[...] As Albert Einstein once noted, compound interest is the greatest mathematical discovery of all time but you sure don’t want to be on the losing end of compound interest for too long. In such a case, the longer you are in debt and not chipping away at the principal, the longer you will continue to be in debt (for a good example of how compound interest works against you, see Million Dollar Journey’s example of interest paid during the life of a 25 year mortgage compared to a 40 year mortgage). [...]

Real estate investments can be great “passive” investments, but they can also be huge money pits, especially if vacancy rates skyrocket and you have difficulty finding good tenants. Your “$1000/month” cash flow is by no means guaranteed, and you need to have the ability to cover the mortgage and other operating expenses without the benefit of a tenant paying rent, should that situation arise.

On CDIC, not everything is insured and even the CDIC caution about stability

So that said, I guess your money (the majority) is in daily interest, Bonds, Mutfunds, GIC (longer than 5-years) and RRSP’s

As safe as houses.

A person saves from net income (after paying taxes) to purcahse a home. They leverage that home by paying a financial institution over 25-years 2.5 times that mortgage loan all from net income

George, I have nothing further to say on safe and secure

I will, however, disagree with you regarding the safety of “money in the bank”. Bank deposits in Canada are 100% safe if they are insured by the CDIC. If the bank goes under (highly unlikely, but possible), then your deposits would be returned, up to the CDIC maximums. An insured bank deposit carries far less risk than a highly-leveraged investment in real estate.

you said

“Minimal risk investments are things like insured bank accounts, GICs, and so on. They don’t have any chance to grow greatly, but they’ll typically keep up with inflation. They don’t have much of a chance of dropping in value, also.”

I refer to banks in the same way as a brothel, or those so called strong financial institutions in the US that have gone bust in the past, or the like Northern Rock in the UK, or like the Fannie Mae’s and the Sallie Maes… no guarantees.

Dont ever say your money in the bank is safe. Sorry, if you want to be a purist then the closest it gets is under the mattress or in a safety deposit box.

Hedge against the downside, maximum leverage … that is my investment strategy… I read that somewhere from a 1929 market crash that someone made zillions

RBC nice Canadian bank, fluctuating stock, pays a 3% dividend, no guarantee on capital

GIC’s 4-5% (non RRSP’s), taxable until the TFSA comes around.

Then again, no guarantee or hedge against inflation, or if the bank or Canadian economy waffles.

Its really amazing how a loonie could do what its done in the last twelve months, or that the US buck no longer commands the worlds attention, everyone eyeing the Euro … whatever next, we will be trading carbon credits … not a bad idea!

George, I dont know whether the Canadian government will go bankrupt, whether the CPP or OAS will be there in the not to distant future, or whether the loonie will be devalued to a second or third class currency within the next 10-years.

Canada is dependant on the USA for survival, and should the US be hurting, it is likely they will pull everything back home (I would)

The auto industry is hurting in Canada, that in turn spins off to other industry sectors, housing, sub-factories, the butcher, the baker the candle stick maker.

On the East Coast the fisheries industry ain’t what it was, as is the logging & timber industry in BC.

its a selfish individual world that we live in George, its every man & woman for themselves … banks, industry, the ecomomy, politicians

Sorry to go on, but everyone and everything is leveraged. Its belongs to no-one

Yes, everything in life is a risk, but generalizing like that isn’t helpful. The goal is to maximize the reward and to minimize the risk. Leverage increases the risks AND the rewards of any investment – the bonus you get from leveraged investing when the investment grows is just as much of a handicap if the investment drops in value.

You say that your strategy is “mine and only mine”, yet it’s clear that you’re advocating your strategy as being a “safe” way to invest. I’ve pointed out that it isn’t necessarily as safe as you think.

Minimal risk investments are things like insured bank accounts, GICs, and so on. They don’t have any chance to grow greatly, but they’ll typically keep up with inflation. They don’t have much of a chance of dropping in value, also. These aren’t the best choice for everybody, but they should form a core part of any portfolio.

Before I say anymore, I want everyone to know that I am a Canuck living in Southern Ontario.

One of my personal examples posted somewhere else, is an REI that I purchased for $125k 3-years ago that has a 100% mortgage and cash flows a nice $1000/mth. Its a walk away situation, “as safe as houses” should the housing market crash, what do I care.

Same goes for dividend paying stocks, that are optionable long & deep in the money … yet to lose a single red cent … a strategy that works for me .. and only me, thank you very much.

Everything in life is a risk, even putting a million dollars in a safety deposit box or under the mattress, there are no guarantees that the million is ever safe.

I am 61 years old, I do not have time on my side, I have had my trips and pick-me-up’s, but what do I know!

You do whats best for you the individual. My strategy is mine and only mine, it works for me, it belongs to me and not considered advice for anyone else to try.

Now George, back to high leverage, do you have any suggested minimal risks investments. that hedge against what-if uncertainties?

Risks are involved in all investments, and characterizing real estate and dividend-paying stocks as “safe” isn’t a fair or accurate description.

Its not really a tough decision, since it is my opinion that 100% leverage for safe secure investments (such a REI or dividend paying securities that pay double your interest payments on the loan) is the best deal in town.

If you never ever want to pay off your residential mortgage or an REI mortgage (since you always want cash-flow) then its better to always leverage max.

Its all a mind set, and can you sleep at night

And if you factor in inflation over a 40 year amortized mortgage the actual cost in today’s dollars of a 40 year vs. a 25 year are not nearly as large as people would expect. The total cash outlay may be something around 30% higher, but with inflation factored in it is only around 15% more.

Finally, it is a reasonable projection that making payments commensurate with a 25 year amortization but instead taking out a 40 year mortgage and splitting that into a 40 year amortization and the remainder going to a non-registered investment can yield a better net worth than sticking with just following a 25 year mortgage paydown plan.

on places between 150 to 200k you spend about $200 dollars less each month

if you rent out the house and live there you will stay in the positive. With what ever you want at the end of the year you can pay the maximum prepayment.

If you pay the maximum prepayment every year the amount of extra interest you pay is only a few thousand dollars.

So in my opinion 40 year am is great for starting real estate investments because it gives you a safety net when your property is not as lucrative as you thought it would be.

You can always increase your payment amount if your income is higher in a couple of years. A house can be payed off in less then 7 years doing this with a bit of luck and skill.

I agree with you completely.

The buy vs. rent decision is so ridiculously complicated that it is clearly in the realm of being a “lifestyle decision”. I just presented an argument to the contrary to help bring it back to that realm.

I actually don’t care what people do with their money so much as why they do it. When people say “renting = throwing money away”, it means that they’re basing their decision on bad information and that makes Gates a very sad panda :(

So lets look at the 300K home, it costs:
Mortgage + Maintenance + Utilities + Property Taxes + HOA/Condo Fees (if applicable) + Additional Property Insurance

Now let someone else buy that 300K home, and you rent it instead:
Mortgage + Maintenance + Utilities + Property Taxes + HOA/Condo Fees (if applicable) + Additional Property Insurance + Landlord Profit + Tenant Insurance

Now sure, I agree with you that in places that have bubble home prices and rents haven’t caught up yet, it’s probably better just to rent. In most normal places in the country that aren’t in a frenzy if you are staying put for 5+ years you’re probably better off financially buying.

If you look at my other posts over at Canadian Mortgage News you’ll see how I’m making your point for you for areas like Calgary where home prices have spiked way past the “3 times median income rule of thumb” in the area, where historically the median home prices have pretty much followed incomes.

Take my city for example. I’m way out on the east coast (like on the ocean east coast, not Ontario) and while no one really wants to live here, it keeps home prices pretty rational. The median family income in my area is something like 60K and the average home sale price from the CREA website is at aroun 160K. That’s pretty darn reasonable.

Another thing you forgot to mention is that in your example of when the kids are 14, your 300K home has appreciated at an average rate of 2-3% per year, plus you retain complete cotrol of upgrades which make it worth more. Assuming you paid nothing extra on your mortgage and you owed 277K on your home and it’s now worth somewhere between 365K – 400K. Suptracting your agents 6% (or 24K) you walk with 400K – 24K – 277K – 15K (for staging and prep) = 84000 dollars. That’s with 0 down on a 40 year mortgage over 10 years with 3% appreciation. I didn’t calculate the CMHC fees and all that jazz, but you get the point.

I think the argument for and against buying realistically will never be won. Each province, city, neighbourhood, and even each individual deal has so many variables that you can never come up with a clear winner unless you are looking at two very specific properties and comparing the rent vs own. Even then you’ll never know the real cost of each until you’ve lived there a while. What happens if that great apartment you’re renting on the cheap is around the corner from an awesome health food restaraunt? This could happen anywhere and use a ton of your cash without even realizing. What about when you’re renting your apartment and people move in above you and across from you that you can’t stand. That’s what happened to me, and why I’m now enjoying a back yard, large deck, my own paint on the walls, and detatched from anyone who could suddenly move in around us. It’s a personal call, not a financial one in my case. Though finances play a part, it just makes sense for my family and were not the primary concern.

Because this is patently false and one of the myths many of us are trying to dispel.

Total Cost of Home Ownership:
Mortgage + Maintenance + Utilities + Property Taxes + HOA/Condo Fees (if applicable) + Additional Property Insurance + Lack of Mobility + Your Time

If Rent ~ Mortgage, then it’s quite likely that the Mortgage is more expensive not less. Paying $1730 for a mortgage over 40 years (@ 6.5%, 5-year rates), gives you about 300k in house (we’ll assume a 30k down), which gives you a starting place in Calgary right now.

So now we start adding:
Maintenance is estimated at 1.5 to 4% of your purchase price per year. Here’s a great list of stuff that breaks. Given the cost of labour in Calgary, let’s go with 2% = $6600 / year = $550 / month. Even if you’re handy and can keep that down, that’s still $275 / month. Obv. it’s not every month, but it averages out to that.

Utilities, maybe it’s a wash if, so we’ll just say zero, but apartment renters often pay less than condo owners.

Property Taxes: right now in Calgary this is about $200 ($2400 / year), the average number for Winnipeg homes is $3600+! Expect that number to go up as Calgary is squeezed by increased labour costs.

Additional property insurance: $50 / month.

Lack of Mobility: (depends on career) If you’re living in a factory town, your home could become worthless overnight. If you’re on the fifth year of a mortgage and your dream job comes up somewhere, you either have to rent your place or throw your money away.

Heck, on the 5th year of your 40-year mortgage you’ll still owe 296k on the house! That’s right, you’ll have paid 102k over five years + all of these other things and you’ll still owe 296k on the house!

Your Time: Owning a home definitely takes time. It’s far less time consuming to write a note to your landlord (A/C not working) than it is to find someone to fix the A/C.

So breaking this down, monthly cost to own =
$1700 +
275 +
200 +
50 =
$2225 / month + 30k down-payment + long-term commitment

If you start your 40-year mortgage now to accommodate your 2 & 4 year old kids (for example), they will be 42 & 44 when you finish your mortgage. When they’re 12 & 14 (in 2018), you will still owe 277k on the home, which will make it tough to move.

I’m not saying that ownership is bad, but it’s very over-rated. If cost to rent ~= cost to own, then renting is likely less expensive, especially in the case of a house.

It’s also not fair to say that rent approximately equals the cost of a mortgage. If you have a mortgage, you also have to pay property taxes, utilities, repairs, and maintenance. Some or all of these items are included in most rent payments.

If you’re getting a 40-year (or longer) mortgage, you’re effectively paying rent to the bank instead of to a landlord. Except that you may be in a very bad situation if your home’s value drops and you end up owing more money on the mortgage than the home is worth.

I have to say, I considered it for a minute to free up monthly cashflow toward the other, higher interest debts, but I became reluctant to act on it when I figured what 10 more years of interest would cost me.

I once had somebody tell me that a mortgage payment is like background noise – it’s there, but you do your best not to notice it. You also don’t bother trying to get rid of it, since it blends in after a while.

I went to our bank and wanted to see if they would match the broker’s best rate, but they refused. Accordingly, my business went elsewhere and I’m happy with the switch.

From other blogs, I see some people doing this. They obtain the best available rate through a mortgage broker. And then they bring the paperwork to their “big bank” home branch. Most times they will be able to match. Because the banks don’t have to pay commission to the broker. But I do think that this is not too ethical though.