Wednesday, March 14, 2012

debt and debt - part II

I hear some of you nay-sayers still shaking your heads and wagging your fingers at me for my "reckless" borrowing.

But here's the short of it...  How is it any different borrowing money to buy a house then rent it out?  You're taking on a huge tenant risk, and housing market risk all yourself.  If the market tanks you're left with negative equity in your home.  (Your mortgage is bigger than the value of the home)  Or if your tenants walk away, or tie you up in court or with the municipal tribunal you're still on the hook making your mortgage payments, gas payments, water payments, electric payments, insurance payments, and property taxes all the while they continue to live in your property and NOT pay you.

Most of the money I've borrowed has been used to buy REITs.  (Real Estate Investment Trusts)  So they do the work dealing with tenants, taxes, insurance,  repairs etc. all the while paying out the profits to the share holders.  Yes, I am still exposed to all of the above risks, but the risks are mitigated because REITs generally have dozens to hundreds of properties with dozens to hundreds of tenants. And yes if the real estate market explodes they generally go down too, albeit more slowly so I've got a much easier way of getting out rather than having to sell a home at a loss in a buyers market.

So yes, the risk/reward ratio is way smaller but the bank charges me 4% to borrow and many REITs pay out 5-8% in distributions.  So the difference is mine to keep all with very limited direct risk and with no need to go repair exploded/frozen water pipes, or toilets at 3 am.

So on average I'm getting 3% for doing little on money that's not mine, plus the interest cost is tax deductible against my earnings.

So Invest my friends.  You don't have to borrow to do it, but in my opinion it makes a very compelling argument of you chose to do so.

That's how the rich get richer...  You can start yourself on the path to riches too.  It never hurts to get a sweet gig that pays you hand-over-fist, but as a starving artist chances are your value may never be understood or appreciated during your lifetime.

Tuesday, March 13, 2012

debt and debt

Not all types of debt are equal.  As contrary as this may sound, some types of debt are justifiable, or good, or even tax-deductible.

Now hold on, I hear you shaking your heads... I owe money I don't have!  How can that be good?

Now this post may seem like I'm being completely contrarian to the popular sentiment both in the media, social media, blog-o-sphere, and twitterverse, but in actual fact there really are types of debt that are both good, useful, tax-deductable and socially acceptable.

How many of you out there borrowed money for school?  Now if that's not a good debt (provided you didn't have a mental breakdown and are now perusing a career in burger-flipping rather than your desired and highly leveraged certificate, diploma, degree, degrees, and/or what have you.) then I don't know what is.  You borrowed money so you could better yourself and hopefully get yourself a better paying job rather than just walking up to the nearest McCoronary-Artery-Disease-with-bacon-and-cheeZe and offering your burger-flipping services.

Other forms of good debt is mortgage debt.  You had a bit of money, and a regular pay-cheque (which I've never had either) and the bank decided you were worthy.  You rushed out and bought your dream home in the 'burbs to support your 2.4 kids and a dog, with a green yard and a ride-on mower.  That's a BIG debt...  Perhaps the biggest debt most Canadians are ever willing to take on.  (Baring of course the most reckless spenders who max out everything and generally wind up as the contents of a "till-debt-do-us-part" episode, or bankruptcy)

There is another good type of debt which most Canadians would think is reckless... Margin debt.

Margin is the credit your brokerage is willing to extend to you based on a percentage of your holdings.  Is this crazy?  You might think so, but how is it any worse than your credit card or line of credit?  It's not...  And the truth of the matter is that it's way better.  The interest on the margin is tax deductible (against your trading profits) where as the interest on your credit cards and line of credit is NOT.  And thanks to it being "secured" with your stock holdings the bank/brokerage/greasy broker generally offer you a better borrowing rate than your CC or LOC, and definitely a better rate than the nearest bookie or loan-shark.

So clear off your CC and LOC with your margin...  (And don't load up them again either)  And you're now immediately in a much much better financial situation.

Is it any more risky than having a cash account and a maxed out credit card?  Short answer: NO!  Long answer: NO!!!!.

No for those of you who think stock market investing is a gamble at best...  Fine... I give up.  Put your damn money under your mattress for all I care.  You're losing money to inflation.

I'll on the other hand I borrow from my margin to buy blue-chip dividend paying stocks.  The dividends pay for the interest, I get the tax deduction, AND I get to keep the capital gains.  If they go down in value I don't care since I bought them for the long haul, and generally my picks pay more than my interest cost.

Happy investing!  (Aka world domination)