Bought a house.. now what?

[Icedawn]

I was wondering if people had any suggestions for the following situation... and where to go from here.

1. Young couple fresh out of school (early 20s)
2. 1st individual will start making 80K/yr in a few months, with a 20% raise per year for the next 5-6 years.
3. 2nd individual will pull in 45-55K/yr starting in 1.5 years, with no significant raise for 2 - 5 years, then a jump to somewhere between 100 - 200k/yr
4. Couple borrows 400K privately from family. Together with own capital, purchases condo in cash.
5. No other debts.

So... given this sort of situation, what would you do?

Various options I'm toying with include

a) refinance the home, use money to invest in equity markets. Use salary to pay off interest and live. Pros - diversifies investments, greater potential for growth, fully tax deductable mortgage. Cons - Going from zero debt to 800K of debt? wow. Just plain scary.

b) do nothing with the house, leave it paid off and just pay off the private loan at a normal rate (20-25 yr amortization). Additional salary goes toward external investments. Pros - slowly increase in diversification, lower risk. Cons - not leveraging house even though we can, lower potential growth.

c) do nothing with the house, leave it paid off, and pay off the private loan at maximum rate. Other than things such as RRSPs, no other external investment. Pros - least borrowed, money, least risk, can remove debt to family sooner. Cons - extremely non-diversified, low potential growth

Any suggestions? Am I forgetting something? Other options that I should be considering?

[Un4GivN]

Would the loan from your family be interest free? What are their terms for you paying them back? If they're not very strict with you paying them back, I would opt for option 2. I'm pretty conservative with my investments and tend to invest in low-risk options so option 1 would be out the door for me for sure.

Sounds like you kids are in a great position right now! Grats!

[simms]

A is essentially the Smith Manoeuvre.. I would probably leverage that, but it really depends on your appetite for risk - you have a "mortgage", a "wife", bills... I'd probably wait a year or so to see how things pans out financially before committing to a plan.

At our age, things can change in the blink of an eye - we have good jobs but a recession could hurt us, housing market could correct, you and your "wife" could have a fight - all hypothetical factors but possibly real ones that may affect your outcome.

Don't mean to rain on your parade, but what happens if you two split?

[Icedawn]

Well, I think the safest assumption is that I'm paying 6% interest to family, but on a flexible timetable.

If we split, I think our agreement is that all the assets and debt falls to me, and her interim contribution is treated like rent. (She's the far more financially conservative one). However, this will obviously be subject to renegotiation once she starts working.

And hm, its true, I'm tempted to go for option A myself, except for, as you noted, for the next 1.5 years things will be tight. Unless I opt for income generating investments with the leveraged money, I'll be paying the 48K of interest out of my own income stream... which, once taxes are accounted for, would leave only 20K in the first year for living expenses other than rent.

Is this plausible? We spend less than 20K/yr right now on non-rent expenses, but other's suggest that this is merely because we're in school still, and that we should budget for a mini-"explosion" in additional costs once we're working.

[pitz]

Well, I think the safest assumption is that I'm paying 6% interest to family, but on a flexible timetable.


With that kind of money involved....your family better get a lawyer involved to draft a bullet-proof mortgage. Especially since you expect to be able to protect the asset in your favour if the relationship dissolves.

If theres a mortgage against the condo, in favour of the family 'lenders', then just how would you manage to get a mortgage anyways to do this investing.

Think about it carefully....


If we split, I think our agreement is that all the assets and debt falls to me, and her interim


You don't think. The law, relating to division of assets, in combination with any legal security, and any valid prenuptial agreement/cohabitation agreement, specifies.

Get this sh*t nailed down because if you don't, the stakes sound pretty high.

[jvangilst]

Well, I think the safest assumption is that I'm paying 6% interest to family, but on a flexible timetable.



6%? Is that per annum, or total? You could probably find mortgage rates less than that.

[qster]

Get a financial advisor!

Why would you need to borrow $400K from family to buy a house?
Get a mortgage approval and see how much you can afford to buy based on your current income.

The one thing people forget is.. once the mortgage is locked in you are basically paying the same monthly payment amount. Over time, hopefully, your income continues to grow and by the time you hit midway through the amortization, you would have at least doubled your household income.
You both are young so you have that in your favour.
If you two have any family plans in the near future, then you'd need to sit down and calculate things... get an FA.

If you are looking for a house in the $400-500K range... limit the amount of funds you borrow from your family and get a mortgage to cover the rest.

Or you can use the $400K and invest some of it and use the balance towards a downpayment. Let the investment work for you and pay off the loan and the mortgage at the same time.

So.. find a good FA (financial advisor) quick and sort it out before you close on the house..

Congrats, by the way.

[sunset_orange]

I was wondering if people had any suggestions for the following situation... and where to go from here.

1. Young couple fresh out of school (early 20s)
2. 1st individual will start making 80K/yr in a few months, with a 20% raise per year for the next 5-6 years.
3. 2nd individual will pull in 45-55K/yr starting in 1.5 years, with no significant raise for 2 - 5 years, then a jump to somewhere between 100 - 200k/yr
4. Couple borrows 400K privately from family. Together with own capital, purchases condo in cash.
5. No other debts.



80K/yr salary job fresh out of school? whoa, man, I must have picked the wrong professional field.. :cheesygri

[SMC23]

80K/yr salary job fresh out of school? whoa, man, I must have picked the wrong professional field.. :cheesygri

I agree! On top of that 20% raise for the next 5yrs that would peg him/her at 165K/yr?

In any case, I would take that 400K and invest in equity stocks as it appears you have the time to reap full benefits from these type of investments.

[patrob]

I agree! On top of that 20% raise for the next 5yrs that would peg him/her at 165K/yr?


I wonder what kind of job pays 20% raise every year for first 5/6 years :confused:

[qster]

I wonder what kind of job pays 20% raise every year for first 5/6 years :confused:

A lawyer for one of the top law firms in the downtown core.
Wonder if OP can handle the hours for the next 2-3 years.

[patrob]

A lawyer for one of the top law firms in the downtown core.


Of course...:rolleyes:

[slugbot]

A lawyer for one of the top law firms in the downtown core.
Wonder if OP can handle the hours for the next 2-3 years.

80K is about 20K short of what they pay and if you complain about the hours you shouldn't be making that much money anyways.

80K doesn't go very far for a couple in the city, especially young professionals, especially after tax.

you won't be lacking in funds once wifey is making staff money and you make partner.

personally, i would not mortgage your present lifestyle in order to position yourself for the future when you'll be rolling in the dough anyways

so go out there and buy some canali suits and ferragamo shoes and don't gamble the house on chasing equities

and i sure hope your parents got independent legal advice when they agreed to loan you the money against no security and a demand promissory note that becomes unenforceable after 2 years and no pre-nup between their kid and the spouse.

[Icedawn]

a) about the money from family - its not secured against the property. I recognize that its a significant sum, so I'll be drafting up a written agreeement, but given it is from our parents, there's a certain level of flexibility/trust.

I'm also going the route of borrowing money from parents... primarily because it gives me more flexibility? I could probably get a loan from bank, yes, but a) at a higher interest rate given my low down payment, and b) with much less flexibility.

Also, the ability to do what was described as option A) or the "smith manuever" sounds very enticing... I'm feel like I'm okay with a massive amount of debt, but I woudln't be able to get this much from a bank alone. (I just don't know if this is a good idea)

b) about the prenup - yeah, I know I should be doing something like that technically. I think what we intend is actually quite clear... the problem is I know it might be overruled by the law. In a way, I'm placing some trust in the idea that we'll abide by a fair agreement regardless of what the law says (somewhat naive, I know). At least thankfully, kids are not on the horizon yet... at all... like, not even on the planet yet...

c) about the exact interest rate - I'm just approximating. When it comes to drafting, would probably just use something like TD prime - 0.5% or something like that. But something in the correct range.

d) about a FA - is this something a lot of people do? I've never really considered this option in the past... if only because I have friends that are FAs at banks, and I'm like, "why the hell would anyone listen to you? You failed out of some B.ba program, took a random certification course, and now people trust you to arrange their finances?? Mind you, I differentiate between FAs and asking for random advice on an internet forum, if only because I'm just looking for ideas/comments here because I don't like talking about money with family/friends.

e) and lastly, yes, if you do a search on my name, i've probably revealed that I'm in law school. hence the reason why I'm looking to get all this stuff set up before I graduate and have to start working a ridiculous number of hours.

[Icedawn]

80K is about 20K short of what they pay and if you complain about the hours you shouldn't be making that much money anyways.
80K is articling, 100K is 1st year after articling. (Although I'm unclear what exactly you meant by the second part of the sentence)

80K doesn't go very far for a couple in the city, especially young professionals, especially after tax.
tell me about.

you won't be lacking in funds once wifey is making staff money and you make partner.
or I decide to abandon that path and go inhouse! woo!

personally, i would not mortgage your present lifestyle in order to position yourself for the future when you'll be rolling in the dough anyways

so go out there and buy some canali suits and ferragamo shoes and don't gamble the house on chasing equities hm, you think I should spend now rather than leveraging while I have the luxury of a 40+ year time horizon? Why not? I decided to spend instead of levaraging/saving during undergrad when really, my yearly income with trivial in the long term, but now that I'm making at least decent coin?

and i sure hope your parents got independent legal advice when they agreed to loan you the money against no security and a demand promissory note that becomes unenforceable after 2 years and no pre-nup between their kid and the spouse. So true. I would advise against a third party doing exactly what we're doing... yet... its not really within contemplation for ourselves to do it differently. Although worst case scenario, it is not like I'm borrowing from their retirement funds or anything.

[qster]

80K is about 20K short of what they pay and if you complain about the hours you shouldn't be making that much money anyways.

I already knew Law firm, the moment OP mentioned 20% annual raise.
I did the law route for a year (wasn't for me), but I was lined up for Blake Cassels & Graydon LLP (a friend worked for Stikemand Elliott...he didn't like or fit into their culture).
At the time it was $65-75K for articling within the first year. Pass the Bar and you get a huge raise.


80K doesn't go very far for a couple in the city, especially young professionals, especially after tax.


It goes a bit further since OP's wife/gf is still in school and not working as he could use her tax amount and apply to his income to reduce the taxes and get a refund.

OP should as for a sr. Financial Advisor that has been doing it for a few years or if your bank has a tier system (like CIBC's Imperial Serice or Private Banking) get an Investment Advisor to steer you in the right direction.

Personally... the most I would need (if I'm debt free coming out of school) is $100K, use that as the downpayment on say a $400K-500K property. Your mortgage would be in the $1700-2000/month. This would be attainable as $80K base plus a bonus would bring you about $5,000+ per month after taxes.

Then with sound financial advise, use the other $300K and invest it. If the investment is good, you should be able to pay off the loan within 3-4 years and possibly come out ahead with some extra.
I would have thought that you being a legal eagle would know of other lawyers or investment people to ask this type of advice then using RFD.

I pull in six figures and can handle my mortgage myself without the wife (she's making the similar coin). As long as you live within your means you'll be fine.

Congrats on the landing a gig with one of the heavy weights downtown.
Get ready for the long hours.

[slugbot]

Of course, on top of the refinancing with the bank, he'd also be expected to pay his parents back on the 400K at the same time, unless they're OK with bankrolling his portfolio.

You also have to keep hireback in the back of your mind...

And you always have to take any institutional financial advice with a grain of salt, as I'm sure any adviser would get wet the moment you mention your situation to them.

[qster]

Theoritically.. OP would be paying back $100K (dowm payment) since the other $300K would be used for investments.

Lock down the mortgage at 5 years (5.4%)

The $300K loan can be paid back within 3-5 year frame along with the $100K used as the down payment (profit from $300K). Then OP would be square with the family.

A good investment advisor wants you to make $ as they make commission off your profits.

Just think.. if OP has this situation 3 years ago and but the egg into Google stock... $300K would be about $1.2M+ right now.

I wish, I had the same option as OP 2.5 years ago.

[Icedawn]

yeah, corporate business law doesn't seem to be my cup of tea either, but I've found IP work quite interesting so far.

OP should ask for a sr. Financial Advisor ... I'm a TD customer generally... are you refering to one of their financial planners as found here? https://www.tdwaterhouse.ca/financialplanning/index.jsp I think this is what my sketch friends were hired as, to be honest.

Then with sound financial advise, use the other $300K and invest it. Right, so essentially you're suggesting the first approach right? Go with the higher risk approach where I essentially borrow from parents and bank to buy both house and investments at the same time. One of the problems is that I'm relying on just my own resources at the moment, which essentially means mortgage/interest costs in total of 3.5-4K/month, on monthly income of maybe 5.5K. At least at the beginning, its going to be tiiiiiight.

I would have thought that you being a legal eagle would know of other lawyers or investment people to ask this type of advice then using RFD.
Unfortunately, I'm not particularly saavy when it comes to financial stuff at the moment.

I know my science.. I know various areas of law... but where people pick up this byzantine knowledge of RRSPs... tax... different investing approaches, etc... is beyond me. I'm currently trying to do my own personal research (inc. bouncing questions off RFD) before talking to someone professional just so I can actually understand what's going on instead of accepting what they say at face value. On this point, any recommendations on a good book that gives an intro to this topic? Should really be learning about everything from tax -> rrsps -> capital gains -> property...

Congrats on the landing a gig with one of the heavy weights downtown.
Get ready for the long hours. 1400 billable hours here I come... gotta love boutiques.

[qster]

If you plan on sticking with TD, their Financial Planners are a joke.

Go with their Private Investment Counsel or Private Investment Advice. They are both divisions of TD Waterhouse.

Network with some accountants, I'm sure you could barter services down the line as everyone needs a laywer, accountant and a doctor at some point.

There are books and information online about "Leveraging" your money to make debt work for you.

Remember...even the Rich are in debt and have mortgages. They use the current supply of funds to invest and make $ by staying ahead of the interest rate they incur.