Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.
At 27, Robert recently came into some money after selling a fixer-upper (his old student house) in London, Ont., He is ready to make the next move to buy a property in Hamilton to start a family. The problem? His girlfriend is tied to her career in Toronto where they share a rental apartment with a roommate.
“I want to move to Hamilton to buy a nice home, but my girlfriend wants to stay and rent,” he says. “We are having a tough time deciding what to do.”
The benefit of sharing at home with two otherpeople is afforablility — his share of their Regent Park rental — split three ways — is $ 430 a month.
Robert makes $ 90,000 a year as a small-business owner and puts a lot of that money back into his business, which makes his take-home pay close to $ 2,000 a month.
The COVID-19 pandemic has significantly cut food, drink, and travel spending. “Used to be a lot more socializing with friends. Drinking beer at the pub with buddies,” Robert says. Now, most meals are from home or at a patio. “Rarely we will get takeout.”
On the weekends, Robert and his girlfriend are spending more time and less money outdoors, taking walks, going to the park, or window shopping for houses around the GTA.
Robert has also picked up a new hobby — doing renovations.
“Flipping my student rental property in London for profit made me really happy having something to work on with my hands. As a city, boy I find it hard to get that outlet when you’re working 9-5 at a desk,” he says.
With no debt, his goal is to buy another home and put the rest of his savings into stocks for retirement. But with his girlfriend’s work in Toronto, where should he buy?
We asked him to share his daily spending to get an idea of his finances.
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Robert’s house flip and goals.
It sounds like Robert has had some good and bad financial fortune in 2020. His house flip in London generated a profit, but his income took a hit initially from COVID-19. I think both are important to reflect on.
Buying, fixing up, and selling real estate can certainly generate a profit. It’s the leverage of being able to put down a small down payment and borrow the rest of the money from a bank that can really help. However, the same leverage can hurt you.
Using simple, albeit unrealistic numbers for Toronto, if you bought a house for $ 100,000 with a $ 20,000 down payment, and sold for $ 120,000, the profit isn’t just 20 per cent, it’s 100 per cent. You have invested $ 20,000 and earned a $ 20,000 profit. That said, what about selling for $ 80,000? That means $ 20,000 invested and $ 20,000 lost and a zero per cent return.
The big challenge with flipping real estate is the transaction and carrying costs which aren’t factored in for my simple example. Buying and selling generally results in land transfer tax, real estate commissions, and legal fees. These transaction costs can generally range from five to 10 per cent. And when you’re flipping a property, you need to pay mortgage interest, property taxes, insurance, and other miscellaneous costs without earning any rental income. An ambitious flip gone wrong can cost more than anticipated to renovate and can take longer than anticipated to sell. Along the way, costs add up. At least it sounds like Robert is handy and can do some of the work himself, and the fact that he likes doing that handy work helps make a flip an experience as much as a financial strategy.
I think a young person who has seen their income decline due to the pandemic should be that much more careful about taking on financial risks right now. What happens if you get partway through a house flip and your income declines at the same time, meaning you can’t carry the costs?
It sounds like Robert and his girlfriend have some challenges trying to figure out where they are going to live based on her need to be in Toronto for work. If they do stay put, and continue to rent, they should consider the cost of their rental. Although modest from the sounds of it, rents are dropping in Toronto and they may be able to rent another unit for less, pay the same and get more for their money, or even renegotiate their current rent. It’s the first time in a long time that renters are more in control in the city.
Robert has modest gas costs but no car payments. That suggests that he or his girlfriend may own a car, so I think it’s important to consider when a new car may be needed and be planning for that future cost. Also, their rent is fairly low and if he is hoping to buy in the future, their costs will likely increase.
His other spending is down compared to pre-COVID due to decreased travel and entertainment costs, so now may be a good time to establish a savings plan that accounts for the future costs of home ownership and consistently set aside money for short-term and long-term savings goals. I encourage people to save first and spend the rest, because it’s easier than spending first — sometimes, there’s nothing left to save.
I’m happy to hear that investing in stocks for retirement is one of Robert’s goals. So many young people want to go all-in on real estate and home ownership without considering a small allocation to long-term savings. Real estate has appreciated nicely recently in cities like Toronto, but if a young person thinks their home could replace their RRSP over the next 30 years, I’m worried that may not work out. RRSPs are great saving tools for high income earners like Robert, and some of those savings could ultimately be used for a home down payment using the Home Buyer’s Plan as well.
The result? He spent less. Spending week 1: $ 267.71 Spending in week 2: $ 192.70
How he thinks he did: “I was initially going to wait one week to hear your advice but after adding up all my expenses from the past week, I’m totally OK with my spending,” Robert says.
After looking at his financial situation, on top of his profits from the home sale, and his savings from COVID-19 pandemic restrictions, Robert realizes he’s in a position to enjoy life during this strange time and even share it with his friends who aren’t.
Take-aways: When it comes to buying a home, Robert realized he was being “a little rash” trying to push into another property ASAP after reading Heath’s cautionary advice on buying during a pandemic as a business owner.
“I’ve realized how fragile my consistent income is during the pandemic,” he says. “It’s something to seriously consider when buying a home as I’d essentially be tripling??? my monthly expenses.”
Next step for Robert is to come up with a plan and look into investing in a home sometime in the next five years.
“Need to seriously look into strategic RRSP and TFSA allocation if I’m going to keep my house profits to invest,” he says. “Got to get researching!”