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The MIC manoeuvre – Say goodbye to your mortgage

Controversial, Real Estate 25 Responses »

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.

The Future of the Real Estate Market

Real Estate 3 Responses »

Jun 152020

A large price drop is coming says CMHC

Canada’s federal housing agency predicts home prices will decline by as much 18% this year. The Canada Mortgage & Housing Corp. (CMHC) is concerned for the country’s long term financial stability amidst the higher unemployment rate this year. Its CEO recently announced that one fifth of “all mortgages could be in arrears if the country’s economy hasn’t sufficiently recovered.” He also predicts the nation’s debt to disposable income ratio will climb from 176% now to well over 200% through 2021.

In fact, CMHC doesn’t think real estate prices will start climbing again until the second quarter of next year. The graph below shows the average price of homes up until now, followed by a solid-filled probability range representing the most likely scenario into the future. As we can see the short term outlook is not good for real estate investors.

My opinion

Although I can’t speak for the rest of Canada, I feel a price correction of 18% in Vancouver is probably not going to happen. According to zealty.ca, the median price of homes in Metro Vancouver has been moving up over the past 5 years. The 12 month average did turn negative in 2017 and 2019, but overall the trend is still moving higher. The nationwide lockdown during March and April also didn’t seem to hurt prices too much.

Personally I feel like the worst of the economic pain from the pandemic is over. We will probably see a flat real estate market over the next few months followed by increasing prices near the end of the year. Then in 2021 and 2022 prices will continue to climb by 4% a year as the economy expands and lenders continue to print credit. 🙂 I believe now, during the summer of 2020 is a great time to buy real estate because prices are subdued due to the pandemic. Transactions have slowed so there are fewer buyers to compete with. And interest rates are still in the basement so mortgages are cheap.

Even if there’s a large housing crash around the corner it probably won’t last long as the political will to stimulate the economy is all but certain. So I am not worried.

How I obtained a negative interest rate mortgage

Economics, Real Estate 12 Responses »

May 112020

Why inflation matters

U.S. government bonds in 1990 were paying investors 8% a year. That sounds amazing! Especially for a low risk investment. 🙂 But not everyone was buying them. Why? Because investment returns don’t tell the whole story. The inflation rate that year was 5.4%. That means the real rate of return on those bonds was only 2.6%. Stashing $100 under a mattress would have lost $5.40 in value during 1990. As Ray Dalio says, “cash is trash.”

Obtaining a mortgage from an unconventional lender

Earlier this year I bought a rental property and took on a new mortgage at 2.44% fixed interest rate for 5 years. After asking around different banks I decided to use monoline lender MCAP. They deal with broker channels and often have lower rates than the big banks. 🙂

negative interest rate mortgage

Since this is an investment property the interest on the mortgage is tax deductible. My marginal tax rate is about 30%. So my effective interest rate after tax adjustment is 1.71%. But this is the nominal rate. To get the full picture we have to subtract the inflation rate. Last year Canada’s official inflation rate was 2.25%. So my real mortgage rate equals the nominal rate (1.71%) minus the inflation rate (2.25%) which comes to -0.54%.

So I’m effectively paying a negative interest rate. I’m earning 54 basis points to borrow money. Woot! 😀 Personal finance author Robert Kiyosaki says smart people use debt to get rich. He’s right. I’m growing my net worth by literally having this mortgage.

The historical average inflation rate in Canada has been about 2% annually. Let’s assume it will continue to average 2% for the foreseeable future.

This is bad for my mortgage lender. The asset they are holding (my mortgage) will slowly lose value over time. Fortunately for them the 2.44% interest rate they charge me is still higher than the expected inflation rate.

My new investment property with 15% expected annual return

Real Estate 27 Responses »

Mar 092020

Owning a piece of the suburb

The recent stock market mayhem is a crucial reminder of how important it is to maintain a well diversified portfolio. After selling my farm last year I was too overweight in stocks so I decided to rebalance. 😉 At the beginning of this year I welcomed a new investment property into my growing portfolio. 🙂 It’s a one bedroom apartment in a low-rise building – less than 10 years old. It features an open floor plan that measures about 650 sf, and has a large balcony.

In today’s post I will explain why this purchase makes financial sense for me, and break down the numbers.

Why invest in Vancouver real estate?

In a previous post I explained how to improve investment returns by primarily focusing on broad asset class trends instead of analyzing individual assets. In late 2019 I was trying to find the most undervalued asset class. At the time, stocks were at record highs. The expected return for the TSX index was just 5% a year. Likewise bond yields were a joke – and still is today. So nothing looked attractive. 🙁 I was starting to lose hope.

But then I looked at the real estate market. To my surprise the expected return was 10% or higher. Hey, now we’re getting somewhere. 😀 I have discovered an undervalued asset class with terrific return potential. Ka-ching!

Mr. Krabs is my role model

The next step was figuring out where to buy real estate. For tax purposes I planned to stay within Canada. I also wanted to buy in a large city with steady population growth. After looking at Montreal and Toronto I ultimately decided to stay around Vancouver due to the following reasons.

Prices in Vancouver recently pulled back about 12% from all time highs in 2018.
The capitalization rate has greatly improved over previous years.
Insanely low vacancy rate of just 1% helps keep rental rates high.
Relatively high population growth.
Home city advantage. I can manage the investment myself instead of paying a property manager.

Choosing the right investment property

The last step was to narrow down my choices by making a list of criteria – such as the price range, rental restrictions, building age, capitalization rate, etc. The capitalization rate is a measurement of profitability. It’s the net income generated from the property divided by the property’s price. A good cap rate in Vancouver is 3.5% or higher.

A couple of years ago Vancouver was a terrible place to buy rental properties because the projected returns were abysmal. According to Colliers International, the cap rate here was as low as 2%. Ouch. Here’s the data for Q1 2018.

Low rise condos have higher cap rates than high rise condos

However, things turned around over the next 2 years. By the end of 2019 the cap rate climbed as high as 4.25% in some segments of the market. 🙂 It’s still not as lucrative as in other cities, but it’s comparatively better than before. Here’s the data for Q4 2019.

An investment property in the prairie provinces would have a high cap rate

At this point I knew exactly what I’m looking for. So I was finally ready to head out and find me some prime real estate. 🙂

finding the right investment property requires a good realtor

I started searching in October on the website zealty.ca. I also hired a realtor to help me filter listings and write offers. By the way, if you’re looking to buy or sell I recommend finding yourself a British real estate agent. They’re all about the proper-tea. 😀

Anyway, in the beginning all my offers were falling through. Then one day in December I came across a very promising condo in Burnaby, a vibrant city east of Vancouver.

Burnaby has about 250,000 residents and the population is growing fast

I attended the open house and liked the property right away. It satisfied about 90% of my buying criteria which was excellent. 🙂 The asking price was also reasonable. The market was heating up so I knew I had to act fast. I made an offer shortly after viewing the place. After some back and forth an agreement was reached, and I paid a small deposit – or as I like to say, a condo-minimum. 😀 I removed my conditions after getting a home inspection and mortgage confirmation. A few weeks later the property was mine. 🙂

Rental Property Criteria

So here are the reasons why I like this condo.

Low strata (HOA) fee which works out to just $0.28 per square feet. (See fee schedule here)
High cap rate of 3.6% to 4.0% range according to comparable rents in the area.
Built by a reputable developer.
High walk score and transit score – over 80% for both. This makes it easier to find renters.
Safe neighborhood, with a relatively young demographic.
Area has a high level of education and high median household income (~$110,000 according to StatCan.)
Unit not facing south or west so it doesn’t become a sauna in the summer.
No upcoming special assessments or deficiencies in the building.
Friendly neighbors.

Now here are some things I don’t like the about property.

The underground parking spot is a bit far from the elevator.
Can be a little noisy due to construction down the street.

So there’s not much to complain about. Overall I’m very happy with this purchase. 🙂

In any case it was finally time to make some money from my new investment. Do you know how many ants you’ll need to fill an apartment? The answer is tenants. 😀 I showed the apartment to more than a dozen potential tenants. There were a few goofballs who didn’t show up to their appointments.

But eventually I found a young, middle class couple with a cat. One of them (not the cat) has a credit score in the high 700s, – surprisingly good for someone in his mid 20s. They moved in at the end of February and pay a monthly rent of $1800 – which they can easily afford on their combined gross income of $100,000/year.

This puts my rental unit’s cap rate at 3.9% – which is on the high side for a Vancouver area condo according to the Colliers table shown above. 🙂

Breaking down the numbers

From the beginning I wanted an investment property that would be cash flow positive. A conventional 20% down payment wouldn’t cut it. So instead, I decided to proceed with a 30% down payment.

Sold my farmland – Here are my returns

Real Estate 29 Responses »

Jan 132020

Farewell to my 310 acres of Saskatchewan farmland

Farmers and Wall St. bankers don’t have much in common. But something they both seem to enjoy is getting down and dirty with their hoes. 😉 Farming can be difficult. Some grain farmers barley scrape by. Luckily for me it’s a lot easier investing in farms than working on them. 🙂

Thank you so much everyone for following me on my 7 year farmland journey. I have received a lot of comments and support regarding this major investment. But all things must come to an end. As you may be aware, last year I put my farmland up for sale with a real estate agent. Well as of last week I have successfully sold my farmland. 🙂

I received my first offer after a few months of listing my land. The buyer and I negotiated and we ultimately settled on a price of $445,000. This is 5% below my initial asking price.

The advantage of getting out of an investment is being able to reflect on my decisions, and consider where I could have done better. In today’s post I’ll review my experiences of buying, managing, and selling the farmland.

Breaking down the numbers

I invested $40,000 of my personal savings, and leveraged up to buy $322,000 worth of farmland. It was basically a 12% downpayment that allowed me to greatly improve my returns by 8-fold. 😀

Farmland profitability 2013 to 2019: Let’s start by looking at the farm’s income statement over the years. In 2013 my operating costs were low because I only had a mortgage on one farm for most of the year. It wasn’t until the end of 2013 that I had closed on the second farm. I operated at a small loss in 2014 before turning a profit again in 2015.
Net operating profit: $10,000

Let’s look at my capital gains next.

Capital gain = sold price – purchase price – transaction costs
Sold price: $445,000
Purchase price: $322,000
Total commissions and other transaction fees: $26,000
Capital gain = $97,000
Cheese-n-rice! That’s the most money I’ve ever made buying and selling a single investment! This must be what affluent people feel like all the time. 😀

Finally the return on investment can be determined using the following formula:

ROI = (Net gain from investment / Cost of investment ) x 100%
Net gain = $97,000 capital gain + $10,000 net operating profit
Cost of investment = $40,000

Return on Investment = 268%

Wow. 268% ROI over 7 years works out to a 20% annualized return. 😀 Sweet sassy molassy! I feel simply elated! By comparison the TSX stock market index returned about 60% over the last 7 years, including reinvested dividends.

Here is a look at my farmland balance sheet over the holding period. $40,000 of cash savings was turned into $260,000 due to price appreciation and gradually paying down the farm loan.

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