Feb 092015
 

Canadians are notoriously overweight. :P Financially overweight in real estate that is. ;) When it comes to buying houses we are even more gluttonous than our American pals. The Canadian median household net worth may be one of the highest in the world, but strip away the equities in our homes and many of us would feel financially emasculated. :|

Foreign ownership, low interest rates, and a growing population in major cities all contribute to our strong real estate market, which many say is in a bubble. But whether properties in Canada are overvalued by 10% or 30% it really doesn’t matter for investors who keep the following points in mind.

  1. Diversification –  Invest in more than one type of asset class
  2. Time – If we have a long term outlook then our risk of losing money is greatly reduced, especially if we combine this knowledge with diversification.

If we’re properly diversified and hold our investment long enough then we’re bound to make money in stocks, real estate, bonds, or any other market. Over 70% of Canadians are real estate investors. Fortunately most of these investors understand the benefits of a long term investment and forced savings. But it’s the first factor, diversification, that many seem to struggle with.

Having one’s net worth tied up in multiple condo units is not the best way to allocate assets. There are other types of properties out there like office space, restaurants, parking lots, etc. that are all available for anyone to purchase and rent out. With the recent lowering of interest rates and the falling Canadian loonie I’ve decided to take another look at real estate. Since I already have a residential property and farmland, I think it would a good idea for me to diversify my real estate portfolio and buy some commercial properties. :)

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Here is what I’m looking for in an investment property:

Type: Industrial – usage would include manufacturing, warehouse, garage, etc
Location: Greater Vancouver Area – includes Burnaby, New West, Richmond, Surrey, and the Tri-Cities
Price range: $250,000 to $500,000
Zoning: I, M, C – Each municipality will have its own naming convention. For example M-1 in Vancouver is a flexible designation for a range of business types like animal clinic, catering, laundry/cleaning, work shop, cold storage plant, etc. And C-2 can be used as a barber shop or beauty salon. These zoning bylaws can be found on the local government’s city website.
Capitalization rate: 4% to 5% – Similar to the ROI (return on investment.) This kind of return would be comparable to a high-yield bond fund, but with less risk. :)

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Jan 052015
 
The Bank of Canada Governor Stephen Poloz stated last month that this country’s housing market could be overvalued by as much as 30%. This may very well be true, but it’s nothing to be alarmed about. ;) In fact I would be really surprised if our real estate market was not overpriced given what’s going on in the rest of the economy. Toronto’s real estate has increased almost every single year for the last 19 years, except in 2009.
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A large part for the seemingly illogical run-up in real estate prices in Canada, the U.S., England, Australia, and parts of Asia over the last 2 decades, can be rationally explained by TINA, which is an acronym for There is No Alternative, a term first made popular by Margaret Thatcher. It’s the same reason North American stock markets reached all time highs at the end of 2014. :) The Canadian Stock market is currently overpriced by more than 20% according to historical averages. The S&P 500 stock market index in the United States currently has a P/E ratio of 20. That’s 25% more overvalued than the historical average P/E ratio of around 16.

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Jan 022015
 

To understand why the Canadian housing market is performing so well we have to look at where the demand is coming from. According to the Canada Mortgage and Housing Corporation, one person households are “expected to show the fastest pace of growth, making it the single biggest type of household by the 2020s.” As the population ages more senior women are becoming widowed. More young women are also delaying marriage and opting to buy smaller homes. As a result, the CMHC says that females today are over-represented in the singles condo market.

In 2011 Canadian women already represented 65% of all condo owners who are single. If we look at the statistics for people who are 55 and older, that number rises to 76%.

Back in 1971 couples with children made up 50% of all households in Canada, while only 13% of homes were occupied by unattached individuals like myself. But today couples with children households have shrunken down to 29%, and singles now represent 28% of all households. Gee willikers! 8-O How the times have changed.

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In the hot Canadian condo market, particularly in Vancouver and Toronto, the one-bedroom units are what’s selling today. “This is a very important force: more single people living by themselves, mainly women,” CIBC deputy chief economist Benjamin Tal says.

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Oct 252014
 

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I’ve been very fortunate with my past real estate investments. My Vancouver condo, and farmland near Yorkton, SK have altogether made me over $75,000 in pre-tax capital gains, at least on paper. ;) Not too shabby considering how 5 years ago I still had student loan debt and a negative net worth. :P

Researching a New Investment Idea

Recently I was brainstorming ideas for my next investment. Stocks are pretty volatile these days due to lower commodity prices like for oil, wheat, coal, and base metals. :( Residential properties also seem kind of flaky at this time because we don’t know whether or not the trusted Fed will tighten its monetary policy next year or open the gates to even more quantitative easing. :?  So it’s hard to find under valued assets these days.

However, I was recently browsing the MLS database on realtor.ca, which of course is accessible to the general public. And I came across several listing on the outskirts of Regina, Saskatchewan that caught my attention. These listings are for undeveloped plots of land, near the Regina International Airport (Code: YQR.) The size of each lot for sale varies from 2,000 ft2 (185 m2) to 10,000 ft(929 m2) or more, so they’re large enough to build an apartment or restaurant on. Here’s an example of one of those properties I might be interested to buy.

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Oct 072014
 

Difficult to Refinance

You know the credit market is tight when the former Chair of the Federal Reserve can’t even refinance his mortgage. :P If that’s of interest to you, you’re not a loan. :D Ben Bernanke graduated with a Bachelor of Arts in economics in 1975 from Harvard University. He later received his Ph.D. in economics at The Massachusetts Institute of Technology (MIT.) Bernanke once even taught as a professor at Princeton University. He was also the chairman of the Department of Economics there from 1996 to 2002. But perhaps he is most notably known as serving 2 full terms as chairman of the central bank of the United States. He had control over the monetary policy of the world’s largest reserve currency. In other words he was arguably the most powerful and financially influential person on the planet.

So imagine everyone’s surprise when his request to refinance his mortgage was denied. 8-O As the Chair of the FOMC his salary was nearly $200,000 a year. However since he no longer has an impressive W-2 (T4 slip in Canada) he does not meet the requirements anymore of someone with a “stable income.” Nevermind he now makes $200,000 each time he presents a speech. Or that he currently has a $1 million book contract. Or that his net worth is over $2 million. All the bank sees is a person who was working over the last 11 years, and is now unemployed. The metrics by which financial institutions decide who to give loans to is flawed to say the least. Anyway the balance on Ben Bernanke’s mortgage back in 2011 was $672,000. It was a 30 year fixed-rate loan at 4.25% interest rate.

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Many financial news sites have already discussed this story. However hardly anyone is talking about the most important question. Does it seem strange that a multi millionaire, who has always made a lot of money, still have a $672,000 mortgage at age 61???

Perhaps it shouldn’t. :)

The reason why Ben Bernanke likes to stay in debt

My investment strategy has always been to follow what the top 1% of the richest are doing with their money. Ben Bernanke’s behaviour of using leverage is perfectly in line with other like minded individuals.

Here’s why it makes sense to take on debt, even when he could pay off his mortgage at any time if he wanted to. It’s because interest rates are at rock bottom. :) He printed a lot of money during his position of power that insured rates will continue to stay low for years to come. Every dollar that the Fed creates out of thin air becomes a dollar of DEBT that the United States people have to bear. The only reason the economy is still holding itself together is because the cost to service debt (the interest rate) is low. Rates have been so low for so long that people and government alike have become addicted to cheap money. With a record amount of debt the country simply can’t afford the cost of those debts to increase any time soon.

Ben Bernanke bought his house on Capital Hill in 2004. Today his home has appreciated in value by $126,468, and the stock market has gone up by nearly 100%. This means by using the bank’s money to buy a property he was able to free up his own savings to invest in the profitable stock market.

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Plus, by flooding the banks with so much money, Ben Bernanke made sure that the U.S. will have positive inflation. Most people don’t like inflation because it eats away at the value of their savings. But this same reason is precisely why it helps those who have debt. Inflation in the U.S. is currently at 2% a year. This means 2% of Ben’s mortgage balance of $672,000 will be paid off automatically by this time next year. That’s $13,400 of real wealth gain, created passively and discreetly thanks to the monetary policy that he purposefully designed, which is an environment of low interest rates with modest inflation. Inflation is created to help the U.S. government pay down its massive $17.8 Trillion national debt. However it benefits personal debts as well.

Printing money also has the effect of propping up the financial markets because: a.) it creates more financial transactions and activities. And b.) the market needs to build in future inflationary pressure. And using leverage in a rising stock market can multiply the returns! Furthermore. borrowing money to invest means the interest that one pays on the loan is tax deductible. :)

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If Ben had paid for his house in cash (used no debt) then he probably couldn’t have bought one nearly as expensive. A smaller, cheaper home would not have appreciated as much as his actual, larger home did. So he would have missed out on part of that $126,468 tax free gain from his appreciating residence. Not to mention all the stock market gains he would have missed out on too.

In other words Ben has brilliantly engineered the financial system to reward those who use leverage and debt to build up their financial assets. His successor to the Fed, Janet Yellen, is most likely going to continue the monetary policy that Ben had put in place. So far Yellen has done nothing but print even more money on top of the balance sheet that Ben left behind.

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