$500 Okanagan Lake Beachfront
by Mark Terry
Consider the confused look on our realtors face in Jan 2008 when we listed our house and when asked “What are you looking for?” replied, “Nothing.” Of course the realtor was very concerned for us, after all, if we got out of the market now it would be very costly for us to get back in at a later date. My relatives who invested in property were more open with their thoughts and comments and merely considered me an idiot. Regardless, our house sold in March 2008 about two months before the decline in the Penticton market. I have heard “Wow, were you ever lucky!” on more than one occasion. LUCK!! My wife and I looked at where we were living. The land our house was on was worth the same with or without the house. Most people “believed” that house prices would continue to go up. The “truth” was that land prices were out of sync with reality and it was time to sell.
“Don’t confuse me with the truth, I know what I believe.”
I consider myself an optimist regarding the Canadian housing market when compared to the likes of Garth Turner, author of numerous books including his latest “Money Road”. However Garth Turner makes some valid points regarding what most Canadian’s consider their #1 retirement asset: their home. Consider what, according to Wikipedia, affordable housing is: “a commonly accepted guideline for housing affordability is a housing cost that does not exceed 30% of a household's gross income” . So where I live, the gross household income is approximately $62,000 (2006 Government of B.C. Statistics figures of $53,875 and adding a very generous 15%) and allows $1,550 for housing. At current interest rates (4 %+/-), that works out to about a $300,000 home with a mortgage of $270,000 for 25 years. What’s missing? The average interest rate over the last 36 years according to CIBC historical data, is 10% (9.9889%)! That changes a $1500 payment to $2600. What that means is the price for affordable housing should be $180,000. In real life, for what my brother paid for his 3 bedroom split entry, wouldn’t cover the current cost of a bachelor suite loft condo. Oh, and the average income in his trade has only increased 5% in 14years!
I won’t get into the discussion of whether or not your home is an asset or liability. For that I would suggest reading “Cash Flow Quadrant” by Robert Kyosaki, however I would advise that you “don’t drink the Kool-Aid”. To continue, the equity in your house is “savings” that can be used or converted into another asset to generate income and/or growth. Whether you choose to access these savings through a “Home Equity Line Of Credit (HELOC)” (DO NOT USE A REVERSE MORTGAGE!) or if you choose to convert the equity into cash through selling, as my wife and I did, depends on your stage of life and risk tolerance. Here is the obligatory liability statement: “Please consult your financial specialist when considering any of the strategies mentioned in this article”. Lynda and I chose to convert. My youngest child had graduated and was moving out. Anyone know the best way to keep your kids from moving back home (especially if they’re inclined to bring friends)? Sell your house and buy an RV! Having done that, we have not had one of my three kids move back!
The following strategy is only possible by using an investment specialist like those at Agility Financial, who are registered Exempt Market Dealers. With the money from our home we could have bought our 5th wheel, however, by investing the money, we make 3.3% on the cost of the RV. Here is how you could do something similar. Use the bank's money at 7% and invest in something like a Mortgage Investment Corporation (MIC) that has annualized returns of 10.3% and is 100% redeemable after 90 days. If interest rates increase higher than the returns you can redeem the investment and pay off the loan, zero interest rate risk. BUT, because the investment is in mortgages, it automatically creates an interest rate hedge, your investment returns typically go up with the interest rates.
You can do the same thing by using your HELOC with the added advantage that the interest on your loan reduces you taxable income and saves you taxes. You can also do the same thing by using your cash to buy the RV then borrowing to invest, however, the interest on the loan is usually higher than a mortgage.
With the equity from our home, we financed our 5th wheel and found a very nice site at Illahie RV Park, recently renamed to Summerland Beach Campground and RV Park. After one year we were “permanent residents” and now our rent is the same each month - 50 feet from the beach!
Mark Terry is an Independent Financial Advisor with Agility Financial. He can be reached at (250) 276-5424 or Please contact the author of this article or your financial advisor if you have any questions regarding the strategies mentioned in this article.
