Do you feel like you’re not investing for the future and have used your investments and savings to buy a home? Everyone needs to diversify their investments to plan for retirement, but that is becoming harder with increasing living expenses.
In today’s conversation, Matt Parker talks with Certified Financial Planner and Cash Flow Specialist Kelly Ho about how to invest even when home ownership becomes more and more expensive.
Find Kelly Ho at dldfinancial.com/team/kelly-ho
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Introduction: Think today's mortgage process is complicated and stressful?
Introduction: You're right, it is. But it doesn't have to be.
Introduction: This is the House Rich podcast and we've simplified the mortgage process. Your host, Matt Parker, AKA Mortgage Matt delivers practical advice in a fun and entertaining way to help you understand your mortgage so that you can start making money, not the bank. So let's get your home ownership journey started. Here's your host, Matt Parker.
Matt Parker: Hey, Matt Parker here. Very excited. Always a pleasure to have Kelly Ho with me. Kelly, thank you so much for joining us.
Kelly Ho: Thank you for having me, Matt.
Matt Parker: Kelly's a great resource. She's a partner at DLD Financial. She's a certified financial planner, certified cash flow specialist, so she's an expert in money and we're really looking forward to get your insight in terms what you're thinking, what you're seeing, and just get your feedback, especially in a... I think it's a very difficult time from a real estate point of view, in Vancouver and well pretty much across Canada. But primarily we'll talk about our local market and with appreciation values on affordability, inflation, all these different things. I'd love to talk to you about how clients and homeowners and home buyers can position themselves properly, where they can utilize the funds they have available for the purchase, down payment wise and closing cost wise. And then also position themselves so they can plan for the future, retirement, education, all the different things that we need to be thinking of into the future. I'd love to just pick your brain and get your insight into that.
Kelly Ho: Absolutely.
Matt Parker: Yeah. So when you're sitting down with a client and my side as well, and we sort of go back and forth, I know we work a lot together, but the idea is really, when they're looking at that purchase and they're looking at securing that property, how do you walk them through that planning side of it of how much of my assets should I use towards a purchase versus the amount that I should use or keep aside? Is there sort of a framework that you walk them through?
Kelly Ho: Yes, there is. And it really depends on what the client's situation is at, and when I become involved. So the ideal scenario is that I become involved at the beginning where they're like, "Hey, we'd like to save a down payment. We'd like to purchase a home. Here's our time horizon. Here's how much we earn as a household or here how much they earn as an individual." And when they come to me that early on in the process, I can actually map it out properly. And then I can actually go, "Okay, well let's take a look at your cash flow. Where are things now today?" And then obviously, usually most of my clients will work with someone like yourself and they'll give me an approximate breakdown of what the increased cost will be. And so I consolidate all the information together to show them, "Here's your new cash flow situation."
And then I take it a step further by actually integrating the cash flow scenario into a retirement plan to go, "Hey, if you do intend of retiring or slowing down one of these days, here's what that looks like in combination with your cash flow situation, paying down a mortgage, and trying to save." So it's juggling a bunch of balls, but what it is we don't want it to be a surprise, right? Because oftentimes, you hear from your friend circle, social circle, other people that going, they're so focused on buying that home that they can't focus on anything else. And then there's that sense of regret to go, "Hey, I kind of wish maybe I did a little bit of more homework. I just got way too into the frenzy." And hoping that they would've done things a little bit more differently.
Matt Parker: It's interesting in the sense that estate's such a hot topic, especially in Vancouver, that I think a lot of people fall into that. "Everyone's doing it." Or whatever that mentality is. But I do see that just seeing clients over the years, us personally, just appreciation and equity growth in real estate is substantial or can be substantial. And is there a sort of set percentage that you generally work off of, where it's like, "Well, if I have X amount available, I should allocate this percent of my investible assets towards a purchase?" Or is it more based on cash and how we can potentially utilize cash flow to maybe reestablish the investment side of things or position ourselves long term knowing that we're taking out a larger percentage of our assets today while we're planning to recoup that over time so we're still diversified? Does that make sense?
Kelly Ho: Yeah, I would say all of the above because not everyone is okay with taking home equity to replenish their retirement. It's a very scary idea because in reality for people they're like, "Well I've already taken on this massive debt and you want me to take on more debt?" So then it really comes down to what is their casual situation And if their casual situation allows them to go in that direction and we understand the good, the bad and the ugly that's associated with going down that route, then absolutely. But for a lot of people we have to go through all these different scenarios and see what their earning potential is. Is there any inheritance that's coming down the line? Right? As morbid as that sounds, but for a lot of people in our generation it is a reality, right? I'm already starting to see that with my clients in their 50s and their 60s because people are living longer. So these are people with parents in their 80s and 90s who were still alive and well but have finally decided that they're going to downsize and have decided that, "Hey, I'm still around. I'd like to see you enjoy some of these funds versus waiting for me to actually die before you get any of this."
So there are all sorts of scenarios and I think regardless of what it is, we shouldn't go into the situation blind. And I also think there's a sense of fear too. It's that fear missing out. To go, "Hey, prices are going to go up. Houses going to going to be three million, it's going to be four million and I'm never going to be able to buy a place." And I think I'm not a realtor, I'm not a real estate professional, so I can't speak to that. What I can speak to is what people bring in and what their expenses are going out.
At the end of the day, we have to buy our groceries, we have to pay for mortgages, we do want to go on vacation, hopefully, sometime in the not too far distant future and do fun things too. And we have to talk about what are we willing to sacrifice if that's the case, to make this happen. And if we can make everything happen, fantastic. But it all has to be within the context of a plan.
And there is a way. I map it all out. And therefore when people go into situations they can comfortably place offers. They know what their ceiling is, they know exactly what their cash flow is. And oftentimes, Matt, with our mutual clients, I often go, "Go ask Max, what are the closing costs? I can actually factor that in," stuff like that. So it's all about disclosure, knowing what you need to know front, so that I can actually punch out these scenarios for clients and they're very well informed and they feel confident going into these, what I feel are ridiculous bidding wars.
Matt Parker: And hopefully that shifts, hopefully it's just overly stressful. I think you bring up a good point of just the team, like having a team of professionals that are versed in what they do and then working together to position yourself properly to make sure that you know are situated properly for the future. I think that's a great point. And also with the fact that you said that, which I always talk to clients about too, is yes, sure we want to get the property but we still want to make sure that we're working on, and we're focusing on cash flow so we can live life, have fun, do the things we want to do, right? Because we're only here X amount of times. We want to enjoy that as best we can. And like you said, we are seeing a lot more, let's say early inheritance gifting from family. Whether it's utilizing the equity growth in properties over time or just cash that they've accumulated in helping the younger generation get into properties.
So a lot of these higher value homes, there is a lot of transfer of money and wealth happening. So I think that that is of helping the market along too, where it's not just relying on just, I'm there. So because of the fact that the older generation are sitting on such a large amount of real estate wealth in Vancouver, that it's very interesting to see that being passed. And the other side of that is a lot of them actually are sitting on it and not selling. So you have a lot of, let's say the older generation that their property's gone up X amount of value, whatever the case is, maybe the referring property taxes now and just selling that property creates just a tax problem for them that they don't want to handle that. So they're just going to stay there until the end and then that will then free up more properties as well, which is creating another part of the supply challenge. So no, that's very interesting. I mean, any thoughts around percentage of income that you recommend allocating towards real estate or anything along those lines?
Kelly Ho: But you're referring to the mortgage payments?
Matt Parker: Mortgage payments, or even property ownership. Do you get that detailed with clients when you're planning it out?
Kelly Ho: It's different for each set of clients, right? Depends whether it's a single income or double income. So, I know from your perspective that you look at total debt ratio.
Matt Parker: Yes.
Kelly Ho: Right. So I leave that to, you know, as an expert, but on my end I look at the bigger picture. I literally go, "What are we spending on traveling? Is this mortgage payment going to inhibit your ability to travel? If it is, then that's a deal breaker then that's not okay, maybe we need a lower mortgage." Or how much money do you want in retirement? Do you need 10 grand a month in today's dollars or are you okay with seven? So if you need 10, then no, your mortgage payment cannot be that big, right? Because then I will be able to provide advice on how to actually save towards earning 10 grand a month. But if you're okay with seven grand a month, then by all means we can have a larger mortgage payment as long as your lender will lend it to you.
Matt Parker: I mean really when you look at it, sure, cash flow planning, but it's really life planning.
Kelly Ho: Absolutely.
Matt Parker: Yeah. That's very interesting because it really just gets that detailed, where you're looking at spending, you're breaking it down into different buckets of how much we want to spend on this for travel or for even groceries if you want. I'm sure you get quite detailed as that keeps going up.
So question for you, because we have a lot of self-employed clientele as well, and maybe cash flow is not consistent where it's not the same month over month. What's a good approach when looking at that from a cash flow plan? Is it an average of the last X amount of months when figuring out these numbers? Or how would you recommend business owners or people with variable income handle that situation?
Kelly Ho: Yeah, I mean, it's both, right? So it's looking at how have they done over the last few years and what is the current trajectory of where they're going to be, right? Because it'd be quite stressful to take on something and they're barely making it right, and neither would the lenders approve them to begin with.
But one of the biggest things, and this encroaches a little bit on the accounting side as well, is the issue of taxes, right? Because as self-employed individuals, they're really driven people, entrepreneurs, and oftentimes they're focused on running the business. And I tell everyone, and what you have to treat yourself like an employee of yourself.
Matt Parker: Yes.
Kelly Ho: What that means is if you were working for someone, you would not even have the luxury of deciding when you want to pay your taxes. The taxes are taken off the top and you work with what you have left over. And that's one of the joys of being an employee is you don't have to worry about that.
But as a business owner and self-employed individual, we oftentimes have that option to go, you know what? I need this extra money, so I'm going to hold back, I'll deal with the taxes later. And oftentimes that will get people into cash flow trouble because all of a sudden the next thing they know is they have to file their taxes for the previous year and now they need 15,000, 20,000, 30,000 bucks for taxes and they don't know where they're going to find it because they spent too much.
Matt Parker: Yeah, no, good point.
Kelly Ho: That's dangerous. And I would say my first piece of advice for all those people, I'm like, anytime you get paid, I don't care how much, whether it's a thousand dollars invoice, or a hundred thousand dollars invoice, you have to set the appropriate amount of taxes aside as per their CPA, what their CPA has told them to do.
Matt Parker: So even setting up an account for that, the tax account or whatever you want to call it, and just-
Kelly Ho: Whatever they want to call it, or they can remit it directly to CRA if they want. I mean, that's to the discretion of how they arrange it with their accounting professional.
Matt Parker: Kelly, so we get the property, we do the mortgage, we get to the end, they get position, they get keys, and they move in. And we've probably talked about this before we get to that point, but there's a lot of questions around insurance and do I need insurance? Should I get mortgage insurance? Should I get the bank mortgage insurance? I mean, there's a lot of confusion around that term life, all these different things. From your point of view, knowing a lot more about the insurance world than me, what is your recommended timeframe to handle that? Would that be before you actually take ownership of the property or what would be the best sort of path to start that discussion?
Kelly Ho: I would say once there's an accepted offer and you know that it's just a matter of time before the closing, right? 'Cause I will say the insurance industry has made vast improvements in getting the underwriting done more quickly. But depending, sometimes, they'd love everything to be straightforward, but depending on the client and their health history, sometimes things could take a little bit longer. We don't want there to be a gap in coverage. We want to make sure that when they move in, they know that if they were to be hit by a car, that the mortgage is taken care of. And then secondly to your comments about the different types of life insurance, especially when you sign off on a mortgage.
And I know in your industry you're required to say, "Hey, there's this mortgage life insurance, do you want to do it?" Right? And the issue with that is usually it's specific to the lender. And oftentimes what happens is if the person dies, the money goes directly to the lending institution. So there's no option for the survivor to even say, "Hey, you know what? Actually maybe I don't want to pay off that mortgage yet. I'm okay, I'll take the money and I'll decide whether I want to pay off partially or maybe not pay it off at all and just maybe have that money sit and grow and I'll just take what I need to pay off the mortgage."
And then as well, over the course of 25, 30 years, if people have mortgages, you may not be with the same lender the entire time. So do you really want to be qualifying that many times for life insurance? And also, one of the traps of mortgage life insurance is there's very minimal underwriting and assessments that's done at the beginning, which leads to a lot of litigation from what I hear, horror stories of, "Hey, they told me they approved me, but how come," after the person's gone, they're like, "Hey, how come they're saying no, we cannot pay out based on X, Y, Z."
So when you think about it, there's a reason why certain things are easier to get than others. And the cost generally could be about the same or less. And when I say less, it's usually on my end, it actually costs less. But obviously I'm the one that asks the very invasive questions. And sometimes I might say, "Sorry, a nurse will have to come see you and draw some blood and take a urine sample. And then we get doctor's report." And that's mainly because we want to make sure if and when the time comes, we can get the money to the family with no further information required. Because the insurance company has already made a promise that, "You know what? If something were to happen, here's a check."
Matt Parker: And like you said, and with the bank offered insurance options and they're generally protecting themselves a lot.
Kelly Ho: Yeah, they're the beneficiary.
Matt Parker: They're the beneficiary.
Kelly Ho: They're the beneficiary.
Matt Parker: With anything with the banks, that I talk to clients about a lot is, yes, you are a customer of theirs, but their primary focus and customer are the shareholders and they are for profit and they want to make money, and that's really what they're out there to do. So yeah, it does take away the opportunity of looking at all the options, if that makes sense. So I think that, like you said, it's planned and really get into that plan of what do we expect? How is cash flow? How much do we have set aside? Do we need coverage? If you stop working, can you still make payments? I mean, there's so many things that discussion entails that it's not just a quick talk. From my point of view.
Kelly Ho: It's not. And quite frankly, actually the whole insurance discussion ties into the financial planning part. So often has, when I'm running those scenarios for clients, it often works into the risk portion where we talk about insurance to go, "Hey, let's take a look at your group benefits to make sure that in the event you can't work right because of X, Y, Z reasons, that you have a decent long term disability plan." And we also all know, I don't know if anyone's well versed in this, but ICBC has changed some rules where they have a certain maximum that they'll only pay out if the employer doesn't pay. So, that's a whole other issue that's come about.
And what if we get sick? Unfortunately, a lot of people getting cancer, that type of thing, we all know someone, right? Who's gone through that, but they're not sick enough for the long-term disability to pay out. Now what? And depending on the familial situation, we're also thinking, "Okay, well if the one spouse is gone, or if one partner is gone, great, I can pay off the mortgage, but what if I wanted to work?" So then income replacement, right? Because when a person dies, their ability to earn income has also died with them.
So it's a whole host of issues, not simply, "Oh, pay off the mortgage, done." So as opposed to having a million insurance policies, why not have that discussion and just spend that extra half an hour, an hour with a professional to decide what works best for your situation.
Matt Parker: Simply put talk to Kelly and-
Kelly Ho: There other people too. But yeah, someone.
Matt Parker: Or someone like you.
Kelly Ho: Someone like myself, right.
Matt Parker: That is an expert and knows what they're talking about and has all the different options available and really can map out the plan that best suits your life and your goals. So thank you so much, Kelly. It's always your pleasure. I love connecting. I love working with you. And where's the best place for anyone wanting to reach out, connect with you? Where's the best place that they can do that?
Kelly Ho: Our website. That's www.dldfinancial.com.
Matt Parker: Wonderful. I'll put that in the notes in the show, and thank you again, and we'll be in touch very soon.
Kelly Ho: Thank you, Matt.
Introduction: Thanks for listening to the House Rich Podcast with Matt Parker. We hope you enjoyed this episode. For more information and resources to get you started on your home ownership journey, visit www.MattParker.ca, and don't forget to rate and review this podcast. Thanks again for listening.