Basic Moose House Purchase Rules

Edited Photo. Source: Flickr - Ralf Kayser

It is possible to bring housing into the mix when accumulating wealth Moose-style. However, there are rules to ensure sanity!

Moose Rules for Housing

  1. You first must be comfortably saving enough for retirement in real investment accounts (TFSA, RRSP, and Cash/Margin accounts). Follow Moose Math to estimate your number. If you are under 30, you should be saving a minimum of $562 per month. This money is for retirement only, not raiding later for your downpayment! It goes with saying that after your home purchase and those related expenses, you should still be comfortably saving your number every month.
  2. Always have your 20% downpayment plus closing costs plus an emergency account on hand. This significantly reduces your leverage ratios, saves you money on insurance costs, and decreases your chances of getting into a financial pinch. Your emergency account should be equal to 3 months expenses. This will shield you from unexpected expenses associated with owning a house: furnace breakdown, hot water tank replacement, flood in the basement, roofing disaster, etc. New house or older house, one episode of Holmes on Homes highlights the importance of this!
  3. Make sure all other consumer debt is paid off. No outstanding credit cards, lines of credit, student loans, etc. Never, ever, EVER borrow your downpayment, EVER! If you have outstanding debts, you are essentially borrowing your downpayment. This type of behaviour brings you into dangerous debt cycle loops where you are constantly relying on monthly payments for everything: a recipe for poverty.
  4. Stability... or stay-ability. Never buy a house if you are going to school, in an unstable job, in a career you can't see yourself in long-term, or planning to move somewhere else in the foreseeable future. Trading costs on housing are ridiculously expensive. Sales commissions, lawyer fees, mortgage fees, staging costs, survey costs, transfer taxes, etc. can easily run $20,000+ on a typical house in Canada. Much more in high priced markets. There's a reason why there are 40% more real estate floggers than medical doctors in this country; they make gobs of money selling houses in their price-fixing trading monopoly... If you buy a house, be sure to stay in that exact house for a long time. Buying, selling, flipping, upgrading, and downsizing is for chumps. Every time you change real estate you lose 4-5% of the house value off the top. Your real estate guy and mortgage gal will rub their hands together gleefully at your expense I guarantee you! I'm all for spreading wealth, but make sure you are actually wealthy before you give away thousands!

These first four rules are critical to home buying success and general long-term wealth. Without these prerequisites, you are gambling your long-term financial health on chipboard and vinyl. You survive when house prices go up, but you put your family at serious risk when prices stagnant or fall.

A survey in 2016 by Manulife found nearly 40% of homeowners couldn't make their monthly bills at least once in the previous year. Not surprising in the land where combined household debts are higher than the total value of the national economy, average non-mortgage debt is at $22k per person, high ratio home loans are approved daily, and where 1 million house lusters would crumble if interest rates increased just one measly percent.

The final rule is financial evaluation relative to rent. This is the most complicated step and it's NOT simply mortgage payment vs. rent fees.

Your Retirement Savings Plan

Edited Photo. Source: Flickr - mijori

After talking about the ridiculous housing situation in Canada for a few weeks, one thing I've been hammering home is the dangerously low savings rates in Canada. About half of Canucks have less than $10,000 put away, only 60% of us are putting anything away for retirement at all, and a full 1/3rd of us admit we have zero clues about how much money we need to save at all. About 40% of savers are pillaging retirement accounts to pay for credit card bills and wood fibre assemblies. Embarrassingly although 60% of us save for retirement, the average saver over 55 years old has $125,000 put away! Using our 20x Rule, that translates to a portfolio income of $6,250 per year... ouch!

You'll notice I have not talked about paying off a mortgage instead of real investing: the current trend in this house-horny land. This is because housing provides you with nothing. It's a non-productive, no-income generating, costly to maintain arrangement of chipboard, sticks, vinyl, and asphalt. The only thing a paid-off house does is displace about $15,000 of annual expenses... maybe. At 20x, your fibre slap-up is worth $300,000 tops in my unemotional, don't-care-about-granite, numbers world.

Planning Ahead

If you're reading this blog, chances are you at least have some knowledge of the power of self-managing your investments with Questrade, keeping your costs low with index ETFs, and what it means to invest in a disciplined style that generates long-term success. This is important!

To figure out your retirement needs, it's important to adjust all your numbers for inflation. The average Canadian couple will spend $40,000 - $60,000 a year with a paid off house and no debts. If you're renting add about 15 G to that. This income level will pay for a lifestyle that includes vacations, some eating out, and activities -- comfortable, but not lavish, spending. The next step is to plan your retirement age because this helps you figure out your portfolio withdrawal rate based on the Rules. I'm going to base my numbers on the 20x Rule to allow for a standard retirement.

The third -- and probably most important factor -- is when you start saving. Compound interest is a powerful force. In a Balanced Portfolio, you can double your money approximately every 12 years with no new contributions. Saving young gives a powerful advantage that's very difficult to make up later.

The Only Equation That Matters

[(Your Estimated Spending - CPP) x Your "Rule")] = Your Required Portfolio (in today's dollars)

Once you have Your Required Portfolio, all it takes is a simple compound interest calculation to get your minimum regular monthly contributions.

Your Required Portfolio / [(1.005^(12 x Years of Saving) - 1) / 0.005] = Minimum Monthly Contribution (in today's dollars)

For example, let's say I'm 30 and want to retire at 65 under the 20x Rule and I spend $50,000 a year with a paid-off house. I get 35 years (or 420 months) of saving. I'll estimate $10,000 for CPP. CPP is funded in a defined benefit pension format and is highly likely to provide benefits for a long time in its current form. I don't include OAS as it's drawn from annual government revenues as a form of wealth transfer. OAS benefits could quickly be reduced if the expenses get too high.

What's my Required Portfolio? $800,000 = [($50,000 - $10,000) x 20]

How much do I have to save per month? $562 = $800,000/[(1.005^(420)-1)/0.005]

I would say every young Canadian should be saving at least $562 a month for a decent retirement. This is in addition to -- not instead of -- paying your mortgage! $562 a month translates to about 8.5% of gross household income in Canada. More than double our current savings rates.

What I do have to keep in mind is my monthly savings must be adjusted up for inflation each year. Otherwise 35 years from now I'll have my $800k, but prices will probably have more than doubled by then so it would be worth less than $400,000 in today's spending power. Not the same...

What is your monthly savings number given your desired spending and number of years to retirement?

Next Monday it will be back to housing where I talk about the Rules of buying a house. Later on in the week I'll share our Net Worth Update. Little secret: we hit a huge milestone earlier this month!