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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 29, 2015 | The Cure

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The Doctor is in. Here, read this TIME issue from 1975 and shut up. Nurse practitioner Amy Zon will be with you shortly.

First up, Louise. Spill it, colleague.

Hello, Garth. I discovered your blog a few months ago, and I don’t know what I’d do without my daily dose of The Greater Fool. I would love to be featured on the blog. I’m a 29-year old physician, with an annual income in the mid six-figure range. On the personal side, I have ~30K in a TFSA (index funds) and no RRSP.  I also have personal debt in a line of credit (mostly from medical school), a significant amount in the low six figures.

I purchased a 1-bedroom + den condo in the GTA almost exactly 4 years ago, and I don’t think the value has increased much.  I estimate that I could sell for around 220K.  Mortgage debt hovers around 155K.  I am terrified of the future possibility of a special assessment, and there’s rumours of another condo going up right beside the current building.  The latter would greatly affect my property value (current view from my unit is completely unobstructed).

I’m single, no kids, no pets, but would love more space.  I’m considering selling, using the equity I have in the condo to pay off a significant portion of the LOC, and start renting a townhouse instead.

My current costs for housing are around $1350 per month.  This includes mortgage payments, maintenance fees (most utilities included), property taxes, and hydro.  For the properties I’ve been looking at to rent, the average price is 1650-1850 per month, excluding utilities.  That would make total costs around 1800-2000 per month.

Because I am currently single, but my situation could change in the next 5 years or so, I don’t think it would be a smart idea/time to buy; my needs could easily be different in the near future.

Is it a better idea to continue owning the condo, slowly increasing the equity but running the aforementioned risks of a special assessment/value drop, or bite the bullet, sell, and start renting but at significantly higher monthly cost?

This is easy. Sell and rent. First, you’ve been sitting on seventy grand in equity for four years which has provided a zero return. In fact, with the potential of a special assessment and a new building about to suck the view and lower your equity, there’s too much added risk. Even if you sell now, paying the realtor commission, you’ll likely sustain a loss – non-deductible.

Thus, renting lowers the risk, adds marginally to your overhead, frees up dollars to invest, allows you to move into a larger unit and unencumbers your sorry life. And it must be a sad existence of unzipped cabana boys at Club Med and too much blow. After all, you’re an MD earning “mid six-figures” with over a hundred grand in debt, a cruddy suburban condo and just $30,000 in a TFSA. Where’s the cash going? Louise, please tell us you’re not a psychiatrist.

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My name is Carson and I’m a long time reader of the blog and I’ve recently been thinking about doing some leveraged investing, and had some tax interpretation questions I was wondering if you could help me with.

I’m 29, an engineer making $85k, don’t own a home, and have $40k in investment savings (between RRSP & TFSA). I’ve been preapproved for a 2.99% LOC for 1 year (which goes up to Prime + 2.99% after the year) and I figured this was a decent rate to use in leveraged investing. I don’t have a home (and therefore no HELOC), so I don’t think I’ll be able to find a much better rate than this to use in the short term.

I understand that the interest on money borrowed to invest is tax deductible, but I am wondering if this is still the case if I invest within a TFSA. I get the sense this would not be allowed, but have not been able to find a definitive answer.  I have room in my TFSA to hold this entire amount, so I figure this will be the better place for it regardless of my question.

Forget it, Carson. Bad idea. Sure, leveraging (borrowing money) to invest can be a great strategy if the funds come cheap, you have a long-term horizon, enough experience as an investor to understand and swallow the risks and do it in a non-registered account. No, interest on a loan taken to fill your TFSA is not deductible from income.

And this is a bad rate deal. Sure, 2.99% is nice if you can invest for a 7-8% long-term annual return, but when it pops to 6% in a year, even with tax-deductible interest, it’s way too tight a spread. There’s no guarantee any portfolio will advance predictably year after year, and if 2016 turns out to be a 0% period while you are forking over 6%, odds are you’ll despair and fold.

A young, single guy making your money should be able to save consistently. Do it. And direct every dollar into the tax-free account, in the assets and weightings I have outlined. I don’t care how cute [email protected] is. Stay away.

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I’m Amil. We recently had a new addition to our family and I’ve heard of RESP’s, how do they work?

What would be the best way to save for his education and to save for my son in general?  Also I’m not sure whether there are other things that we should be considering such as life insurance, a will and anything else that would be important to set up if anything were to happen to my wife or me.

Ah yes, a new parent. Swimming in hormones and endorphins. Plus a sudden gush of obligation and protectiveness. It’s why the Baby Vultures who circle maternity wards with their RESP brochures do so well. It’s red meat time for all the insurance salesguys who swoop in and sell you policies which 90% of the time are cash-sucking, life-long albatrosses. So, be careful.

In terms of RESP, yes, you should start one. But not one of the BV variety. Ensure yours is a self-directed plan, which you can open through an online brokerage, at the bank or with an advisor. Fill it with good, diversified, growth-focused ETFs, since the time horizon is long. Apply for the government grant, which adds 20% annually to a $2,500 contribution from you. The funds grow tax-free and can be taken out by the kid once he/she starts post-secondary schooling. If they fail you miserably and become a teenage rock god worth $1 billion, a good chunk of the money can be rolled into your RRSP if you have room.

As for insurance, stick with term. It’s cheap, flexible and all you need in the case of an emergency. Compare rates online, and remember the cardinal rule: never buy coverage from your cousin who failed the community college Hot Tub Maintenance Technician course and is now an insurance expert.

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July 29th, 2015

Posted In: The Greater Fool

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