Jul 202020
 

Let others make your mortgage payments for you

If you’re tired of paying your mortgage on your own then this post is for you. The MIC manoeuvre is a legal tax strategy that allows you to effectively get other people to service your mortgage, so you don’t have to. How does it work? You simply borrow money to purchase Mortgage Investment Corporations (MICs) which generate investment income. This income is then used to cover the cost of both your new loan and your mortgage payments. 😀

Get help with your mortgage payments for free.

A MIC is a Canadian investment that holds mortgages secured by real property. It’s similar to a mortgage REIT in the United States. Some borrowers can’t get a mortgage from traditional lenders. But they can still obtain financing at a higher interest rate from alternative lenders such as MICs. If you invest in a MIC, the mortgage payment of someone else becomes your income! 😎

Similar to its cousin the Smith Manoeuvre, both strategies make use of tax deductible debt and financial leverage to increase your net worth. But unlike the Smith Manoeuvre, the MIC Manoeuvre also increases your cash flow. It does this by removing the biggest expense from your household budget – the mortgage payment!

 

How to implement the MIC manoeuvre 

Why service a mortgage like a sucker when you can get others to do it for you instead?

 

To keep calculations simple let’s say your current mortgage balance is $100,000. According to TD bank’s mortgage calculator, your monthly mortgage payment in the current interest rate environment would be $379. This works out to roughly $4,500 a year.

Everyone knows the best way to get rid of a home loan is to talk to actor Mortgage Freeman. But if you’re not that well connected, using the MIC manoeuvre will still save you that $4,500/year in payments. Here’s how it works.

Step 1

Start by opening up a home equity line of credit (HELOC.) Then take out $150,000 from it and put the money into a discount brokerage account. You can generally borrow up to 80% of the value of your home. HELOC rates are about 3% these days, and payments can be interest only. This means the minimum payment you will have to make on your HELOC debt is $375 a month, or $4,500 a year.

So far your combined debt is $250K ($100K mortgage + $150K HELOC.) Your annual payment to service this debt is $9,000 ($4,500 + $4,500). 

Step 2

This is where the magic happens.😉 You take the newly funded $150,000 in your brokerage account and purchase a basket of Mortgage Investment Corporations, which can be publicly traded or private. In the past I’ve blogged about which ones I like and hold. Currently popular MICs such as Timbercreek and Atrium have yields around 8%. Disclaimer: I currently own both of them.

Using 8% yield as a benchmark, a handful of MICs worth $150,000 can expect to generate $12,000 in annual investment income.

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Jan 152018
 

How to Prepare for Higher Borrowing Costs

My debt to income ratio is about 500% while the national average is around 173%. Readers sometimes email me and ask what I will do when interest rates rise. My answer is simple.

I tell them I will pay down my debts in an accelerated manner prioritizing the highest interest loan first. I will limit my monthly interest expense to no more than $1,500. Doing this will adequately protect myself from interest rate risk. Sounds like a solid plan, right? 😉

But I know not everyone will agree. :/ Back in 2014 I noticed some people were concerned that I had taken on excessive risk because my debt level was too high. This sentiment echoed around various internet forums. Here are some examples I’ve saved.

The last commentator wanted to know how I’m doing now. That’s what I’ll be discussing in today’s post. 🙂

But first, here’s a look at my debt summary in 2014. The numbers are taken from my net worth update 4 yrs ago.

Liquid’s 2014 Debts Balance Interest Rate Annual Interest Cost
Mortgage$200,0002.95%$5,900
Farmloans$208,3003.40%$7,082
Margin Loans$52,9004.25%$2,248
HELOC$17,9003.60%$644
TD Line of Credit$33,7005.25%$1,769
CIBC Line of Credit$14,0004.50%$630
RRSP Loan$5,0004.00%$200
Total Debt Balance$531,800  
Average Weighted Interest Rate 3.47% 
Total Cost of Debts$18,474

 

Back then I had nearly $532K of debt, charging me an average interest rate of 3.47% per year.

I was paying $1,540 per month in interest. But I was cash flow positive and saving about $1,000 per month. I felt like I had everything under control. So I didn’t understand why people claimed I was overly leveraged. I thought maybe I was missing something. But as Bobby McFerrin would say, “don’t worry, be happy.” 😀 So that’s what I did.

And here’s what my debt looks like today, 4 years later. 🙂

Liquid’s 2018 DebtsBalance Interest Rate Annual Interest Cost
Mortgage$180,3002.80%$5,048
Farmloans$185,3004.30%$7,968
Margin Loans$57,0002.40%$1,368
HELOC$14,9003.70%$551
TD Line of Credit$5,0005.45%$273
CIBC Line of Credit$17,5005.00%$875
Total Debt Balance$459,000  
Average Weighted Interest Rate 3.49% 
Total Cost of Debts$16,083

 

So my debt costs me $16,083/yr or $1,340 per month right now. This is actually $200 per month lower than in 2014, despite interest rates being higher today.

Yay. Bobby was right. There was no need to be worried. 😀

Nearly every asset class I hold long positions in has produced decent returns since 2014. Had I not borrowed and used other people’s money to invest I would have missed out on all the investment gains.

 

Continue reading »

Nov 092017
 

tl:dr. The answer is yes, Enbridge is a good buy. 🙂

Fair Market Value of Enbridge (ENB) 

Canadian pipeline company Enbridge is currently trading at around $47 per share. But based on Benjamin Graham’s formula for valuing stocks, which I’ve discussed before, the fair market value of Enbridge should be around $62.

Enbridge stock’s EPS is $1.96. The growth rate (g) is 10.5% a year according to Nasdaq.com. And long term high quality corporate bonds currently yield 4.1%, which represents the (Y) variable in the equation above. So we can see that (1.96x(8.5+2×10.5))x4.4/4.1 = $62

$62 per share is in line with what most analysts have determined as well. For example TD Equity Research recently posted a 12 month target of $62 for Enbridge. Here is the full research paper for anyone interested. This indicates that ENB may be oversold right now.

If Enbridge climbs to $62 per share that would be a 37% increase in total return. That’s pretty darn good! 😀 This is why I believe Enbridge is potentially oversold right now and is a good buy. 😀 Over the past decade ENB dividends have increased by 10% annually. Enbridge plans to continue growing its dividends by at least 10% every year through 2024.

Enbridge has one of the strongest economic moats of any company. Since pipelines require a lot of capital and regulatory approval, it’s not an industry where anyone can easily get in. Much like the railway industry, it’s pretty much an oligopoly without much competition.

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Apr 242017
 

Borrow money to make money

Today we’ll explore a common question I get asked all the time: What is my thought process behind leverage? The short answer is simple. I want to make high returns without being exposed to high risk. Normally the two go hand-in-hand. But leverage allows me to separate them. For example, a speculative marijuana stock may grow 20% to 50% a year. But it could just as easily lose half its value. The potential reward is tempting. But the high risk is not worth it.

Instead, I’m looking for a lower return, lower risk investment such as an established oil/gas pipeline company known for its predictable earnings, dividend growth, large economic moat, and low stock volatility. Using historical data and fundamental analysis I may determine that there is a very high probability this stock will appreciate 4% to 10% a year. I can then apply a leverage multiplier of 5 times on this investment which means my actual expected rate of return is 20% to 50% before subtracting the cost of borrowing.

In other words, I do not subject myself to the high risk that is typically associated with juicy returns. But I still get those juicy returns! Awww yeah. 😀

That’s pretty much it. The long answer requires some further explanation. Let’s start with the 3 criteria I look for before I borrow to invest.

Using financial leverage can produce greater returns

 

The 3 fundamental rules of practicing leverage

  1. A 10+ year investment time horizon.
  2. An adequate diversification strategy.
  3. An asymmetric risk-return opportunity.

The first and second rules are straightforward. Billionaire Jeff Bezos recommends we think in 7 year terms to remain competitive. I suggest taking that up to 10 years just to be safe. 🙂 In terms of diversification it can mean more than just having stocks and bonds.

 

Seek Out Asymmetric Returns

Now comes the fun part. Rule number 3. As we all know there is no investment without risk. The third rule is about knowing which investment has a favorable risk to reward ratio. This simply means comparing the odds. For example, let’s say we are asked to roll a normal 6 sided die. If it lands on 1, 2, 3, or 4, we win $10. 🙂 But if it lands on 5 or 6, we lose $10.

So should we play? The answer is a resounding yes every time! 😀 We have a 66.7% chance (4/6) of success. So from a rational perspective this has an asymmetric probability in favor of us winning.

 

Analyzing Probable Returns with a Bell Curve

We can use a normal distribution to help identify favorable investment opportunities. In statistics, a normal (bell curve) distribution outlines all the possibilities with the most likely outcome being in the middle. The standard deviation can be used to measure the variation in a set of data. Let’s see how we can put this bell curve to use when we overlay it on top of a chart that shows how many times the stock market returned a specific amount over any 10 year period between 1916 to 2016. (source)

leverage is about probability

So over the last century, any 10 year period of investing in the S&P500 index would have returned somewhere between 6% to 11%, 40% of the time, or within 1 standard deviation of a normal distribution curve. Additionally, returns were between 3% to 14%, 72% of the time, within 2 standard deviations from the mean.

This strongly suggests that we have a 95% probability (95/100 possibilities) of making at least 3% annual return from the stock market in any given 10 year period. Pretty neat eh? 😀 Time in the market reduces risk in the market, and creates a huge asymmetric advantage for investors.

But enough theory. Let’s see this at work in a real life example.

 

Banking on Leverage

A couple of years ago I used leverage to buy RBC Royal Bank stocks. Let’s go through my thought process behind this decision.

Large cap, blue-chip dividend stocks are ideal to use leverage on. They don’t come much bluer and larger cap than RBC. It’s the largest company in the country. Plus, there’s a lion in the logo. That’s how you know it’s a top quality company. 😉

I borrowed $4,000 to buy 55 shares of TSE:RY and contributed $0 of my own money. I wrote a full analysis on RBC and explained why I thought it was a good stock to buy at the time. The reason I used leverage was because I didn’t have any cash and the investment fits my 3 rules of leverage.

  • First rule: I planned to keep RY stock for the next 10 years.
  • Second rule: I made sure RY would only be a small part of my total portfolio.
  • Third rule: RY’s P/E ratio, peg ratio, and other fundamental measurements looked appealing in 2015. The stock was expected to grow 8% to 10% a year for the foreseeable future. Historical data showed strong earnings growth and stock appreciation. RY’s dividend would be enough to cover the interest cost of the debt. Thus, this would have a favorable asymmetric risk-to-reward ratio.

My return on this investment so far, net of margin interest cost, is about 37% or $1,500. Not too shabby. 😀 But this shouldn’t be a big surprise. After all, stocks are fundamentally priced based on their earnings. And RBC has an impressive history of consistent earnings growth. Back in 2015, RY was expected to earn $7.35 per share by 2017. Fast forward to today, it appears RY may actually be on track to hit $7.40 EPS this year. We shall see.

This leveraging strategy is also recession resistant. For example, let’s say I did the exact same thing in 2007 at the peak of RY’s market capitalization, (the worst possible time to use leverage) right before the greatest recession of our generation. Yikes! Well despite the unfortunate timing, 10 years later I would still end up with a 70% positive return, net of interest expenses! This is why I am not concerned about future recessions. 😉 I know I can just hang on to RY until the stock market recovers like it always does after a major correction.

Continue reading »

Apr 202017
 

Some people suffer from areophobia, the fear of flying. But this is plane silly. Flying is statistically safer than driving. Yet some people live entire lives without ever getting onto a plane due to this irrational fear. They believe merely walking into an airport could give them a terminal illness. 😄

Borrowing to invest is similar to flying. Nobody ever has to do it, but it can make life a lot easier. I can certainly take a train to get from Paris to ZĂŒrich. However, flying is much faster. I can retire comfortably some day without ever going into debt. However, using leverage will enable me to get there much faster. 🙂

If we tend to pick bad investments, then we should probably pay a professional to help manage our portfolio. But on the other hand, if we have a history of making mostly good investment decisions, then rationally speaking we should double down to boost ours returns unless evidence suggests otherwise. Leverage doesn’t change our odds of winning. It merely enhances our gains or losses based on the inherent odds of the underlying investment decision.

Using leverage removes the problem of not having any money to invest. It allows us to be fully invested at all times, but still have access to instant liquidity. This gives investors a huge advantage. Just ask any MBA graduate.

Next week I will blog about my 3 fundamental rules of leveraged investing. A lot of readers have requested this so I will break down my thought process and method. The extended bull market cycle we’ve been in has helped my investments tremendously. But when I use leverage, I also follow specific criterias that are meant to reduce downside risk in recessions and bear markets. 🙂

 

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Random Useless Fact:

Foxes are smarter than most, but not all, dog breeds.