Net Rental Income: $600 per month

So, what was the net result of all this work putting in a rental suite? We took on a bigger mortgage, have had to up our house insurance and will be paying more for hydroelectic. But we get to collect monthly rent cheques. But we have to pay tax on that income. But wait, there are tax deductions we'll get too...

So where does that leave us? By my calculation we're clearing about $600 per month. Here's my breakdown:

Monthly Cost                    Pre-Suite          Post-Suite

Mortgage + Prop Tax       $1768              $2332
House Insurance               $86                  $103
Van Payment                    $338                $0
Hydro (electricity)             $118                $218 (est)
Water                               $30                  $42 (est)
    - Rental Income (net -   $0                    $959
    accounts for income

    tax and deductions)

Total                                $2337             $1736

Net Profit: $601

Now, out of this monthly profit of $600 will have to come any upkeep/repairs to the suite and any months that the unit sits vacant. In our market, there is a general vacancy rate of 1.5%, which means we can expect an average loss of $200 per year due to vacancy, or about $17 per month. Since the suite is brand new, I think it's reasonable that our repair costs will be fairly low in the short term.

I think we didn't do too badly!

Financial Update: October 2012

There have been lots of financial happenings around casa Hutch since I last posted. I've attempted to sum it up a few times but it just felt like things were too unsettled yet to log a post.  It's high time I put metaphorical pen to paper though and laid out where we're at.

First of all, the suite is DONE. Done and rented, yo. In just a few days our tenants will be moving in and monthly rent cheques in the amount of $1100 will start to flow. Awesome.

Second, the renovation has been fully financed with the equity in our home. Our mortgage now stands at $452,000 at 3.29%, bringing our monthly payment including property taxed to just over $2300. Ouch.

Third, we used some of that equity to pay out our car loan, to the tune of $8500. Both vehicles we now own free and clear. That feels pretty good, and we're no longer make the $340 payment every month.

Fourth, we have managed to pay down a big chunk of our line of credit and the balance stands at around $6000. Paying this remaining balance is now priority number one. I'm hoping to do it in about 4-5 months.

That brings me to my fifth point. I made a pretty major executive decision yesterday and shut down our biweekly RRSP contributions. Where previously we had been socking away $867 per month between the two of us, we will now be directing that towards the afore-mentioned line of credit debt. Because we're paying 5.75% interest, I'm willing to take the hit on retirement contributions in the short-term. Once the line of credit is paid off, we'll restart the RRSP contributions, hopefully at a higher amount.

And that is where I'm going next. Now that our financial situation has settled down and Mr. Hutch is back to his regular full-time gig, I can start some serious planning for the future. I have a (free) consultation with a fee-only financial planner in a couple of weeks. I've got a handle on where we stand financially and now I need an idea of where we want to go, and a map of how we're going to get there.

There's going to be lots more to write about in the coming weeks and months.

Beating The 50% Rule

Our rental suite is so close to being done. It's been a pretty long slog, particularly for Mr. Hutch. We have only a few things left on the to-do list: hanging closet doors, building a few shelving units, hanging the towel holders in the bathroom. Finishing-type stuff.

There is an aptly-named theory in real estate investing (The 50% Rule) that states that your monthly mortgage payment (principle + interest) on any rental unit should be no more than 50% of the monthly rent you receive. In our expensive city, there is no way this is achievable by buying new properties. But by building a rental suite within our existing home, we blew The 50% Rule out of the water.

So how about some numbers? We've got a few outstanding payments to make, but all told we should be in to this sucker for just north of $70,000. We added approximately $500 to our monthly mortgage payment in order to finance the building of our suite, but we expect to collect somewhere in the neighborhood of $1300 per month, plus we will enjoy some decent tax deductions. A pretty decent trade-off if you ask us, especially if you measure it by The 50% Rule.

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.