Couple seeks R&R with a B&B
Mid-30s couple want to quit good jobs in search of a more fulfilling life and wonder if their net worth is enough to fund a move to latin america and a new bed and breakfast They just might be able to manage this major change because they are already fru
Philip, who is 34, and Louisa, who is 39, are already planning to quit the world of salaried employment.
The plan — move to a warmer place than canada, perhaps Peru, where Philip has family roots, and open a bed and breakfast. “We want to set up a bed and breakfast or a small hotel, to travel in Latin America, and to make the second half of our lives a lifestyle that we control, rather than our employers,” Philip explains.
After watching their immigrant parents struggle and, in one case, die before they could enjoy their lives, they are anxious to leave the rat race behind and find fulfilling lives.
They will cut the ties to their solid jobs in the transportation industry, which pay them $8,000 a month after tax, pay off mortgages on their house and a rental condo that total $113,000, and then convert their home to a rental property. That would provide income in addition to the $634 net monthly cash flow they get from their present rental property.
Making it happen with $792,500 of present assets, mainly in the two properties, will take some financial engineering. Take off their mortgages and they have net worth of $679,500.
however, there remains the fundamental question of how they will finance a business in a distant country.
Family Finance asked caroline Nalbantoglu, a financial planner who heads cNal Financial Planning Inc. in Montreal, to work with Philip and Louisa.
“It is a question of numbers, making sure that their financing cost for the property will be sustainable and that their cost of living will be supportable,” Ms. Nalbantoglu explains.
First problem – getting money to buy and set up the B&B. canadian banks may be less than enthusiastic about lending to inexperienced hoteliers in a foreign country, the planner says. But for the purposes of the analysis, it is assumed that they will get a loan.
If they can rent their present condo out for $1,200 a month, then their net income from both properties would be $1,860 a month after expenses, Ms. Nalbantoglu estimates. If they can get a home equity loan of $300,000 at 3.5% with a 25-year amortization, then with a monthly mortgage payment of $1,500, they would have to generate at least $1,000 a month from the B&B after expenses to pay their own costs of living, perhaps half of what they are in Montreal.
They could sell the rental property and capture present equity, about $300,000 after selling costs. They might get a better return with this cash, but they would also be reducing collateral they might use if they seek a loan for the B&B from a canadian bank.
Forecasting the revenue from a nonexistent business in a foreign country is risky, to say the least, Ms. Nalbantoglu says. They can reduce the risks of their own plan by increasing their capital in order to have enough money to invest in their B&B. Saving for three years while maintaining their present jobs will cut the need to leverage the B&B off two rental apartments in Montreal. If the B&B were to have a slow start or a bad year or if interest rates on their condo mortgages were to rise substantially, they could find themselves unable to maintain it.
If the couple does wait for three years, they will be able to pay off the mortgage on their principal residence. They will have been able to save about $150,000 without counting interest the money may accrue. That will enable them to make at least a down payment on a B&B property in an inexpensive market. The potential rental income from their two Montreal condos will provide backup cash flow, meaning they will not be completely dependent on their B&B. And they will not have had to leverage their backup canadian investments: their two properties.
canadian pension law will actually help them, though with some time lags, to finance their B&B. Both Philip and Louisa have defined contribution
pension plans.
upon leaving their jobs in canada, they can transfer the funds in the plans to a Locked-in retirement Account (LIrA). After two years of non-residence, they should be able to transfer the monies into an unlocked account. Then the couple can pay 25% withholding and take the money to their new home. They will, however, need to take tax advice in their intended country of residence to determine how the remaining funds will be treated — as capital free of tax or as taxable income, Ms. Nalbantoglu suggests.
RETIRMENT
Predicting how much income the couple will have in three decades in retirement is guesswork, Ms. Nalbantoglu says. Philip and Louisa will have traded off their present jobs and good pension plans for the unknown returns of entrepreneurship in a yet-to-be-selected country. They will have some Old Age Security benefits based on years of residence in canada after age 18 divided by 40. At present, that would give Philip 16 years of credit and, therefore, $2,621 a year from OAS. Louisa would have 21 years of credit and therefore $3,408 from OAS in 2013 dollars.
At retirement, say at 65, if the couple wants to sell their B&B business, they might obtain a good price. They would still have their canadian rental income of $22,320 a year before any expenses. If they were to sell the properties, which would be mortgage-free by the assumptions of this analysis, they would have $650,000 at present market values. At just 3% over the rate of inflation, they would have pre-tax income of $19,500 plus OAS of at least $6,029 plus QPP benefits of perhaps half the maximum benefit, which would work out to $6,075 a year. That adds up to about $31,600. If they return to canada to retire and split their pension incomes, taxes would be negligible. It would be sufficient for a modest retirement in canada. If they have made a success of their B&B, it would be more.
“They are young and frugal,” Ms. Nalbantoglu says. “I do not see why they cannot achieve their dream of owning and operating a B&B, but they have to give themselves time and sufficient capital to realize their goal.”