Risks of Home Equity Loans & Use of Leverage -- Wealth Cycles & Plays -- BUCHAN BULL VLOG 13

[leo14t]

Very nice video. I agree playing with home equity is a very risky move, but that depends on what are you going to use a Home equity loan. I truly believe that investing in Real Estate market in this downmarket is a very good move to make. Investing in Rental properties to increase cashflow and not looking to invest for appreciation. As a Real Estate agent i recommend this to homeowners with equity or people with 401k plans that are loosing money day by day... 10% on a rentalproperty is agooddeal

[BuchanBullBullion]

@charronfamilyconnect @2011rcm @solojam -- Just posted links in the description to Historic Canadian 5-year Conventional Mortgage Rates and Historic Bank of Canada Rates, should have posted these earlier as they are at the basis of the argument. Look specifically at the 1973-1983 period.

All the Best,

Jim

[charronfamilyconnect]

@BuchanBullBullion Thanks man I will check those out a litte later. Your a great source of info. Much appreciated!

[charronfamilyconnect]

So Jim, Here is my situation, I am mortgage free on a house worth around $275,000. If I sell you think I should buy bonds with it. By the way I never heard of inflation adjusted bonds before? How about if I buy silver with it as Alexis probably would or you think thats too risky? Thanks!

[BuchanBullBullion]

@charronfamilyconnect Hi, I think everyone needs to evaluate their own situation. I do not think bonds are a great way to go, but was throwing it out there for the people who need to hold that type of assets. Bonds can be risky to especially if heading for fiscal collapse--there are inflation adjusted bonds, and also lots of corporate bonds(maybe the bonds of a PM producer are safer than a gov't bond at this point?

[BuchanBullBullion]

@charronfamilyconnect Personally, using wealth cycles I would invest the capital into whatever area of the economy I felt was undervalued. I do currently feel PMs, especially silver are undervalued, and I would have no issues myself investing a large portion of my capital into physical PMs, or well run PM stocks...really anything that carries with inflation I would look at. Sectors that would benefit from economic turmoil and increasing interest rates is where I would look to allocate capital.

[2011rcm]

@charronfamilyconnect Short term bonds, nothing over 5 months, then reallocate your money as conditions arise. Generally the market favours PM stocks after July August, currently Gold stocks have underperformed based on the rise in Gold prices.

[charronfamilyconnect]

Sorry for my last question. Here is a better one: What do you base the decreasing future value of a home on? Historyically homes have gone up in price at least in Ottawa? Just curious what makes you think it will decrease in value? Do you anticipate government layoffs/austerity measures in Ottawa for example or the demographics of people downsizing into smaller homes. Do you mean the bigger homes will decline to to downsizing etc?? Thanks!

[BuchanBullBullion]

@charronfamilyconnect Purely basing my theory for decline in home prices based on future increases in the borrowing rates, which are negatively related to interest rate hikes.

In Ottawa though, we did see Mr. Clement not rule out greater austerity measures, so could see a PS downsizing like in the 90's which could affect locally, but nationally the average should decrease as the artificially low rates are increased to true market levels.

[2011rcm]

If you use the equity in your home home for an investment the Interest is Tax Deductible using the Smith Manouever or setting up a Re-advanceable Mortagage.

[BuchanBullBullion]

@2011rcm Very good tip! What are your thoughts on if the tax savings will make up for the decrease in home value over the holding period? Or if you think people will run into problems during refinancing in 5-10 years with increased interest rates, and likely a depressed house value?

Jim

[2011rcm]

@BuchanBullBullion Since higher interest rates generally result in increased Stock Market valuations, a person could buy the market (ie. Dividend paying Stocks) and keeping the money in the Investment account so taxes are not incurred. Hedging the loss in real estate values by using the market is a good option. I fully underatand your viewpoint in your video and do support your views, but remember Banks do not consider money an asset, you cannot borrow against the money you have.

[BuchanBullBullion]

@2011rcm "Banks do not consider money an asset, you cannot borrow against the money you have. " In theory yes,but unfortunately what we see in the loans market, for individuals or small-to-mid sized businesses is a lack of loan availability. If you have the capital they will lend, which I know counter-intuitive, but seems to be status-quo lately with lending.

This obviously also depends on one's credit rating and relationship with the bank though. Bonds or Equities may be necessary as collateral

[charronfamilyconnect]

Whats your opinion on investing in real estate in the US for someone like me who is considering investing in real estate. I was told the tax rates are low, and the ratio of rent vs. holding costs is very good! Thanks!

[BuchanBullBullion]

@charronfamilyconnect I have friends that spend a lot of time doing this. There are certainly some good deals to be found in the US, but nothing is without risk. The housing values are still declining down there, and greater and greater foreclosures expected in coming years, so purchasing could be a test of time for your return.

Another risk, although unlikely, but I have heard mention of it, is the gov't giving out foreclosed homes for the tax revenue--this could hurt any RE investment, Jim

[charronfamilyconnect]

@BuchanBullBullion What is the risk if you have the money up front to buy it outright? Hey man this is my situation which I dont share with everyone. I have mortgage free home valued at $275,000, and about $150,000 liquid doing jack shit in GIC's What would you do with that man. OFcourse I have some prescious metals stored away(500 oz of silver). What would you do man if you were me? I guess you would sell the family home first? Thats tough when my boys grew up here in this nice community?

[charronfamilyconnect]

@BuchanBullBullion My acquantances are mostly buying in Georgia and are buying the homes outright and have property management companies taking care of the managment of the properties. They charge 10% of rent. Sounds good but ofcourse I would rather buy where there are jobs flowing which seems to be nowhere in the us man!

[BuchanBullBullion]

@charronfamilyconnect Exactly, it is like catching a falling knife down there right now. I posted a 25May11 article in description "U.S. home prices dropped 5.5 percent in the first quarter from a year earlier, the biggest decline in almost two years, as sales of discounted foreclosures undermined real estate values. ", and another article came out today, forclosures made up 28% of all sales, and are expected to increase as a % of sales moving forward--puts pressure on entire market, bad news.

[solojam]

buy a new home, best value

u won't make anything, but u won't lose anything, renting u always lose.

[BuchanBullBullion]

@solojam If one was to buy a home, I would at least buy a resale home for best-value. And you can lose large on home purchases, only if you intend to stay in your home for life do you lose nothing. Many people intend to do this, so this argument is certainly not for them, but is intended to show how you can best utilize your capital for highest return.

[solojam]

@BuchanBullBullion u should always have a new home part of your portfolio, some builders tend to sell much cheaper than what its really worth, resale's your looking at problems, brand new comes with 7 yr warranty and everythings new, easier to sell.

also u have to be a avid investor and find the value deals out there, u have to live somewhere, renting your throwing your money down the drain

remember u are leveraging the banks mortgage they are giving you so your making 5% per year leveraged

[solojam]

@BuchanBullBullion a new house or condo is just part of a well prepared portfolio, i would not have everything in stocks or bonds or real estate, or PM's for that matter.

im on my 2nd real estate transaction in 4 years, ive made 7% after taxes and fees on my new real estate, pocketed the gains because its my primary household, no tax also on primary real estate

remember your stocks are taxed and bonds even more.

heloc is just looking for trouble, any leveraging is gambling and not very wise

[solojam]

@solojam 7% per year after taxes and fees

[BuchanBullBullion]

@solojam No loss to me renting, the banks are getting $0, great disposable income every month due to no interest, taxes, maintenance, insurance(beside renter's). I can invest this money as I see fit, or choose to wait for a housing price decline, which IMO is inevitable in Canada especially, and purchase for much cheaper--opportunity costs.

I know this blog is not going to make me any friends, as this is not the mentality people in NA are used to, but maybe time to reevaluate?

All the Best

Jim

[solojam]

@BuchanBullBullion u have to live somewhere, might as keep your capital, your money that u pay someone for rent is gone forever.

buying a house is not a great way to make money but its a great way to maintain your money, also you have to be an avid investor like i said, alot of new home builders are priced cheaply, you have to find these ones.

im expecting the housing market to crack also once interest rates rise, but if u get into something of value u are atleast maintaining your capital.

[solojam]

@BuchanBullBullion real estate would not be my main investment, its part of a portfolio since you have to live somewhere. remember a 50 thousand down payment on a valued condo that is going up 5-7% per year, you are making a 5-7% return on $250,000 dollars your leveraging the banks money, so get a cheap interest rate and lock it in, that equates to $20,000 grand in your pocket everywhere, yes your paying about $12,000 of that in interest but you are still coming out ahead. No tax when you sell

[solojam]

@solojam $20k every year it should say *

so lets say you invested your $50k elsewhere and made 5% per year, you are only making $2500 before taxes, with that $50k, so lets say you take home $2000 after taxes, with the house you are breaking even, but remember you are paying $12000 rent per year in the renting scenario, so you are down $10,000 bucks per year but with the house you are staying neutral you are not gaining but you are not losing.

[BuchanBullBullion]

@solojam I am not sure I agree with the value of the real-estate staying the same or increasing especially over the next 5 years. We are in an environment where interest rates have no where to go but up, and housing prices are directly inversely related to the interest rate. We have seen a decline in US avg home values to $144K from around $285K, this can happen in Canada, and I truly believe it will, so as an asset in my portfolio, I do not wish to own real estate as a devaluing asset.

Jim

[solojam]

@BuchanBullBullion usa is in shambles, the job market is destroyed, canada is still fairly strong due to immigrants flooding the country, im waiting for rates to rise but it could be another few years before that happens, the bubble is still forming here

[BuchanBullBullion]

@solojam I think BOC raise rates on the 31rst, and is just the start. We are overheated, and very difficult to call a top, so when I sense a bubble or overvaluation I exit per wealth cycles theory, and will look to reenter once I feel it is undervalued.

Great discussion!

Jim

[solojam]

@BuchanBullBullion how many years have you been renting? i bought in 2007 when everyone was yelling dont buy dont buy, but i still made 7% per year from 2007 to 2010, but i bought in a amazing area with major growth and i got the new house for such a good price from the builder, i sold in 2010, found a brand new condo this time and put first down payment in 2010, its already up another 20k in equity in a year.

alot of areas are overheated and way overvalued, but there are gems out there

[2011rcm]

@BuchanBullBullion The latest data is showing weakness in the Canadian economy, if they raise rates it will be in Sept. Info from Reuters Article headline: Canadian dollar weakens on oil, BoC outlook "The central bank is scheduled to announce its monetary policy decision on May 31. Most market watchers expect it to keep the borrowing rate at 1.00 percent, where it has been since September following three rate hikes last year as the economic recovery gained steam."

[BuchanBullBullion]

@2011rcm I will go opposite the tide--I expect a small hike on the 31May2011, followed by further hikes in sept and into the New Year. Everything lately is so based off of one piece of economic information that it can be so difficult to call until the date, as there may be new info released which changes market consensus.

The volatility we see just shows a lack of market comprehension, and movement with each new piece of data released--a tricky period to play in.

All the Best,

Jim

[2011rcm]

@BuchanBullBullion With the increases in inflation during the last quarter, (food, energy, commodities) an increase in rates would hurt businesses.  The housing market is not important enough to raise rates at this time.

[BuchanBullBullion]

@2011rcm Certainly not basing the increase prediction on housing market solely, just think it is time to get that ball rolling--the longer they keep it low the more harm to the economy in the long-run(ie. Greenspan). Funny because only a week ago most analysts expected a rate hike in May, but due to the European debt concerns, possible end of QE and volatility in markets lately, 3 primary dealers have pushed back their increase expectations until sept.. I may be dreaming, but please do it soon!!