Stop Monthly Retirement Fund Contributions In Order Purchase Rental Property?

This is an idea that’s been rattling around in my brain for a bit. It seems like it could be a smart move, but I’d like to get some feedback from those of you with more knowledge or experience than me.

My husband and I own a small home in which we are currently building a basement rental suite. We also contribute to our RRSP (canadian retirement funds), which are tax-deductable. With 18 month old twin boys, I can forsee us needing a home with more space in a few years. The boys currently share a room that’s about 80 square feet. I’m all for living simply in small spaces, but I just can’t see stuffing two 14 year old boys in that room down the road, you know what I mean?

So here’s my idea:

– Halt our monthly RRSP contributions and instead save that money in something short-term
– five years (or more) from now we take those savings plus accrued equity in our existing home (I conservatively estimate that in five years we could tap into anywhere from $60,000 to $76,000 from in our current house if we mortgage it back up to 80% of its value at that time) and use that as a down payment on a new family home that suits our growing boys better
– rent out our current house as two separate units. Again, a conservative estimate of monthly rental would be in excess of monthly expenses (mortgage + property tax) by about $400

So now we have our family home, and the rental home is carrying itself plus a bit extra. The mortgage gets paid off by tenants and we have it as a nest egg for retirement. We then have the option of keeping the rental for it’s monthly cash flow in retirement, or selling it for cash.

Other things to consider:
– Our current home has been renovated and repaired by my handy husband literally from top to bottom. That sucker should not need any major work for a long time. I don’t forsee needing a huge contingency fund if we rent out both main floor and basement units
– RRSP contributions are tax deductible. If we stop making these, we miss out on that tax break for the forseeable future. If we go ahead with this plan, we could resume contributing to our RRSPs once we make the move
– We have about $50,000 now in our RRSP account that we would not touch.
– We live in an expensive city where a decent home that has the room we’d like for our family (again, I’m not talking a lot, but more than our current 930 square feet for four of us) would be at least $550,000. Ouch.

So there are the basics. What do you guys think. Does it look like a solid plan or is there something I’ve failed to consider?

Thanks everyone for your thoughts

How to handle family who ask for loans?

I’ve fortunate enough to be mostly FI, mostly through good luck, though I was headed there by age 35.  Thriftiness taught by my depression-era-child father, and by stumbling into “Your Money or Your Life” early on, set me in the right direction.

The question I have is: Others in my family (and especially my in-laws) often turn to us for money help, and we’ve generally messed up how we’ve handled it. Have others had this problem/opportunity and how do you handle it?

Discussion / Details:

Probably because of my father, all the family loans on my side of the family have worked out great. We set them up to split the interest between what I would get in a CD/Savings Account and what they would pay for a mortgage. Never any real tension (except over who was keeping tracking of the paperwork :D), and the first mortgage worked out well enough for all that we’re now into a second. Everyone won.

My in-laws, however, are totally different. No money lent has ever been repaid, and when setting up the loan, all talk of interest was met with horror!  (Of course it was only going to be for a short period of time, just to get over the hump).

Someone else I know has it worse. His partner’s family had many kids, and as adults they all turn to them for money. He’s sick of it, his partner’s loyalty is torn between him and family, and, its all very messy.

As many of you have already guessed I’m sure, the worst is the way the money is spent. So often, after getting the help for “a little bit” (usually multiples of $10k) to “just to get by”, a new car appears, or a new kitchen, or similar extravagant purchases that no Mustachian would ever consider for themselves, let alone with someone else’s money! Rarely does anyone ask for advice, they just want the money. This is often rationalized as “You were so lucky. Not everyone can be so lucky”. Nevermind the completely different lifestyle, priorities and choices being made.

Other info:
+ for the most part, none of these loans will affect my FI, but how they are treated really does affect my “karma”
+ we’ve gifted generous amounts to family over the years
+ invariably “in-law” loans seem to be the problematic ones, so handling that with your partner is challenging too

One idea is to setup a family loan pool. Make its contents public between the family. Make all loans made out of it public to all in the family. When the pool is empty, it can only be filled up by repaying loans already made. However, how can this avoid becoming a tragedy of the commons? First one to put a straw in the pool sucks it dry and that’s it. One would hope the scorn of the rest of the family would fix this? An argument against is “this is very private, even within family” – though personally I say “screw that”.

Another is just to never make family loans. Perhaps just gifts, or nothing. Not sure how that would work.

As much as anything else, as others become FI, please be aware of this potential problem. No good deed goes unpunished.

Has anyone else hit this? Do you have any advice? Also, once you’re already in the hole with a bad loan, any advice for getting out?