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December 28, 2016 | What Matters

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.


What is it about the end of the year that makes us question everything? Our finances. Relationships. Jobs. Love handles. And real estate. It may only be the flip of a calendar page, but every January brings such angst because this is an emotional time of the year. Even for the wealthy. Like Aaron.

“I have been following your blog for 10 plus years and love the dog pictures,” he says, in the obligatory genuflect. “I am an ER doc in the last 10 years of my career.  My wife works part-time and we have 2 kids at university with money leaking out of our bank account for them.  We have $1,000,000 in investments, RRSP, TFSA, RESP and corporate saving.  Our house is in a hot market (Victoria) and is between $1.4 to $ 1.5 million with a $500K mortgage thanks to a reno and foundation issues.  We have an opportunity to sell and rent a nice smaller house ($3000 / month) in the same neighbourhood.

“What do you think?  If we sell where would we invest and what happens if the market hits Vancouver levels and we get kicked out of our rental?”

See? Being full of doubts and turning to a pathetic blog populated by deplorables is not mutually exclusive with being a pillar of society. So let’s parse Aaron.

Being an experienced emerg doc he probably earns about $300,000, so savings of a million a decade prior to retirement is not that stellar an achievement. Sounds like those are expensive kids. Or maybe there’s a mistress tucked away up in Ladysmith. In any case, doctors don’t normally have pensions, so when the salary ends life will change abruptly – even with a million.

Meanwhile there’s another mill in real estate equity plus $500,000 in mortgage debt in a house in steamy little Victoria – where VYR refugees have imported their dread mainlander disease called FOMO. So should the doctor just ride the housing wave higher and cash in later when his digs are worth $2 million? Or bail, get liquid, and prepare for retirement?

That’s easy. The market is over-valued, speculative and on the cusp of big changes (rising rates, tighter lending, Trump), while his medical career barrels towards a fixed termination date. Keeping 50% of net worth in real estate (one asset) likely constitutes more risk than investing in a balanced and diversified way to support the rest of his days. In other words, it’s a stretch to think the house will double in value in a decade, but reasonable to assume his portfolio will – simply based on historic norms and conservative projections.

Selling the house, harvesting the million and investing it in a balanced way for ten years should turn that into two million, while eliminating debt that will renew at a higher rate. The numbers are compelling. A million in equity could be earning $60,000 a year. The mortgage, property taxes and insurance require $3,000. So, that house represents a cost of roughly $8,000 a month. If the family can live in an equal house in the same hood for three grand, with no debt, what’s to debate?

Oh yeah, houses could continue to rise, or Aaron might become homeless. Greed and fear. See how emotions work?

Nothing in life is for sure. It’s a matter of playing the odds. The fact that half of all marriages survive is astonishing, given how they occur. So, yes, Victoria real estate could continue to plump in value, though the odds of that are falling rapidly.  Even if it were so, the doc would have to sell his place at some point to free the money for retirement – and what if the market sagged at just that moment? Unlike financial assets, which can be liquidated in small amounts to liberate cash (no matter what the prevailing conditions) a house is a one-and-done deal. You can’t sell a chimney to make ends meet.

So why not harvest the tax-free capital gain when the buyers are buying? Duh.

As for getting kicked out of a rental, well, deal with it. The chances of this happening are less than the 100% certainty the mortgage will renew at a higher rate or that over time the furnace will croak or the shingles fail. With two kids leaving the nest and retirement within view, it’s probable he’ll want a different (smaller) place down the road anyway. The rental house is not the F home. That forever place might end up being in someplace more exotic and electric. Like Etobicoke.

Well, Aaron, suck it up.  Apply some of the skill, reasoning and intuition you use in saving lives to improving your own. Emotion’s so over-rated. It’s only a house. Not the goal of life. More than anyone, you should know what that is.

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December 28th, 2016

Posted In: The Greater Fool

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