Post: #1

This thread is inspired by a forum member that I met during the meetup controversy back in February. I wasn't able to find a thread on the forum regarding this topic so I'd figure I'd start one.

There are several considerations that I'm thinking of, both personal and societal, in writing this;

- Right now I have roughly $25,000 in life savings, no debts, and a career (in the military) that pays about $70,000/yr. I'm able to save about 25% of my after-tax income. I pulled all my money out of my mutual funds the Friday before Black Monday 2015, when the Dow Jones opened down over 1,000 pts, and it's sitting right now in USD, appreciating versus the CAD.

- My parents are pressuring me into buying my mother's condo (that she rents out) in Calgary, and using it as rental income (as well as to, supposedly, claim primary residence in Alberta even if I'm posted to Nova Scotia for tax purposes.) Like everyone else in Canada, they've both bought wholesale into the real estate mania that's metastasized in this country.

- I'm convinced that both global stock markets and the Canadian real estate market are on the verge of a severe correction. Indeed, it's already started in Calgary.

- I'm increasingly coming to the realization that I don't want the military to define the entirety of my life, and I definitely would like the ability to live location-independently. My obligatory service ends in 2020, at which point I'll be free to walk away. I'll be 27 at that point.

So here's a thought about a potentially viable path to location independence that I could see for myself:

- Wait for the Canadian housing market and stock markets to significantly correct. (In my opinion, a severe global economic contraction of the type we're facing will do that to both.)
- Buy the property from my mother at its depressed value (which could, by some estimates, be up to 50% from its high point.)
- Pay off the mortgage as fast as possible.
- Take out a HELOC loan against the property, then use that to invest in a corrected stock market, focusing on high-dividend and blue-chip stocks. Supplement by renting out the condo for income. (Mom has already offered to manage the property.)
- Live off the investment income, somewhere where the cost of living is significantly less than in Canada (basically, anywhere I'd want to live.)

The forum member that inspired this post managed to achieve location independence for himself by using precisely this method. I've never had much of an innate entrepreneurial spirit, so the prospect of creating my own business I find, frankly, daunting. But I have an economics degree and I follow financial and economic news religiously.

It's definitely risky, sure. But everything good in life is. And I know it can be done successfully, as I've recounted above.

What do you guys think?

Post: #2

First of all for tax purposes the alberta provincial tax is only good if your making 100k+ a year even with other provinces except quebec. Even after the tax changes set by the NDP, Alberta is only good if your income is very high as a place to set your taxes because it's a flat tax on whatever income you earn. It actually hurts people with low incomes in Alberta.

Post: #3

1) Buy Condo, Take out HELOC, Invest in Market - Can't you just buy stocks on margin/with borrowed money? Or get into options? It seems to me that you're looking at a complicated transaction because you want a greater sum to play in the market. Where you might be able to get those funds/have the same leverage through easier means.

And it seems like you're trying to time the market as well.

2) If RE prices are going to drop majorly, that means good properties are going to on sale. Buy/Hold/Rent (only if it cash flows, of course). When they appreciate, you sell. This assumes that the local job market is strong enough to support rents that exceed your holding costs. (like "9 months of occupancy pays for 12 months of mortgage notes" mentality)

Love to hear experts chime in on this.

WIA

Post: #4

HSLD, I appreciate your efforts to be creative. A couple of things to keep in mind. If the markets get hammered you might not be able to access credit like you think you could. So you might not be able to borrow or borrow as much as you think you could.

Also, just be careful of trying to time or out think the market. I am sure some of the experienced investors have taken their fair share of lumps.

Not trying to discourage you. I think spending the time up front and devising a plan is worth the effort. Even if the plan changes. Because if you spent your time well in planning your will probably learn things that will be useful in your life at some point.

I wish you the best.

Edit: if you think the re market is gonna take a dump you would be a better son by getting your mom out so she doesn't take a loss. Meaning help her sell it now. There is no reason you have to buy her condo.

Post: #5

Don't put money in the market that you can't afford to lose. A HELOC is one of those things. Especially as a stock market newb.

No one's ever gotten rich from the market with their own money. Ever.

The only way anyone has ever made money in the market market is 1) commissions managing other people's money, 2) selling books/news/"advice" on the market, 3) buying the whole company, firing bad managers and becoming the owner. No one's every made it rich by just investing in an index and that's it. But people make it rich on the market by selling the services and peripheries all the time.

Post: #6

I'd suggest you take some time before you buy the condo, at least see the situation by fall. Alberta is going through a lot of stuff and I suggest you wait till the dust settles, from someone who currently lives there.

Post: #7

This is a complex situation which requires a more in depth view of your finances and projected expectation for the future:

I will start by asking a few subjective questions, because the objective logistics in implementing your solution depends on how you express your views on the world(eg. state of global mkts):

1)The condo - how much equity does it have relative to the mortgage? There is an existing 1st position mortgage on it, you are going to be taking out a 2nd position HELOC at a higher rate if I understand you correctly. You are buying the condo to use its rental cash flow to service the 1st position mortgage and pay the HELOC with supposed dividends or your after tax earnings. If the condo RE market in Calgary bottom falls out and you are underwater on the condo, are you going to keep paying that mortgage which is higher than the appraised/mkt value?

2)The dividend yield - Are you confident based on your stock picks/global outlook/sector outlook that the dividends are sustainable? Can you read financial statements? Do you understand a company's underlying business model and their position in that vertical and how they value add and have a defensible moat?

3)Global capital market outlook - You say you are negative on global markets and are waiting for a significant correction. What if you are wrong? How much in opportunity cost are you willing to endure to wait for a correction that may only occur after markets have gone up another 100%?

4)Your risk tolerance - Do you truly know your risk tolerance levels? Can you handle a 50% market correction? Can you handle a market correction on borrowed funds?

I'm doing the same thing you are thinking of doing - the difference being I'm not using RE assets as security for a lower rate. Using RE assets as security for a lower rate only makes sense if you are GETTING the lower rate. The fact there is an existing mortgage on the condo I already know you will not get anywhere near prime. You may get 7-8%, hardly a profitable spread between the cost of borrowing and the rate of return. As WIA alluded to, you can simply borrow on margin, most major Canadian brokers are at 4% for margin, much lower than what a 2nd mortgage(HELOC) rate would be as you will find.

I can expand on the process needed, but for yourself if you can't answer with confidence those points above, don't do it.

Post: #8

Are you an investor or a trader? An investor is in it for the long haul and would never wait for the big correction. Just keep investing 10% of your income in the market. If it crashes keep investing the 10%. It is called dollar cost averaging.

If you waiting for a correction, then forget about investing and start being a trader. It is a whole different world. Whether the market goes up or down does not matter to a trader. A trader gets in and then out with small profits on a regular basis.

In the long run investors tend to do better. But not in the short run. Trading is a lot of hard work though.

Post: #9

Seems like many balls to juggle and several different variables that need to line up in accordance with what you want. Why not just say "no" to your parents on buying the condo and stack cash which you can use in your recession scenario? Even then, I don't understand the benefit in paying off the mortgage as quickly as possible if you're just going to use the same amount of money the HELOC would net you but with interest attached to it.

Also, I'm an American national so not familiar with Canadian tax planning, but I wasn't aware you get a tax break for mortgage interest... and even if you did, nothing is better than 0% interest, which is what you'd be getting just using the money you stashed. I guess if your mom really wanted to unload it, you could ask her for a seller carried loan, right? "Give me the best rate, mom!"

Personally, I have no confidence in myself to time crashes/peaks so I just plug away using dividend yielding stocks while buying 10-20% more during the dips.

Post: #10

I work in real estate in Alberta. Definite buyer's market. My philosophy about RE investing is 100% cash flow based, ie; buy rental properties, and never buy a single unit. (1 vacancy = 100% vacancy rate). Purchasing a house is for normal people, essentially buying into the "white picket fence American Dream". I assume most of us on here want location independence to some degree, and I highly recommend the men of ROK don't purchase a home. But this depends on your life goals as well.

If location independence is your goal, RE investing may be a good path to get there, but not on a buy and hold basis. If a house with a a basement suite or duplex is in your price range, I'd recommend that. You can buy with 5% down based on owner occupancy. Being in the military is a pretty good excuse to purchase as your own home, but then have to rent out both units when you have to travel.

As for investing, personally I've found you have to put way too much money into stocks to see any kind of livable income off of dividends. But if this person you met has done it, I'd be curious to learn how. As it is evidently possible.

I wouldn't suggest a HELOC against a Calgary condo. Depending on location, the price still has a long was to slide. You could be looking at a mortgage and HELOC adding up to more that the condo's value in the near future.

At the end of the day you're moving in the right direction seeking location independence. I'd say look into dollar cost averaging your money into index funds.

Also previously mentioned, Alberta residency doesn't really help you unless you're at 100k plus

Post: #11

15 years ago I was almost exactly in the same situation as HSLD and I bought a triplex and lived in one of the units. I'm not a fan of condos because I think the monthly fees are a rip off. When I moved abroad I rented out my unit as well.

I did pretty much all the maintenance myself because I'm cheap and I think a man should know how to do that kind of thing. It makes a huge impact on your bottom line.

The house cost in the low-mid 6 figures when I bought it, now it's worth low 7 figures. It's in the crazy Canadian real estate market, but there's enough of an equity cushion and strong enough cash flows that I'm not worried. The crazy market is also why I never expanded: by the time my equity was built up to the point I could get more properties, the valuations were too high for my liking.

I re-amortized my mortgage several years ago because rates were low and I wanted to increase my cash flow.

I'm location independent and have systems in place to streamline the rental operations while I'm in other parts of the world. It's good to have family that can help when local presence is needed.

I borrow against the house at 2-3% to fund larger capital and lifestyle expenditures so I'm not constrained by my monthly cash flows.

I know the conventional wisdom is to have zero debt, but if you're paying 2-3% to borrow and total debt is not a large chunk of your net worth then it's not a big deal. Interest rates will go up eventually, but not in the near future.

If you borrow money to invest, whether on margin or HELOC, the interest is tax deductible. I wouldn't put HELOC money into the stock market. I've done it and have done terribly. I'm horrendous when it comes to stocks.

My monthly cash flows aren't huge, but by living in places where the cost of living is much lower and the women are feminine I don't feel any hardship.