Posted by Canadian Dream on August 6, 2008
I got an interesting question the other day from Jason:
I’m thinking about investing in real estate, but I’m apprehensive because of the
potential real estate slow down. But would still like to “play” in the market.
Could you do a review of mortgage investment corporations like the one offered
by ACIC (http://www.acicinvestor.ca)?
Well first off Jason I will put out the disclaimer that I’ve never invested in an Mortgage Investment Corporation (MIC) so I have just some limited research on the topic done. Overall the general theme of the investment looks attractive on the surface.
ACIC been around issuing mortgages for 10 year now and doesn’t have a single default yet. In addition their share price has been steady at $1000 for years (it isn’t publicly traded) and they have averaged a 8% rate of return. The income from the fund is paid quarterly and is taxed as interest (but you can hold it in an RRSP). Mortgages are split between 1/3 commercial and the rest residential.
There are of course some issues. First off the minimum investment amount is $5000 or $20,000 if you want to hold it in an RRSP. So this type of investment isn’t for the small time investor. You have to tie up a fair amount of money into a single investment. The second issues is you can only cash out your investment quarterly and if you do it in the first two years you pay a 2% redemption fee. Another issue is they seem to be limited to mortgages in the BC and Alberta markets, so you aren’t well spread out over most of the country.
What strikes me the most about Jason’s question is he states he wants to invest in real estate. In this case your not invested directly in real estate, but rather investing in mortgages. ACIC doesn’t own any properties so it is more similar to a bank than a REIT. So it is important to note the difference depending on what you are looking for in your portfolio.
Given the average Canadian is typically over weight in banks and real estate in their net worth most of us don’t need something like this to invest in. Also because the payout is treated as interest it isn’t all that attractive from a tax preceptive unless you hold it in your RRSP. I would keep some thing like this as a limited part of any portfolio say around 5%. So given you would like something like this in your RRSP likely that means you would need a portfolio of $400,000 ($20,000/5%) to make this work.
So overall if you have a healthy size portfolio and you think that a MIC would work for you, sure go ahead and do some more research into it. For the rest of us, I would shelf the idea for now. I already own some BMO, I don’t really need another bank that just invests in mortgages in a limited area.
Posted by Canadian Dream on June 10, 2008
Well my since my second opinion post was turning into a monster length comments I decided to take the last set of questions be Jordan and answer them in their own post. Jordan asked the following:
But do you think it would be possible to share some of the more general information of your plan, like the % of income saved for retirement, paid to the mortgage or other financial goals like the RESP you mentioned. How long you project it will take to pay off your mortgage? Is your priority to pay it down or save & invest? What % or $ do you expect your net worth to increase annually? What have you set as important milestones along the way and when will you hit them? Can you describe in a bit more detail the types of “What if” plans you put in?
All of the above are very good questions so here are some of the answers. The plan using most of my yearly savings to cover everything including a slight mortgage acceleration, the RESP’s and retirement. The plan requires I save just over $15,000 annually (about 21.5% of our pre tax salary/daycare income) which includes $230/month for RESP’s for the boys and $150 annually to accelerate the mortgage to insure it is paid off on my 45th birthday.
The goal for the RESP accounts was to ensure each child has at least $10,000 a year (today’s dollars) for four years to help cover their education costs. Meanwhile the slight mortgage acceleration is to just make sure it is paid off when I retire at 45. At this time I have no plans to put any additional funds at the mortgage beyond what is outlined in the plan. I just want it gone by the time I retire, beyond that I don’t feel with today’s low rates there is any point trying to pay it off faster. The pay back just isn’t there. If rates increase to 7% or more it might be worth my while to adjust the plan depending on how my investments are doing.
According to the plan by next year my net worth should be up 12% (note the plan using my actual net worth, not the blog version). From there the % should drop as my savings are only scheduled to increase by 1.5% per year (with inflation) meanwhile the assets should keep growing at a higher rate. While I expect my salary to increase by 3% annually. This should allow me some wiggle room if inflation is higher than I expect. The plan also allows for any additional money that shows up at my door to be spent with no effect on the plan. So any bonuses, or daycare income is freely available for personal spending. The plan does have a yearly net worth number which I could use as a target if I like (which would mean I should have a net worth of over $1million in today’s dollars when I retire).
The ‘what if’ plans consists of several scenarios I had Preet run to determine the effects of certain events on my goal. The idea of the ‘what if’ plans is to cover any short fall in the main plan if my personal inflation is higher than expected or my investment performance isn’t as high as predicted. The plans consist of two main options 1) downsize my current home to a smaller one by 20% of market value and 2) work part time in retirement and produce $2500/year during my early retirement phase (45 to 60). The second option was put in the simulate the fact I expect to do some things that earn some income in retirement (freelance writing/this blog).
The interesting fact of the plan is I set it all up to be reasonable for goals. I could easily exceed the savings goals and consider retiring earlier than 45. At this time I not willing to do that. Why? I need some money to enjoy today and cover this little odd expenses that show up.
Posted by Canadian Dream on March 4, 2008
I really do like getting emails with questions from people. Some things are certainly specific enough that they can’t really be brought up in the blog. Yet here is one from a reader, Trevor, I thought I would share.
“I was just wondering when you started saving. “
My response went something like this:
I’m not sure I completely understand your question, so if I don’t answer it let me know.
I’ve been saving since I was a little kid. So during high school I got the chance to go on a school trip to France I paid for half the trip myself. Then when I got to university I drained all my savings again on classes and books. So I really didn’t start saving for retirement and paying down debt seriously until about six months after I got my university degree (age 22 1/2).
I find it rather interesting that it seems I’ve always been saving. So by virtue of that fact I’ve never had a major problem with debt. I’ve only ever had a balance on my credit card for a few days when a expenses cheque from a work expense was late. So obviously this behavior has helped on my plan to retire at 45, yet I feel it can be learned.
For example, I’ve met many people who start off in life not doing so well with money and manage to turn it around. It really is a matter of deciding what you want and making the choices to get there. Will power is more important than your salary when you are planning early retirement. You need to be able to say no to the things that don’t matter to you (but may still matter to your friends, co-workers or neighbours) and say yes to what does matter most: freedom.
So when did you start saving?
