Market softens leaving boomers in trouble with two mortgage payments Rick and Collette, a couple in their early 60’s had owed several rental properties on and off over the past 20 years. Their final plan before retirement was to build a custom home, sell it for a profit. Then use the proceeds to pay off their current mortgage on their principal residence and live mortgage free. However, just as they had finished building their custom home, the market softened leaving them with two homes, two mortgages to pay and not sure what to do.

They knew real estate was a good investment, but did not know how to deal with a changing market. Afraid that it might wipe out their retirement plans indefinitely, they needed help.

 Investment Consultant and best selling Author of Everyday Real Estate Millionaires, Paul M. Hecht worked with Rick and Collette to get back on track.

“They had some other investments that were providing some income along with their job income and when they do finally retire they’ll receive a decent pension income. Plus, they had some equity in their primary residence, so if they had to get out quick, they could sell fast and still be okay,” says Paul. “It’s not ideal. However, getting stuck with the custom flip in their current market for any length of time would result in a loss and delay their retirement. Therefore we made the following recommendations quickly to put them back on the right track.
   
 
  Couple, married, 2 adult children, entering retirement.
   
   
  Stuck with two mortgages in a down market delaying their existing retirement plan.
   
 
  Examine the existing portfolio, current retirement plan and make recommendations to get back on track.
   
   
  Get back on track so they can retire shortly and enjoy time with family, friends and leisure activities.
   
   
  Household income $90K/yr, $360K in RRSP’s, $45K in savings, $150K LOC, $0K credit card debt.
   
   
  Principal Residence: $600K value w/ $350K mrtg, cashflow = (-$2,250)/mo PIT Custom Flip (same city): $850K value w/ $875K mrtg, cashflow = (-$4,700)/mo PIT RRSP Investments $360K = $1,800/mo
   
   
  Unfortunately, this was a scenario where we wished they had consulted us before they started the custom flip, as we would have steered them in a different direction. When they started building, the median home price in the area was $420K, median family income was $65K, the population was 120,000 and there was a lot of new construction over $700K already. They built a “million home” to flip in a market with a lot of competition and low future demand for that type of product.

In addition, there were several established neighbouring communities of resale homes with similar sq footages that had been completely renovated for $100K less. And, buyers of resale homes don’t have to pay the HST. That’s at least a $150K difference. Unfortunately, buyers will compare value. Many people who build new construction don’t research their competition until it’s too late.

So, Rick and Collette could either sell the custom home, take a loss now, rent it out or, wait for the market to come back. Since the amount of rent they could collect would not cover costs, our recommendation was to put both the custom flip as well as their primary residence up for sale immediately. If the custom sold first, then they could stay in their primary residence. Alternately, if their primary residence sold first, then they could take the equity, pay down the balance on the custom flip and move into that one.

They did just that – putting both on the market immediately. After 30 days, they had to lower their prices on both. Two months later, they finally received an offer on their primary residence. With that sale, they moved into their custom flip and reduced the mortgage balance from the proceeds of their primary residence sale.

That did a few things. First, it reduced the monthly payment stress of paying two sets of mortgages, property taxes, insurance, utilities and the like. Second, it freed up their lines of credit. And, it gave them a great home to entertain in, which they love to do. Plus, there was an added benefit of keeping the custom home.

Because it was much larger than they needed as a couple, the walk out basement could be utilized to produce income. The basement was already finished with a kitchenette, bathroom, two bedrooms and a separate entrance. It just needed a wall and door between the floors to make it it’s own unit. However, because they lived in a retirement spot; vacation rentals, B&B’s and student housing were in demand. The basement could rent for $900/mo to students or $950/wk in the summer months.

They decided to rent it out as a B&B during the summer months and to students during the off-season. This gave them an extra $16,200 per year (Averaging $1,350/mo).

The next step was to get them investing into income producing real estate so that they would have income for retirement. They knew real estate was a good investment but did know how to invest without dealing with tenants and management hassles that they had experienced in their previous rentals.

In there market, we recommended purchasing single-family homes for rent-to-own. A 3 bedroom starter home was around $325K. 2 bedroom condos were around the same price. We saw much better value with a single family home.

That strategy allowed for a much more caring tenant, property maintenance was handled by the tenant, a long-term lease would be signed - thus no vacancies or turnover. It would make the management much easier and predictable cashflow for income.

With their existing LOC (line of credit) freed up, they were able to use it for down payments on two starter homes in the $325K price range. They secured two great tenant/ buyer providing them with a positive cashflow of $400 per property after all expenses. This gave them an additional $800/mo. Plus, when the tenant/buyer exercises their option, they will realize a profit.

Rick and Collette’s Real Estate and Investment Portfolio (including their primary residence) showed large negative cashflow. With the new plan, basement income and Rent To Own properties in place, they turned their negative cashflow from -$5,450/mo to positive cashflow of $550/mo or $6,600/yr.

That is a turn around difference in cashflow of $6,000.00 every month!

With their pension income, they will have more than enough to cover all their living expenses and then some, even in their “million dollar” home. When the market is better and/or they have paid down some of their mortgage from their Rent-To-Own Profits, they will sell their custom flip and move to a more affordable property.

In the meantime, they have retired from their jobs with confidence and are now enjoying their new leisure activities, their summer B& B and entertaining with friends and family.
   
 
   
 
 
 

 
 
 
 
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