DIY vs Robo Quick Challenge

January 11th, 2018 by Potato

I was challenged a while ago to figure out if DIY investing is really worth it for regular people when you factor in the value of the time and effort spent — should I even be putting time into things like the book and course to help people learn to invest when robo-advisors are the future?

And of course the first defense is that even if a robo-advisor is doing the work, you still need to do some reading so you’re prepared for the risks and uncertainties inherent in investing, etc. But the point is still there: are the savings of DIY worth the extra time it takes now that robo-advisors exist?

I decided to do a quick back-of-the-envelope comparison. Though there’s no way to know for sure that I didn’t tweak the assumptions to get an answer I liked, I assure you that these are the first reasonable estimates that came to me as I was trying to be fair — we are “doing it live” so to speak.

So do-it-yourself investing requires a bit of time and effort, and the question is how do you value that time and effort to figure out when it makes sense to DIY vs. just pay a robo-advisor? For this I’m going to assume that we’re only talking registered accounts, so no ACB and other tax reporting headaches of a non-registered account (and besides, if the robos aren’t tracking it for you then a more complex robo portfolio may be more work than a simple DIY one).

First, you have to learn about your risk tolerance to make sure you’re ready to invest at all, come up with a rough plan, figure out whether to prioritize your TFSA or RRSP, etc. But that’s a wash as even if a robo-advisor is handling the day-to-day aspects of your investing, you still have to deal with that.

There will be more up-front costs to learn how to invest as a DIY-er. You’ll have a bit more learning to do for DIY investing, like the mechanics of making trades and rebalancing, choosing a model portfolio to follow, as well as some investment in learning to control bad investor behaviour. The Practical Index Investing Course is $299 $169 and a one-stop resource, with another ~15 hr required to work through it — so the total cost depends on what you value your time at. Let’s use $25/hr and call it $544 in up-front investment (more if you’re going to go with the library card and time method – the course will save you lots of research time, which is the point of it /self-promote).

Then on-going effort is small but not nil. For the TD e-series route you may have to spend 2 hours/year or so on tweaking your automatic contributions and rebalancing; for ETFs it might be more like 4 hours/year. Plus the ongoing MERs of the funds (and the robo-advisor’s fee for that option).

Element DIY e-series DIY ETFs Robo-advisor
Time: learning about risk tolerance, planning Same – this is table stakes for investing Same – this is table stakes for investing Same – this is table stakes for investing
Learning how to trade and manage portfolio $544 (one-time) $544 (one-time) 0
Annual cost of funds 0.45% 0.2% ~0.7%
Annual effort to maintain $50 $200 0
Total cost for $10,000 for 5 years $1,019 $1,644 $355 (*)
Total cost for $100,000 for 5 years $3,044 $2,544 $3,275 (*)

* – includes “first $5k managed free for a year” offer calculated with real all-in costs.

Now I am a fan of robo-advisors and they do have their place — lots of people will be well-served by going to one and not everyone wants to be a DIY investor. That’s important so I’ll repeat it: regardless of the potential savings of DIY, not everyone will want to (or should) do it all on their own. Plus there are other potential benefits, for instance a robo-advisor may help prevent bad investor behaviour (and read Michael James’ comment to further reinforce that — any savings can be swamped by bad investor behaviour).

But it looks like even if you give a decent value to your time ($25/hr here) and assume that there’s a big up-front commitment required to learn it, that DIYing can still make sense and be worth the time and effort for moderate-sized portfolios. I picked 5 years out of the air as a reasonable amount of time to amortize those up-front costs — the longer you think that’s good for, the more DIY will pull ahead (at least where the portfolio is large enough to make sense in the first place). For smaller portfolios, the time might not be wisely spent on DIY efforts, though small portfolios do grow into large ones and there is some value to just sticking with one method.

Note that putting a value to your time also reinforces the traditional wisdom that you need a ~5-figure portfolio for ETFs to make sense over TD e-series — even with commission-free purchases, the MER savings may not outweigh the effort with smaller portfolios.

Never Weight — 4th Quarter Update

December 31st, 2017 by Potato

I have a bad habit of powering my way through tough projects and tight deadlines by eating at my desk — a bio-hack I picked up ages ago (undergrad for sure, and I think I used it a few times even in high school). I thus tend to gain some weight with many major projects, and it never quite goes away. For years I didn’t really do much about it — too busy on the next thing — but during grad school I set a “never weight” for myself, a point where I’d give myself a mental slap in the face and re-prioritize my health over whatever project was consuming me at the time. I hit that never weight near the end of 2016.

I actually made some decent progress in the first three months of 2017 after resolving to lose the weight. But then I backslid, and backslid, until by the fall I was over where I started.

So to make it real, I committed to dropping the price of the course and the book if I couldn’t lose the weight.

Here we are at the end of the year, and in the 4th quarter I’ve managed to lose a hair over 12 pounds, which is pretty impressive considering this is the quarter with Halloween, my birthday, and Potatomas. That also brings me back under my never weight so I can finish the year down from where I was this time last year… but it’s not quite good enough as I’m still not back to where I was in February, just barely erasing the gains that happened in the third quarter (and to be fair, half that was dropped almost instantly after the bloating from the Sept all-nighter season passed — it’s been about 2 lbs/mo of real progress).

For Potatomas, my parents got me a fitbit, I’ve got a new android phone that can do apps the BlackBerry couldn’t (like Carrots), so I’m more hopeful heading into 2018 that I’ll be able to keep up that ~2 lbs/mo improvement.

But for now, my failure to undo the damage of Q3-17 means a discount!
The course is down from $299 to $169 now!
The ebook version of the Value of Simple will be going down to $6.99 (this will take a few weeks as I’ll synchronize it with the 2nd edition release).

Otherwise, it’s been one of the longest-ever hiatuses here in the 19 years of BbtP. I don’t have much of a public update: things are busy in RL, and I’m trying not to stay up late blogging after everything else is done (and my brain is too broken to write anyway, whereas before it was broken in a way that I had to). I’m taking the next week off work, so hopefully I can get a few draft posts out to published status (as well as pushing the 2nd edition of VoS out the door).

FLM and the Wonder Bread Abomination

November 1st, 2017 by Potato

Financial literacy month is upon us, and I have another stretched metaphor for you.

Bitches Get Riches had this post in the summer on learning to cook for yourself, which will help kick this off. Even if you don’t become good at cooking or build a large repertoire, out of necessity most people are going to learn to cook a few things at some point in their lives. Parents will teach kids what is and is is not food – often one of the first things they teach them after “hey, I’m Daddy. Say ‘Daddy’.”

So then you’re well prepared for when this horrific ad appears in your feed:

An ad for Wonder Bread suggesting the reader put pizza sauce (or ketchup) on a piece of bread, lay down strips of -- quote unquote -- white cheese, and toast until barely melted to make what they term is a Mummy pizza.

You’ll just know, because you have some measure of food literacy, that this is not a recipe you should attempt. And that any smiles you’ll be enjoying will be at your own expense for attempting to pass this off as food. Or you’d just know that if, for shits and giggles, you did make it to throw up on your Instagram, that you’d never give it to a kid as “food” and never, ever, ever give it to a kid calling it “pizza”. That ketchup and barely melted cheese on a piece of bread is an abomination and is in no way a pizza, let alone one deserving of a made up -acular adjective, and that even if you used pizza sauce a) you wouldn’t put it on a piece of wonder bread and b) you’d at least leave it in there long enough for the cheese to bubble you monster. (Wayfare notes that ketchup and cheese is kind of like a grilled cheese sandwich and this might not be so horrific if they passed if off as that instead of pizza, which I would still not eat)

Anyway, this is pretty clearly the sort of ad you would instantly know is just a bad idea because of food literacy. If you never really bothered to learn about what makes food good (or what makes pizza the High Food of the Special Day rather than something other than a slice of bread with sauce and barely melted “white cheese”), you might get taken in by this perfectly legal ad. And indeed, though all would instantly recognize the moral repugnancy of the act, there is no actual law against calling a piece of bread with ketchup on it “pizza”. Though perhaps there should be, consumers are completely unprotected against predatory recipes such as this, and attempting to protect them would be a big regulatory hassle1

And of course, so it is for financial matters. Except that’s not something we all learn proficiency with. If you saw an ad for a monstrous mash-up product like a market-linked GIC, it might look neat, the ad copy might even sway you into putting some of that in your children’s portfolios. And you might even call it a “good investment”, never knowing what true pizza, I mean investments, taste like without developing your financial literacy.

Looking for a place to start? I’ve got a reading list here.

1. And even then, you might end up with protections such as nutrition labels and ingredient lists that help protect against some form of abuses but will not solve all the problems and sometimes require their own, different form of literacy to parse.

The Rent vs Buy Decision

October 10th, 2017 by Potato


Housing is usually the largest expense in any family’s budget. Getting the decision right about how to pay for your shelter (and how much to pay) matters. Yet you don’t get to take a hundred cracks at it and learn by trial-and-error, all you get is time to do some analysis and make the best move you can with the information available to you.

Unfortunately, many people will spend more time comparing their cell phone options than comparing their housing options. This is partly because it’s also an incredibly emotional decision with lots of overly simplistic heuristics out there: many people look to buy once they are able to, without even considering renting for the long term. They’ll jump to comparisons of condo vs townhouse, or a mortgage affordability tool without even considering whether they should buy at all.

The key thing to know is that in some conditions renting can be the better way to go. There are many factors involved, and this is a long post that will touch on many of them, but if all you take away from this post is the knowledge that renting is not “throwing your money away” but can instead be the better way to pay for your shelter, and that you’ll have to analyze your own situation, that would be fine.

Step zero in your hunt for a place to live should be to evaluate whether you should be buying at all, or if renting may be a better move.

I’ve organized this post with headers and sections to help make digesting it easier, but be warned, it is long. This video covers most the ground I’m going to go over if you prefer video content:

The Core Financial Point

Imagine you had two houses/apartments side-by-side, identical in every respect. You could live in either one, the first being offered for rent, the second for sale. There are non-financial considerations in the choice, of course, but start with the financial ones so you know what to compare the intangibles against.

If the rental is being offered at $2,500/mo while you could buy the other for $250,000, you don’t have to get too far into the details of the math to figure that buying is going to work out better for you: you’d pay off the purchase price in a little over eight years with rent that high.

If the rental is being offered at $1,000/mo while you’d have to pay $1,000,000 for the purchase, it looks very different. If you have to pay 3% on your mortgage, then the interest alone would be almost three times the rent! Renting is superior here by a large margin.

These are two extremes, a price:rent of 100X in the first case, and 1000X in the second. Somewhere in-between those two extremes is a cross-over point, where it’s a break-even proposition to rent or buy.

Exactly where that point falls requires doing some more math, and will depend on a few key assumptions, but the first key point is that it exists: there is a point where prices get so high relative to renting that it makes sense to rent your shelter instead of buy it.

The second key point is that this is not some weird hypothetical situation: the price:rent in some of Canada’s largest cities is above the break-even and it is financially better to rent given many reasonable assumptions.

Comparing the Costs of Renting and Buying

You absolutely cannot just look at the mortgage payment and compare that to the cost of rent. There are many more components to the comparison: you have to look at the total cost of owning versus the total cost of renting.

As a renter, you may have to pay rent, tenant’s insurance… and that may be about it. Any savings you have over the ownership costs you can save and invest, as well as investing the downpayment.

As an owner you’ll have to pay for the property itself; if you don’t happen to have that much cash on hand, you’ll need to pay for a mortgage, which consists of interest (the cost of “renting your money”) and principal repayment. You’ll have to pay for upkeep (note that if you buy a condo that will be split into upkeep you’ll have to pay for directly and irregularly, like replacing the appliances, and the regular condo fees), insurance, property tax, and the transaction fees to buy and sell (and don’t forget that at some point you will be selling — often sooner than you may plan to).

These things are not going to stand still: rent will go up, as will the price of the house (unless it goes down), and money invested will earn some return. These are very uncertain values, so you will want to run the calculation a few times using different estimates to see how it works out. Find a few similar (or if possible, identical) units in your neighbourhood and do the math to see whether buying or renting makes sense on an apples-to-apples basis.

Here is the page for the rent-vs-buy calculator that offers that tool and goes into more detail on the factors. Preet Banerjee also has a rent-vs-buy calculator that includes a Monte Carlo simulation to run many different values of the different parameters. If you’re allergic to Excel, Get Smarter About Money has a flashy one, but note that it has a bug and does not properly compound the differences. The New York Times has one that lots of people link to, but firstly it’s made for Americans, so you have to do non-intuitive things like set your tax rate to 0, and secondly it just shows you the break-even rent, but not how meaningful that difference can be after compounding for some time.

Why Apples-to-Apples

I suggest you start with similar (or identical) places because that will give you the best gauge of whether your market favours renting or buying. For example, in North York (part of Toronto), price:rent can be so extreme (over 400X as of 2017) that a renter would be ahead of an owner by hundreds of thousands of dollars after just ten years. Once you see how skewed the prices are, and how favourable renting is, you can then take the next part in your housing decision: where to actually live.

If you were going to buy, you might have been looking at a 3-bedroom detached house, figuring that you’d save on some future transaction fees and just stretch for that, even if your family might not need the space for a few years. If you’re choosing to rent though, you might rent a 2-bedroom apartment for a few years first. Now it doesn’t make much sense to compare renting a 2-bedroom apartment to buying a 3-bedroom house in a rent-vs-buy calculator — of course the apartment will be cheaper. But that doesn’t mean that once you see buying is no great deal that you can’t then take that move to save even more money.

Similar logic applies for renting out part of a house: if it’s better to rent the whole house, then buying a place and renting out the basement is not suddenly going to make owning make sense.

It’s fine if apples-to-apples is not necessarily the actual decision before you, it still makes sense to do it to see what the price:rent is in the neighbourhood.

The Numbers Can be Huge

Near my daughter’s school there are several houses for rent in the $3500/mo range. That’s expensive, but Toronto’s an expensive place. Buying those same houses would run you around $1.5M in today’s market — even more expensive.

Let’s quickly run through the math: say you were going to buy one of these places for $1.5M. To have 20% down would be $300,000. You’d also need about $54,000 on hand for the land transfer taxes, title insurance, and legal fees.

So on the renter’s side: $354,000 to invest. A monthly rent of $3500 ($42,000/yr), and yearly tenant’s insurance of $420. Total of $42,420.

On the owner’s side: nothing to invest, a $1.5M house, and a $1.2M mortgage at 3.2%, for an annual mortgage payment of $69,634. The owner also has to pay property tax, about $10,500/yr. Insurance of $2000/yr. And they have to set something aside for maintenance and repairs – 1% is a decent rule-of-thumb, though some argue when prices are as high as they are in Toronto that over-states things (on the other hand, with trends the way they are now in the neighbourhood, tar driveways that need updating get replaced with interlocking, kitchens get upgraded far sooner than they wear out, etc. etc., so 1% may still be pretty close). So call it a $15,000/yr maintenance reserve. Total of $97,134.

Both the renter and owner have the same utility bills, as the houses are otherwise identical, and their other lifestyle expenses (from food to vacations to retirement savings) are not a factor.

In the first year alone, the renter is ahead by almost $55,000 in terms of cash flow. Part of the mortgage payment the owner paid would go towards building equity in paying off the house, but then the renter would also have (at 7% returns) another $26,719 in investment returns — the opportunity cost of having the downpayment sitting as house equity instead of invested.

We can keep going year-by-year to see how the numbers add up, but it’s clear just from the first year that the renter is way ahead financially. You may have non-financial reasons for buying, but there’s no way most people would put a $55,000/yr price tag on “pride of ownership.”

And you may say that ok, buying a million-dollar house in Toronto is nuts, but I knew that at “million-dollar house in Toronto” so how does that affect me? If you’re also looking at price:rents of over 400X, you’ll also find that renting is a much better way to go, even if it’s $1000/mo vs $400,000 on a condo. Run the numbers for your own situation and don’t assume that buying will be the better way to go, or that it will be close enough that you can let non-tangible factors make the decision – the numbers can be huge.

Also note that if you were to naively just compare the mortgage payment alone to the rent, they are not that far off — the mortgage is $69,634 to $42,000 in rent — especially if you factor back in the nearly $32,000 in principal repaid. But the other factors can’t be ignored.

What About Appreciation and Leverage?

Note though that in this comparison I do not need to add leverage to the renting side — while real estate gives you access to far more leverage than you could get as a renter buying ETFs, leverage adds risk and you don’t need it.

When you run the calculation for a longer period of time, your assumptions about the future appreciation of the house price matters a lot to the comparison, especially with leverage involved.

If we’re in a bubble and prices decline, then of course renting is going to win, but that may not be the way that this irregularity in the market gets corrected.

Toronto house prices were up double-digit percentages last year; if you believe that kind of insane growth will continue, then the comparison is very one-sided: a leveraged investment with an incredible rate of return is going to be a good thing. If you truly believe prices will continue to go up double digits then go out and buy five houses with as much leverage as you can scrounge. However, trees don’t grow to the sky: even if there isn’t a full-on housing crash, it’s highly unlikely that these rates of price increases will continue — and there’s no way to be sure in advance. A more conservative guess might be closer to the rate of inflation, which is about what housing has done over the very long term. You can even play with the spreadsheet to find what rate of appreciation is “baked in” to current prices, see where that puts prices a decade hence, and ask yourself if that makes sense.

To try to justify the price movement as something other than the madness of crowds, some people have tried to compare Toronto or Vancouver to pricier markets like New York or London. We may think of New York as a kind of archetype for cities: Toronto is like New York in that it has transit and a dense urban centre with financial and research and technology jobs with some kind of arts scene — maybe it is the next global cities and prices will keep going to the stratosphere. A helpful framework is to invert the comparison: if Toronto is like New York in some ways, and therefore should have prices closer to New York’s, how is New York similar to Toronto? Put that way, you may say, “Should New York have prices similar to Toronto’s?” and your mind goes “Whoa, it’s New York, it’s nothing like little Toronto!”

Invest the Difference

Another big point in the rent-vs-buy comparison is that the renter gets to invest the downpayment and any difference in annual costs. Earning a decent return (the default in the calculator is a 7% nominal or 5% real return) is another factor that makes renting a good move. However, if you don’t know how to invest, and your only alternative to buying is sticking your money in a savings account, then it’s harder to see how renting will work out. People often ask “How do I invest my money to get a decent return like that?”

I’ve written a book and created a course specifically to help guide people through how to do that.

Just like with the point on making apples-to-apples comparisons, you don’t have to invest the difference if there are non-financial considerations. For instance, you could have a more fulfilling and balanced life by investing most of the difference, and using the rest to take an extra vacation or eat out more, or buy a car, or rent a place that’s even nicer than what you could afford to buy — whatever fits your life.

Non-Financial Factors

The financial comparison has a lot of factors and is important, but really it’s just the start to frame the decision. There are lot of non-financial factors and pros and cons to buying and renting, and you can always spend more for something — money is there, in part, to spend — just make sure that the intangible benefit you get is worth the cost paid (and for that, you have to start with the financial comparison to set the stage).

Owning Pros:

  • Pride of ownership
  • Security of tenancy
  • Easier to renovate/control of property
  • Leverage

Renting Pros:

  • Flexibility
  • Lower financial risk (no maintenance risk, no liquidity risk, diversified portfolio)
  • Lower cash flow (don’t have to invest the difference)
  • Can look to only meet current needs (non apples-to-apples comparisons)

(And the cons are mostly inverses of the pros: renting has less security of tenancy, no pride of ownership, and having to work with a landlord and their whims; owning has cons of a lack of liquidity and financial risks)

Risk and Life Trajectory

Imagine the path or the trajectory your life is to take: you’ll live in this starter house, then sell it and move to this forever house; you’ll get this job then move to this city to take this promotion; you’ll have these kids at this time.

Housing can play a big role in that life trajectory, and a crash in the housing market (or even a “soft landing”) can have big effects on that trajectory. If you own your house and need to move for a new job, or to get more space for kids, there are huge transaction costs. If you haven’t built up enough equity, you could be stuck. You could be forced to sell at the worst time by a job loss or transfer, or a divorce; your plan to upgrade the starter house may not work if the market declines and the equity ladder you thought you were climbing turns into a snake.

Renting gives you a lot of flexibility: you can move to follow a job, split up, or upgrade with very little in the way of notice or transaction fees. If renting costs less, and you’re saving up the difference for larger financial cushion, it also gives you flexibility and resiliency to accept lower income (for illness, job loss, mat leave, or to go back to school). It will let you take more risks at work, which might help you get out of a bad or shady situation, or more aggressively chase a promotion or new opportunity, even start your own business.

The flexibility does have a downside: there’s less security of tenancy. Your landlord might sell the house out from under you, forcing you to move. Many people want security, and that’s fair — but at what price? Security of tenancy is often over-valued, and while flipping and reno-victions do happen, they’re often after tenants have had several years with a place.

Moreover, the risks of security of tenancy are risks of inconvenience, whereas the risks of getting stuck in an underwater house may be rarer but have much larger severity: they can completely derail your life trajectory.

Renting Mindset

Some people don’t see their rental home as truly theirs, and that’s a bad mindset to be in. Owners move every few years on average, but while they’re in that transient house or condo, it’s theirs. Treat your rental the same way. Find a rental you want to live in, don’t just get the cheapest place you can find and count the hours until housing Armageddon finally arrives. Hang your pictures and paint the walls. Remember: renting is still better even if house prices don’t crash — at these price:rents, all that’s required is that they not go up at insane rates. It will take years for a correction to come, if it does at all.

And don’t let choosing to rent your housing derail your life trajectory: kids can be born into rental household (I do have one myself) just fine.


Many myths and mantras have developed over the years with regards to housing, and they can be tough to shake. Here are a few dispelled:

Throwing Your Money Away

Versions include: “renting is throwing your money away” “pay your own mortgage instead of your landlord’s.” “rent will include all those costs like maintenance and property tax and interest because landlords make money.”

Working through the rent-vs-buy math above should put this to rest — there are many costs involved in owning that are “throwing your money away”. Yes, landlords aim to make a profit renting their units out, but it doesn’t mean that this is a guarantee, a natural law that man cannot break. It is possible to mis-price a rental (or to be primarily a speculator).

A clever way I’ve heard it put: You can rent your house, or you can rent the money from the bank to buy it. Either way you’re paying rent.

Or if you prefer more clever sayings to combat a meme, consider this: buying food is just throwing your money away. Why don’t we all grow our own food?

Forced Savings and Building Equity

A very common point in favour of buying is to say that you build equity by buying, that it’s forced savings. This is true, but can be myopic because it’s not like renters can’t build equity in other ways.

You have to look at the whole picture. Consider chips. At one store you give me $10 for a bag of chips and I give you $2 back in the form of loyalty points that you can later redeem for cash. You get to eat a delicious bag of chips that’s all yours and you got $2 worth of points back, that’s good, right? Forced savings! Building equity! Not all of the money is “thrown away”! But if you can just buy the bag of chips for $5 from another store you’re better off — you can hold on to $5 out of your $10 separate from the purchase of the chips, rather than just $2. There’s no “return” or “forced savings” in the second case, and the full amount paid for the chips is “thrown away”, but you put out less to begin with. In both cases you get delicious chips. In one case you paid a higher total cost, but got something back.

If you need to be threatened with homelessness to save — which is what “forced savings” really means — then you need to call a money coach, not a realtor. After all, homeowners need to save, too: for repairs to the house if not retirement, so you can’t rely just on forced savings. And having the flexibility of lower cash flow can be important in emergencies.

For those who say that “real” people don’t save the difference: yes, people often have trouble saving and investing intelligently. But we’re not talking about the general population, we’re talking about you and your choices: the fact that you’re here means you’ve self-selected to be more likely to have your financial house in order.

Landlords and Yield-on-Cost

Part of why people rent houses for ridiculous price:rents is because while you have to choose between buying at today’s price or renting at today’s price, many landlords paid a much lower price many years ago. They don’t consider the current yield, they think in terms of yield-on-cost, which might be quite good (and I’d be totally open to buying my place at the 2003 price).

You Have to Buy to be an Adult

You may “need to buy before having kids” or “to really be a grown-up”, but these are just social norms from a past generation. Babies don’t care whether the roof over their heads is owned or rented, all they care about is their parents’ love (and the cold glow of the tablet computer). If you want or “need” a detached house with a yard for your kids or fur-babies, you can still have that as a renter. They’re rarer than studio apartments, but still an option.

Make Renting Work for You: Everything is Negotiable

There are definitely some cons to renting. On balance renting is quite possibly the better move for you, so consider some ways to try to mitigate those cons.

Remember that rules and tenant protections vary by province. I’m most familiar with Ontario’s (I live there) and to some extent Alberta’s (where tenant protections appear to consist of a bar napkin with “screw you, renter scum” scrawled across it). Moreover, remember that everything is negotiable, and landlords are (mostly) people too.

Long Leases

A big concern people have when deciding to rent is the security of tenancy and potential rent hikes. Moving isn’t fun at the best of times, and it’s especially exhausting if you’ve just had a kid.

Long leases are a potential solution that hardly ever gets talked about. In Ontario, tenants automatically get to stay and become month-to-month tenants after their lease (typically 1 year) expires. You may get to stay for as many years as you want, with rent increasing by provincially controlled inflation, but the concern is what if the landlord wants you out? What if they want to sell, or push you out in some other way (say the unit is being renovated, or that their close relative needs it, or they sell the building)?

As a month-to-month tenant, you could be forced out with relatively short notice for these reasons.

To mitigate this, you can sign a longer-term lease: 2, 3, even 5 years — longer than many homeowners end up sticking around. In Ontario, as long as you have a lease in place you have the place, even if the landlord wants it for personal use; even if they sell, the new owner has to take you on at least to the end of your lease. If you sign a long-term lease and you end up wanting to leave early, you may have to pay the lease out (depends on how fast the landlord can find new tenants and what rent they will pay), the cost of moving would likely still be less than an owner would have to pay in land transfer taxes and realtor commissions.

Many landlords want long-term tenants, and would likely be thrilled at the prospect of a longer lease, but hardly anyone I know actually asks for one.

Renovations and Improvements

You can hang pictures and paint the walls in a rental. You may have to paint them back when you move out, but you absolutely can personalize your rental within reason to make it your home. Now owners will sometimes personalize to the next level with renovations. As a renter you can avoid all the construction dust and just find a place renovated the way you want in the first place, and move easily when it no longer suits you.

However, if you have specific needs or desires, remember that everything is negotiable. You can renovate a rental, you just have to work it out with the landlord. I myself have split the costs of adding a dishwasher with a landlord when a house we wanted didn’t have one in the kitchen. More substantial renovations are possible — around the corner from me a fixer-upper went for way below market rent in exchange for the tenants putting in the sweat equity of renovating it (the landlord paid for materials). In The Wealthy Renter, Alex Avery describes a case where someone worked with the landlord to renovate the kitchen, coming up with a unique long-term lease that had provisions for paying the tenant back for the work if the tenancy was ended early.

It’s important to remember that renovations are usually a lifestyle expense. We like to tell ourselves that they’re “investments” and that when a place is sold a new buyer will pay more because of the renovations, but in 15 years a buyer will look at the kitchen you upgraded and decide it’s dated and has to be redone just as much as they would have for the previous one you replaced. So it’s ok then to spend money renovating a rental to make it more enjoyable for you even if it’s not “yours” – you can’t fool yourself about the investment value up front, but that doesn’t mean it isn’t worthwhile in some cases to put the time, effort, and funds into renovating your rental home to make it fit your life.


We can talk about large systematic issues, speculation, household debt, regulations, and all that jazz, but this is the main point I want you to walk away with: you have options in how to go about arranging for your shelter and largest expense. You have to live somewhere, and the rent-vs-buy decision for your neighbourhood is the only one that matters for your life. For many Canadians, especially in Toronto and Vancouver, renting may be a much smarter choice.

For more, check out this discussion from Because Money, and of course the rent-vs-buy spreadsheet.


I’ve written a lot over the years on the housing market and the rent-vs-buy decision. I wanted to try to summarize it down to one post that I could point people to when the matter of “step zero” came up. To try to keep this post as “the one”, I will likely edit it several times after publishing as I realize I forgot some things, could organize it better, or explain parts better.

I also believe that Toronto (and Vancouver) is in a massive real estate bubble, and that the current price: rent imbalance will be solved by prices going down… one day. But it’s not going to be fast. Note that coming out better as a renter does not depend on prices going down — just on the cashflow differences and alternative investments out-performing house appreciation in the long term. I don’t talk about the macro picture here, or issues of foreign investment (which may be another source of why someone might rent a place out for less than it costs to own) or interest rates increasing or how or when things might correct. Because all that stuff is too high-level. When you’re looking to put a roof over your head and are at step zero of the house-buying process (should I buy at all?), you can’t make your decision dependent on a housing crash that may or may not come, or may be half a decade in the future if it does. It may be folly to compete in a bidding war for a house with price-insensitive capital, and it may be easy to talk in broad strokes about the doom (or future global primacy) over the horizon… but you have to live somewhere, today, which means seriously considering renting and looking at the options available to you today.

Early Withdrawal from RRSP for Low Income Year?

October 9th, 2017 by Potato

A common myth is that you can’t withdraw from your RRSP until retirement (except for programs like the HBP or LLP). There’s actually no such restriction: you can withdraw at any time, but the withdrawal will get added to your income for the year, and you will lose that room. Now, most of the time that means you’re going to want to wait until retirement before withdrawing anyway.

But what if you’re in a period of your life where your income is temporarily low? Mat/pat leave, or a job loss, for example? It may make sense then to pull some of your money or investments out of the tax shelter when you can do so at a lower tax rate.

Reminder: The RRSP is beneficial in two basic ways: it provides tax-free compounding of your investments, and lets you contribute with pre-tax money, so you can engage in tax arbitrage by deferring the tax until later, when you might be in a lower tax bracket. Much of the time the tax arbitrage is not much of a benefit, as clawbacks of various programs can make your effective tax rate in retirement higher than raw income might suggest. But, if you have a year with minimal income (because of job loss, mat leave, etc.) then you may find yourself in the lowest possible tax bracket — lower than when you contributed the money — so there’s an advantage to withdrawing then. But you’ll be trading away the one benefit for the other. Is it worth it?

There are a few basic scenarios to consider, and your own different tax rates and rates of return will play a role, too.

The biggest question to start with is whether or not you have excess RRSP room. For many younger people who start saving early, getting 18% of your pay in RRSP room and a chunk of TFSA room (~10% of the YMPE) means that you’ll have more tax shelter space than you will fill. In that case, burning some of it up to withdraw in a low-income year is an easier decision: you pay tax at a lower rate, then put it back in when you’re in a higher bracket. The benefit from tax-arbitrage just between the bottom rate of 20% and a middling ~30% is a one-time gain of ~10%, which is going to far exceed one or two years of tax on investment growth (assuming you don’t actually need the money to pay for your expenses while out of the workforce).

If you have excess RRSP room, it’s a pretty easy choice to withdraw during a lower-earning year. You can even plan in advance for this where possible. For instance, you may ordinarily use your TFSA for long-term savings, but if you’re pregnant and expecting to be off work the following year, you might choose instead to use your RRSP (or even withdraw some funds from your TFSA to contribute to your RRSP), then withdraw those funds when your earnings are lower the next year.

We’re not all in that boat though — if you started building up a non-registered account before the TFSA was introduced, or if your RRSP room is used up by a pension, or if you have earnings that don’t generate RRSP space (like grad school stipends or dividends from your small business), or if you just simply have a high savings rate (which may be needed for early retirement plans or because you wasted your 20s in grad school and have to play catch-up or because you’re renting-and-investing-the-difference), then you might not have any available RRSP contribution room to put back what you take out in a low-income year. In that case, you’ll want to be more careful and certain that a withdrawal in a low-income year will really help you before you go through with it and burn the space.

Now it’s harder. You could get the one-time benefit of pulling money out at a low rate, but then you’re going to have non-registered investments that grow more slowly due to the tax drag than registered ones — and if you expect to be in a low bracket at retirement anyway (or for several more years as your disability takes time to resolve), then taking the money out early is of no real benefit to you.

There are going to be a number of factors at play: you’ll have a higher rate of compounding on your RRSP investments than non-registered ones (made even more complicated by the fact that some capital gains can be deferred a long time even in a non-registered account). The length of time to consider will matter, too: if you’ll have to pull the money out in a few years anyway, then it may make sense to withdraw early, as the difference in growth rates may not add up to much compared to the difference in effective tax rates of the withdrawal. If it would be a few decades before you would otherwise take money out of your maxed-out RRSP, then even a modest tax drag can add up to a large effect and you’d be better off just leaving things alone in your off year.

To help look at a few scenarios, I’ve put together a spreadsheet available here. You can play around with it to see which is better, and also how much you’d be off by in different scenarios if your assumptions are wrong.

For example, we can run a scenario where Wayfare is 37 and would be in the 20% tax bracket this year, but in a few years is able to return to work and get back to the 30% tax bracket, and then will stay in that bracket until the money is needed in 18 years (retirement at 55). Let’s assume her investments grow at 7% inside the RRSP, and at 6.5% outside. In that case, she is a bit better off to withdraw early (~$122 extra in the future for $1000 withdrawn today). If instead the disability is permanent, and the later withdrawal would also be at 20%, then she would have been better off leaving the money in her RRSP. The optimism costs ~$193 (in lost growth in future dollars) for $1000 withdrawn today (about 8% of her future investment value). If her non-registered investments are less tax-efficient and only grow at 5.9% (because her earnings power returns, for example), it’s an even worse deal to withdraw early.

It’s a tough call — you have to know the future to say for sure how much (if any) you’ll save.

And for the case of someone with no spare RRSP room and non-registered investments, there’s a similar dilemma of whether to realize the gains now in a low bracket, paying tax now so you have less to continue investing, but resetting your cost basis higher for the future. The second tab of that spreadsheet looks at some cases for that decision.

Of course, we’re actually facing these decisions. While going in I thought it would make sense to take advantage of a low-income year, after looking at a few scenarios we’re not going to burn any RRSP room as long as there’s still non-registered investments standing behind the emergency fund.