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August 9, 2016 | The Outlier

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.





Those who think this is an anti-property site, as opposed to simply being a dog blog gone bad, are wrong. Real estate is fun. You can buy it even without money. It’s big and showy. You get to park in front of it. It can impress your friends. Chicks and mothers dig it. You can look rich even when you’re drowning in debt. You can nest. And, of course, it always goes up.

I get it. This is a one-strategy nation. Buy a house. Pour everything you’ve got into it. Hope for the best. But as real estate swells, so does risk. So the message here is one of balance. It’s perfectly okay to buy a house if you need one, want one, and (especially) can afford it. But the more of your net worth you pour into a single asset, the more you’re rolling the dice.

Here’s John. “Long-time reader of your blog,” he says, which suggests he has no life. “I wanted to run a financial question by you.”

“My wife and I recently bought a new house. We live in small town Ontario, house price is $370,000. We own our house with no mortgage, which we are selling. After realtor fees should be netting $270-$280k.

“Wife and I are both 31, two young kids at home and have investment assets between our TFSA and RRSP’s of approx $150,000.

“Question is how much should I be putting down on our new house? Rate is a 5 year fixed at 2.44%. I want to put down as much as I can and pay our mortgage off quickly, but with a rate at 2.44% I know this isn’t the smartest financial choice…but living without a mortgage has been great!

“We also have car loan at 4.99%, would you recommend paying this off with our equity and adding it to our mortgage balance?”

Hey, hipsters & wanton metrosexual, tattooed urban cool people with no money but social relevance, did you catch that? Here’s a young couple with (a) two screamers, (b) a house, (c) no mortgage debt, and (d) $150,000 in liquid assets and investment savings. This is what happens when you make sensible decisions, like living in a place where houses are still homes instead of futures contracts. In a setting like that you’re able to find what this pathetic blog is all about. Yes, balance.

So what should John do? Let’s revisit the Rule of 90. Simply put, deduct your age from ninety to arrive at the percentage of your net worth that should be stuffed into a single asset, namely residential real estate. In this case, J and squeeze will have $275,000 flowing from their house sale, plus $150,000 in financial assets for a net worth of $425,000. For age 31, that’s a great achievement in 2016 when most people’s lives are measured in debt.

So 90 less 31 is 59, which translates into $250,000 of their NW that – as a maximum – should be held as house equity. That would increase their financial assets to $175,000, and end up giving them a mortgage of $120,000. At 2.44% for a five-year fixed mortgage, it’s a measly $533 a month, or about what the average 416 Vespa-rider spends on weed.

Over five years the $175,000, invested in a balanced portfolio pumping out a modest 6%, would become $235,000, giving them a $60,000 lump sum to throw against the mortgage. So they’d end up with the same level of financial assets, a weensy $60,000 mortgage, and the ability to borrow that amount against their equity to top up the portfolio (if they’re comfortable with the added risk), creating a tax-deductible mortgage. Or they could just enjoy having a ridiculously low mortgage rate while their portfolio grew at double the pace, ensuring that they grew more diversified every year.

The car loan? Just pay it. Why squander money that can make money paying off debt on a depreciating asset?

The point’s simple. Balance. This is not the time to be holding all of your wealth in a single asset class, especially one house at one address in one city. Owning real estate is fine, but not when that’s all you’ve got. Eventually everyone grows to understand it’s cash flow, not a paid-off property, that gives peace and happiness.

See? This blog is about the meaning of life.

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August 9th, 2016

Posted In: The Greater Fool

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