Sorry kids, I’ve retired the Sunday Morning Link Dump. May it forever rest in scantily clad peace.
Instead, allow me to do something that’s going to be a lot easier–at least for me. I’ll continue to feature stuff I think you guys will like, from a number of finance blogs, traditional media sources, and maybe even my tweets. We’ll start out with a little something that’s on my mind, just like before. We’ll just skip all that stuff in the middle.
So without further adieu, let’s get to it. Here are the things I liked this week.
1. Toronto Life Magazine, which regularly profiles terrible real estate deals like the one I made fun of on Thursday, isn’t just all about the housing bubble. They also did a profile on Kevin O’Leary I thought was pretty good, even if the writer clearly went into the article despising the guy.
2. Over at Money Nomad, a guest contributor told the story about buying 98 acres of land for just $14,000 in Georgia. No, not that Georgia. The country.
3. Vanessa pointed out how being a solopreneur sucks more than the unnamed person who once gave me a chunk of concrete from his basement as a “gift.” I 100% swear it happened and he was serious about it.
4. Over at the Vox Youtube channel, there’s a detailed explanation of why you shouldn’t drive slowly in the left lane. Please forward to all of your fathers who do 111 km/hr and get mad when everyone passes them.
5. The Financial Canadian points out that there’s a pretty simple path to becoming a millionaire. You start young, save a bunch, and you’ll get there. It’s simple advice maybe, but it’s still an important reminder.
6. Liquid Independence made an investment in a not yet publicly traded online music player. I’m not exactly sure what it has going for it over all the other alternatives, but hey. It’s still a pretty interesting story.
7. Moneygeek, a blog I continue to think is criminally underfollowed, talked about what it was like to work for a hedge fund. Did his boss used to throw phones at him like Jim Cramer used to do when he ran his hedge fund? Click through to find out.
8. Boomer and Echo argues the rule of thumb saying a retiree will need 70% of their final pay is likely way too high, with some people only needing 35-40%. I think he’s onto something.
9. Nick Denton, the owner of the recently shut down Gawker, did a bunch of questionable things to avoid taxes, like a lot of other rich guys. The fun part is how Gawker writers used to get upset about other companies doing the same thing. Ah, hypocrisy.
10. If you’re on Reddit and you’re not following r/PFJerk, you’re doing Reddit wrong. If you’ve ever thought us PF folk go a little nuts sometimes, you’ll think it’s hilarious.
The best of Nelson
I write stuff for other websites too. Here’s a few samples.
1. I wrote about the latest goings on at Home Capital Group, which is always good for a chuckle. Never change guys.
2. I talked about some mutual funds that are well worth their fees over at Sustainable Personal Finance.
3. And over at the Lowest Rates blog, I gave some tips on how to make the most out of your credit card rewards.
Just a reminder, I am available for hire to appear on your blog. Contact me to get started.
Tweet of the week
What am I supposed to do, not include this?
Have a good week, everyone.
Over the years, I’ve said plenty about overvalued real estate in Canada, especially in Toronto and Vancouver.
In a post some said was my finest ever (thanks, three readers!), I wrote a whole bunch of words about how Canadian real estate is way, way, way overvalued. That was in 2013, which is almost long enough ago that even if I end up being right, I was early enough my prediction shouldn’t really count.
I also told people how to short real estate using options, or how to indirectly short the market by buying related companies. I also wrote about how I tried to short the market and how it didn’t exactly work that well.
So instead I just hang out on the sidelines, rubbing my hands together in anticipated glee, just waiting to laugh at you suckers who bought at the top of the market. I take breaks to twirl my evil moustache and laugh menacingly.
I sometimes wish for a perfect real life example of how dangerous investing in Toronto real estate is. I think I found it. Take it away, Toronto Life magazine.
The seller had lived in the (2 bedroom on an impressively leafy lot) house for 40 years. A neighbour approached him in early summer about buying the place and renting it back to him, but the deal fell through. The seller’s interest was piqued, though: he saw an opportunity to make money without moving. He found an agent willing to market the house as an investment property.
I have never met this seller, but I immediately like him a full 162% more than most of my relatives.
The buyer, who is a real estate agent, was completely on board with the seller’s plan. She agreed to rent it back to him for a minimum of 5 years, for $2,500 a month. The seller will pay for his own maintenance and utilities.
Of course it’s a real estate agent. Those people are the best at putting all their eggs in one basket. Okay, how much did he get for the place?
The house was shown about half a dozen times, but the agent investor moved the fastest. The seller accepted her offer, for $77,000 under asking.
By the numbers:
- $3673.78 in taxes (2016)
- 880 square feet
- 35 days on MLS
- 2 bedrooms
- 1 bathroom
Let’s take a minute to just soak in the fact a house with 880 square feet of living space costs close to a decent middle class retirement. I just paid less than $200,000 for pretty much the same thing. I’m not saying you should leave Toronto and never come back, but…
Oh wait. I did say that.
Now onto the good stuff. How much money is the buyer making off this thing?
- Total cost of $925,965 thanks to Toronto’s land transfer tax
- Mortgage of $729,600
- Down payment of $196,395
- Mortgage rate of 2.59%, five-year fixed, 25-year amortization
- Mortgage payment of $3,306.28
- Mortgage interest of ~$1,500 per month
- Maintenance of zero, property management of zero
- Taxes stay at $3,673
- House insurance of $3,000
- Rent of $30,000
First, let’s look at our nice Realtor’s return based on the entire investment, including having to pay the land transfer tax.
Expenses (including mortgage payments): $46,345.00
Cash flow: (16,345.00)
Cap rate: LOL%
Now we’ll just look at mortgage interest instead of a whole mortgage payment. This goes down over time, of course, but we’ll assume $1,500 for the first couple of years.
Cash flow: $5,327
Cap rate: 0.57%
And finally, a return on capital.
Cash flow: $5,327
Down payment: $196,395
Return on capital: 2.7%
Just yesterday I did a post on Oaken Financial GICs which pay a 2.75% interest rate. You could make more money just doing that than taking on all the risk and added work of trying to manage a rental.
So there you have it. All you need to do to match the return offered by a GIC is leverage your money five times over and buy a house in Toronto’s crazy-overvalued real estate market. Please don’t. Seriously, I’m begging you. This won’t end well.
Because hey, even though GICs yields approximately 0.0009%, maybe some of you want to buy them.
Remember back in the day when you used to be able to get upwards of 4% (GASP!) on GICs? Pepperidge Farms does. And so does your boy Nelly. But that ain’t going to help you today.
If you’re like 85% of the country and have an account with an EVIL big five bank, you’re looking at some pretty craptastic GIC rates. On a five year GIC, which have the best rates, CIBC offers 1.25%, Bank of Nova Scotia, TD Bank and Bank of Montreal offer 1.5%, and Royal Bank leads with a 1.6% rate. SUCH GENEROSITY.
Fortunately, it isn’t very hard to do a lot better than that. Getting in excess of 2% isn’t hard, and it’s even possible to find five year GICs that pay more than 2.5% annually. Now we’re talking.
You might scoff at the difference between 1.5% and 2.5%, but it actually matters. The difference per $10,000 invested is $100 per year. That doesn’t seem like much, but that’s because you’re looking at it all wrong. $250 per year is 66.6% more than $150 per year.
This is an important lesson to learn about finance. Banks know most people don’t care about halves of percents. But they can really make a difference, especially in a low interest rate world.
Oaken Financial, meanwhile, doesn’t screw around with stuff like that. It has carved out a niche in the market by giving the highest GIC rates out there, including a whopping 2.75% on a five year GIC. Let’s take a closer look and see whether this is a good spot for your fixed income cash.
How do they do it?
Like many of the other companies offering high-yield GICs, Oaken Financial doesn’t have much for physical locations. So it keeps its costs down that way.
Oaken is a subsidiary of Home Trust, which is then a subsidiary of Home Capital Group, Canada’s largest alternative (read: crappy credit) mortgage lender. It’s a big company with some $25 billion in assets, most of which is lent out against houses in the Toronto area.
When a bank lends to people with crummy credit, they can charge more. That’s why my latest car loan was 700% a week. When borrowers are charged more, a lender can afford to pay more for capital and still be okay.
This works until it doesn’t. If something happens to bring down the whole housing market (especially in Toronto), Home Capital is in trouble. I’ve previously mentioned how I think Home Capital is screwed if the bubble pops.
EQ Bank–which has a high-interest savings account that keeps paying less interest–works in much the same way.
As a GIC holder, the riskiness of the underlying loans should be of little concern to you. Oaken is CDIC insured, which means the federal government guarantees all deposits up to $100,000. I wouldn’t be too worried with anything above that either, since it would be very unpopular politically if the government let deposit holders get hurt if the bank went down.
And most people can easily increase the CDIC amount to $200,000 by having one GIC themselves and putting another in their spouse’s name.
Sorry, single people.
There are several ways you can get an Oaken Financial GIC.
The easiest would be to go to one of their locations in Calgary, Vancouver, Toronto, or Halifax. These are all located right downtown near public transport, so there’s really no excuse for not going to visit. Tell them Nelson sent you just to see the confused look upon their faces.
You can also phone or email them to walk you through the process.
You can deal with an Oaken-approved mortgage broker. They’ll have you complete a simple form, make out a cheque to Oaken, and send off the package for you. They get a small commission for doing so.
The easiest way to do it is online on the company’s website. I filled out the form in less than five minutes. It was quick and painless. Note the only way to send your money to them is via cheque, but they can direct deposit after that.
Other things to know
The most important thing to know about Oaken Financial’s GICs is the difficulty of getting out. You have to show the company proof of financial hardship (or, I kid you not, death) to get out of a GIC early, rather than just paying a penalty like with a normal bank. Cashable GICs exist, but they max out at a rate of 1.85%.
From the company’s referral website for mortgage brokers:
And if you’re going to do that, maybe the better option would be to just stick the cash in the Oaken Financial high-yield savings account which yields 1.75%.
You can choose to get paid interest annually, semi-annually, or monthly. Note that you’ll forfeit a little interest if you choose a semi-annual or monthly payment option (2.75% to 2.7% to 2.65%).
I’ve also heard reports of things taking a little while when Oaken does get an application. Each one is delivered to the Toronto office where it’s overlooked by employees, so it’s nothing to be alarmed about. Just remember if you do use them it takes a little bit of time.
Should you do it?
There’s really only one disadvantage to using Oaken Financial, and that’s the lack of redemption privileges. There are ways around that, like signing up for a one year, 18 month, or two year term, but those have lower rates of 2.05%, 2.25%, and 2.40%, respectively. So you’ll give up a little bit for increased flexibility.
Overall I’d say its products are pretty comparable to its peers’. As long as you’re cool with committing to the whole term of your GIC, I say you might as well use Oaken.