Home' Trinidad and Tobago Guardian : August 17th 2014 Contents AUGUST 17 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG9
Richard, age 46, recently
returned from living abroad.
He landed a job that pays him
$40,000 per month before
taxes. He is the sole bread-
winner in the family and, after
rent and other regular household expenses,
he saves $6,000 per month, which has accu-
mulated to $160,000. Apart from his savings,
he pays $4,000 per month in various insur-
ances and annuities. He has a car loan of
$5,000 per month, which will be repaid in
the next 51 months.
Richard is seeking general advice and our
opinion on the following as he is considering
investing his savings:
Option 1: Purchase a SUV (sports utility
vehicle) and rent it to executives.
Option 2: He is considering opening a coffee
shop similar to the one he owned abroad and
owns a professional espresso machine and
grinder (valued at $45K), which needs an
upgrade costing $15K.
Option 3: Take out a mortgage and purchase
a beach house to rent until the debt is repaid
then make it his retirement home.
The information Richard has provided to
this point is very limited to arrive at a definitive
and reasonable recommendation. In spite of
this we will outline some of the points he
must consider when making his decision.
Each of the options above speaks to some
kind of entrepreneurial pursuit, which suggests
he is focused on aggressive wealth creation.
The challenge with this is the element of risk
in terms of his investment of time, effort and
money and the mitigation thereof.
The other question that we should answer
is how will this decision impact the other pos-
sible goals someone at his age may be con-
sidering namely: emergency provisions, home
purchase and retirement income?
What Richard has going for him is a full-
time job that pays well which affords him a
comfortable lifestyle and a decent savings.
The other side of the coin is he is merely 14
years from retirement, owes a significant debt
on a depreciable asset and is currently renting.
It is hard to imagine that Richard has enough
capital for any of the options above and, as
such, he may need to consider incurring debt
to bridge the gap.
Most lenders will look at two key factors
when evaluating a borrowing request: the
client s ability to pay and the bank s fall back
position (collateral) if the client defaults. The
ability to repay depends on income security
and the client s debt service ratio; the latter
includes all existing debt payments plus rent.
We must consider rent as none of the
options above speak to acquiring a residential
house that will substitute his current living
We have not been given his monthly rent
but can make an educated guess if we subtract
his insurance ($4,000), loan payment ($5,000)
and savings of ($6,000) which totals $15,000---
from his $40,000 paycheck we will get $25,000
from which he would have paid taxes and
other statutory deductions (estimated at
$9,000) leaving him with $16,000 to cover
rent and other living expenses. We can only
assume that his rent may be about $5,000.
Adding rent to his current loan of $5,000
it brings his obligations to $10,000, which
places his debt service ratio in the vicinity of
25 per cent of his gross salary, leaving him
with only 15 per cent or $6,000 (25% + 15%
= 40% Max DSR) to go towards any new debt.
If the additional debt were a mortgage we
could gauge his borrowing potential using the
following variables: his time to retirement of
14 years, a mortgage interest rate of say 7.0
per cent and a monthly new monthly payment
of $6,000 translating to a possible loan of
Assuming he didn t have a car loan, his total
debt payment would be $11,000 increasing
his borrowing power to $1,200,000. If the
new debt were for the purpose of a residential
home then he would no longer have the rent
of $5,000 pushing his potential mortgage pay-
ment to $16,000 per month and a borrowing
potential of $1,700,000.
A brand new SUV could cost $300,000 and
above, I am almost certain that Richard could
qualify for a second car loan but he will need
to disclose to the lender and the insurance
company that the vehicle will be rented and
the relevant adjustments will be made to inter-
est and premium rates.
Whilst the risk may be a bit lower than a
regular rental business, he has to make realistic
estimates regarding frequency of rental or the
size of such a market.
Richard has to carefully flesh out the market
for such a business and how he will promote
and manage it. He also has to ask himself
what quantum of returns he is seeking and
what is the ultimate objective he hopes to
accomplish with this investment.
The upside is that Richard has much expe-
rience in this line of business. The downside
is that it was in a different country and culture.
While Trinidad does have a range of various
coffee shops, he must study if espressos are
a favourite of locals and how he may stimulate
demand for such a brew. He has to decide
which niche he wants to operate in. Tradi-
tionally espressos have been the beverage of
executives and professionals. If this is his mar-
ket then he needs to appeal to his audience
with ambience and top-notch service. This
speaks to a significant capital outlay including
finding a strategically positioned outlet.
Beach House Rental
It was instructive to see what Richard s bor-
rowing potential was as this would inform his
ability to finance such an investment. Similar
to the executive car rental business, the lender
will need to consider the commercial risk
behind this venture and price it accordingly.
Richard is rightly thinking about his future in
terms of a comfortable retirement home how-
ever this approach must be juxtaposed next
to his need for housing today and the current
and future rising cost of such.
Nicholas Dean (Cer-Fa) is a financial
coach and mentor who is the managing
director of the Financial Coaching Centre.
He can be contacted at:
Exploring investment options
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