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July 4, 2016 | We’re Doomed

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.

ADVICE modified

Whether it’s the bedroom eyes, chiseled jaw or the rippling pecs will never be known. Maybe even the advice. Dunno. It just happens. Complete strangers want to share their intimacies with me. And here we go again.

Routinely I’m accused of fabricating these letters. I wish. But these people actually exist. What’s more alarming, they dwell among us, reading this very blog. So keep your elbows in.

Dear Garth, I have been reading your blog for 4 years and most of the time I do agree with your views to be conservative with $$$ and to invest, and not get over your head with debt. However, living in westside Vancouver it is difficult to be risk-averse. Anyways, my wife and I are both academics who have had to scratch and claw for everything that we have (no trust funds here). I am 55 and my wife is 52 and we have an 11 year old. We are both profs bringing in a total of $360K per year, and we are both workaholics.

We have a paid for (smallish) but stylish duplex that we could sell for in this market for 1.7M. We have about 1.2M in our pension plan at the university, and 220K in savings, with 45K in an RRESP and about 45K in an extra locked RRSP. We have always lived below our means, but this seems to not have served us well as our 1400 square foot place will be rather small when the 11 year old takes up an electric guitar and blasts us out of the house.

We are on the fence with trying to purchase a spectacular completely renovated 2100 square foot duplex in Kitsilano that we think we can get with 2.6 Million. With 1.7M + 0.2M extra, this would leave us with a 700K mortgage to finance over 15 years. We clear about 18K per month, and in the first 5 years it would cost around 5.5K per month (including property taxes), which we can easily do.

In Vancouver it is very difficult for people, there are very few rentals on the west side and the idea of turning Vancouver into a “world class city… has been so detrimental to so many people. I am a Bernie Sanders supporter and do wish that we had a more egalitarian society for us all. All the best, Max.

Like, where do we start? With the fact you and your smart wife make $360,000 a year, clear $18,000 a month and have saved only three hundred thousand after decades? Or that you’re ‘risk-averse’ and are considering blowing your savings and taking on a $700,000 mortgage in your mid-fifties? Or that you’re actually thinking about paying $2,600,000 for half a house? Or you have utter confidence your pension will be there thirty years hence?

You may have PhDs, but this is nothing but a case of truck-stop, dumb-ass, HGTV house horniness which you’re blaming on an 11-year-old. Shame. No sane person spends that kind of money on a duplex unit, Max, and in so doing deliberately hollows their savings, chokes down a load of debt and then looks to a pathetic blog for justification. Stay where you are. Send the rest of Bernie.

Now, on to Jason, who appears to the penultimate Helicopter Kid — with Mom and Dad seriously in control. There is a price to be paid when you take free money. This is an extreme case.

Found your blog and like it. My parents recently gave me $600,000 which they specified should be spent on real estate for myself. I can access another $200,000 from mom & dad interest-free, amortized over 30 yrs or so. I’m currently single, early 30s, earn a modest income as an economist, plan to live in Toronto, maybe find a partner in next 5 yrs but no kids for sure. My question is: what would you do? Is it better to invest in a house or a loft/condo? Should I buy for my current lifestyle (not much need for space eg 1 bedroom units) or would I be crazy to overlook places that aren’t exactly attuned to my current lifestyle but will likely have more sustained demand/appreciate faster (eg 2 bedrooms, a home)? Should I take the fantastic parental loan to buy a nicer spot, or is it better to stay debt free and improve my current cash flow to invest in higher-yielding investments (e.g. stock market)? You’re probably super busy and don’t have time for this, but thought I’d write just in case!

How could I not reply, Jason? Not every day do we hear from a manipulated 30-something who happens to walk into six hundred grand from the Bank of Mom. But the question is, why would they make such a dumb stipulation, and why would you agree to it? You’re young, unattached and obviously don’t need real estate. Besides, dude, you’re an economist — trained to recognize asset bubbles, risk and aberrant human behaviour (even in mothers).

The simple answer to your question is, don’t bury $600,000 in a condo which is highly unlikely to grow in value, has insane ownership fees and was probably constructed out of glue, staples and gravel. A SFD is obviously better, but that means more Momsie. The better solution is to just take the cash and invest it in a balanced, diversified portfolio (with a fully-funded TFSA) which could end up being worth $5 million when you’re fifty. They’ll get over it.

And speaking of screwed-up parents, here’s the situation Thomson is facing:

Hi Garth, long time blog reader, first time writer. My parents have saved nothing for retirement. My mother is 63 and no longer working due to health issues, and my Dad is 55 and still toiling away. The reason I’m writing is that my mother has the option to either take a $1600/mo pension from her employer, or a $226,000 lump sum. Based on what I’ve read on your blog, I think the lump sum is the right way to go.

They also have a mortgage of $110,000. [email protected] said that, rather than sell the house and pocket $100,000 or so, they could get a shiny new 25-year mortgage. Her rationale is that it would be cheaper than renting. Needless to say, this sounds crazy and I think they should sell the house and put that money into their tiny nest egg and rent.

My questions:

Where is the safest place for them to park this money while losing as little as possible to inflation? and; this 25 year mortgage idea is crazy, right?

It’s depressing how many times I hear this. Not about the sleazy, self-serving [email protected], but rather people in their sixties who have managed to save nothing and have 100% of their net worth in a single asset. The public pension was never designed to paper over people’s life mistakes. Living for six decades and ending up with zero net worth is a fail. So, what should they do about it?

Simple, and Tom’s already got it figured out. Commute the pension and sell the house. By commuting you take over possession of the money which then becomes the property of the family, not the pension plan. You can lessen tax exposure by managing your own portfolio (or having it done inexpensively) since every pension payment is fully taxed by investment returns are not. You are protected against future woes a plan may face (it happens). And the rate of return can be equal or greater than that which most plans earn. Plus, given the low interest rates today the commuted value has been pushed higher.

If these guys take the lump sum, dump the property and add in the equity, this $336,000 egg can throw off about $1,700 in monthly income (some taxable, some not), and still largely preserve the capital for later life. Their debt would be reduced to zero. Plus no property tax. No maintenance. Add in CPP and OAS as they become available, plus some employment income, and this is the best outcome, even paying rent.

Lessons: You can be young and poor and happy. Never old. The greatest risk is running out of money, not losing it. Don’t seek advice at the bank. In the end we all need income, not a house. And if you’re going to mess up your financial life, at least have one good son.

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July 4th, 2016

Posted In: The Greater Fool

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