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July 2, 2019 | Leverage

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.

“I need smarter friends,” Chris says. Could be. After all, one of his friends (seriously) sent him the real estate flyer boldly reproduced below.

“Check this out,” he says. “Apparently many are gullible!!! It’s head shaking and that’s why Trump is leader of free world and socks doesn’t know what to do at G20 cause he was too busy at raptors rally and the recent parade.”

Well, that may be stretching things, Chris. But there’s point to be made here about the Common Man (sorry, Person). People are financially illiterate, naïve, susceptible. No wonder they get into trouble with money. The real estate profession ain’t helping, either. By setting up a competition between a hunk of real estate and liquid assets it’s the enemy of balance. This makes people think all they need is to own is a single thing – a house – as both shelter and financial strategy. One more reason never to fully trust anyone making their living on commission.

Let’s hope the dinglenuts who designed this is merely ignorant. And not evil. But I wonder.


If the Sandy-Randy challenge has arrived in your mailbox, or that of  a loved one, here are some things to remember.

First, be realistic. Real estate in Canada’s best market (the GTA) has increased in value about 2% this year. A balanced and diversified portfolio is up about 10%. Inflations is 2.5%. The long-term appreciation of real estate is about 4%. The long-term growth in financial assets is about 7%. Houses are not retirement plans. They’re houses. You live there.

Second, real estate investors face massive expense to both buy and sell. For example, the average detached house in 416 comes with a $60,000 bill for double land transfer tax to be paid in full on the day of closing. The average commission payable upon selling is about $65,000. Plus HST. So before any real estate investor can ‘earn’ a cent in profit in that market, they must have a $125,000 jump in value – more than 8%.

In contrast the cost to build a balanced portfolio with about a dozen positions in it is maybe ten bucks a trade. Same to sell. That’s $240, compared wth $125,000. (And I didn’t even mention the burden of lawyers, appraisers and home inspectors.)

Of course the whole Sandy-Randy realtor charade is premised on leverage. The stock investor is portrayed as having used $30,000 cash to secure a $30,000 investment while the housing dude used 10x leverage to buy a $300,000 house. There’s nothing preventing Sandy from using a loan (or margin) to secure the liquid assets, of course (creating tax-deductible interest), but let’s examine what leverage means.

If financials swoon and Sandy’s portfolio loses 10% of its value in a correction, she has 10% less money, retains 90% of her wealth and has no debt. If the real estate market corrects by 10%, Randy loses 100% of his equity, has zero wealth, and is left with $270,000 in debt. Why do the Re/Max guys never mention this?

Of course, carrying costs are a factor. There are none with a financial portfolio, unless you hire some smart guy to manage it for 1% a year – a fee you may be able to write off your taxes. With a piece of highly-leveraged real estate, there are mortgage payments, property tax, insurance, condo or strata fees and maintenance. Yes, you get to live in a house, but renting one is cheaper. Besides, financial portfolios can pay you a positive monthly cash flow.  Houses cost money to keep.

Taxes on profits? Yes, they’re tax-free with real estate. Ditto for a portfolio held inside a TFSA, RRSP or both.

Finally, risk. Not only does leverage wildly exaggerate risk in any falling market, but the danger of putting all your net worth in one bucket these days is extreme. Real estate’s a sitting duck for more government taxation as it becomes a symbol of wealth (look at BC). Housing also turns illiquid when the market sours. Financial assets, in contrast, can be sold in seconds. The last thing you want going into retirement is a paid-off home that can’t be turned into cash flow to live on. So a one-asset plan’s a total crap shoot on what conditions may be when that holding must be punted.

Life is about balance. If you need to buy a house and can afford it without gutting your net worth or leveraging your family up the wazoo, go for it. Prices are lower in many places and mortgages are cheap. But this is not a contest. Failing to stuff a TFSA for several decades, neglecting a retirement plan or lacking wealth for when troubles come – that’s gambling.

Sandy wins. She’s a little hot, too. Maybe she needs a friend, Chris?

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July 2nd, 2019

Posted In: The Greater Fool

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