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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

October 11, 2017 | Too Scary

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.

Jennifer’s easy to hate. Almost loathe to tell you about her. Can imagine the reaction, given all the deplorables who hang out here to use the washroom, write on the wall and razz the patrons.

Her father’s a wealthy Albertan (there are apparently some left) and she knows there’s a fat inheritance in her distant future. In the meantime he advanced her $1 million to buy a house in place where anesthesiologists and Land Rover peeps call home. So Jen and her husband sold their current property there (“way too small”) for a big pile and want to move up, thanks to daddy. But the sad, tragic, horrific part of this story is that they need a $4 million house (“I mean,” she says, “have you actually seen what three million buys these days? Really.”).

So Jenn and her husband have $2.9 million in cash but cannot manage to live on his $320,000 income. Apparently it takes at least $180,000 (after taxes) to properly care for children. The rest just kind of, like, melts away. So, if they mortgage $1 million, there’s a good chance of going over the financial cliff long before pop rings the bell and the Albertan funds arrive.

What to do? she asked, batting lashes. Naturally, I told her to forget buying back into an expensive market she squeaked out of (the house sale took months), and outlined the risks – especially in the rarefied, fickle atmosphere of multi-millionaire real estate. Then we reviewed her budget, which is a yawning black hole of expectations, needs and unquenched desires. That went about as well as you would expect.

So, I said, why not rent? Instead of laying down three million in cash and borrowing another mill, just go and lease a house for $8,000 or ten or twelve grand a month. The invested money would yield about $15,000 a month in a tax-efficient manner (don’t tell Jagmeet), which means there’d be enough cash left over to handle manis, pedis and the poodles.

The outcome? She fears risk. So despite the fact she’ll have $1,000,000 in financing which will grow more costly with each renewal, face a property tax bill larger than many people’s incomes, be cash-flow negative each month and buy into a market segment prone to price swings (a 10% correction is a $400,000 loss), Jenn’s her daddy’s girl. The old guy once lost money on junior oil & gas stocks, so she thinks houses good, investments bad.

It’s an extreme example of a common theme. Most people mistakenly believe they know about real estate. They exaggerate gains and minimize loss. They ignore the massive costs involved in buying and selling while discounting the burden of ownership – financing, insurance, repairs, utilities, property tax, strata/condo fees. Mostly they waive away risk, concocting elaborate and silly reasons why this asset class will do what none in history ever has, and never decline. “The government won’t let real estate go down.” Or, “But everybody wants to move here.”

The flip side is a wholly unrealistic view of the risk inherent in investing in other stuff. The Fruit People had an interesting little survey they were selling to the media yesterday. “Which do you find scarier: going into a haunted house or making your first investment?” asked Tangerine Investments.

The result: 63% say they fear opening an investment account. Only 38% were wary of having their neck pierced and their blood suckled by a hairy, caped man who blogs daily. The FP also discovered almost 40% of Canadians have zero investment accounts (not even a piddly TFSA) and of those, 96% had never thought about it.

So, time more people understood the nature of risk, and how to mitigate it. This is at the core of what investment guys do – spend all day (if they’re good at it) tamping volatility, fluctuations and uncertainty, ensuring money works and capital is preserved. Logic dictates that a portfolio which contains a variety of assets (various bonds, trusts, preferreds, global equity holdings) will have far less risk than a single building on one street in one city. The financial securities are always, unlike Jenn’s house, liquid. They can be sold with the click of a mouse, without paying some guy in an Audi 5% plus HST. They don’t attract property tax, don’t need to be insured, never require repair or need to be mowed or shoveled. Mostly, unlike houses, they pay you to own them – a monthly cheque, if you want, or a growing nest egg.

The obsession with real estate in Canada is extreme, pervasive and utterly unhealthy. A shocking amount of net worth has been put into a single thing, with people becoming less diversified daily. Worse, they use scary amounts of leverage to buy houses, borrowing heavily against future earnings they cannot know nor count upon. As every banker on the planet has been warning, such rash behaviour’s made Canadians immensely vulnerable to shocks. A couple of them seem not too distant.

Anyway, be thankful you’re not poor Jennifer. She’s going down. No tears for her. But lessons for all.

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October 11th, 2017

Posted In: The Greater Fool

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