How much do you know about financial independence?

Posted by: Vikb

There are lots of well documented ways to house hack to reduce living expenses, but it really depends on what you would accept as a solution. Living in a van or RV long-term isn't something everyone is willing to do. If you are it can be a nice idea. Moving someplace low cost is great if you are happy living there. You can find lots of geographical arbitrage options if you are keen to live outside Canada for part or all of the year. If you are happy with roommates or renting out your living space on AirBnb you can come up with a bunch of living options that are low cost/no cost/make you money. Moving from owning a paid of house/condo to renting [especially in a coop] can unleash all sorts of capital.

A few ideas from friends I know:

1. A friend moved from BC to NB and bought a 40acre rural property with a house on it that was foreclosed by the bank. He paid ~$35K cash. The house needs a lot of work so he's tackling that himself one project at a time. Most of the land is forested and he's harvesting trees for lumber and heating fuel.
2. A friend who is quite wealthy got into a coop townhouse with very cheap rent and let's his wealth compound in the stock market.
3. I know a person bought a property with a couple larger buildings on it in a popular tourist area. They turn the buildings into 4 suites. Lived in one and rented the other 3 out as a business that made them money. Did that for a number of years and then sold the property/business for a nice profit.
4. A friend had an acreage and put an RV on it. Moved into RV and rented out the main house.
5. A friend moved to Mexico full-time for the lower cost of living.
6. I know a person who had a house in a tourist area. They rented it out and when it was rented they took their RV and went camping. When it wasn't rented they lived in the house.
7. I have friends that built a tiny house on wheels. They then rented a house outside town with a large lot and put the tiny house next to the main house. They sub-let out the main house to cover the rent.
8. I was just talking to someone in Comox that planned to retire shortly, sell their home and move to the Philippines for the low cost of living.
9. I have two friends that are living in slide in campers on their trucks and travelling around Canada/USA/Mexico doing fun stuff living super cheap.
10. I know quite a few people that didn't change their living arrangements, but took a hard look at how they were spending their money and reduced their cost of living significantly without changing how much they enjoyed their life. That meant needing less income to live and fewer investments to retire.
11. I know lots of people that retired and then took on easy PT jobs that made them money and got them something they wanted [ie. season's pass at resort, discounts at bike shop, discount at grocery store/hardware storem etc..]
12. A friend takes in high school kids from other countries and gets paid $1K+/month to provide a room, food and a bit of parental supervision.

The idea of using a home equity LOC can work. I'd prefer that to a reverse mortgage. If it was me I'd consider moving someplace with lower home prices and selling what you have. If you are living in Vancouver there should be quite a few options of places to live that would allow you to access a decent chunk of equity. Maybe all of it if renting is an option. You can then invest the equity and it can grow until you need it.

A couple more thoughts about using a LOC that occurred to me. Your bank can terminate your LOC depending on your financial situation like home values dropping in which case you may suddenly not have access to those funds and have to pay off the outstanding money owed. Not highly likely, but if it happens it will come right when you are least able to handle it. You can take money out of your home [LOC or mortgage], invest it and then deduct the cost of borrowing vs. the capital gains/dividends/interest on your investments. That would make borrowing less onerous, but there needs to be a direct paper trail between the borrowed money and the invested funds. See the Smith Maneuver as an example --> https://wowa.ca/smith-maneuver-canada

Thanks for taking the time to document all that. Some food for thought!

Im not really concerned about the bank calling in LOC early as the max credit they've agreed to is about one third of its current value.

If real estate drops that much, I think the whole of Canada will implode so I'm sure the banks will have bigger problems to worry about 😉

Reverse mortgages are bad, avoid them (rates are way too high). HELOC is superior, the one challenge is you need income to quality, so get one locked in before you retire. Even HELOC isn't great when rates are 6-7% though, that will add up fast if you are not making repayments. Selling the house, investing the equity in a diversified ETF portfolio (with appropriate risk for your time horizon) is probably the best bet in terms of generating reliable cashflow, especially if you have TFSA/RRSP room. You might even be able to use the new FHSA once you sell your house. Obviously there are downsides to renting, depending on the market you are in.

Posted by: grambo

Reverse mortgages are bad, avoid them (rates are way too high).

There's no doubt they are weighted in favour of the lender, but they are not without merit for some people. Without knowing someone's full situation or their goals it's impossible to say whether a certain financial product will or won't work for someone.

Posted by: syncro

Without knowing someone's full situation or their goals it's impossible to say whether a certain financial product will or won't work for someone.

yup, this. Without the full story, I got misled by 6061's "got a lot of money tied up in my (Strata) property and not enough investment/pension/RRSP to fund me for 30+ years of retirement" into thinking little to no RRSP or TFSA savings and trying to retire mostly on overvalued vangroovy real estate.

6061, you might try a more anonymous case study by providing more detail over here:

https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/

Posted by: heckler

Posted by: syncro

Without knowing someone's full situation or their goals it's impossible to say whether a certain financial product will or won't work for someone.

yup, this. Without the full story, I got misled by 6061's "got a lot of money tied up in my (Strata) property and not enough investment/pension/RRSP to fund me for 30+ years of retirement" into thinking little to no RRSP or TFSA savings and trying to retire mostly on overvalued vangroovy real estate.

6061, you might try a more anonymous case study by providing more detail over here:

https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/

Ha! I missed that other page entirely and thought their first post was the one on this page that started with "My mortgage...."

Sixzerosixone if the plan is to stay in a strata unit then you need to account for rising strata fees and potential strata special assessments for repairs that could be into 6 figures depending on the nature of the work and how far down the road it happens. Your questions were:

1. Downsize (in same locality)
2. Move to a cheaper location (similar sized property)
3. Line of credit on existing property
4. Reverse mortgage (?)
5. Sell and lease-back
6. Sell and rent instead (different property)
7. Van life or Anything else more imaginative?

1+2. Downsizing/moving is a good option, but you need to consider all the costs you will incur from selling/buying such as realtor fees, property transfer tax, moving costs, etc. The net amount of cash you generate has to be worth all the expense and hassle of selling and moving.

3. LOC or HELOC could work, bust as others have said these are demand loans and you want to make sure you have enough liquidity available to cover the outstanding amount should the lender decide to call in the loan.

5+6. Leasing/renting could be a negative depending on your location as you could pay more in rent that what payments on a second mortgage might. Renting also puts you in the predicament of not having long term housing stability and as you get older that becomes more important.

7. Van life could be fun for a short while, but is that something you want to do longer term as you get older?

Unfortunately the era of "free" money (ultra-low interest rates) has passed us by so LOC or mortgaging for cash is not as attractive as it used to be as the margins on your net returns (diff btwn interest on mortgage vs gains in investments) are going to be slimmer which makes that sort of move more risky depending on your investing acumen.  There is potentially the smith manoeuvre to reduce those costs, but another option is to consider starting a home based business. That way, whatever percentage of your home is used for your business you can write off that same percentage of all your home costs. So if 25% of your home's size is used for the business then 25% of your mortgage interest, utilities, strata fees, etc can be written off and provide you with essentially tax free income. You can't continually run the business at a loss, but if it's making a small profit you're essentially generating tax free income or from another view lowering your living expenses. I've done this for many years and it has provided anywhere from $10-25K in additional income per year that I don't pay tax on. Part of that also comes from other expenses of running the business such as liability insurance and vehicle expenses, but it's a good way to generate additional income while avoiding additional taxes.

What makes this a tough decision is uncertainty about our economic future and the housing future. What are your plans for retirement life? Do you want to travel a lot, take it easy at home, spend money on a fleet of mtb's? If you haven't planned out what your retirement costs will be that is the place to start in order to see what you will need for your retirement. It's better off to die with money in the bank than to die penniless and broke and scraping by or being forced to sell your home to cover expenses. This sounds harsh, but is an unfortunate reality for too many people. You said you don't want to leave money to the govt when you pass but can always consider donating whatever money is left to some cause(s) you believe in, like say a local trail org. If there is a significant amount you could even set up a trust to provide money in perpetuity or donate it to a trust. That can easily be set up through an estate lawyer.

It's good that you are considering this stuff now while you are still working so you can plan for the future and provide yourself with a cushion in your retirement. It's better to have more than you need than not enough.

Unfortunately the era of "free" money (ultra-low interest rates) has passed us by so LOC or mortgaging for cash is not as attractive as it used to be as the margins on your net returns (diff btwn interest on mortgage vs gains in investments) are going to be slimmer which makes that sort of move more risky depending on your investing acumen

The way my banks financial planner explained the HELOC to me was just to use to draw down what I would need, when I need it (and only pay the interest as the capital is re-paid when home sold).

So, in my mind, I wouldn't be drawing down a huge amount to start with, and I could use some of what I've withdrawn to cover the immediate interest repayments back to the bank. Admittedly, I haven't run the numbers so I don't even know whether that's viable (I'll take a look out for a HELOC calculator to figure this out - I current use the HELOC only to shuffle money between banks/accounts occasionally and then repay capital in entirety so I've never seen interest rack up ..). As you can probably guess, HELOC are a bit of a mystery to me!

You make a good point about Strata special assessments - FWIW, the Strata recently replaced both the roofs and the windows using special assessments but the sidings will need to be replaced somewhere in the next 5-10 years I guess

6061, you might try a more anonymous case study by providing more detail over here:

https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/

Cheers Heckler!  That looks like a little project in itself ...

Posted by: SixZeroSixOne

The way my banks financial planner explained the HELOC to me was just to use to draw down what I would need, when I need it (and only pay the interest as the capital is re-paid when home sold).

So, in my mind, I wouldn't be drawing down a huge amount to start with, and I could use some of what I've withdrawn to cover the immediate interest repayments back to the bank. Admittedly, I haven't run the numbers so I don't even know whether that's viable (I'll take a look out for a HELOC calculator to figure this out - I current use the HELOC only to shuffle money between banks/accounts occasionally and then repay capital in entirety so I've never seen interest rack up ..). As you can probably guess, HELOC are a bit of a mystery to me!

You make a good point about Strata special assessments - FWIW, the Strata recently replaced both the roofs and the windows using special assessments but the sidings will need to be replaced somewhere in the next 5-10 years I guess

As long as you have money borrowed against the heloc you're paying interest on it. So if that borrowed money is invested somehow and the rate of return on the investment is less than the interest rate on the heloc you are losing money. You are also losing money due to inflation. So the theoretical gains in your investment needs to be more than the interest charged on the heloc and the rate of inflation combined, otherwise your equity (money) is disappearing. If you simply pull the cash out now for a rainy day fund and it's sitting in a savings account earning interest at a lower rate than the interest on the heloc then you are losing money on a monthly basis. However if you get the heloc but don't withdraw from it and just keep it available to help with large emergency expenses (strata assessment) that would be fine, but be careful with using a heloc as a piggy bank because if you're not keeping an eye on it as the interest accumulates it could noticeably eat into the equity of your home depending on how much you've withdrawn.

What will work for you depends on your assests, income (pensions) and costs. I think it makes sense to back things up a bit and start out by formulating a plan for your retirement and what that's going to cost. Once you know that then you can look at what your retirement income looks like it should be and determine if any sort of adjustments need to be made for increasing your retirement income. It may be that working a few years longer or transitioning to part-time work is a good option.

I'm looking at taking early retirement but continuing to work a couple days per week. With the bridge payment on my pension and working two days per week I'll be making the same money that I am currently working full-time hours. I could continue to work longer to increase the value and payout of my pension, but working another 10yrs full time doesn't make any sense when I can maintain the same income and work only 2 days/wk. I don't plan to live forever so that extra 10yrs of freedom and good living makes a lot more sense than working another decade to have a little more money when I'm a decade older.

Edit: One other option is to consider a commuted value for your pension - they give you a lump sum payment up front instead of monthly payments. Doing that, along with selling and buying down, could result in a significant amount of money that you could put to work for you which could give you a higher monthly income than your pension alone. While this could work out better, it takes some significant analysis to figure that out and you'd probably want to seek some help from a certified financial planner to help you sort it out. The good thing for you is you have a number of viable options to consider. Whatever you do, make sure you do your due diligence and consider getting help from a CFP that works independent of a bank to help you make a plan if you're not sure on how to proceed.

Or here, the Canuck version of Bogleheads.

https://www.financialwisdomforum.org/forum/viewforum.php?f=34

I see a couple mortgage refi / helic threads at first glance.   FWF is a significantly older crowd, more experienced in post retirement finances.

One thing I would factor into any retirement plans that count on home equity is that coastal BC is long overdue a mega quake. Selling a property or accessing home equity credit could be a non-starter for quite a while after that happens. While it's not something that's highly likely it's not something that can be discounted either. I'd want a retirement plan that does okay should that occur. 

https://www.newyorker.com/magazine/2015/07/20/the-really-big-one

So personally I plan to keep a mortgage on my house through retirement (unless interest rates get ridiculous relative to market returns). I don't want that much of my net worth tied up in a property on the island. If the mega quake doesn't happen, but the stock market underperforms having some home equity to tap into is a nice backup plan. If for some reason my financial picture changed such that I expected that home equity would certainly be necessary to fund my retirement I'd sell the property and either rent here or buy in a part of BC unlikely to be affected by a quake/fire/flood.

Posted by: syncro

but another option is to consider starting a home based business. That way, whatever percentage of your home is used for your business you can write off that same percentage of all your home costs. So if 25% of your home's size is used for the business then 25% of your mortgage interest, utilities, strata fees, etc can be written off and provide you with essentially tax free income. You can't continually run the business at a loss, but if it's making a small profit you're essentially generating tax free income or from another view lowering your living expenses. I've done this for many years and it has provided anywhere from $10-25K in additional income per year that I don't pay tax on. Part of that also comes from other expenses of running the business such as liability insurance and vehicle expenses, but it's a good way to generate additional income while avoiding additional taxes.

I don't see deducting business expenses (including business-use-of-home expenses) as magically generating additional income or reducing my tax burden. These are real expenses so deducting them is simply part of calculating my net business income. If I didn't deduct those expenses, I'd be overpaying taxes.

Posted by: [email protected]

I don't see deducting business expenses (including business-use-of-home expenses) as magically generating additional income or reducing my tax burden. These are real expenses so deducting them is simply part of calculating my net business income. If I didn't deduct those expenses, I'd be overpaying taxes.

No it's not magically (your words, not mine) generating income or reducing taxes, but for a home based business you're turning space you're already paying for that isn't providing you with any financial benefits into one that is. So for example if someone has a spare room that sits empty a lot of the time and hardly ever gets used, but using that space for a home based business it now provides with a tax credit against any income you make. Depending on how one's business is set up and run, if those business use of home credits are equivalent to the income the business generates (after costs like equipment purchases, insurance, etc) then there is no tax paid on that income. The result for the sole proprietor is they have generated additional income with no tax burden. Depending on the size of the business use of home expenses this could be a notable amount of income. But even if it's just a small amount, say under $10K, that's an extra $10K of income that's not being added to your overall tax burden. You can consider the same line of thinking with vehicle expenses if your vehicle is also used for business purposes. Whatever percentage of the vehicle use is for business purposed, that percentage of vehicles expenses is a write off. So while it may not be a net plus for things like fuel/oil/repairs, if a vehicle is leased then the business use percentage becomes a tax credit that you would not get if there was no home business. What's better, being able to write of 25% of your vehicle lease or zero?

Having a sole proprietor home based business can be a good way to generate extra income with no additional tax burden for potentially little effort into running the business depending on what it is. For some people it could offer the potential to turn a hobby that makes a little cash on the side into a legitimate business that provides an additional revenue stream. The point of my post is that you can use the tax system to your advantage if you know how. Big business has been doing it for decades, why shouldn't the average person take advantage of the same benefits as well?

I have always thot owning your RE is a good idea and i think thats proven out since rents have gone mach stupid IF you can find a place to rent and IF that place doesnt get sold out from under you, I read about a lot of seniors who are fucked by rising rents and a shortage of places to live

having a mortgage in retirement was OK, in my case it was small and I was just waiting for the inheritance

IMO you don't want the government knowing too much about your business, instead of the nickle n dime approach to payiing income tax I just hit a few button on the wealth simple web site and pay the number

Rent vs. buy is very location dependent. The calculator below is nice if you want to see what that comparison is like in your area. When I hear people talk about the question I don't get the impression they've run the numbers and thought it through comprehensively. That said if you want to own no matter what or you want to rent no matter what there are definitely qualitative differences that can sway the decision even if the end result is not the most optimal financial choice.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

If you buy a house you can pay it off and let that equity sit there or you can keep a mortgage and invest that capital. There is no right or wrong answer for everyone so it'll come down to your particular details which way is best.