Helpful Tips for Tax Refund Planning

A good way to think about the tax money that you may get back, is that it is not ‘free money’ or a ‘gift’ – rather it is your money that you put away in a forced savings plan throughout the course of the year. Framing it like this can sometimes help one to more rationally plan what to do with the cash once it reaches your bank account. Will you spend every last penny on a new wardrobe, invest it, or save it?

I came across an article by Alan Schram, an author with The Canadian Finance Blog, about this very topic! Alan’s article outlines 6 areas you can consider applying your saved funds to:

• Firstly, it may be wise to consider allotting a small amount to some ‘wants’. Putting 5-10% of your refund into an account for splurge shopping may mitigate the urge to blow larger amounts later on if you’re feeling down or having an ‘off’ day or week.
• Emergency Fund: either start one, or add to your existing fund. You never know what life will throw your way, so keeping some money in line will help you face unexpected financial hardships.
• Debt Repayment: putting your tax refund money towards a debt you have (a car loan, student loan, line of credit, etc), will substantially decrease the amount of interest you will pay on that debt in the long term.
• Savings: reach your savings goals faster with a little boost from your tax refund.
• Retirement: don’t just care for your present, care for your future by putting money aside for retirement.
• Vacation: this option is the last on the list. If you’ve taken care of all other aspects covered above, consider investing in a vacation!

You can read Alan’s full article here: What to do With Your Tax Refund

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

DIY Tips & Top 10 Features of a Profitable Rental Property

If you’ve ever thought about investing in real estate you’ve probably considered different aspects of a property that can make it an effective investment. It can take a lot of research to find a property that has the types of amenities you’re hoping for, but the hard work and investigation can be a major pay off when it comes to the return on investment. Is there an abundance of jobs and schools in the area? Is there a low crime rate? How high are property taxes? Or perhaps you’ve found a property in a perfect location, but the residence needs some updating in order to get top dollar from rental income or a future sale. Check out these 2 great articles to learn more about the Top 10 Features of a Profitable Rental Property & Do-It-Yourself Projects To Boost Home Value.

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

“Investment” defined – Part I

What do you think of when you see the word “Investment”? Do you think of the funds you have put into the stock market, the contributions you have made to an RRSP, or the rental property you own? Or do you think of cars, education, jewelry and furniture ‘investments’ as well? The reality is that the term “investment” has become overused and in some cases misused. An “investment” is literally the commitment of money or capital to purchase some type of asset with the expectation/intention for it to return some kind of income profit.

Investments come in many different forms, including properties, commodities, stocks, bonds, mutual funds, and more. Some investments are essentially guaranteed to return a profit, while other investments may come with the risk of the loss of all or some of the principal funds. Typically, the more risk associated with an investment also means the potential for a higher return, while less risk associated with an investment usually means a smaller return.

Investments can be broken down into three basic categories: Ownership investments, Lending investments, and Cash Equivalent investments.

First, a look at ownership investments:

Ownership investments are probably the most common types of investment. The category represents quite simply, things that you actually own that can bring you a profit. Ownership investments are generally the most volatile type of investment (meaning that they show the greatest amount of change or instability), but they also tend to return the highest profit of the three investment types. Some types of ownership investments include:

Stocks. Stocks (also called ‘shares’ or ‘units’) are ownership investments because a stock is a certificate that shows that you own a specific portion of a company, and you have a right to your portion of the company’s value. You can choose to sell your portion of the company as you wish, because it is your personal property. Stocks have an extremely wide range of purchase prices, risk levels, and potential for profit. Stocks or shares can be publicly traded or privately owned, the former usually being easier to sell or liquidate, and the latter being harder to sell as the private market may be much smaller.

Commodities. Commodities are a type of alternative investment, discussed in my previous blog. These are goods that have value and there is a demand for them, but are essentially the same no matter who made them. Commodities include things like antiques, paintings, gold, silver, platinum, sugar, rice, coffee, and other collectibles. Commodities do have a small risk due to the potential for damage or wear, but they also have a great potential for profit. They may also be difficult to sell if they are privately owned, depending on the market for that particular commodity.

Real Estate. Real estate is another type of ownership investment that is often classified as “alternative”. The house you permanently live in is not necessarily an ownership investment, because in order to profit from the property you would not have a home to live in (you’d have to sell it), but any rental properties that you own would fit into the category of an ownership investment. In some cases, real estate can depreciate over time, but with care and maintenance investments like these can create a profitable return when you sell. As well, because real estate can be rented to residential or commercial tenants for positive cash flow, many people find real estate to be a lucrative investment.

To see what kind of return you may receive from a particular investment, or to calculate how much you need to invest for a specific return, try out this Investment Calculator.

For more information on ownership investments, contact info@sharethewealth.ca, and look for my next blog that will discuss Lending and Cash Equivalent investments.

Resources:
Investopedia
Bank of Canada

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Alternative Investments – Part II

In my last blog article, I explained what alternative investments are and what characteristics they have. Alternative investments are basically anything that is not a publicly traded investment. These are things that are not cash, and typically have a low correlation with other more traditional investment assets. In this article, I will look more deeply at some of these types of alternative investments including the types of investors that may be drawn to each type.

Private Equity
Private equity is ownership of companies that are not traded publicly on a stock exchange. Investors may be eligible to directly purchase shares of private companies, either through a joint venture agreement or through an Offering Memorandum. (more about Exempt Market Securities in a later blog – stay tuned!) Private equity firms will sometimes buy out public companies to make them private and improve the financial results of the company. An example of this is when Thomas Lee and Fidelity Investments bought Ceridian, a publicly traded human resource outsource company in 2007. Private equity investments often require a long-term investment because it can take time to improve the results of a company.

Commodities
Commodities are goods for which there is a demand, but where the goods are the same no matter who makes it. Examples of commodities include precious metals (Gold, Silver, Copper), petroleum, coal, coffee, sugar, rice and more. Commodities can be solid alternative investments, because the demand for these goods is almost always existent and rising, which mitigates risk. The prices of these items may not rise drastically over the short-term, but as a long-term investment, history has shown they almost always yield a positive result. Commodities are also great because they are accessible to a wide range of investors, due to a variety of goods and prices. Click here for a great article on How to Invest in Commodities.  One can invest directly in commodities, say silver, by physically purchasing silver coins from a reputable dealer and keeping them in a safety deposit box or other safe place, or by purchasing shares in publicly traded companies that deal in silver mining, to avoid having to store and insure these commodities.

Real Estate
Real estate, like commodities, is another great alternative investment that is available to a wide range of investors. Lower net-worth investors (in some provinces) can invest in syndicated private companies or in affordable properties that they can purchase themselves or with a partner, such as condos, small homes, and vacation cottages. Higher net worth investors can also invest in syndicated private companies, and/or look into purchasing whole apartment buildings, and other housing developments, with or without an investment partner.  Click here to read more on finding people to invest in your real estate deals.  For a short-term real estate investor with time and handy-man skills, their goal may be to buy a fixer-upper home, do the necessary repairs and renovations, and then sell (also called ‘flipping’) the home shortly after, hopefully for a good profit, although this can be a risky business. For a long-term real estate investor, the goal may be to purchase one home and rent it out in order to pay all associated costs, which can often lead to the free-hold ownership and on-going positive cashflow from the continued rental of several homes or units until beyond retirement. While real estate assets are not as liquid as other assets, the investment can often provide stability in comparison to other traditional investments.

Are alternative investments part of your portfolio? What is or isn’t working for you? For more information, contact us at info@sharethewealth.ca.

Resources:
Investopedia
Benefits Canada.com
Investor Home

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Alternative Investments – Part I – What is an Alternative Investment?

When someone says the word “investment”, what are some of the first things that pop into your head? Stocks, Mutual Funds, GICs? These three types of investments are popular and can be classified as “traditional”. But there are many different investment assets available that generally follow different characteristics in comparison to traditional asset investments.

So what, then, is an alternative investment?

Alternative investments include investments in assets other than publicly traded stocks and bonds and mutual funds. Some of these investment assets include:

• Real Estate – commercial, residential or industrial
• Commodities – such as precious metals, oil and gas
• Private Equity – Investments in companies that are not publicly traded
• Hedge Funds – Aggressively managed portfolios of investments using a wide variety of investment strategies, and usually unregulated

What characteristics do alternative investments typically have?

• Low correlation with traditional financial investments – This means that alternative investments are not highly related to other investments that are publicly traded. For example, if the stock market goes down, your alternative investment may be only slightly or not affected at all.
• Relatively Illiquid – Alternative investments are not usually very liquid, meaning that they cannot be “cashed in” at any time for a return. Because alternative investments consist of things like real estate and commodities, such investment vehicles can take time to bring in a return, but the time usually pays off.
• Potentially Higher Returns – in comparison to traditional investments.
• Reduced Volatility – the amount of volatility (prices moving up and down) associated with alternative investments is usually lower in comparison to traditional investments.
• A Range of Accessibility – Alternative investments like Hedge Funds are often available only to institutional investors ie. Banks or pension funds or high-net-worth individuals ie. Accredited investors (those with over $1Million in assets, or that earn over $200K per year for a minimum of two years, because of their complexity. However, real estate and commodities are often very accessible to smaller investors, depending on the province the investor resides in (rules regarding eligibility vary from province to province).

Alternative investments can be a great solution to investors looking for a potentially more stable investment asset, especially when they aren’t in a hurry to cash in their return. While the value of things like real estate and precious metals may take time to rise, the fact is they are generally always rising over the long-term, which can make these assets a highly valuable investment.

Look for my next blog, which will focus on the details of some alternative investment assets.

Resources:
Investopedia
Benefits Canada.Com
Investor Home

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Can I Afford This House?

That’s a really good question in today’s economy. It’s so tempting to get the house you want and justify the payments later. However, with things so uncertain these days, it’s better to get the house you can afford than to have to worry about how you’re going to make your mortgage every month.

The rule of thumb for mortgage payments is the 28/36 ratio. Your lender wants you to have a certain debt ratio before your loan is approved. Your mortgage payment should ideally be no more than 28 percent of your monthly income. Your total debt obligations (including all credit cards, car loans, student loans, your mortgage and anything else you owe) should be no more than 36 percent of your income. So how does the 28/36 ratio work? Here are some examples.

Chelsea and Dan together earn $10,000 a month. They have one car loan with a monthly payment of $425 and credit card debt that averages around $300 a month. They would like to buy a house with a $2300 a month payment. Can they afford it?

$2300 ÷ $10,000/month = .230 or 23%
total debt w/mortgage = $3025
$3025 ÷ $10,000 = .3025 or 30.25%

So, their mortgage payment would be 23 percent of their income and their total debt would be just over 30 percent. They could easily afford the house.

Let’s look at another example.

Sam and Rachel want to buy a house with a payment of $2600 a month. Their monthly income is $12,500. They have student loan payments totaling $1100 a month. Their two car payments come to $980 a month. The three credit cards they use have payments of about $1200 every month. Can they afford the house?

$2600 ÷ $12,500/month = .208 or 20.8%
total debt w/mortgage = $5880
$5880 ÷ $12,500 = .4704 or 47%

Even though Sam and Rachel make more than Chelsea and Dan and their mortgage payment would be a lower percentage of their monthly income, their other debt is so high (totaling 47 percent including the mortgage) that they cannot afford the house.

Complicating the picture is the fact that you never know what’s around the corner. What if your car blows its engine or one of you is laid off? What if you have a medical emergency and your deductible is $10,000? It’s better to plan for the worst. Make sure you’re in control of your other debt and that you have room for sudden, unplanned expenses in the budget. Then, and only then, do you know how much house you can afford.

There are some housing markets in Canada where home ownership is therefore out of the question for many people – but this may not be such a bad thing! There are a lot of Canadians out there who have bought ‘too much home’ for their income, and therefore are forfeiting saving and retirement planning as a result. Every time there is an ‘unexpected expense’ they fall further into debt.

“But I want a home as an investment!” is the usual complaint. However, there is something to be said for renting a place at a price you can afford where the repairs come out of the landlord’s pocket, and routing extra funds into other investments instead – and many of those can be real estate based. Contact info@sharethewealth.ca to learn more about real estate based investments!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

How to Perform Due Diligence

In my last blog, I explained what due diligence is and the importance of completing it before investing into a new opportunity, business, or rental property. In this blog, I’ll highlight what specifically you should look for and the important questions to ask.

While conducting your due diligence, look for accounting red flags and hidden legal liabilities, and find out who is making the accounting and legal decisions. Are these people legitimate?

Questions to ask about the proposition:

• Is the offering memorandum professional and comprehensive? Be sure to always fully read the offering memorandum and ask any questions you may have.
• Does the memorandum give a satisfactory overview of the company?

Financial questions to ponder:

• What is the cash flow situation?
• Is there an explanation of the revenue streams?
• Is their valuation of assets accurate?
• Are there any hidden liabilities?
• Are there any irregularities in the financial statements?
• How is the company’s history with financial compliance?
• Have auditors or authorities released any questionable documents about the company?
• How reliable are their financial projections?
• What type of risk does the company hold?

Some legal questions to inquire about:

• Have all articles of incorporation, tax registration, board meeting minutes, and shareholder records been made public? If not, why?
• Are there any pending legal cases or threats of actions?
• Are all accounts, regulatory filings, and tax payments made to date?
• Has the company had a history of past cases? Do settlement documents exist?

When it comes specifically to performing due diligence on a prospective rental property, this is the list that Robert Kiyosaki suggests looking into:

• Current rent roster with paid-to dates
• List of security deposits
• Mortgage payment information
• Personal property list
• Floor plans
• Insurance policy and agent
• Maintenance and service agreement
• Tenant information: leases, ledger cards, applications, smoke detector forms
• A statement of structural alterations made to the premises
• Commission agreements
• Rental or listing agreements
• Governmental permits or zoning restrictions affecting development of the property
• Tax bills and property tax statements
• Utility bills
• Capital expenditure disbursement records pertaining to the property
• Income and expense statements pertaining to the property
• Market surveys or studies of the area
• Construction budget or actuals
• Tenant profiles or surveys
• Work-order files
• Certificates of occupancy
• Title abstract
• Copies of all surviving guarantees and warranties

Although this may sound somewhat exhaustive, you will be much more informed – and knowledge is power. Once you have all the background information about the property or investment, you will be able use reasonable judgment in whether to move forward or not.

At Share the Wealth, we complete a rigorous due diligence process on all opportunities we participate in. In addition to everything listed above, we thoroughly investigate company leaders and their track history. We carefully look into the merits of each project, including location, economic fundamentals, the business plan, the exit strategy, risk factors, and projected returns. This process often takes several months, as the opportunities must also exhibit consistency and longevity before we invest. To see more on our due diligence process, you can read our FAQ page.

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Things a First Time Real Estate Investor Should Consider

70% of the wealthiest people on the planet either made or hold their fortunes in real estate. However, the real estate market is being blamed for causing some of today’s economic woes. The bottom fell out of the market, and in many parts of the country it hasn’t recovered yet. The upside to this is that, at some point, the market will turn around and if you buy for positive cashflow, it is almost irrelevant whether the market goes up or down.

Keep these points in mind, however, as you make the decision to buy an investment property.

1.  You’ve heard it before – location, location, location.
Do your demographic research carefully. You should consider an area’s major employers, growth rate, new businesses and home construction. Find out if the demand for homes and rental properties is rising or falling. The tighter the rental market, the better for investors, as low vacancy rates mean more choices of tenants, and higher rents. Canada Mortgage and Housing Corporation (CMHC) does regular forecasting and analysis on these key economic indicators – click here!

2.  Get the right property.
It doesn’t really matter when you buy, as long as the property is making you money. Do your research, talk to professionals and don’t make a decision hastily. Don’t EVER be talked into a property to buy and hold long term that you have to fund out of your own pocket, although many realtors and so called investment professionals will try to tell you it’s a great deal or that its good to lose money because it will lower your taxes. This is insane advice, no matter how high your current income is.

3.  Think about your role.
Why are you investing? Do you want to refurbish and resell? Are you going to manage the property or hire a company to do it for you? Do you want to be a landlord and are you prepared for all that entails? Be sure of what you’re going to do with the property and get all the details and make sure the have the people, budget and/or time, whatever resources you need, planned for and lined up.

4.  Get people you can trust.
If you do plan to hire someone to manage the property for you, make sure that you budget for a good management company with a reliable track record, and that the property will still generate good cash flow even after this expense. Get references and talk to others who have worked with this company.

5.  Understand the financing.
Investments in general, and real estate investments particularly, can come with hidden costs. Ideally, talk to another seasoned real estate investor who pays attention to the details or a banker or a financial planner to make sure that you understand what the numbers mean before you put down some money.

6.  Remain detached.
Don’t fall in love with a property (or a tenant for that matter). You run the risk of not seeing the downside of an investment or when it’s time to get out if you’re emotionally involved. Sure it’s a great house with a stone fireplace, a media room and built-in window seats, but if it’s not making money, it needs to go.

Investing in real estate can be lucrative, but it’s hard work at first. As you get more familiar with the process, the deals will be easier to spot, and the process will get easier. The downside is that one bad deal can spell painful financial lessons. The new 20% down payment rules have also made it harder to come up with the down-payments necessary (although the plus with this rule is that investors are avoiding the CMHC insurance premium charged for a lower than 20% down payment). Do your homework, look at lots of opportunities and invest for profit!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

How to Figure Out Your Housing Budget

Many of us have been taught that owning a home is the pinnacle of the “Canadian dream”, and many of us have believed it to be true. If you have been reading our previous blogs, or any of Robert Kiyosaki’s books, our position is that owning a home is a liability, not an asset. By our definition, a liability is anything that takes money out of your pocket. Even if your home is mortgage free, it is almost always still a liability because one must still pay property tax, insurance, utilities, and repairs/maintenance. *We say almost always, because there are instances where people have turned their homes into assets, ie. by renting out rooms or suites to tenants, or otherwise generating income, such that the home generates more income that it costs.

This is not to say that owning a home is a bad idea. There are lots of pluses including: freedom to have pets, decorate/paint the way you want, eliminate the risk that a landlord will ask you to move and of course, the eventuality that the mortgage will be paid off. We all have to live somewhere and whether we rent or own, there is a cost associated with having shelter. The point is that it is a cost that should be budgeted for and buying “too much house” can be an easy trap to over extend and create too much debt. When considering buying, you might ask yourself: What’s realistic? How do I decide how much I can spend?

1. The sky’s not the limit. Think about your needs. Is your family expanding? Then buy a house with one more room, not three more.  Are you working from home and need a small office? Then get a house with an office, not a conference center. Decide what you can spend and what you need and stick to it. Our rule of thumb is no more that 35% of your net income for the total housing costs (mortgage/rent, insurance, property tax, utilities and repair/maintenance), even if the lender will extend more mortgage credit to you. Be strong!

2. Think about house of your dreams…Write down every feature you can think of that you’d love to have in your fantasy home. Be sure to prioritize these features, in case you need to cut back when you start looking.

3. Take a look at your cash on hand. Make a realistic assessment of the cash you have available for the down payment and other costs. Your down payment ideally should be at least 20% of the purchase price. This will eliminate the costly CMHC high ratio insurance premium, and lower your mortgage cost and duration.

4. Talk to a mortgage broker. At this point, it’s advisable to be prequalified for a loan as good deals tend to get snapped up quickly. You can also see if your math matches what you will need for the house you want. Using a broker has many advantages over going to a bank – more on this in a subsequent blog.

5. Start looking. You’ve done your homework – now get out there! Look at neighborhoods and the homes you had in mind. Do they fit what you have on paper? If they don’t, don’t try to fudge the math. Keep moving until you find something that does.

6. Start making compromises. You’re just not finding that house with the good schools and the spacious kitchen? Get out that prioritized list and focus on the ‘must haves’, instead of the ‘nice to haves’.

7. Use a realtor to help with the hunt. As in any situation, it’s best to bring in a professional. S/he may know the perfect house that you would have never found, and as a buyer, it costs you nothing. Don’t get this far without building a solid foundation on hard numbers and hard choices. You want a house you love, but you have to pay the bills every month, too.

Do you have any suggestions for those on the home hunting journey? If so, please share them with us!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Quick Facts About the Home Equity Line of Credit

A home equity line of credit, or HELOC, is a flexible line of credit that is secured by the equity in the borrower’s home. It is usually set at the lowest rate available, often at prime or even under prime for those with excellent credit scores. Currently HELOC interest rates are 1 or 2% above prime for most people, as the institutions (often banks) that are financing the HELOC’s need to make a profit in this very low interest rate economic climate.

The line of credit is much like a credit card – it has a maximum, but the borrower does not have to take the entire amount at once. Payments are usually made monthly, and may include principal repayment plus interest or some may require that only interest payments be made.

A HELOC’s value is calculated based on the cost of what it would be to rebuild the home, as well as the market comparables, or sales of similar homes in the vicinity. The current rules right now are that most HELOC’s are limited to 75% of the value of your home. For example, if a home is valued at (or appraised at) $300,000, and you owe $100,000 on your mortgage, you have $200,000 in equity. Because the HELOC is capped at 75% of the value of your home, in this case it would be for $225,000, which is 75% of $300,000. Given that you owe $100,000, that would not be available as a HELOC for you – but the remaining $125,000 would be.

HELOCs have traditionally been used as funds for major expenditures, including college and home repair and remodeling, or as rainy-day funds for times when households are short on cash. Increasingly, however, HELOCS are being used as first mortgages, either to purchase homes, to refinance first mortgages or be used as a source of investment funds – such as the Smith Manoeuvre – this is also known as ‘leveraged’ investing. Note: For those who use credit, including HELOC funds for investment purposes, the interest can be written off as a tax deducton.

One useful feature of these loans is that they may be split into several smaller accounts. For instance, if you wanted a separate account for each use – college, home repair and a car – you could split the equity line into three different accounts.

To qualify for a HELOC, the borrower is usually required to have a Total Debt Service Ratio (TDSR) of under 40%. This means that all of your debt payments (credit cards, car loans, mortgage, the HELOC and any other debt) must not be greater than 40 percent of your total income.

When economic conditions dictate a low, stable prime rate, HELOCs are very safe. However, if interest rates are volatile, the cost of funds for a HELOC can skyrocket quickly. Have you had a HELOC? How have you used your HELOC? Any suggestions?

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.