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February 23, 2020 | Dr. Garth

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.

Be informed we have decided not to blockade this blog in support of our people, the Greater Fools. Instead, we’ve set up a financial healing lodge. The hereditary Dr. has arrived… just in time to treat Robert and Lynn.

I just finished reading Doug’s post and am struggling with a financial decision. My wife and I are conflicted on whether it is better to purchase a new Lexus SUV or lease! I’ve always thought it was better to purchase but as our much wealthier friends are leasing we are torn. My better half feels if we lease and there is a serious mechanical problem then we just return the vehicle but if we purchase then we have to either get warranty coverage or pay for it out of pocket. I don’t feel it’s that cut and dry and I hate going into a dealership as I really don’t trust these guys any more then I trust a real estate agent. My better half also feels we could try leasing for three or four years and if we like it return the car and lease a new one again. She likes the idea of having a new model every three to four years. I’ve also thought of trading in my 2014 Q60 and putting an additional $15 grand down to buy the new Lexus. This would then leave us with a low interest car payment monthly. Do you have any advice re this matter?

Listen to Lynn. Trade in the old ride and lease.

The logic is simple. First, why tie up $70,000 in a vehicle that could be invested instead? That amount of money left in your portfolio could easily become $140,000 in a decade and $280,000 ten years after, adding eighteen grand a year to your retirement income. If you leave it in the vehicle, the value ultimately travels to zero.

Leasing gives you (and Lynn) total piece of mind. If it breaks, they fix it. When you get tired of it, they take it back. If it needs maintenance, they do it. Leasing requires little or nothing down, so you get to preserve your capital. Lease rates these days are cheap. And you rent the car during the period when depreciation is the worst.

Yeah, yeah, I know you might shave off some dollars by using cash, but that’s an illusory saving. And by leasing you will make it far, far, far, far easier for her to pick out a new model in 2023. The GreatFool rules at play: (a) buy what appreciates. Rent what depreciates. (b) She’s always right.

Now to Lawrence with a question I hear a lot. Should you borrow to invest?

I write this not expecting a reply or to make your blog, but in the off chance it does, great!  Thank you for doing what you do.

Wondering what your thoughts are on using one’s line of credit to fund a TSFA.    I know it’s an interest rate vs. return rate proposition… our LOC is 4% and our mainly ETF built TSFA has done very well the past few years.   I am thinking of maxing my wife and I’s TSFA’s and using the gains earned in the TSFA to pay the interest and principle on the LOC.

The risk is if the TSFA doesn’t return more than the interest charged on the LOC, in which case we can pay that interest from our incomes.

Do you see clients do this often?   The long term prospect is, in my view, simple:  Take $80,000 and pay 4% on it, invest it for 7-8% return annually, use that to pay the interest and principle on the LOC.   Effectively investing on margin.    If things goes sideways in life and we need the cash it’s sitting there in the TSFA in a liquid EFT and we can cash in and use it as if it were a LOC again.

Intuitively this makes complete sense to me… why am I hesitant to pull the trigger?

Because it’s a bad idea, and you’re a smart guy. Using leverage to make financial investments must be done carefully, judiciously and tax-efficiently. First, borrowing at 4% means the funds must be coming from a secured LOC, since the rate on unsecured lines is considerably higher. Remember this is a demand loan which can be called at any time, plus the rate can be adjusted by the lender on its whim.

Second, the interest is not deductible, as it would be with an investment in a non-registered account. Third, you need to be earning at least 7% on the account to compensate for the above. Fourth, nobody should leverage a portfolio which they self-manage. Sorry, but that’s just a reality, since the swing from greed to fear can be swift and destabilizing. When assets swoon, people who have borrowed to buy them panic, sell low and try to trash the debt. Lose-lose.

Listen to your gut.

Now to Jesse. “Long time listener, first time caller,” he says. “If the helpline is open, I come with the following:

I am currently considering putting some extra cash into a locally managed MIC that has averaged ~7% over the last ten years. What are the relative merits of investing in a REIT vs a MIC? I have contribution room in both my TFSA and RRSP – would you suggest putting either of these asset types into either of those vehicles? (I’m 38, so can leave that cash parked for 30ish years if I keep eating my vegetables). That’s it. Keep fighting the good fight… some of us are following studiously, even on the days when it seems like everyone has been overserved on the crazy juice!

Real estate investment trusts (REITs) and mortgage investment corporations (MICs) are totally different animals. The first invest in income-producing properties like office towers, industrial facilities, malls and apartment complexes, are managed professionally and trade publicly, available through a diversified fund like XRE. REITs have done well over the past few years with capital growth in the 8% range, and own some of the country’s marquee structures. Most throw off income as well as providing a capital gain. (XRE has a 10.5% annual growth rate since inception and provides a 3.55% distribution, for example.)

Mortgage corps hold the debt of borrowers who couldn’t qualify for bank financing. Seriously. This means there’s usually considerable risk, as well as illiquidity. If a MIC dangles a high rate of return in front of you, this is why. You might never get your capital back – at least the risk of that happening is far higher than with a REIT. Plus many MICs don’t let you leave easily, holding back redemptions. In addition, interest paid is fully taxed as income outside of a registered account, whereas REITs often give a taxless return of capital. Also remember that if your MIC blows up, and it’s in an RRSP, you cannot write off the loss.

Stay away.

Finally, here’s Graeme, who has written the Spiritual Leader today merely to brag and gloat.

Thanks for all your wisdom on your blog – helps me confirm things that I believe to be true but constantly get questioned at work and through mainstream “financial” media. I’m just writing as one of those annoying people who is truly writing you to signal that they have made good financial choices in their lives and want to brag about it somewhere, preferably somewhere where someone will tell them how to make yet even better financial choices.

I’m a 26 year old on the moister fringe (I think??) who rents a two bedroom apartment in Saskatoon for $1100 which includes heat, water and internet. Power is ~$45/month. I split this with my S/O so housing costs are ~15% of my annual income. I’m blessed with a well paying job working for the prairie salt cartels and have managed to hit a NW of $250,000 with a full TFSA, RRSP and a company pension to boot. Am I a unicorn?

Yes, my son. In the independent GF Nation, you have special status. If you were modest, like me, you’d be perfect.

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February 23rd, 2020

Posted In: The Greater Fool

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