). We aren’t interested in bidding wars or paying an inflated price (maybe the sleep deprivation has made us delusional). We’ve been doing a lot of window-shopping and underbid on one modest fixer upper house. We were basically laughed at by the seller’s RE agent, but in our defence, we calculated an estimate of all the renos, some of which were significant including waterproofing the foundation, putting a proper insulated wall between the garage and house, and closing off the attic (which was open to the garage). We subtracted the reno costs from the list price to come up with our offer, which seemed like a reasonable approach to us. The house ended up selling for close to list price ($475k). The housing market is SUPER frustrating and so we were hoping to get your perspective on whether my partner and I should use my cash savings to buy a house or use the cash to max out my TFSA (and his), invest it, and continue renting. It’d be helpful to get a 3rd party opinion from an expert that does not stand to profit from our choice (like a realtor or the bank) so without further adieu, please MATH THAT SHIT UP!

Burning Questions:

  • Can we afford to buy a house?
  • What will buying a house do to our retirement?
  • If buying a house doesn’t make sense, should we max out my TFSA with my savings and then load my partner’s TFSA?
  • Should we sell the Audi (instead of continuing to have car payments for the next 4 years) and then purchase a used vehicle with cash?
  • Should we scrap buying a house in Canada and travel around in a RV for a year?
  • Or should we consider buying a fixer upper house in Italy for €1?

Income:

  • My gross salary is $155k and bonus is up to 50% of my gross salary
  • Notes:
    • Bonus is not guaranteed as it depends on company and individual performance but in the last 5 years, the payout has often been close to 100% of the max (i.e., last year it was 35% of my salary, which was the max I was entitled to; my max increased to 50% when I received a promotion right before my maternity leave started)
    • It has taken 13 years of hard work at same company to get to this income level
    • I am on maternity leave until end of June and then returning to work full-time
  • My partner owns a small, sole proprietor business and he makes about $50k pre-tax per year

Monthly Spending:

  • Rent: $2300.00
  • Utilities: $110.00
  • Internet: $67.74
  • Groceries: $500.00
  • Gas: $300.00
  • Rental Insurance: $18.89
  • Car Insurance (Both): $343.78
  • Audi Payments: $558.00
  • Cell Phone (Both): $192.10
    • Note: Lauren’s work covers $600.00 per year
  • Eating Out: $150.00
  • Cat (Food, Litter, Vet Visits, etc.): $121.02
  • Self-Care: $162.00
    • Note: I get 6-7 pedicures per year and try to get 1 massage per month (my benefits cover 80% of massages up to $1000 per year)
  • Miscellaneous (Gifts, Clothes, Etc.): $500.00
  • TOTAL: $5323.53 / month

Debts:

  • We have a monthly car payment on a used Audi A4, which is a business vehicle for my partner
    • There is $26k remaining over 4 years
    • Minimum monthly payment $558.00
    • Financing rate of 4.88%
  • No other debt

Fixed Assets:

  • My car: 2007 Honda Civic (300,000 km on it and it’s still in great shape)

Investments:

  • My HISA: $200k
  • My RRSP: $110k
    • Maxed out and so far, only about $15k is invested, but working on investing the rest following your investment series portfolio
  • My TFSA: $2k
    • Have not maxed it out to keep house down payment money readily accessible in HISA
    • Invested using your investment series portfolio
  • My Non-Registered Investment Account: $1k
  • My Company Pension (DCPP, DPSP, and RRSP): $210k
    • Invested by provider (SunLife)
  • My Partner’s TFSA: $2k
  • My partner does not have a RRSP and I’ve owned a home before so neither of us have FHSAs
  • My partner does not have much in the way of savings as his business was subject to closure for over 1 year due to government lockdowns during the pandemic and he’s still recovering from that

Other Considerations:

  • We currently live in the GTA but are thinking of relocating to Windsor Essex County as that’s where we’re from and our families are there
  • We want our son to grow up around family as we both had very close relationships with our grandparents growing up
  • If we relocate, my partner will have to rebuild his business from scratch
  • My job is remote so I can be anywhere
  • I really enjoy my job, but it can be stressful and sometimes require working in the evenings and weekends, which will be difficult with a young child
  • If there were some ways for me to work part time at some point to be more present for our son and any future children, I’d love that
  • My partner enjoys being an entrepreneur as he has flexibility and answers to himself
  • We’ve also discussed:
    • Renting/buying a RV and road tripping around Canada and the US for a year with our son instead of buying a house
    • Buying a house in Italy instead of Canada and spending part of the year there (to entice population growth, some towns are selling fixer uppers for €1)
    • Buying a cottage in Ontario and renting it out instead of buying a house for our primary residence

House Info/Rationale:

  • We’ve been looking at houses in Windsor Essex County listed between $400-$700k
  • My bank pre-approval is for “up to $750k with a 20% down payment” (i.e., a $600k mortgage), however, we don’t think that’s affordable
  • We’re trying to find a house with an unfinished basement that we can finish ourselves and rent out for an extra source of income to throw at the mortgage or invest
  • From what we’ve looked at, it seems $500-$600k is what a house like this is listed at currently in Windsor Essex County
  • Here’s an example: https://www.realtor.ca/real-estate/26394003/46-nicholas-street-leamington
  • Our rent for a 3-bedroom condo in the GTA is $2300 per month so it is cheaper to rent now versus paying a mortgage, property taxes, maintenance, land transfer, etc.
  • We like the idea of building equity in a home and having a bit more space and a yard as we want to expand our family to add one more child
  • Our current landlord has been talking about selling and we’d like peace of mind that we won’t have to leave where we live against our will which is also an attraction of home ownership
  • A rental income would offset some of the house ownership expenses
  • If we stay in the GTA, we cannot afford to buy but we’ll need to move to a bigger place at some point and rent for that will be more than we pay now
  • We follow Garth Turner’s “The Greater Fool” financial blog, and it seems that now may be a good time to buy (if one needs a house and can afford to buy) as interest rates are forecasted to drop in the spring and so banks are predicting house sales will increase after that

We know any insights you share are not financial advice. We’d greatly appreciate any comments or suggestions you have on our burning questions!

Thank you and wishing you a great day!

HouseHornyMother


A lot of people told me about the “nesting instinct”, which is the insatiable urge to make a comfy home for your little one when you get pregnant. I did do some “nesting” in terms of buying some second hand baby stuff but I never got the urge to buy a house. And then after Little Matchstick was born, that urge still never came. Even now, I still don’t any urge to buy. That’s not to say I’ll never buy a house, but if the math doesn’t work out, and I can’t find a place I actually want to settle down in for 10+ years, I just don’t see the need. Houses are money pits that make it hard to have predictable expenses and take away time from appreciating my child’s growth milestones by sucking up all my time with home maintenance. Some people, like Mr. Money Mustache, love that stuff, but I feel the same way about fixing stuff around the house as I do about getting a root canal and walking on broken glass. I like my money exactly where I can see it–in a portfolio, paying me to exist.

But clearly this reader has fallen for the siren song of real estate, so let’s find out how attainable their house dream is.

Summary

Income (gross) $155K +$50K=$205,000/year
Expenses $5323.53/month or $63,882.36/year
Debt -$26,000 @4.88% interest
Investible Assets $200K +$110K +$2K +$1K +$210K + $2K = $525K

Okay, now normally I would advocate for paying off the debt on the car but since they indicated this is a vehicle for business purposes, the deductibility of the loan interest may make it worth keeping the loan. Talk to your accountant since I don’t have all the details of your tax returns.

For the purposes of this reader case, we are going to do the calculations assuming they pay off that debt with their savings, as this would be the more conservative assumption. This would reduce their monthly expenses by the car payment amount, which is $558. This means their Investible Assets would become $525,000 – $26,000 (car loan balance) = $499,000 and their monthly expense would go down to $5,323.53 – $558 (car payment) = $4,765.53. This would put their yearly expenses at $57,186.36 which means an FI number of $57,186.36 x 25 = $1,429,659.

Given that she makes $155,000 per year gross and maxes out her RRSP, and he makes $50,000 in self-employment income and has no RRSP, we can plug these numbers into a tax calculator to get a total net after-tax earnings of $117,479 (hers) + $37,950 (his) = $155,429. We’re not going to count bonuses in this analysis to be conservative since it’s not guaranteed.

This is an estimate of how much they earn per year after taxes during “normal” years. However, this year HHM also is on mat leave until the end of June so we have to account for that. During mat leave, she will get Employment Insurance benefits of $668 per week, and then returning back to her full salary for the 2nd half of the year. So she can expect to earn $668 (EI) x 26 weeks + $155,000 / 2 = $94,868. Plugging that number into the tax calculator (and maxing out her RRSP) gives her a net income of $75,318. So that means this year’s net income will be $75,318 (hers) + $37,950 (his) = $113,268.

That means we have two savings rates: This year, which includes mat leave, would be $113,268 – $57,186.36 = $56,081.64. And subsequent years of full employment, which would be $155,429 – $57,186.36 = $98,242.64.

So, how long will it take them to get to FI?

Year Balance Contributions ROI (6%) Total
1 $499,000.00 $56,081.64 $29,940.00 $585,021.64
2 $585,021.64 $98,242.64 $35,101.30 $718,365.58
3 $718,365.58 $98,242.64 $43,101.93 $859,710.15
4 $859,710.15 $98,242.64 $51,582.61 $1,009,535.40
5 $1,009,535.40 $98,242.64 $60,572.12 $1,168,350.17
6 $1,168,350.17 $98,242.64 $70,101.01 $1,336,693.82
7 $1,336,693.82 $98,242.64 $80,201.63 $1,515,138.09

Note that as always, all numbers are after inflation, or “real” dollars. Check Appendix B of Quit Like a Millionaire for a more detailed explanation.

Only 7 years!

Not bad at all! However, knowing that she’s going back to work and they will have to pay for childcare, that expense will have to be taken into account, and child care can cost anywhere from thousands of dollars per month if you send them to a fancy Montessori daycare to zero if family is available to help out. I would recommend HHM redo these calculations with their new expense after she goes back to work and childcare is factored in.

In addition to childcare, they also want to buy a house. As I’ve said many times on this blog, houses take a big chunk out of your net worth, locks it into one asset and continues to cost you money in property taxes, interest, insurance, maintenance, etc even after the mortgage is paid off. And now with high interest rates, your monthly payment is even scarier. So, buying a primary residence is not a smart financial decision, especially given the extremely below market value rent HHM is paying for a 3 bedroom condo. However, given that they are paying below market rent and the landlord knows it, it looks like HHM is looking to buy a house more for lifestyle reasons since she’s afraid of the landlord selling and kicking them out. As a mother, I understand where she’s coming from. However, that doesn’t automatically make owning the better choice. You can still have stability while renting, but you have to be strategic about it. This is why I avoid condos and houses and prefer rent-controlled apartments. There’s a much lower chance they will sell the entire building. Knowing the rental laws in your area and strategically picking the type of rental is paramount to finding a stable, financially sound rental for your family.

That said, even though I prefer renting and investing over buying a home, that doesn’t mean I wouldn’t consider buying if the math works out. As we always say on this blog, let’s MATH THAT SHIT UP!

The home in Windsor they want to purchase costs $519,900. If they put 20% down, with today’s interest rates, the mortgage calculator tells us that their monthly mortgage would be $2500/month. On top of that you need to add maintenance, insurance, property taxes, etc, which adds another 50% onto of the cost of the mortgage by the rule of 150 (to see how we derived this number, read our book “Quit Like a Millionaire“), giving us an estimated $3750/month.

They would save on the rent but have to pay for the mortgage and all other housing expenses, which increases their monthly cost to $4,765.53 – $2300 (rent saved) + $3750 (housing costs) = $6215.53/month or $74,586.36/year. This changes their FI number to $74,586.36 x 25 = $1,864,659.

Since the house is in Windsor, they would need to relocate and as a result, her husband would have to rebuild his business from scratch. They would lose out on his entire salary with this move, making the opportunity cost of buying the house way more than just locking their money into one illiquid asset.

So we have to recalculate the savings rates with only her income. In the first mat leave year, that would be $75,318 – $74,586 = $732. So that first year, they’re basically not saving any money. And then after that, their savings rate would be $117,479 (her net income during normal years) – $74,586.36 = $42,892.64/year.

What does this do to their time to retirement?

Well, by having to put $103,980 toward their down payment, they start up with a lower net worth of $499,000 – $103,980 = $395,020. And their savings rate is lower due to higher home ownership costs, so…

Year Balance Savings ROI Total
1 395,020.00 732.00 23,701.20 419,453.20
2 419,453.20 42,892.64 25,167.19 487,513.03
3 487,513.03 42,892.64 29,250.78 559,656.45
4 559,656.45 42,892.64 33,579.39 636,128.48
5 636,128.48 42,892.64 38,167.71 717,188.83
6 717,188.83 42,892.64 43,031.33 803,112.80
7 803,112.80 42,892.64 48,186.77 894,192.21
8 894,192.21 42,892.64 53,651.53 990,736.38
9 990,736.38 42,892.64 59,444.18 1,093,073.20
10 1,093,073.20 42,892.64 65,584.39 1,201,550.24
11 1,201,550.24 42,892.64 72,093.01 1,316,535.89
12 1,316,535.89 42,892.64 78,992.15 1,438,420.68
13 1,438,420.68 42,892.64 86,305.24 1,567,618.56
14 1,567,618.56 42,892.64 94,057.11 1,704,568.32
15 1,704,568.32 42,892.64 102,274.10 1,849,735.06

15 years instead of 7. Buying the house doubles their time to retirement!

Not great. 

Things would get better after they pay off their mortgage in 25 years, but that time frame wouldn’t help since they’d reach FI before then.

But what if they aggressively pay off their mortgage in 10 years instead of 25? Would that save them enough mortgage interest to get to FI faster?

Putting a 10-year amortization period into the mortgage calculator, we get $4469 as the monthly payment. With home ownership costs estimated to be around $1300 per month, their monthly housing cost goes up to $5769, so their monthly expenses become $4,765.53 – $2300 (rent saved) + $5769 (housing costs) = $8234.53/month or $98,814.36/year after the car is paid off.  While she’s on mat leave, they’ll actually be in the red by $75,318 (her net income calculated previously) – $98,814.36/year = -$23,496.36. After returning to work, she’ll be able to save $117,479 – $98,814.36/year = $18,664.64/year. However, since they can kill the mortgage in just 10 years, in year 10, their expenses drop to only the home ownership costs (maintenance, property taxes, insurance) of $1300/month, so their overall expenses becomes $4,765.53 – $2300 + $1300 = $3765.53/month or $45,186.36/year, which would drop their FI number to only $1,129,659. Their yearly savings would then increase to $117,479 – $45,186.36= $72,292.64/year.

This means they’d become FI in:

Year Balance Contributions ROI (6%) Total
1 $395,020.00 -$23,496.36 $23,701.20 $395,224.84
2 $395,224.84 $18,664.64 $23,713.49 $437,602.97
3 $437,602.97 $18,664.64 $26,256.18 $482,523.79
4 $482,523.79 $18,664.64 $28,951.43 $530,139.86
5 $530,139.86 $18,664.64 $31,808.39 $580,612.89
6 $580,612.89 $18,664.64 $34,836.77 $634,114.30
7 $634,114.30 $18,664.64 $38,046.86 $690,825.80
8 $690,825.80 $18,664.64 $41,449.55 $750,939.99
9 $750,939.99 $18,664.64 $45,056.40 $814,661.03
10 $814,661.03 $72,292.64 $48,879.66 $935,833.33
11 $935,833.33 $72,292.64 $56,150.00 $1,064,275.97
12 $1,064,275.97 $72,292.64 $63,856.56 $1,200,425.16

A little under 12 years.

Better than doubling it, but it would still extend their time to FI by 5 years. They also mentioned they want a basement suite to rent out to generate extra income to put towards the mortgage.

This sound great in theory but becoming a landlord isn’t passive or easy money. When you have a baby, time is precious. Why waste it being a landlord and having to deal with strangers who could stiff you on rent, destroy your property, and then having to wait months to kick them out? The laws in Ontario are on the tenant’s side and all you need is one bad tenant. Be very sure you want this kind of headache before becoming a landlord.

Also, they need to consider the fact that losing his income source by moving to Windsor makes her the only breadwinner, which is risky. If anything happens with her job, houses are harder to sell in Windsor, so there’s a lot of eggs in one basket here. It would be financially safer if they rented in Winsor until her husband builds back up the business or finds another stream of income. At that point, THEN buy a house.

And now to answer her “burning questions”:

Can we afford to buy a house?

You can afford it, but I don’t like the idea of going down to one income with a family and having a house in a Windsor, which is a tougher housing market to sell in.

What will buying a house do to our retirement?

It doubles the time from 7 to 14 years unless you aggressively pay the mortgage off in 10 years. Then it’ll still extend your time to FI by 5 years.

If buying a house doesn’t make sense, should we max out my TFSA with my savings and then load my partner’s TFSA?

You betcha.

Should we sell the Audi (instead of continuing to have car payments for the next 4 years) and then purchase a used vehicle with cash?

As a business vehicle car payment interest is deductible, which may make keeping the loan and investing instead worthwhile. Check with your accountant to see if makes sense financially.

Should we scrap buying a house in Canada and travel around in a RV for a year?

I’m not sure where this is coming from. What will you do after the year is over? Is it just to test out VanLife? Figure out why you’re thinking of this as an option and what will you do after the year is over.

Or should we consider buying a fixer upper house in Italy for €1?

No. Don’t buy a place in a country you’ve never lived in. Rent there first to see if you like it. Ownership laws and ease of sale changes from country to country, you’ll want to be familiar with the local real estate laws before buying. Plus, parenting is already a ton of work, fixing up a house will just take up more time and make you miss out on all the important milestones of your kid in the early years. Also, the idea of operating a circular saw with a screaming infant nearby sound like an excellent way to lose a finger.

What would you do if you were HHM? Would you move, buy a house, and lose out on one income? Or continue renting in their current place?


Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we’re trying to do here, consider supporting us by clicking! Thx 😉

Build a Portfolio Like Ours: Check out our FREE Investment Workshop!

Travel the World: Get covid-19 coverage for only $45.08 USD/month with SafetyWing Nomad Insurance

Multi-currency Travel Card: Get a multi-currency debit card when travelling to minimize forex fees! Read our review here, or Click here to get started!

Travel for Free with Home Exchange: Read Our Review or Click here to get started.



Source link

Related Articles

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisement -spot_img

Latest Articles