- the source for market opinions


March 21, 2016 | The Confused

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.


Worried about what T2 will do in the budget tomorrow? Don’t. Fret instead over the poor, wretched, confused, tormented and diddled people who read this pathetic blog. Let’s visit a few.

“Long time listener first time caller….or however this works with blogs,” says Stephen.

“I’m a 38 year old guy with a now estranged wife and pregnant girlfriend. I am in the process of separating from my wife of 7 years and selling our home in Squamish BC. The crazy speculation in Vancouver has spilled north to our little community and especially recently my home value has skyrocketed.  Assuming the bottom doesn’t fall out in the next 6 weeks I will have some money that I need to invest.

“My wife and I’s assets are spread out between the equity in our home 380k after fees, 38k RRSPs, 6k TFSAs and around 6k in locked-in pension.  We have a variety of debts, loans, lines of credit and credit cards that amount to approximately 87k. So after we pay things off and split things up we should each walk away with around 170k. We are in the early stages of a lawyer writing up a separation agreement and I wanted to reach out to you now in order to make sure I don’t miss any strategic moves.”

So, he’s left his wife, taken up with another woman, started a second family, amassed few assets, and has no agreement to formalize the separation or protect his position. Let’s have a moment of silence for the squishable Squamish Stevo.

Obviously, dude, do nothing until you and the ex have come to a meeting of the minds, and papered it. Will this be an equal division of assets? Does she still live in the house? How will you handle any financing against it? Who signed for that $87,000 in debts? Could an outstanding or disputed secured LOC hold up the sale? Have you discussed spousal support? And what do you have to offer the new babe, who’s about to produce a new dependent and take a year off for mat leave, when you’re walking away with just $170,000 (if you’re really, really lucky)? Which head came up with this plan?

Hormones alone won’t do it, Steve. You need a lawyer. Then a financial strategy. And stop writing to blogs. Sheesh.

“I am a big fan of your blog but would like some clarification on you rule of 90,” says Nancy. To remind, I have suggested deducting your age from 90 to ascertain a reasonable amount of your net worth to have in a house. The theory is young people can tolerate more debt and risk. Wrinklies, not so much

“Does the 90 minus your age have to do with the equity in your home or with the mortgage for it? I have a mortgage of 50k on a home worth about 400k (I live in Edmonton so not sure how accurate that will be in another year), in addition to about 75k my husband and I have in TFSA’s or RRSP’s.  We are both late thirties, so is too much of our worth tied to the home?  Should we borrow a small amount against the home and invest?  How do you feel about borrowing against your home for investing purposes, we don’t need the RRSP deductions because our income is too small, but could still increase our TFSA’s?”

Looks like Nancy and hubs have a net worth of $425,000, of which $350,000, or 82%, is in a single asset. Not smart, especially in Edmonton where the real estate wobble has really just begun. At their age, about 50% of net worth in a house should be the max amount.

So, to clarify, net worth is assets less debt. A $400,000 house with a fifty grand mortgage means $350,000 in equity. Add in the liquid assets, and that gives total NW. Of that (in this instance) the house dominates. Thus, she and her squeeze have a serious lack of diversification and balance.

Borrow against the home to invest? Sure, it’s a strategy, and rates have never been lower – which means you can get money at less than 3%, enjoy 100% tax-deductible interest, and hopefully invest for returns which are double the cost of borrowing. But leverage also brings risk. You have to ignore market volatility, keep a long-term focus, maintain a liquid portfolio, be prepared for higher borrowing costs down the road (all LOCs are variable rate) and ensure your portfolio is balanced and well-maintained.

Bottom line: every mortgage payment makes you more invested in one asset. A better strategy: sell, invest the proceeds to pay your rent, and avoid what’s coming.

Or you could, like unsuspecting Sebastien, walk straight into the maw of the storm.

“I’m hoping you read this and can give me some input on my dilemma. I’m a 23 year old tradesman living at home. My income is roughly $70,000 however, I am not yet a journeyman so I can expect around $80-100k within a year or so and I have $33,000 in cash and investments. My grandfather whom is a decamillionare real estate investor/businessman has given me $25,000 to invest and more after I can show I’ve done good with it in a year. He isn’t one for the markets and all I know how to do is invest in index funds.

“So, I’ve looked at getting a $450,000 house with a suite in the Fraser Valley so I could live in the bottom and rent the top using the leverage to help pay the mortgage and voila an investment. Assuming a buy and hold strategy, I don’t think it would be the worst possible thing. I know from reading your blog, these aren’t the best of times and I would normally refrain from any sort of real estate but given the circumstances do you think it could be a wise decision to lock in?”

Oh, Seb, you innocent. Mom has sure protected you from the real world, hasn’t she?

Listen, kid, you’ve barely enough money to cover the closing costs on a $450,000 house, which will total more than six times your annual income. You have to qualify at the posted bank rate (doubtful), then shoulder a mortgage, property tax, insurance and maintenance, plus repairs and utilities. All for living in a basement – and hoping you can be cash-flow positive after buying an asset inflated in value because rates are low and demented people live down the highway in Vancouver.

After a year there’s no way you’ll have made a dollar, since liquidating the asset would mean paying a fat commission. Besides, why the hell does a 23-year-old want to be $400,000 in debt? What if your trade falls on hard times, or you have to move to find work? Not to mention you’ll have to be washing your own undies now.

I doubt your zillionaire grandfather made his money buying anything at the top of the market with a trainload of debt destined to reset at higher rates. Did you ask him? Invest your money in good ETFs inside a tax shelter and relish the freedom, mobility and spirit of your youth. That’s the way to make old men impressed. And achingly envious.

STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the Weekly Recap.

March 21st, 2016

Posted In: The Greater Fool

Post a Comment:

Your email address will not be published. Required fields are marked *

All Comments are moderated before appearing on the site


This site uses Akismet to reduce spam. Learn how your comment data is processed.