Welcome to real estate Wednesday. This week’s post is about surviving a bubble real estate market. Canadian and United States real estate is like the Charles Dickens quote right now: “it was the best of times, it was the worse of times.” Having said that, there continue to be pockets in the United States were real estate continues to be quite hot.  In certain regions of Canada, there continue to be predictions that they are in a bubble real estate economy (Vancouver comes to mind immediately). I have heard two people employ the following strategies lately to survive the bubble and come out on top. Its actually quite simple if you think about it since it follows the same principles as prudent stock investing. Unfortunately, the strategy only works if you have a home:

1. If you think you are in a bubble, two things tend to happen: (1) your home is worth a lot more than you think its worth; and (2) developers are rushing into the market and creating a huge supply of a certain type of housing- typically condos since they are easy to build (this was the U.S. about 2 years ago).
2. Sell your home. It doesn’t matter if you think you are at the top of the bubble or not. The key is that in any bubble assets are over-valued and purchasers have a distorted perception of risk (people believe “its not like the last time…”) so you will end up ahead regardless.
3. Park your profit in something safe and which can be made liquid quickly (i.e. GIC) and rent a type of housing in which supply is increasing more than demand. In Toronto that’s a 500 -650 square foot condo (obviously, the problem with this strategy is that its easier if you have no kids or they are still quite young). Supply drives down the rent which allows you to keep as much money as possible. In an ideal situation, your rent should be less than your previous mortgage payment.
4. Wait for the bubble to pop.
5. Re-enter market at lower valuations and with a large down-payment.

Results seem to be quite impressive. Anyone try this?

A reader writes: “can you blog about married couples having joint bank accounts, credit cards and investments and what happens if one of them is in trouble financially?”

I may be qualified and contextually challenged to answer this question since I am a lawyer by training (qualified albeit I am not in practice) but do not have any joint accounts given I am single (contextually challenged). Keeping in mind this is not advice but information and not specific to anyone’s situation the response is- it depends (there’s the lawyer talking!).

It depends for a variety of reasons- laws differ depending on the jurisdiction of the joint account but, generally (with double emphasis on generally), here are some scenarios to think about.

1. If there is a joint credit card issued in both spouses name, the “good” spouse is responsible for the entire debt even if the “bad” spouse has declared bankruptcy (in simple terms, a bankruptcy freezes any action a creditor may have against you and a trustee in bankruptcy disposes of the estate (i.e. the bankrupt’s assets) and divides it among creditors for usually cents on a dollar)- I am assuming that the spouses are jointly liable for the debt. Thus, sharing a credit card with a fiscally irresponsible spouse if both spouses are jointly liable for the debt is a very risky proposition for the household (please note there is a difference between joint signing authority and jointly liable- the former allow other people to incur debt, the latter means all the card-holders are responsible for the debt regardless of who authorized the charges- you cannot use “I did not know” as a defense: ignorance of the law is generally not a defense).
2. If you have a joint bank account and one of the account holders is being pursued by creditors (whether in or out of a court action), the creditors will obviously assert that the entire sum in the bank account belongs to the “bad” spouse and it is up to the “good” spouse to prove how much of the bank account belongs to them. Under Canadian bankruptcy law, the monies held by the bad spouse in a joint account will be part of the bankrupt’s estate and used to pay out creditors (if indeed there is any money in the joint account). In a garnishment situation, the same analysis applies. Thus, in one way or another, the spouses have to determine what part of the account was deposited by whom to protect or to pay out from the joint account.
3. The same analysis applies to investments with one twist- insurance products (life insurance, segregated funds etc.) are exempt from seizure from creditors in Canada (assuming monies were not diverted to these instruments for the primary purpose of evading creditors in which case the transaction can be reversed). Thus, the entire pool of investment among spouses is protected if it is in an insurance product. If a joint investment account is not in a creditor-proofed insurance vehicle then the same accounting has to occur as per #2.

The long and the short being: if you are married to a fiscally irresponsible person who may have creditors knocking on your door before too long, make sure you have separate accounts. However, if creditors are already knocking on the door, it may be too late since there are laws to prevent the deliberate transfer of monies to avoid creditors.

As an aside, for those readers who are entrepreneurs, please do think about limiting your household’s exposure to your business risk by avoiding joint accounts and removing yourself from title to the house (a personal guarantee for a business loan will pool the home into the assets the bank can seize upon non-payment).

My usual disclaimer applies to this and all posts: this is information only and not advice and not written with any specific individual or jurisdiction in mind. Please consult an accountant or trustee in bankruptcy if you hold joint accounts of any kind whatsoever with a fiscally irresponsible spouse to ensure the household is protected. Good luck.

I am back from my week long business trip which took me to Calgary the day Alberta’s Premier Stelmach announced an increase to the Province’s royalty of $1.4 billion when all is said and done. Premier Stelmach’s announcement was on par with election night tension; one of my co-workers rushed into the guest office I was working in and said “did you hear the announcement?” one minute after the announcement. Then, everyone downloaded the announcement and talked about it for 30 minutes.

How did the markets react the next day? In the short term, there was very little effect on oil and gas stocks. The royalty does not change the fact that natural gas is cheap and oil is trading at over $90/barrel. It tends to reinforce the notion that the market hates uncertainty more than bad news. Everyone knew the announcement was coming and, despite the doomsday scenario being touted by Calgary’s oil elite, the unspoken fact is that the increased royalty will be passed down to the consumer in one form or another. The market builds in risk that it knows about and punishes uncertainty.

As a good real life example of the market hating uncertainty, compare the royalty increase to the effect the income trust announcement had last year- it looped off about 33% off all trusts because the announcement was a surprise creating a great deal of uncertainty on what was happening.

If anything, I suspect the lesson to be learned is uncertainty, and not bad news, creates better buying opportunities.

I recently made a lunch appointment for November which jolted me into thinking how close year end was. Where did all the time go? Having realized this, I have began to do one thing- plan for taxes while I still have money in my pocket pre-holiday shopping. Instead of doing a charitable donation this year pre-holiday when I spending a lot of money or post-holiday when I have no money,I am donating now. My charity of choice this year is UNICEF. You can donate online (if you feel comfortable putting your credit card number on-line!) and pick which program you wish your money to goto. I picked Schools for Africa. Make yourself feel good and get a tax receipt- donate some money to a worthy charity!

Some odds and ends from this week:

1. Keep your SIN card safe! Almost half of all Canadians keep their SIN card in their wallet which is an open invitation for identity theft predators.
2. Should you use your retirement account to fund your small business? I agree with the answer.

Quote of the week- very timely considering how the market is doing this morning- from the late Douglas Adams- “don’t panic”

Have a great weekend. Light posting week next week given business travels.

…other than a quick update that I did get my money back from the bank for the ATM fraud that occurred last week. No comment provided by the bank as to where my ATM number was used.  It took 12 days for them to do an investigation which is neither a good or bad turn-around time. See you tomorrow.

This week’s real estate Wednesday has the last of our 3 part series by our guest blogger, New Home Buyer, on how to save money buying a house. Enjoy!

In the past two weeks I have written about how to negotiate with your developer and the importance of locking in early to save money on your new house. We are now packing our boxes and are moving in this Friday so it seems fitting that I conclude my three part series today by discussing the importance of putting at least 20% down on your mortgage.

Most people are talking these days about putting no money down and quickly flipping properties. We decided to take the opposite approach and pay a quarter of our mortgage up front.

The reason why 20% is so important is that, in Canada at least, lenders require mortgage insurance for loans made to anyone buying a home with less that 20% of the purchase price down. Canada’s national housing agency, the Canada Mortgage and Housing Corporation (CMHC) is the organization that makes it possible to get a mortgage with less than 20% down - but you have to pay additional costs.

Because it is a form of insurance you have to pay premiums of between 0.5% and 3.10% depending on the purchase price of the house and how much you put down. The higher the percentage of the purchase price you borrow the higher the premiums you will pay.

The CMHC premium is found here:

An additional 0.2% is added to all mortgages with amortizations of 30 years. An additional 0.2% is added to all mortgages with amortizations of 35 years.

These premiums can add up if you are taking on a sizable mortgage. We decided that we were already paying the bank, the developer, and the government enough money and that we would put the 20% down. It required draining parts of our savings accounts but it has gone a long way to helping us save money on our new house.

New Home Buyer

I have often kidded that my ambition in life is to be a slumlord. What better existence than to collect rent, flaunt all building code regulations and laugh all the way to the bank (before you begin your angry letters, please note flaunting building code regulations is a joke- sign me up for the other two though). And the best type of slumlord is one who owns student housing! I remember a friend telling me that in her 2nd year of undergrad, she and 4 of her friends lived in a house located in the student ghetto and they thought it funny that there were holes in the walls big enough for the snow to fly in (how 4 women shared one bathroom for 8 months is still the more over-looked aspect of that story). In all seriousness, a lot of people I know have looked into investing in real estate to rent to students given the large population bulge of Generation Y, parents willing and able to guarantee rents and the relatively small amount of upkeep you need (as a friend said, “students will rent anything as long as its close to school.”)

Thus, I read this story about this year’s Queen’s University homecoming with interest (which also prompted me to write this post). I did my graduate studies at Queen’s and the moniker of the “student ghetto” is a well-deserved one. What surprises me about that story is the one family who held on for all those years and lived in the middle of the ghetto; on Sunday mornings, it looked like a war blew through town- garbage everywhere, random destruction and people walking around in a daze/passed out on other people’s lawns.

Investing in real estate to rent to students really highlights the competing tension in real estate between investing for cash flow and investing for capital appreciation. Assuming you can collect rent year round (which is a huge assumption if you invest in real estate in a small university town where everyone leaves for the summer and tenants are hard to track down), renting real estate to students is more of a cash flow than capital appreciation play since, typically, most landlords put in very little money keeping the place up which tends to reduce selling price. As a result, you are getting good cash flow during your ownership years because you are not really spending any of it on capital appreciation items. Every campus has landlords that do rent out “nice” places but student housing tends to continue to be student housing owner after owner because of its proximity to campus and the well worn tradition of student housing being passed down from year to year. Thus, “nice” student housing is a relative term.

I have been asked, and looked into, several times investing in student housing. I am a huge avoider of pain in the butt situations and being a landlord is a pain in the butt situation and being a landlord for student housing even more so. I don’t think I would have the stomach not to repair defects in student housing which undercuts the cash flow purposes of owning this type of real estate.

If you are interested in this type of investment, I would really crunch the cash flow benefits and downplay your capital appreciation and also consider, emotionally speaking, whether you can handle/have the patience for being a landlord to students (think carefully of what you were like as a student…). If you are willing to do it, you are a far stronger person than me.

Anyone ever own real estate they rented to students?  Am I being too pessimistic?

Last week, I posted on my experience with ATM fraud. My bank still has not resolved the issue yet (they did tell me they would have an answer between 7-10 days which is the middle of this week). As one of the preventive measures (and based on some great tips from readers), I am in the process of reducing my ATM daily withdrawal limit. My ATM card is not linked to anything other than my bank account but you may want to think about de-linking your ATM card to your credit card, LOC or other accounts and just have the ATM card access one account.

But this experience has made me much more aware of preventing any type of fraud and I will share with you some tips I have learned. The point is not to prevent fraud totally- if someone really wanted to rip you off they will- but to minimize someone from doing it.

1. Passwords/PIN Numbers: Rotate your passwords for any on-line access. In an ideal world, make your password a very common word so that a spyware program may not pick up that something uncommon you are typing every week or so which may indicate it is a password (I do understand that spyware programs are quite advanced so please clean your computer often too). Do not have the same password for your ATM card, credit card, on-line access- you are inviting someone to commit wholesale fraud on you. Yes, its more numbers to remember but its better than having your bank account and credit card drained.
2. Telephone/Online access: Never do your telephone banking on a cordless/cell phone. Please can steal your signals (in one of my old places, I use to pick up the phone and hear the neighbors conversation for whatever reason) and I still don’t trust cell phones as completely secure channels of communication. Instead, do it on a conventional land-line. Never access on-line banking while you are downloading/uploading and please install spyware programs on your computer. As a tip, unplug your internet access at night to minimize hacking.
3. Pay Cash: People cannot steal your bank numbers/credit card account number/PIN if you pay cash. Its also a good budgeting tool. As always, cash is king for a variety of reasons.
4. Names: Try to get a bank card without your name on it (I believe some banks now only issue bank cards with numbers and no names). It prevents someone from cross-referencing your name with other publicly available information.
5. E-Commerce: Have one card you use for all e-commerce and make sure the credit limit on it is modest. The less numbers you have floating around the better and, if someone were to steal the numbers on-line, at least you minimize the damage they can do if your credit limit is small.

Let me know if you have any other tips. Thanks.

Ah…it was one of those weeks. Because of the Thanksgiving Monday, I lost track of the days of the week and realized that real estate Wednesday had come and past without a post!  I’ll post the last of the three part series on saving money on buying a new home next week.  Now to wrap up the short week with some odds and ends:

1.  Can google go any higher?  Business Week believes $622/share is not the end of google as a growth stock.

2. Quote of the week from Mutual Fund Manager Richard Nield who runs AIM’s Canadian Premier Fund: “Canadian banks trade at some of the more expensive valuation multiples that we see; in some cases, 30 per cent more expensive than some of the European banks and that is just very difficult for us to overlook…” I am continuing to keep my eye on American banks hoping they get over-sold.
3. I started reading the book “Get Smarter: Life and Business Lessons” by Seymour Schulich (not an affiliate link). A very simple read which is aimed more as an business book and not a personal finance book per se but it does have a few nuggets of personal finance advice including: keep cash on hand (the rich are rich by buying low), buy gold and buy the worse house in the best neighborhood rather than the other way around.

Have a great weekend.

My friends think I am obsessed with cash flow. I have all my accounts set up with on-line banking and check them every day. I believe part of this “obsession” is due to the experiences I wrote about last week- when you work on irregular income, you tend to check your cash flow a little more carefully. Last Thursday, I checked my bank account on-line at noon and noticed something funny had showed up “PLUS ATM WITHDRAWAL” for $361.29. Two things came to mind: (a) how do you do an ATM withdrawal for $361.29? and (b) even if I could, it wasn’t me!

I immediately called my bank and asked whether it was a posting error- perhaps it was a pre-authorized withdrawal that I had forgotten about?  No- it was definitely an ATM withdrawal. Perhaps you made a withdrawal at 1 in the morning, asked the customer service rep? No- I was sound asleep at 1 in the morning. Perhaps you want to cancel the card and report a claim in branch? That would be a yes!

I went into my branch the next day and got a new bank card. They also told me that a “PLUS ATM WITHDRAWAL” is a withdrawal made outside North America and the odd withdrawal amount is due to the currency conversion. The teller, who I know quite well, suspects that my card number was stolen from a reader. When you swipe your card, the machine has two feeds- a legitimate one that goes to the bank and an illegitimate one (the reader) that collects bank card numbers and pins. Scary eh?

I put in a claim and it will take 5-10 days to settle the claim (they either give me back the money or not).

I have two observations to make from this experience:

1. If someone wants to commit fraud they will. Just try to catch it as quickly as possible to minimize the damage. I caught the withdrawal by pure dumb luck- it appears I found it within 6 hours of it happening.  The morale of the story is don’t wait until you get a bank statement to check your balance. Check it often for cash flow and fraud prevention purposes and report anything out of the ordinary immediately.
2. Again- this was dumb luck on my part and not part of any design- I have never raised the withdrawal limit on my bank card since I have had this account 15 some odd years ago. Thus, they hit the ATM withdrawal limit quickly. If you don’t need large amounts of cash at one time, limit your ATM withdrawal maximum for both budgeting and fraud prevention purposes.

Based on this little adventure, I have decided to blog more on fraud prevention as a personal finance topic. If anyone has any tips or suggested topics, please comment. Thanks.