Spouses Éric*, 33, and Philippe*, 30, are considering buying a duplex or triplex as resident owners to replace their condominium apartment, which they want to resell at a profit after their renovations carried out in recent years.
Posted at 6:00 a.m.
The situation
Éric and Philippe wonder about the proper financial preparation for such a real estate transaction, but without compromising their medium and long-term financial and fiscal planning.
According to their preliminary information on the real estate market, Éric and Philippe anticipate the cost of buying a plex in the neighborhood they already live at around $900,000.
Their gross employment income, which totals $182,000, allows them to maintain a comfortable lifestyle while leaving them with a good savings capacity.
On the side of their balance sheet, their total net assets (excluding the value of the defined benefit pension plans of their employers) amount to approximately $155,000.
Of this amount, approximately $115,000 is made up of the net asset value of their residential condominium (estimated market value of $430,000 minus the $316,000 mortgage balance), but only $40,000 in financial assets. in registered tax-advantaged savings accounts (RRSP, TFSA).
Éric and Philippe have accumulated considerable amounts of unused contributions in their respective RRSPs and TFSAs (approx. $215,000 in all).
In this context, Éric and Philippe are seeking advice to optimize their financial and tax planning, so that they can then properly prepare for the realization of their real estate transaction project.
Their situation was submitted for analysis and advice to Alexandre Beaulieu, who is a financial planner and financial security advisor (annuities, insurance) at the firm DMA Gestion de patrimoine, in Brossard, in the southern suburbs of Montreal.
Alexandre Beaulieu is also a member of the board of directors of the Quebec Institute of Financial Planning (IQPF).
Numbers
Philip, 30 years old
Employment income: $105,000
Personal assets:
- RRSP: $6,000 (after HBP/RRSP of $18,000, approx. $27,000 in unused contributions)
- TFSA: $30,000 (approx. $55,000 in unused contributions)
- Savings account: $7,000
- Defined benefit employer pension plan: 70% of salary
Personal liabilities: $7000 student loan balance
Eric, 33 years old
Employment income: $77,000
Personal assets:
- RRSP: $0 (approx. $67,000 in unused contributions)
- TFSA: $13,500 ($70,000 in unused contributions)
- Savings account: $7,000
- Defined benefit employer pension plan: 70% of salary
Personal liabilities: $15,000 student loan balance
Common asset: condominium apartment: approx. $430,000
Common passive: mortgage balance: $316,000
Main annualized disbursements: approx. $63,000
- residency-related: $24,000
- lifestyle related: $25,000
- related to savings and investments (RRSP contributions, TFSA): approx. $14,000
Advice
“The first step in a good financial preparation for Éric and Philippe consists in establishing a realistic budget for their cash flow during the process of buying the plex”, points out Alexandre Beaulieu from the outset.
PHOTO ALAIN ROBERGE, THE PRESS
Alexandre Beaulieu, financial planner and financial security advisor at DMA Wealth Management
This budget planning should also be done for the aftermath of this real estate transaction, when they will have to manage the additional financing and maintenance expenses of their plex based on their net income from employment and rent.
Alexandre Beaulieu, financial planner and financial security advisor at DMA Wealth Management
Beginning with the budget planning for the purchase of a plex, estimated at around $900,000, Alexandre Beaulieu points out two factors that could harm Eric and Philippe’s real estate ambitions.
First, he explains, “to avoid adding mortgage loan insurance costs, the down payment [minimale de 20 %] for the purchase of the duplex should be $180,000”.
However, observes Mr. Beaulieu, “this scenario of exemption from loan insurance will not be possible for Éric and Philippe given that the amount of their available cash is around $172,000” (in TFSA accounts, in net of the sale of the condo, in current savings accounts).
In addition, emphasizes Alexandre Beaulieu, “Philippe has already taken advantage of the home ownership program (RAP) by making temporary tax-free withdrawals from his RRSP” when purchasing their condominium apartment.
Therefore, for the purchase of a plex for around $900,000, Éric and Philippe will have to plan their cash flow for a down payment of 10%, or $90,000. To this amount will be added the various costs related to such a real estate transaction: professional inspection, notary, transfer duties (or “welcome tax”), moving, etc.
Alexandre Beaulieu estimates the total of these disbursements “around $109,000”. In addition, “Éric and Philippe will have to plan for the addition of around twenty thousand dollars in mortgage loan insurance costs on the amount of their loan”.
A plex budget?
As for Éric and Philippe’s budget planning for the aftermath of their real estate transaction, Alexandre Beaulieu suggests a few precautions to take to reduce the risk of undesirable financial surges.
“Currently, Éric and Philippe spend approximately $24,000 per year in housing costs in their condominium apartment, including mortgage payments,” notes Mr. Beaulieu.
“Given the fact that the purchase of a duplex or a triplex will certainly entail additional expenses, I advise them to plan a net cost of housing budget [après les revenus de loyer] which would be double its current amount, or about $50,000 per year. »
In parallel with this budget planning, Mr. Beaulieu advises Éric and Philippe to plan that future net rental income from their plex (after management and maintenance expenses) will be added to the taxable income of their respective jobs.
Also, because their mortgage financing is at a variable interest rate, “it would be important to plan for possible increases in interest charges in their mortgage payments”.
Another budgetary precaution: maintaining a good emergency fund in case of unexpected expenses.
By becoming owners of a residential plex, with the management responsibilities that come with it, it will be essential for Éric and Philippe to have an emergency fund sufficient to cover three to six months of their total monthly expenses.
Alexandre Beaulieu, financial planner and financial security advisor at DMA Wealth Management
“This emergency fund will be all the more important for Éric and Philippe because, since the amount of their mortgage loan is more than 80% of the value of their plex, they will not have access to a mortgage line of credit. in the event of major budgetary contingencies. »
And retirement savings?
As for Éric and Philippe’s concerns about the best use of their contributions available in their registered savings accounts (TFSA, RRSP), Alexandre Beaulieu suggests that they postpone this subject until they have completed their real estate transaction, and then tame significant changes to their short-term budget situation.
“In terms of financial planning for retirement, Éric and Philippe already have the advantage of participating in a defined benefit pension plan with their employer. These schemes are increasingly rare and have an actuarial value [prévision financière à long terme] very high,” notes Mr. Beaulieu.
That said, this asset of long-term financial security should not deter Eric and Philippe from saving independently for their retirement.
“As they are in their early thirties, it is not certain that they will stay with their current employers. [et à régimes de retraite avantageux] until retirement age, in about 30 years. In this context, continuing to save for the long term could give them more financial flexibility as they approach retirement,” summarizes Alexandre Beaulieu.
What priority between the TFSA and the RRSP?
“As for unused contributions to RRSPs, you have to be careful about the difference between the current tax rate at the time of contributions and the foreseeable tax rate when the pension is disbursed,” warns Mr. Beaulieu.
“Especially for Philippe, whose retirement income increased by the minimum RRSP disbursement from age 71 could trigger a tax recovery from his Old Age Security pension. [PSV fédérale], and thus thwart part of the tax advantages obtained during RRSP contributions while he was employed with a high taxable income. »
In this context, Alexandre Beaulieu “recommends that Éric and Philippe focus their savings capacity primarily in their TFSA account, and then wait until the end of the fiscal year to confirm any surplus savings that could be added to their RRSP.
* Although the case highlighted in this section is real, the first names used are fictitious.