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August 16, 2016 | The Ride

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.

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So many emails. So little time. So let’s stop fantasizing about thirty-something millionaires and mythical property-eating giant Chinese dudes, and return to regular programming. In other words, the normal world. If you can call the people who write to me normal. I have doubts.

Let’s start with Cameron the oil rig guy:

“I read your blog regularly. You might see my IP pinging your website from Brazil, Thailand, Australia, etc. That’s me. I own a home on the peninsula in Halifax with my girlfriend and have a yellow lab (bonus points for dog owners, right?).

“I work offshore doing inspection work for big oil required by regulators which is moderately safe from the price of gas changing. Our company survived a terrible year, last year, and are busy again with work all over the place. I’m a salaried employee but get a day rate while working away from home so I’m able to save the bump up easily. My question is A) what to do with cash now and B) what to do when a correction happens? Do I save the cash, invest in anything but Maple, or buy USDs? And if I were to save, let the bubble burst, where would I invest? Maple banks? Or is it all a crapshoot at this point?”

First, Cam, nobody’s safe these days in the energy biz. While oil has crept back over $45 a barrel, and many people think it’s on the way to $60 by next year, this is a volatile commodity during volatile times. So work hard, and invest hard.

That means don’t waste time trying to time the market. I’ve seen even professional money managers totally screw clients by hoarding cash because they think assets are ‘too expensive.’ Then as the inevitable 10% correction comes, they wait to invest, ‘until we see the bottom’ which is never obvious when it happens. Bad idea. Just lay out the elements of a balanced, diversified portfolio and invest when you have the money.

I’ve spelled it out before: 40% safe stuff (various bonds, preferreds) and 60% growth (equity ETFs and REITs). Keep Canadian exposure to about a third of the growth portion, with equal amounts in US and international exchange-traded funds. And remember that for months now doomers and market-timers have been telling people to hide under a rock. During that period Bay Street is up 13% and Wall Street has gained 7%. Bonds, REITs and preferreds have all performed strongly, while cash continues to rot.

Just invest. Spend your spare time playing with your GF and your lab. Way more productive.

Now here’s Will, who’s selling his house and smells a rat.

“As a seller, what do you think my reaction should be to finding a form 320 “Confirmation of Co-operation and Representation” attached to an Agreement of Purchase and Sale that indicates that the buyer has entered a BRA with the agent? As a seller I entered into an agreement with my agent that I thought was exclusive (as I was paying for it) and that the agent would be working in my best interests.

“Now it appears I am to pay for him to work equally for both parties. I would think this would be reason enough to renegotiate his commission. Your thoughts would be appreciated.”

I doubt it, because you’re being weird. You signed a listing agreement to sell your house for an acceptable price, then fork over commission to the listing agent (typically about 5% of the total) for the work involved. The fact the buyer also has an agent representing her has nothing to do with you. It won’t cost you more, nor does it mean your agent is not getting paid to put your interests above those of the rest of humanity.

Typically when two agents are involved the listing agent shares his commission equally with the buyer’s agent, then both share their portions with their respective brokerages. Your agent has an obligation to represent you exclusively while the BRA signed by the purchaser means the same on the buy side. So relax. The time to be concerned is when your agent represents both sides. Can you say, conflict-of-interest?

Well, Kelvin has it all. A hot new wife, two cats, an accounting job with a big company, about a half million in assets (not bad for 29) and now a chance to move to San Francisco and earn a salary in real dollars

“So here’s the question.  We sold our condo in YVR as we are relocating down to Silicon Valley.  Higher wage, lower taxes, better growth, and the ability to cash out of the crazy RE market in Vancouver.  What’s there not to like right?

“Unfortunately the RE market in SF is just as bad as Vancouver.  We’re looking to buy a house down south as I feel that there’s enough economical sense in their higher RE prices.  According to your rule of 90, I should put in no more than $300k CAD as my down payment and invest the rest.

“With the current conversion rate, $300k CAD nets us only ~$200k USD or so.  With a limited credit history and only my single income in the US (for now), our pre-approved mortgage amounts to only $420k USD. That gives us a healthy $620k USD to work with.  However, condos start at roughly $500k USD for a 1 bedroom and houses start at roughly $700k USD for a 2-3 bedroom starter.  Gut feeling tells me to stretch a bit more and buy the house instead.  Carrying cost won’t be an issue in the short term and will be even better once the wife starts working too.

“What’s your thoughts on my situation?  Should I still adhere to the rule of 90 or does it make more sense to stretch a bit more? Where/how should I invest the rest of my cash after buying a place?”

Kelvin may have lucked into the babe and the job, but if he plunks down a big part of his net worth on a San Fran house, that could all change. This is one of the most expensive markets in the US, and there are indications it’s hovering at a point of peak house.

The median price back in 2012, in the wake of the credit crisis (from which SF real estate was largely spared, compared to the rest of Cali), was just $658,000. Today that number has swollen to $1,127,400 – roughly equal to $1.4 million Canadian, or enough to buy a garden shed on the Westside of Van. But unlike Vancouver, where sales are toppling and prices spiking, real estate values in San Francisco have been moderating – up only a little over 5% in the past 12 months (YVR is six times that). Also unlike Van, salaries are 35% higher than the national average, which helps explain high prices. Despite that, the Zillow estimate for price growth over the next 12 months is 0.8%, which is actually a negative number when inflation is counted.

In other words, Kelvin, don’t do it. Not only are you trying to play in the big league with Canadian Tire money, but local real estate is likely at a tipping point and (be realistic) you’re just starting a new gig and might land on your ass. GreaterFool Rule 14 is to never buy a property in haste. Rent. See if you like the place. See if it likes you. And rest assured that if you fail in a couple of years, the ride ends, and crawl back to Van with your tail dragging, it’ll be cheaper.

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August 16th, 2016

Posted In: The Greater Fool

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