A little more than a year ago I visited this goal with my financial situation back then, which has changed. One key implication now is the prolonged recessionary environment and hence suppression of my earning power. And now, to re-visit it again using my current standing.
Just yesterday I completed my electrician course- and would then have about 4 years of post-secondary education, 3 years of oilfield and construction experience- at age 22. Providing my motivation does not yet fade, now I am interested in brainstorming for an additional source of motivation, arriving at this theory of obtaining a Ferrari by age 30.
One prime motive for revising this scenario is the present low oil price recessionary scenario that severely dents my earning power and hence progress.
As of this June, my monthly expenses are at about $4,000. $5,296 of my income after deductions is guaranteed outside a total job loss. Getting a second electrician apprentice job on the second half of the month I have off would earn $2,097 with continuous work; minus the 524$ of EI I would then lose, the halfway point here is about $526. Thus, the average income per month after taxes is deemed to be about $5,822, implying a saving rate of $1,822.
For simplicity purposes, it is assumed property appreciation rates are consistent with inflation and all other financial figures remain in today’s dollars.
Plan A: Live in current property for 2 years with a roommate(s) while saving for next income property with similar value.
Aiming to obtain a second property with a similar value as my current planned one, I would then need $44,000 in additional savings; about 2 years time. Then my current one would be rented out and I would then be 25.
Rent: $1,600 (excludes utilities)
Monthly carrying cost: $1,461
Average monthly interest paid: $464
Taxes paid monthly after write-off: $342
Net monthly cash bleed: $203
Net principal contribution/year: $5,728
Thus over the next 2 years, net worth excluding principal residence would then become $55,456. This is when my secondary income would increase slightly due to increased experience, to a middle point of $937/month; $6,233 for about 1.5 years, then $1,094 for 0.5 years. Note that I exclude 2nd year apprenticeship schooling for simplicity purposes, as then the time to accumulate the required hours would be affected. It’s assumed that then I would work part-time doing odd jobs for cash, where the net income would be similar because of the lack of tax bleed.
First 1.5 years: $2,233/month savings; $40,194
Latter 0.5 years: $2,390/month savings; $14,340
Principal in primary residence: $89,806
Total net worth gain in next 2 years; by age 27: $54,534 wage savings + 55,456 in rental property + 89806 principal res. = $199,796
At this point, then it would be time to leave trucking to stay as an industrial electrician permanently, where then my income would be $108,268/year at 3rd year industrial rate on a 58-hour work week. For simplicity, it is assumed that 0.75 years (9 months) is required to complete both the school and the hours, where 2 months income is replaced by EI, as timing of the schooling and hours is not always perfect. Then for the remainder 3 months, I will be paid 4th year rate. It is also assumed that the above $54,534 is invested in stocks for a 8% return in a TFSA (tax-free).
$199,796 Net Worth start at Age 27, beginning of 3rd year
$5,222/month average net income across 9 months (EI assumed to be $3144 gross over 2 months); 10,998 savings
$124,032 4th year income; $7,254/month net; 9,762 savings
$5,728 contributions towards principal in rental
$6,070 contribution towards principal residence
10998 + 9762 + 54534(0.08) + 5,728 + 6,070 +199,796 = $236,717 at Age 28
For 3 more months then I will receive 4th year rate, go to school for 2, and then get full Journeyman rate, implying an increase in income. For simplicity again will assume it takes a total of 6 months to get to full JM status, and that the principal residence is not re-mortgaged. All savings above is assumed to be again invested at 8%.
$7,254/month net for 4 months, $2,086 net for EI period of 2; $7,102 savings over first 6 months
$154,669/year JM income; $8,848/month net; $87,264 saving over last 18 months
$5,728(2) contributions towards principal in rental
$6,070(2) contribution towards principal residence
236,717 + 7,102 + 87,264 + 5,728(2) + 6,070(2) + 54,534(1.08)(0.08) + 10,998(0.08) + 9,762(0.08) = $361,052
So by the age of 30, if my investment property and principal residence do not appreciate, I would be worth $361,052 in today’s dollars. Yes- it is enough for a Ferrari, but it would consume the majority of my money. The kicker here is all the assumptions we’ve made:
Real Estate does not appreciate
Rents and wages remain at current depressed recessionary rates
2 years to complete 1st year of apprenticeship and 1.5 for 2nd due to limited opportunities in recession
Employment consistency and precise timing
costs of living remain consistent- mainly that I am continuously willing to rent one room out and not increase my expenses- especially toys, travel, and eating.
During the boom years, some properties such as ones I lived in appreciated by as much as 5%/year. If Alberta has another boom sometime in the near future, this would dramatically change my financial picture. If we use a somewhat middle point of 3%, and assume that the recessionary environment only lasts for 1 more year, and rents increase back to normal to eliminate the tax bleed:
Primary residence ($290,000) appreciation in 6 years: $56,275 (very unrealistic to have appreciation in the next year, so only consider 6 years)
Rental property appreciation in 5 years: $46,189
Rent increase to eliminate tax bleed: 206(60) = $12,360
Total: +$125,212; net worth $486,264
So we can conclude that the financial picture overall improves significantly in absence of the recessionary environment, not yet factoring in positive employment implications.
Plan B: Buy a condo near university and rent a bedroom out ($320K budget). Buy second, 1 bedroom condo near Whyte/River Valley area for 2017 ($275K budget), and rent out current planned property.
This scenario is more aggressive, but allows me to enjoy my life a little more living without roommates.
The condo near university has similar carrying costs as the property used in the above scenario. Using a similar savings rate, I anticipate that this would be done in time by January 2017. The statistics for the rental property are as following:
All figures are for over 1 year. Note this is an irregular mortgage with a higher interest rate (3.94%), but the full downpayment is returned after closing. The trick is to use the interest as a tax write-off while getting extra cash from the bank. The result is a higher leverage ratio but also a magnified ROI.
Rental income: $21,600
Mortgage interest: $11,387
Condo fee: $4,788
Property tax: $2,368
Income taxes after applicable tax-writeoffs: $1,019 (Note that now we are paying only 4.7% tax at a 33% tax bracket)
Negative cashflow: $5,256
Total amount spent over the year: $6,275
Principal contribution: $10,317
$4,042 net contribution towards principal (64.4% ROI with $6,275 prepared for the year as the “investment”).
Note if we are lucky and get $1,850/month rent versus $1,800, the net contribution is then $4,642 instead and ROI is then 74%.
We will assume the local recessionary environment remains as a worst-case scenario and hence 0% appreciation. But ROI is 166.1% with 2% appreciation.
Personal budget now is modified according to the new planned property to $4,522. With a $5,822 average net income like above, this implies $862/month savings after the rental property negative cashflow. Cash is to invested monthly aiming for a 8% annual return in a TFSA again. Trading commissions is included in the monthly budget ($9.99). In the last 2 years, the weighed average increase in apprenticeship income is $450/month, which is invested accordingly. So over the next 4 years,
Invested savings from employment: $60,645
Rental property principal contribution (averaged over mortgage term): $41,268
Primary residence principal contribution (averaged again): $50,462
Total net worth gain: $152,376
At this point then I will have enough for another downpayment for a $200K condo, renting for 1300/month. I would then be 27 years old worth $152,376. Statistics for this one over a year:
Purchase price: $210K
Mortgage interest: $3,447
Condo fees: $3000
Property taxes: $1,500
Income tax, net of write-offs: $2,551
After all deductions cashflow: -$271 (for simplicity purposes, assume this is paid for out of employment income increase)
Principal gain: $6,352/year
Over the 4th year, 3rd year of the apprenticeship for 9 months and beginning of 4 for 3 months results in a weighed average net income of $92 less (identical to the previous scenario, just presented differently). For simplicity we will assume lifestyle changes results in monthly expenditures -$92.
Employment savings, invested: $10,686
1st $319K Rental property principal contribution: $10,317
Primary residence contribution: $12,616
2nd $210K Rental property contribution: $6,352
Total: 152,376 + 10,686 + 10,317 + 12,616 + 6352 = $192,347 by age 28.
Now this time is notable as the mortgage is up for renewal on the 1st property, with $267,417 owing. With a re-mortgage at 2.69%, 5 year fixed, 25 year amortization, the monthly carrying cost is now $419 less (noteworthy to consider as the previous rate was 3.94%). A similar unit in another local building 5 years older has a condo fee $60 higher, so we will assume we now save $349/month.
For 3 more months then I will receive 4th year rate, go to school for 2, and then get full Journeyman rate, implying an increase in income. For simplicity again will assume it takes a total of 6 months to get to full JM status, and that the primary residence is not re-mortgaged.
$7,254/month net for 4 months, $2,086 net for EI period of 2; $5,184/month avg.
$154,669/year JM income; $8,848/month net for 18 months
Weighed average of $7,932/month net, $4,173/month expenses; $3,759/month saving; $98,133 – 2,639 tax = 95,494 total.
Primary residence and $210K condo principal contributions: 37,936
$319K condo principal contribution: 18,252
192,347 + 95,494+ 37,936 + 18,252 = $344,029 net worth by age 30.
Note that because of the more bloated lifestyle of living in a prime location condo without roommate(s), net worth is a little less than the previous scenario. However, now with increased leverage, with 3% appreciation on the prime location properties, and 2% on the 210K one as it is not as in demand, but historically real estate follows inflation rates:
1st rental of $319K: 319,000(1.03)^6 – 319,000 = +61,903
Primary residence: 275,000(1.03)^6 – 275,000 = +53,364
2nd rental of $210K: 210,000(1.02)^3 – 210,000 = +12,854
332,281 + above = $472,150
If this scenario was modified to more closely match that of A, where a roommate is living with me the whole time, then at $550/month additional tax-free income (net of additional utilities or condo fee), net worth would increase by $46,200- a little north of 30K more money is made with the higher leverage in Scenario B ($804,000 of properties versus $580,000; 14.4x leverage vs. 8x). Prime location rooms are worth considerably more- closer to 750-800/room, but 2 bedroom units are often out of the $275K price range and that is the limit of my credit utilization.
Prime location condos appreciate more than that of the suburbs ones however, so when the economy is good, ROI is higher. Even if these then appreciate just 1% more in Scenario B, the return is $42,333 higher- about 28-29K better off than buying 2 far-out townhouses, and pushing myself past the $0.5 million net worth mark.
Certainly then I can afford a Ferrari.
To compare Scenario A to Scenario B, we can conclude that by heavy risk taking with the high leverage, I can afford to live without roommates and push myself to be worth close to or even past half a million dollars by the time I am 30- if appreciation to the market returns after a year. Even in a prolonged pessimistic no-appreciation scenario (very unlikely), the high leverage can pay for me living on my own.