What Should We Do With All That Rental Income?

Progress continues on our two-bedroom rental suite. We’ve turned the corner on demolition and repair and are on to construction. As I type, walls are being erected. It’s exciting. One of my favorite pastimes lately is deciding what to do with the extra cash flow once the suite is rented. It involves lists, charts, spreadsheets and calculators. I love it.

We expect to get somewhere in the neighborhood of $1200-$1400 a month in rent from the suite. We’ll also be able to claim some tax deductions (which of course we’ll include in our T1213 form every year) which I’d estimate will add maybe another $200 per month. So we’ll effectively add another $1400-$1600 to our income every month. I can’t wait.

Now for the downside. Here’s all of our debt:

1. Car loan: balance is about $9000, interest rate fixed at 6.89%

2.  Line of Credit: currently no balance, but there will definitely be one by the time the rental suite is finished. I think we’ll be lucky if we end up with a balance of less than $25,000. Interest is variable at Prime + 2.75%, or 5.75% today

3.  Income Tax Arrears: I owe about $4000 to the government in income tax. This is a one-off situation and is related to my recent maternity leave. I have worked out a payment plan that will have it paid off in seven months. Interest rate is fixed at 5%

4.  Mortgage: we just refinanced in June 2012 in order to fund this renovation. We owe $410,000 at a fixed rate of 3.29% and if we follow our current schedule, it will be paid in about 26 years.

Obviously, paying down any and all of these debts is an option. I have other ideas for the money too though. Mr. Hutch and I currently put away $400 every two weeks into our RRSPs. Right now we’re buying mutual funds but I want to change that. Hopefully that will be the subject of a new post in the near future. We also put aside $100 into an RESP every month for the Hutchlings. I want to increase our contributions to both the RRSP and RESP. We’d also like to save for a new vehicle for Mr. Hutch, and maybe the odd family vacation (nothing extravagant).

I think we’ll do a combination of the following:

1.  Pay off the car loan. It’s pretty obvious to me that this has to go as a top priority. It’s essentially like getting a guaranteed 6.89% return and that is hard to beat. Once we’re no longer making payments, we’ll also have an additional $338 per month to direct towards our other goals.

2.  Increase our RESP contributions. The government matches contributions 20% up to a maximum of $500 per year, per child. That is one sweet deal. We could contribute $416 per month for both Hutchlings before we max out the government contributions. I’d like to get close to that.

3. Pay down the line of credit. Again, we’re not going to find anything close to a guaranteed 5.75% return anywhere else these days. Depending on how much our balance is once the renovation is complete, I’d even like to pay off the car loan with the line of credit and then focus on paying down the line of credit. I’d only consider that though if we can roll in the car loan and still have a good cushion left.

4. Increase our RRSP contributions. From what I understand, I can be fairly confident in assuming an average return of around 6-8% for our investments, but of course this carries a degree of risk. It could be more, it could be less. Of course, the more we contribute to our RRSPs, the bigger the tax return. Or tax “keep”, I should call it.

5. Increase our mortgage payments. I’m going to resist the urge to be too aggressive on this. A guaranteed 3.29% return is okay, but our money is probably going to work harder for us elsewhere (like our RRSPs). I’d like to pay it down only to the extent that it is gone by the time we want to retire (much earlier than 65 if all goes according to plan).

6. Save for a new truck, some family vacations and other rainy day-type stuff. Because this is short-term, this will probably go into a high-interest savings account TFSA that earns 1.2%.

So there you have it, the start of a plan. I’ll let you know how it all goes down once that rental income starts rolling in.