Real Estate Musings
Part 1 – Near-Term “Headline” Risk
Let’s deal with the current issues first. The companies we like cover a wide spectrum of industries, including grocery stores, essential services, industrial properties (including logistics), technology, apartments and offices. People still need to get food, go to Canadian Tire and live in an apartment. Offices still need to have a physical presence. We have positioned our clients with exposure to industrial/logistics properties, which are smoking hot right now – Amazon doesn’t own its real estate, but it needs to lease a property with proper logistics to deliver all that stuff it sells. We also invest in REITs that are really incognito technology companies such as Data Centres. All the data from online usage needs to be stored somewhere; Telus, Rogers, et al do not own all their own web storage facilities, they now have to lease it from you.
Anecdotally, industry analysts are reporting rent payments in the >90% range for the companies we own, which is better than the headline news the media seems to be suggesting. Typically, they get >98% collection rate on rents through an economic cycle. Yesterday the federal government announced a rescue package for small business owners facing rent/lease payments (more details to come). The government has already put programs in place for everyone who needs to pay rent or groceries with the $2,000/month (indefinite) ESG plan. The Province of BC has announced a $300/month subsidy for people renting. Governments at provincial and federal levels are taking firm action to allow families and businesses to pay rent.
Part 2 – Investments vs. the Economy
At risk of making a motherhood statement, there is a difference between a good company and a good stock. Because REITs are highly liquid, they were brought down quickly in the panic selling in late March. All companies, good and bad, were taken down in equal measure. The REITs fell by 50% in price. Even if we were to discount all the bad news in the share price and more, REITs are an incredible bargain right now. Best of all we can own good companies and good stocks at the same time which is nirvana for us.
Incidentally we don’t think Warren Buffett is a value investor. He is really an investor who waits to buy when he can get a good company and a good stock at the same time. This is exactly what we’ve also done for our clients.
Finally, we are happy to report that some REITs have snapped back more quickly than the broad market. For example, Data Centre REITs are higher today than they were before March 2020.
Part 3 – Non-Tangible Considerations
All management teams of REITs lived through the crisis of 2008-09, at least for the companies we are interested in. None of them want to repeat that experience and they’ve spent the past 10 years cleaning up their balance sheets. They’ve refinanced debt at lower rates and termed out maturities. Lines of credit are in the tens if not hundreds of millions of dollars in size and are often multi-year committed lines (as opposed to demand loans), so lenders can’t easily cut and run. These REITs issued equity whenever their share prices popped (dilutive to shareholders but prudent in hindsight). These companies are all in a position of incredible strength to take advantage of weaker private or public players who are forced sellers.
There has been a shift to tele-commuting, but it has been going on for the past 40 years. There is currently a worry in the industry about retail (mall) properties falling in value. REIT managers are aware of these shifts. They have been selling off lower grade retail locations and high grading their remaining properties. They’ve upgraded by increasing density and creating multi-use locations, such as building up areas near transit links, adding retail and community use facilities (seniors services, recreational facilities), and building condominiums on top. They make sure these types of value-adds include grocery, recreational, walking/living spaces and access to public transit.
Conclusion: There is a 50% off sale in some high-quality REITs. Buy.
Please contact GIM today to learn more about our REIT Portfolios.
Sources: Scotiabank and NBCFM Research
Disclaimer: GIM staff, clients, immediate family and relatives own REITs directly and indirectly.
The 2020 Investment Season is here! RRSP limits for 2019 and 2020 are $26,500 and $27,230 respectively; the deadline for RRSP contributions for the 2019 tax year is March 2, 2020. The TFSA limit for 2020 is $6,000; you can deposit up to $69,500 ($139,000 per couple) if you have never contributed to a TFSA. Other great ways to invest include pre-authorized monthly contributions (PACs), RESPs, RDSPs and of course, open/taxable accounts. Gold Investment Management is available by telephone: 1.888.436.9955, fax: 1.866.541.7947, email: email@example.com or visit us at gold-im.com.
Let Gold Investment Management help you build a strong future. Invest today!
RRSP & TFSA Tables:
|Year||RRSP Annual Limit*|
*18% of “earned income” for the preceding year to annual limit
In today’s episode, we interview Gold Investment Managements Founder and President Jonathon Gold, CFA. Our conversation covers everything you need to know about publically traded REITs, including the macro characteristics of the uncorrelated returns, the benefits of diversification within Real Estate, why publically traded real estate is in many ways superior to private markets and much more.Grand Theft Life Podcast
If you’ve ever been interested in Real Estate investing, this episode is a can’t miss. You don’t need millions of dollars to own a stake in the millions of square feet of Datacenters, hotels or apartment buildings across the world.
There are many things in life that we don’t know. However, there are a few things that we’ve picked up about personal finance, investing and money that we think can help clients and their families.
- The Jones family, next door, isn’t as rich or happy as you think they are…
- Luck is what happens when preparation meets opportunity
- Really rich people almost never attribute their success to getting lucky
- Get rich quick and get poor quick are two sides of the same coin
- The more complicated the investment advice, the more expensive and the less useful it is
- Spend less than you make. Always
- Ask about anything you don’t understand
- There is no such thing as job security in any industry
- Your personal residence is a place to live, not an investment. Stop watching HGTV
- Stocks tend to payoff because they are so volatile, not despite it
- Your mortgage broker is lying to you about how much house you can afford
- Never reach for yield. High dividend yields aren’t a good predictor of forward returns
- All fees erode investment performance
- Excess is never permanent
- You will never have enough money
- If it depreciates then avoid paying interest on it (I’m looking at you, cars)
- You don’t have to be rich to invest but you must invest to be rich
- Invest in your mind and your skills
- Splurges bring the greatest happiness and then diminishing returns
- If it seems too good to be true, it is. Full stop
- Einstein never said that thing about compound interest (see below). But it’s accurate nonetheless
- If you’re excited about an investment, it’s probably a bad idea
- A penny saved is more than a penny earned
- Market corrections come more regularly than birthdays – expect them
- Forecasting is for weather professionals – and even they suck at it
- The only sure thing about stocks is that there are no sure things
- A raise in your income shouldn’t mean a raise in your lifestyle
- Your life is a better benchmark than the Index
- There is an inverse correlation between performance and time spent watching financial news
Props to Khe Hy @khemaridh for the thought experiment
With this post, we’re hoping to address the challenges of transitioning from residency to an attending physician. There are plenty of businesses that want to sell you their services and our goal is to help you weather the sales storm.
Getting off to a strong financial start as a newly minted attending physician has a disproportionate impact when compared to any investments you could possibly make. The compounding effect of good early financial habits is second to none when it comes to your financial future.
“In your first few years as an attending spend like you’re a resident” – Wise, financially independent Doctor.
1) Create a Debt Plan
In medical school, you cannot really pay down your debts absent of a significant contribution from parents/inheritance. The best you can do is focus on not racking up more debt than required.
In residency, you have an income. Some residents can chip away at their debt, but the magnitude of it can still be overwhelming. Do your best to pay some off but it’s not uncommon for it to continue to expand.
Debt Consolidation – First we recommend that you look at your various debts (LOC, student loans, consumer debt) and consolidate them to the lowest rate available. This means putting it on your LOC in most cases, if you have the room. Most of our medical students/doctor clients can get a line of credit at prime minus 0.25% personally and in their corporation.
Some Advantages of LOC Consolidation:
- Simplicity – All your debt in one place
- Flexibility for payments – You can often just pay the interest if needed or make larger payments when able.
- Lower interest rates – Canada Student Loans are at Prime +2%, ASL/OSAP (insert province) is Prime +1%
Important Debt Considerations – Be aware that some banks send you a letter post-residency that your LOC will be changing from a “Medical Student LOC” to a “Professional LOC”. Be sure to read this and negotiate the best deal for yourself. (Prime -0.25%)
Debt Repayment Plan – Remove the desire to buy that new car or oversized house for the first little bit. Focus on reducing your debt and mitigating taxes paid.
2) Pay Down Debt or Invest?
There is an argument that with interest rates so low currently, that it is better to not pay your debt down. Rather, invest the money and earn a higher return. For example, a balanced portfolio of 60% equity and 40% fixed might return 8% while your debt is costing you around 4%. The arbitrage seems obvious. But…
Pay down debt first
- The average return of a 60/40 portfolio over the past 90 years has be 9% per annum. This return is random and fluctuates quite dramatically. “You can’t destroy risk, it can only be transformed”. Debt on the other hand can be destroyed. Therefore, for behavior and mental reasons, we recommend that our clients focus on what makes them feel the best. This is often in the form of debt reduction.
- With debt at Prime minus 0.25%, you need to beat a 3.5% bogey after-tax to outperform debt reduction on an absolute basis. Our clients are advised to fill their TFSAs and RRSPs then pay down that LOC and student debt.
- Paying down the LOC also gives our clients room to absorb the unanticipated costs and fluctuating income that is typical when starting a practice
3) Debt reduction + Investing
At GIM, we first set our clients up with all the tools they need to get started:
- Non-Registered accounts
- RESP (Registered Educational Savings Plan)
- RDSP (Registered Disability Savings Plan)
- Corp accounts if/when appropriate (wait until you’re keeping significant earnings in your corporation before. There’s no sense in paying unneeded accounting fees until debt is reduced and your personal accounts are full)
During the first few months, you’re going to notice that your income is higher than it was before, and for our clients we recommend making use of the above accounts in this order.
TFSA first – the sooner you start contributing to this account the longer you can enjoy the benefits of compounding.
RRSP second – reduce your tax burden; reinvest the tax refund; compound the growth on a tax-deferred basis.
Investment strategy at GIM is simple but tried and tested. We use an evidence-based approach of utilizing index ETFs accompanied by a geographic and sector tilt and systematic rebalancing. The evidence is overwhelmingly in our favor that high-fee, actively managed funds underperform a low-cost, passive ETF strategy. Many advisors out there will suggest that their mutual fund managers have the best chance to outperform the market. However, over a 20-year period, only 2% of managers have proven to outperform the index net of fees. Indicating to us that it’s incredibly difficult to pick the 2% of managers after the fact. We steer our clients clear of financial salespeople.
One of our greatest value-adds as an advisory team is our ability to deliver a repeatable process with competitive performance for the right price.
4) New Income vs. Resident Income – What to do
As a resident, you received a steady paycheque every two weeks. You paid your rent/mortgage and living expenses. Your financial life was predictable.
Now this all changes. As an attending physician, a financial buffer is more important than ever.
Income Volatility – As you know, your work load is lumpy – whether it be for locums or extra shifts to cover shortages. We’ve found that no one physician client is the same.
There is this image of the wealthy physician lifestyle that is very attainable for nearly everyone. But there is one thing that often gets in the way. It isn’t $4 Starbucks coffee. It isn’t a vacation to Europe or updating the wardrobe. It’s the big-ticket purchases that can derail success. Getting the big purchases right is incredibly important to ensure your financial freedom. We’ll never be the nagging advisors that tell you to cut out vacations or Starbucks coffee. But we will encourage you to get the big purchases right.
5) Insuring your biggest asset – Your ability to earn income
We find its imperative to review our client’s personal insurance. Going from residency to a full time attending comes with its own unique liabilities. When thinking of insurance, we want our clients to make sure that they have enough to cover their expenses and responsibilities.
Life Insurance – You want enough life insurance that if you were to die that your financial obligations of your family are met.
- Covering debts
- Leave enough money to pay for your dependents in your absence
Term life insurance is usually the most efficient way to insure these obligations. The premiums are cheaper than whole life insurance. Without complicating things, we don’t recommend a whole life strategy until there is a business protection, tax reduction or income reduction need for the client.
Keep it simple. Keep costs low.
Disability Insurance – With a longer-term disability, this type of insurance is to cover the loss of income. We recommend clients have “own occupation” insurance which ensures that they don’t have to go back to work in another field of work.
What to consider before deciding on the monthly amount:
- Paid with personal or corporate dollar
- Your business expenses
- Cost of personal Lifestyle
Umbrella Liability Insurance – This is an extension of your home or auto insurance. It covers for liability beyond those policies and payouts that exceed the usual coverage. Unfortunately, as high-income earners, Physicians are at high risk to be sued.
We at GIM hope that this article helps you get started in preparing for your new life. If you’re interested in hearing more from us then please reach out here.