Chapter 6

The Big-Ticket Items of Life

Finance and Major Purchases

Your House, Your Car, that Perfect Cottage in the Woods

If you're anything like us, long before you buy a house, a car, or that perfect cottage in the woods, you've spent many an afternoon daydreaming about what it's going to be like, how it's going to feel. Ahhh . . . a sunny porch where you can sip your brew, a lovely garden where the kids can play, or a sweet ride to zip around town in style.

Yes, major purchases are not just major in terms of cost; they're also major because they are so emotional, representing the culmination of our dreams, desires, and attitudes about how we want to live our lives—not only now, but in the future. They also encompass that uniquely female perspective of rounding up friends and family to share in that perfect home, vehicle, or holiday escape (or at least, share their opinion!).

And yet, as with everything in life, what you dream of and what is realistic right now might be two very different things. Compromise is almost always required, and sometimes, that can be so difficult to accept. But think about it this way: even if you can't quite achieve your perfect dream home or the ultimate roadster (just yet), each major purchase is a stepping stone, and a decision that will affect your future choices and opportunities. The end result? It pays to be in the know, consider your options, and balance both short- and long-term needs, from the starter home to the Tudor estate (and everything in between).

In this chapter, we will look at some of the big purchases of life: your home, your vehicle, your vacation escape, and investment properties.

The Five Cs of an Attractive Borrower

“Neither a borrower, nor a lender be,” wrote Shakespeare, who clearly must have had a few gold coins in his pocket when he bought his cottage in Stratford-upon-Avon. Most of us, however, are not equipped with the necessary amount of cash to buy a home or car outright (modern life can be so expensive!) and we instead rely on banks and lending institutions to help us with our major purchases. For many of us, borrowing is a part of life, which is all the more reason to be informed.

Let's start by considering how lenders will view you (yes, you!) when you are looking for important financing. Too often, we are so busy measuring the rooms and perusing paint chips that we forget that there are a few really important steps required to make that big purchase a reality, the most important being how to secure the best mortgage. It's kind of like a job interview: you have to be prepared and you have to present yourself well.

To keep it simple, here are the five Cs that lenders look for in potential borrowers:

1. Capacity

Once all of your other debts are added up, how much room do you have left to handle more debt, based on your income? Can you actually handle more debt? Lending institutions typically have limits, in terms of the specific percentage of your income that can be allocated to total debts or housing costs, so in order to qualify, you have to fall within these guidelines. You might be able to influence the final outcome, however, by paying down existing debts or choosing a less expensive purchase in order to make the payment fit within the range.

2. Capital

With major purchases, it is not uncommon for buyers to put down some of their own cash at the time of the sale. How much cash can you put down on the purchase? Think of a down payment as your initial stake in the game: you're a safer bet in terms of financing if you pay more up front, and you'll pay less in interest later on.

3. Collateral

When you make a major purchase, it is often used to secure the loan. How valuable and marketable is your purchase? For example, is your dream home in good condition and in a desirable neighbourhood, or is it a real “fixer-upper” in a remote location? In case you default on the loan (which we know you would never do, of course), the lender wants to know how easy it would be to sell the asset to pay off the outstanding loan balance.

4. Character

This criterion really does relate directly to you. Are you a fine, upstanding citizen with a steady job, good education, and a stable place to live? (Now flash that irresistible smile!) Your reputation and earning capability mean a lot, so this is an example of where all your hard work to build up your character, your career, and your credit rating can really pay off.

5. Credit

When it comes to major purchases, you will often require experience with credit in order to get a larger amount. Do you have a history of making your credit payments on time and in full? A credit bureau report, credit score, or other lending references will provide proof of your track record, so you might as well fess up to any indiscretions now.

Although it might be frustrating and stressful, managing your credit is just a part of life. The more years that you can maintain a good record by ensuring that payments are made on time and by retiring debt, the better off you will be in terms of qualifying for future loans. Even if you're still young and not ready to make a major purchase, you should still be thinking ahead to the future when you will be ready (and believe us, that day will come!). After all, you wouldn't want that little problem of an unpaid department store card (gee, the balance was only $150) to get in the way of your dream home, now would you? We didn't think so! So, let's get to it . . .

Your Home

Once upon a time, buying a house was a rite of passage for couples and newlyweds. Nowadays, home buying is no longer strictly for twosomes. Plenty of singletons are pooling their resources in order to buy a home that they could not afford individually, or buying a home that has divided units to provide a rental-income stream. Not only that, more and more women are buying homes and condos on their own (and then becoming permanent fixtures in the hardware-store aisles), making the choice to move forward with their dreams, instead of waiting for that ever-tardy Prince Charming to arrive.

Choosing the right home is driven by both qualitative and quantitative considerations and there are almost always trade-offs between the two. A garage or a garden? A finished basement or a sleeping loft? Extra bedrooms or a home office? A pool or an attached suite for the in-laws? Oh, the choices!

The primary factor for most buyers, however, is all about (you guessed it!) location, location, location. Yep, just like the real-estate agents say. As a singleton or a couple without children, you likely want to find a home close to your place of work, with easy access to your gym, movie theatres, your fabulous friends, and your favourite restaurants and clubs. Once you become parents, however, proximity to entertainment takes a back seat to good schools, quiet streets, and parks and play spaces.

img Golden Rule: The Rule of 32

No, we are not talking about your dream husband's waist size. The rule of 32 gives you a measure of how much you can reasonably spend on a home. Banks, trust companies, and credit unions are generally more than happy to provide qualified purchasers with a pre-approved mortgage up to a defined amount. They calculate how much they will lend you by looking at your income and the amount of debt you carry.

Gross debt service (GDS) is a ratio of debt (i.e., principal and interest, taxes, heating, condo fees, etc.) divided by your gross monthly income and multiplied by 100. The lower the GDS ratio, the easier it will be for you to handle your debt payments. In general, a GDS of 32 per cent is usually the highest level a bank will permit. See more about this and your TDS ratio (can you guess what it means?) in the pages that follow.

Living within Your Means: Three Easy Steps

When you're thinking of buying a house, it's important to take a hard look at what you can afford. You may feel like you can afford an extra $600 a month, but when you start looking at what you can get for $800 a month, well, maybe if you cut back on going out for dinner now and then . . . but how can you be sure?

Financial advisors have invented two important ratios for taking the guesswork out of affordability. Each involves just three easy steps.

If you find you actually spend less on housing than your GDS calculation, and less on debt payments than your TDS calculation, then congratulations, frugal girl! Technically, you are living within your means. Just remember, those are your upper limits. The lower you keep your ratios, the more disposable income you will have to enjoy each month. What you choose to do with that disposable income, and whether or not your spending remains within the limits of that income, may be another story.

The Lowdown on Down Payments

When it comes to down payments, bigger is always better. If you can't afford to save a good-sized down payment (about 10 to 20 per cent of the cost of the house), chances are you won't be able to afford saving for emergencies or the future once you are in that house. Real estate always comes with a myriad of hidden costs, from repairs to unexpected structural issues, and the problem of “uninvited guests” (i.e., critters, not relatives!). So it's essential to consider the whole picture and be prepared.

Saving for a down payment can also make you think more carefully about how much you want to spend (or rather, should spend). When the difference between a $365,000 and a $400,000 home means saving an extra $7,000 for the down payment, you might just start to question how badly you want whatever comes with that more expensive house. Requiring a larger down payment can also mean having to delay your purchase in order to save the additional funds, which could get in the way of apartment-lease end dates, real-estate-market conditions, and passing up that lovely, but slightly smaller house you've been eyeing. What to do? Think through the implications and make the best choice that you can, given the situation.

Mortgages: Terms and Meanings

More Than Just a Pretty Rate

When you begin shopping for a mortgage, you enter the world of rate competition. Every bank and lending company hopes to entice you by dangling shiny low lending rates before your eyes. Do not be easily swayed by all the glittery mortgage glam. Rates are important, but they are not the whole story. When choosing a mortgage, the two most important factors are:

1. the amount of interest that you will pay over the full term of the mortgage (hint: less is more!); and

2. the balance owing when the mortgage expires and you become exposed to new rates.

Here's the thing: rates can fluctuate with economic conditions, which are generally out of your control. So although you might enjoy a relatively low rate for two years, the renewal rate at the end of the term could be significantly higher. Compare this to locking in at a moderate rate for five years and having better rate stability for a longer period of time.

Similarly, while a closed mortgage with a fixed rate for three years might seem like a safe bet, an open mortgage with a variable rate could be even more advantageous for you, if you structure your cash flow in such a way that you can pay down your principal quickly. Variable mortgages might also allow you to lock in at a particular rate at some point over the term, which can help to mitigate risk if rates start to rise.

If you are starting to feel your head spin, you're not alone. Trying to figure out whether interest rates will rise or fall (and when!) is difficult for economists and analysts who follow the markets on a full-time basis, let alone potential borrowers. When you are in the market for a mortgage, pay attention to what analysts and economists are saying about the future of interest rates, ask lots of questions, and seek out information where you can (financial institutions and real-estate resources can be good places to start). You also have to listen to that little voice inside of you, the one that lets you know if you are comfortable or uncomfortable, and make the best decision you can. Remember, you don't have to buy that bigger house right now. If the mere thought makes that little voice scream “no,” chances are you can find your comfort zone elsewhere and move forward.

A smart girl knows that bargain rates are no bargain if they mean that you are locked into a situation that doesn't allow you to pay down the mortgage quickly. Limiting your ability to make extra payments is bad for you and good for the lender. Your goal is to avoid paying excess interest and the way you do that is not by locking into a low-rate mortgage forever (thereby, guaranteeing a big chunk of interest paid over the term). Rather, you need to focus on rapidly reducing the principal upon which that interest is calculated.

The Takeaway

Be wary of those pretty little rates and focus on the total amount of interest you will be expected to pay for the duration of the mortgage. Look for every opportunity you can to pay down the mortgage, such as making biweekly payments (rather than monthly), annual opportunities to apply a lump-sum payment without any fee penalties, and the chance to increase your mortgage payments at some point down the road. For more details, see below!

Tips for Paying Off Your Mortgage Faster

The savings can be significant. For example, on a $200,000 mortgage at 4.5 per cent amortized over 25 years, switching from monthly payments to an accelerated weekly schedule will save you more than $20,000 in interest over the life of the mortgage and reduce your amortization by almost three years.

img Did You Know? Turning off the Meter

Say you have a $100,000 mortgage with a 7 per cent interest rate per year. If you pay it off in 15 years, rather than over 25 years, your monthly payments will be nearly $200 more, yet you will save nearly $50,000 in interest. Now, that's some serious cash!

The Cost of Bells and Whistles

Congratulations, you're pre-approved for a mortgage and now you know the price range within which you can shop (likely more money than you've ever spent in your life!). However, it's important to carefully consider all of the costs before you start falling in love with houses at the top end of that range. You may very well need a buffer zone of cash to cover the litany of new-home-related expenses. Let's consider a few of those sneaky items that can shrink your shopping budget:

img Hindsight

When I first walked into my new house, I had all kinds of ideas of changes I would make: knock out a wall here; change up a paint colour there; install some fabulous, dramatic window coverings. I didn't do those things off the hop, probably due to not wanting to incur the extra costs so soon after making a major purchase, and am I ever glad that I didn't.

Instead, I got a chance to live in the house, to experience where the light fell, why certain things had been designed as they were, what the place was really about. I did make changes down the road, but not any of the changes that I originally thought I would. By giving the house a chance to reveal itself to me and help me understand it, I was able to save money and make the adjustments that really showed off my home in its best light.

The R-Word: Renovations

Admit it, you're addicted. From drooling over Architectural Digest, to perusing design blogs, to PVR-ing all those kooky and often tacky reality-television home-makeover shows, your imagination gets fired up with just a voyeuristic glimpse into the way other people live. Like those weight-loss losers of the biggest kind, the thrill is in bearing witness to the power of transformation, in this case, of the home. (“I never would have thought of using aubergine in the kitchen. Could my bathroom really look that great, too? And in one afternoon!”)

Home makeovers are especially tantalizing and inspiring in their promise of transforming your home with a coat of paint, some new throw pillows, and er, just knocking out a wall here and there (have sledgehammer, will mesmerize!). The proliferation of DIY guides and programs makes home projects and renovations seem within reach, even on the smallest of budgets. And yet, you know in your heart that once you get started, these projects have a way of getting way out of hand (some designers refer to it as “project creep” or the “why not?” scenario). Whatever you call it, big dollars always seem to follow.

But here's the catch: renovations on their own are not bad things. After all, don't real-estate professionals always tell us that they increase the value of our homes and our investment? Well, yes, but it depends how much borrowing and leveraging a girl needs to do to get her dream kitchen. The key is to keep the process manageable, develop an overall vision, and stick with it. Here are a few tips for helping you keep smart renovations within reach:

The Takeaway

Balance, focus on your overall plan, and recognize that you don't have to do everything all at once. Just have that second cup of coffee and enjoy the process!

img Golden Rule: Live within Your Neighbourhood

Before you turn your perfectly acceptable new home into the most outstanding home on the block, consider the location and the value of the homes around you. If you go for every upgrade or high-end renovation and then need to sell your home for an unforeseen reason, the price you will want to recover may be significantly higher than the average selling price within your neighbourhood. This can make it tough to sell, and even tougher to recoup your investment. Keep up with the Joneses if you must, but recognize that there is limited payoff in outdoing the Joneses.

Home Couture Comes at a Cost

Now let's pretend you've lived in your home, given it some time, and let the required renovations speak to you. And now you're ready to thoroughly gut the kitchen! If you're like most of us, you're probably dreaming of something that your very-real savings won't cover. And if that's the case, now is the time to explore your financing options. (Just please do so after consulting with your financial planner: going into serious debt just to have design-magazine-worthy drama is so not worth it.)

Here are three financing options to consider:

1. Use a home-equity line of credit

A line of credit gives you access to a predetermined amount of credit on demand. Generally, you can borrow up to 75 per cent of the appraised value of your home, or up to 90 per cent if the line of credit is insured.

There are some real pluses to going with this option, including:

  • ease and convenience. You may have the option of writing cheques or using a credit or bank card;
  • you can take what you need, when you need it, and pay interest only on the outstanding amount;
  • a line of credit secured against the value of your house will typically be issued at a lower rate than an unsecured loan or personal line of credit; and
  • flexible repayment. You can pay some or all of the outstanding balance at any time without penalty, or make interest-only payments.

2. Increase your existing mortgage

You also have the option of increasing the amount of your mortgage to help finance your renovation. This option is ideal if:

  • your mortgage is coming due;
  • you're selling one house to buy another;
  • you're taking out your first mortgage; or
  • you're locked into a long-term mortgage at a significantly higher rate than is currently available. In this case, the savings in interest over the long term could offset any penalty you may incur for restructuring the mortgage.

This option isn't as flexible as a line of credit, but it does offer some advantages:

  • the borrowed funds are structured to be paid back in a set amount of time; and
  • interest rates can be fixed, if you choose—unlike a line of credit, which floats against prime.

3. Get a second mortgage

A second mortgage is just that: a mortgage that is in addition to your first mortgage. Like a first mortgage, a second mortgage is a loan with a specified rate of interest and repayment schedule.

A second mortgage can be a good choice if you are locked into a long-term mortgage, but wouldn't benefit from breaking your first mortgage. Do note, however, that lending rates for a second mortgage are generally higher than those for a first mortgage.

Like increasing your mortgage, this option trades repayment flexibility for the peace of mind of knowing the debt will be paid down if you stick to the repayment schedule.

The Takeaway

Yes, renovations are exciting. But stay focused on the big (financial) picture, smart girl.

As many of us know, things can quickly get out of hand. If you are using a home-equity line of credit or mortgage funding, it should be used for the purpose of adding value to the home through renovations or invested in other assets that appreciate over time. Access to this credit shouldn't be used for depreciating consumer items such as TVs for every room, cars to fill that oversized garage, and so on.

Above all else, the biggest downside, regardless of which financing option you choose, is that you are adding more debt to your balance sheet. You must be cautious not to put yourself in a situation where you have too much debt that is tax inefficient (i.e., not deductible against income). Therefore, as tempting as a massive design overhaul may seem, always remain cautious about the amount borrowed and be careful to balance that with the value, appreciation, and enjoyment you will get in return. This balanced approach is the key to creating wealth over the long term.

As with anything, seek trusted professional financial advice before doing anything that significantly impacts your balance sheet!

img Life Lesson: Love the Home You're In

No home can ever be perfect, so decide on the compromises you can live with and learn to love them as a whole. Once you own it and make it yours, your home will have a magical way of endearing itself to you (and it just might surprise you how much). Despite the little creaks or areas you thought you must change immediately, you might find many unexpected advantages or conveniences that will make you wonder how you ever lived without them.

It is tempting to focus on what still needs to be done, but it's important to recognize that your home will evolve over time, reflecting your experiences, your changing design tastes (and they really do change), your family's growth, and, of course, your budget. The most beautiful and comfortable homes we've ever been inside were not filled with sumptuously decorated, magazine-perfect rooms, but rather, had started out bare and the owners slowly collected furnishings, making gradual adjustments and additions over time. These are the houses that really are homes, expressing the genuine warmth, pleasures, and values of their owners.

Concentrate on making your home a place where you, your family, and your guests feel happy and welcome, rather than seeking to impress with a showroom ideal (how boring!).

Your Vehicle

It's a little-known fact that in the world of auto buying, women hold a lot of power—purchasing power, that is. According to Road & Travel Magazine, 65 per cent of all new cars and 53 per cent of used cars in the United States are purchased by women. According to the same study, women influence 95 per cent of all auto purchases. Wow! Who knew?

And we're not just talking about the variety of cars that get you from point A to point B. Luxury cars, long the domain of men with James Bond aspirations (or complexes), are rising in popularity as a spending priority for women. In China, where female millionaires are being minted faster than anywhere else in the world, luxury-car sales are skyrocketing. Thirty per cent of Maserati's sales in China are to women, as compared to only 10 per cent in Europe. Ferrari claims that women account for 20 per cent of their sales in China, twice their typical average.

No matter what type of vehicle you buy, there is a key consideration: while a home is generally an appreciating asset that will increase in value over time (assuming, of course, that you maintain and take good care of it), a car is definitely a depreciating asset (unless it has some vintage-collector value). By depreciating, we mean that every year it's worth less and less until the value eventually becomes nominal over time.

Yet the vast majority of people do not focus on the value of the vehicle they buy, nor even the total purchase price. Most car buyers consider one thing only: the monthly payment. In truthing, focusing on this alone, you can use a little creativity and negotiating power to make almost any car fit into your monthly budget. Yet focusing on the monthly payment alone and not the overall cost of the vehicle is one of the all-time most common—and expensive—mistakes that purchasers make.

img Golden Rule: The Three-Year Rule

Always choose a vehicle and a payment plan that allow you to pay off the car within 36 months. Three years and no more! If this means you can't afford the monthly payments, then you can't afford the car.

The same rule applies to leasing: select a car that you could afford to fully purchase within 36 months. Bank the difference between the lease payment and the would-be loan payment and you will even save yourself a bit of money over the term.

Car-to-Home Ratio

Here's another way to put your car purchase in perspective: think about what you spend on your (depreciating) car compared to what you spend on your (appreciating) home.

If, for example, you are making car payments of $1,200 per month (for one or maybe two vehicles), while making mortgage payments of $1,800 per month, then you are paying two-thirds of your mortgage cost on your vehicles. Clearly, this is not a choice that makes good financial sense.

Put another way, suppose your family has a $42,000 SUV and a $52,000 car. If your home is valued at $376,000, then your expenditure on vehicles represents roughly a quarter of the value of your home! Not to mention the cost of gas, maintenance, and insurance. That's a lot of money!

What's a more appropriate level? Whatever car you can comfortably purchase in full within 3 years. See the connection? Since the average car is on the road for 8.5 years, this will give you plenty of time to save for a new one. Over time, you will be able to make larger down payments, with the ultimate goal of paying cash for your car purchase and avoiding interest payments altogether. Now, that's a sensible approach.

img Golden Rule: Leasing for Business Owners

Be careful! Leasing makes it easier to drive away in a car that is more expensive than you could afford to buy. And here's the rub: you are making monthly payments on a car that is depreciating in value, while still being on the hook for its original value, and not even owning it in the end. That's triple trouble!

The financially prudent thing to do is to stick to our Three-Year Golden Rule and only lease a car that you could afford to buy outright over 36 months. Used in this way, leasing a vehicle can be an economically ideal option for business owners, but only if you have the legitimate ability to write off at least 50 per cent of the lease payments for tax purposes.

Your Vacation Property

For many families, a vacation property is an idyllic refuge. The beach, the lake, the mountains; this is a place to make memories that will last forever, where the stresses of daily life drift away on the tide, and where a family can relax, have fun, and renew their bond with one another.

There is no question that a vacation property can deliver fantastic intangible returns. But, is it a wise investment? And if not, what are your options?

While many families share long histories of oceanside or lakeside properties, many choose to rent or visit resorts, rather than buying their own vacation property. Family traditions are made by returning to the same spot year after year (and this doesn't necessarily mean owning it). By renting or staying at a resort, a family can enjoy the same kind of vacation togetherness for a fraction of the cost (and a fraction of the headache) of ownership.

Before you start shopping for a cottage or vacation property, do yourself a favour and do a little math:

Now, tally up the numbers and compare: are you better off renting or are you really ready to buy? You might find that the best approach is to continue to rent, until perhaps increased work flexibility would allow you to spend enough time at your retreat to justify a purchase. Think of it this way: you could use your rental years as a means to do first-hand market research, to find out exactly where you would like to be when you are ready to purchase.

img A Lawyer's Take on Major Purchases

An individual's personal and financial situation will be key factors when considering purchasing items such as a home, a car, or a second home. Here are some things to consider:

  • Marital property legislation (which differs from jurisdiction to jurisdiction) will dictate how such items are to be shared in the event of marital breakdown and, in many cases, death. Pre-nuptial agreements can look after some of these factors.
  • Tax considerations are also important. For instance, purchasing vacation property in another jurisdiction can open up the taxpayer to potentially paying estate taxes in the jurisdiction of the vacation property, as well as in the taxpayer's jurisdiction of residence.
  • In some cases, depending upon a person's circumstances, legal and accounting professionals may recommend purchasing the property via a vacation trust resident in the taxpayer's province in Canada, so as to avoid estate taxes in the United States (for Canadians acquiring vacation property in the States). This decision will depend on, among other things, the taxpayer's total portfolio of assets. Talk to your advisor(s) for further details and explanation.

Keeping It in the Family

If you are fortunate to have a cottage already in your family, you know how precious it is and how tricky it can be when it comes to succession planning. When several children and their families share an emotional attachment, as well as a desire to maintain the cottage, careful financial planning is key.

Here are some approaches to keep in mind:

The Takeaway

Given the various approaches and parties involved, a good approach is to seek specialized advice in this area to understand the options and choose the approach that is best for you and your family. Not only can it save you unexpected tax costs, it can also help to keep peace in the family for the long term.

img Hindsight

My clients came to me and said they wanted to buy a cottage. Though they have high incomes, they already held a mortgage of over $300,000 and were not making progress on reducing their existing debt. They felt that, given their salaries, they “ought” to be able to afford a cottage. Both of them worked long hours to keep their incomes up, so they certainly felt they needed a cottage.

We figured out that the annual costs on the cottage they wanted to buy would be upwards of $10,000. Yet, their cash-flow situation allowed them only about $5,000 a year. Meanwhile, four weeks of a similar cottage rental in the area they chose would cost only $2,000. In the end, we came up with a spending plan that allowed one of them to reduce their working hours by 20 per cent.

Even with this change, their financial plan remained on track. They realized that what they really craved was more leisure time and that they were merely channelling that into the idea of owning a cottage.

Your Investment Property

Buying a property for investment purposes can be fabulous or frightful; there's often no in-between! Not only are you vulnerable to tenant concerns (and headaches!), but to market cycles as well.

If you are a newbie to owning a rental property, an owner-occupied property is a good way to go. This means that you purchase an income property where you actually live on the premises. You have plenty of options: an owner-occupied property can include anything from a home with a basement apartment, to a multi-unit apartment complex. You will likely have more advantageous lending options, since banks consider you less of a risk if you are willing to live in the property (and therefore handle those middle-of-the-night emergencies yourself—fun!).

Should you decide to take the investment-property plunge, here are our top three must-dos:

1. DO start small, by purchasing a property that you can maintain in the event that you are without a tenant for a few months. If you are totally dependent on rental income, you might find yourself in a bind if you lose that rent for a month or two, particularly in the early days of ownership.

2. DO think of your investment property as a tool to build net worth rather than to generate income, at least for the first few years. Once you've paid some of the mortgage down and you've got a cash cushion, then and only then can you start to feel comfortable using some of the income. Slow and steady wins the race!

3. DO be cautious of how much you are borrowing to buy an investment property. Your GDS can be driven up and reduce your ability to borrow in the future. Keep in mind that banks don't typically allow you to use 100 per cent of the property-rental income in determining your income, as they also realize that tenants come and go.

Once you have the chance to gain some experience with investment properties, you will be in a much better position to determine whether you want to buy, hold, or fold. This approach is a winner either way, as it facilitates slow and steady growth or an easier exit.

img Hindsight

I owned a rental property once. Today, if you asked me if I'd prefer to invest in a rental property or get shot in the foot, I would choose being shot in the foot because it would heal faster.

Many people don't realize how much responsibility and expense they are biting off with these things until they are choking on it. Property-buying television shows make it seem like you buy a rental property and then turn on the money tap. The risks are very underplayed and the liabilities can create huge consequences. I'm not saying don't ever do it, I'm just saying think through every outcome and make sure you are fully ready for the responsibilities you're getting yourself into.

Know When to Fold ′Em

Perhaps the only thing tougher than making the decision to buy a major purchase is making the decision as to when to sell it. Over the years, you will have put an immense amount of time, money, and energy into buying and maintaining your house, car, or cottage. When it comes to selling, emotions can cloud your judgment every bit as much as when you were on the buying end.

Investment advisors recommend having a sell discipline when it comes to investing in the stock market. This is a strategy that helps advisors to understand their clients' objectives so they can determine when it's appropriate to sell an investment.

What's your sell discipline with respect to your major purchases, and what are the signs that you need to look out for? How do you know when the time is right to just let go?

Just as a sell discipline can indicate when it's time to get out gracefully, it can also guide you toward staying invested. When things aren't going particularly well, fear and panic might make you consider getting out of an investment prematurely. A strategy that defines and reminds you of your criteria for selling can put things back in perspective and help you to keep the faith.

img Life Lesson: When Life Takes an Unexpected Turn

When life happens and things don't go as planned, an asset, such as a home or cottage, may have to be sold. Depending on the circumstances, this might be really sad or a big relief. In financial terms, however, while real estate tends to appreciate in value over time, in nearly every market, there are periods of low or negative growth. In the case of a sudden setback, whether death, disability, or divorce (or simply realizing you made a mistake and need to unwind it for sanity's sake), it is possible that you may have to divest of a property at a loss. If this property is your principal residence, the loss will probably not be tax deductible (depending where you live).

The emotional consequences of selling the family home, for example, can be more stressful than any financial loss or gain. It is sometimes necessary to take a reality check and realize that your family is still a family, even if you have to make an unforeseen move.

As a parent, your instinct is to shelter your children in times of crisis, but to do so at the risk of financial peril is shortsighted. Children are more resilient than we think, particularly when they are assured of the continuity of their parents' love. Ask yourself if clinging to the family home is possibly more about your own needs, rather than “for the sake of the children.” Financial stability is more important than the continuity of one particular roof. If moving and downsizing can help to stabilize your financial situation and reduce overwhelming stress, then you will be doing the very best to keep your family safe and protected.