We will address two topics this week: a) investment housing analysis and (b) pulling out funds from a "locked-in" RRSP.

A client asked for an interview to discuss buying the house "down the  street" as an investment property.  This was a "steal" at $170,000.  The house was worth at least $200,000.  His own house was almost paid, and he had very little retirement savings.  He is 49 years old.  I agreed to meet him, but I warned him over the phone that single family residential properties may not be a good investment.  I asked him to bring along insurance costs, probable rental revenue proof, amount of property taxes, proof of his salary, and proof of the amount owing on his existing house. When we met, I said to him that the revenue stream from the rental property is all important.  From the probable revenue, we must establish how much is available to pay for the mortgage, therefore we must reduce the rental income of $1200 per month by $225 (for property taxes), $30 (for insurance purposes), $60 each for potential vacancy, reserves for replacement of obsolete equipment or materials, and potential management of the property, leaving $765 per month to carry the debt.  Amortized over 25 years, at a mortgage rate of 8.5%, that net revenue will service only $96,000 worth of mortgage.  Ifhe "steals" the property for $170,000, he must put down $74,000 to make the property carry itself.  Not a good investment!  Revenue streams for duplexes, or triplexes have a much better cashflow, therefore the down payment portion is less.  He asked me if he could refinance his own house to gather up the down payment.  I said that was possible, but by the same token, if he was to refinance his house to pull out $74,000, he could buy multiple units for the same amount of money down, by using the above formula to analyze the cashflow derivative of any property.  Over the weekend, he and a real estate agent went shopping just for comparison purposes.  They found several duplexes and triplexes that could be self-sufficient with only a fraction of his $74,000; as a matter of fact, he can buy a total of eight units (two triplexes and a duplex) for the same amount of money down. By diversifying into several properties,  he lessens his chances of having a problem with cashflow should a unit become vacant.

Several people have asked me lately if one can pull out money from a "locked-in" RRSP.  My answer is yes "under hardship" and no under normal circumstances.  As of May 1, 2000, the Ontario government has provided an avenue for withdrawal of "locked-in" RRSPs to be accessed under six situations.  

These are:

1) Low Income: If your gross income (before taxes) will be less than $25,066.66 in the year 2000.

2) You risk eviction from your home: You have received written notification from a creditor with a lien on the property (mortgage, secured loan, or property taxes) that failing restitution you will be evicted from your home.

3) You risk eviction from a rented residence: You have received a formal notification from your landlord that unless the back rent is paid you will face eviction.

4) You need to come up with first and last month's rent on a new residence.

5) You need money to pay for medical treatment for you, your spouse, or any dependants of either of you.

6) You need money to renovate your residence to accommodate the use of a wheelchair, or other needs to a disability or illness.

You may also direct your RRSP Trustee to use your "locked-in" funds to fund a mortgage or buy stock in an "arm's length" transaction.