It was a tragic event, and yet people have boldly looked forward. Some are rebuilding while others have chosen not to. Although it has now been over a year since it all happened, there are still a lot of unanswered questions.
In this article, I will address some of the Frequently Asked Questions by those who are choosing not to rebuild.
1. Should I rent or buy to live?
First of all, how long do you plan to stay in Fort McMurray? Usually, residents move here with a 5 to 10-year plan. Where do you stand right now? Do you love your job? Do you see opportunities for growth? Do you miss family and want to move back to the city your family is in? If you make less income in a different city, would you be alright with that?
If you don’t see yourself moving for at least 5 to 10 years or more, then consider buying so that you can build some equity in your home and that will give you a cushion against the possibility of a further downturn in the market.
On the other hand, if you’re unsure of your time here, you might be OK to rent.
Either way, it is wisest to live below your means. The real estate market is currently heavily beat down, i.e. it’s a “buyers market.” While this is indeed a great time to buy, as per the buy low, sell high adage, it is not reasonable to upgrade to something that stretches your budget and doesn’t leave you with enough in savings to fulfill your other financial goals (like retirement and paying off debt).
2. Should I invest in real estate in Fort McMurray or elsewhere?
Many are also asking whether they should buy a second or third property in Fort McMurray or diversify into another Canadian city.
In real estate, there are three types of markets – primary, secondary, and tertiary. Fort McMurray, being a smaller city, is a tertiary market. Which means prices can swing up or down significantly in a hurry. We saw it climb rapidly in 2007-2008 and sink just as quickly in 2015-2016.
In contrast, Edmonton might be considered a secondary market and although it did ride both waves up and down, it was less volatile.
Finally, Toronto and Vancouver would be examples of primary markets. Here, prices tend to be more stable, though in recent years those markets experienced significant appreciation driven by foreign investors and immigrants.
For most people, the primary goal of investing is to preserve capital and a close second is to generate a steady return. At a high level then, it makes sense to consider a secondary or primary market to make an investment.
However, it is important to consider factors such as: how much of a down payment to make; maintenance of the property; whether the rental income you can generate ensures your month-to-month income is greater than the expenses and gets you a sufficient return; and whether you have a team of real estate professionals you trust to help you manage all aspects.
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3. How do I secure and maximize the benefit of the extra cash from the insurance payout?
For most people, it’s not often that they’ve had a lump sum of cash – $50,000, $100,000, $200,000 or more that is suddenly liquid. It can be scary, but it can also be tempting. Tempting to spend just a portion of it on a nice, long needed vacation, or a luxury (boat or snowmobile).
So what should you do with this cash? It all depends on your current situation.
Do you have high-interest debt? Do you already have an emergency fund or do you need to put one together? How prepared are you for a job loss? When are you expecting to need a large amount of cash next (ex. buying a car or funding a child’s post-secondary education)? When and with what kind of lifestyle would you like to retire?
Make a list of your goals, state the amounts needed for each, put timelines and/or deadlines to each, and finally, prioritize them.
It’ll then become clear how much should go towards paying down debt, how much into a rainy-day fund, and how much into investments for the future.
When looking at investing for safety, don’t put all your eggs in one stock or property (a fund containing many stocks, bonds, or properties could be sufficiently diversified). Consider also whether you have room in an RRSP or TFSA within which to invest this money and gain some tax advantages.
4. Am I protected in case of other unforeseen events?
In light of the Fort McMurray fires, perhaps you are wondering how prepared you are for other emergencies.
The most commonly overlooked financial emergency for many is an unexpected health problem. Statistically, a couple in their mid-30s has a 60% chance of disability before the age of 65 and a 40% likelihood of having a critical illness like cancer (http://www.manulifesynergy.ca/Risk_Calculator).
One of my clients, a young supervisor, regularly grosses a $300,000 income each year – however, his disability coverage only covers him for 67% of his base pay – $130,000. Assuming he is used to a lifestyle higher than his base pay if he goes on disability leave, there are going to be payments he cannot afford to carry. Worse, if this turns into a long-term event, it would be financially devastating.
Although many companies in Fort McMurray have excellent disability insurance, most don’t account for the fact that a large amount of their income comes from bonuses and overtime – neither of which is covered by your company disability program.