Investing funds to be used ultimately as house equity

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Phil D
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Investing funds to be used ultimately as house equity

Post by Phil D »

My married daughter is 30 years old and currently living and working in Toronto. She and her husband are currently renting a condo and expect to be moving away from Toronto in about 3 years. She has substantial savings which will form the equity for their house purchase when they move. Most of the funds are unregistered although she does have a fully contributed TFSA. ( She has very little RRSP room ). It is likely that she will be taxable in the lower tax bracket for the next couple of years. She is looking for advice on how to invest until they purchase a property.

My thoughts are - These funds should be invested with relatively low risk since the time horizon is quite short. ( Even if this means that the portfolio return is somewhat lower than house price inflation ) Bond yields appear to be less than GIC rates. I lean towards GICs with some split preferreds. ( It looks as if dividend income is quite favourable to interest income in the lower tax bracket ).

Any comments and suggestions would be most welcome.
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Re: Investing funds to be used ultimately as house equity

Post by Peculiar_Investor »

Given the short timeframe, return of capital is far more important than return on capital.

I would concur with your thoughts that GICs are probably the best vehicle at this point in time. I'm less sure about the split preferreds as I don't follow them that closely.
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kcowan
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Re: Investing funds to be used ultimately as house equity

Post by kcowan »

Would she and her husband be OK with condo flipping? Given that they are not committed to Toronto, this would seem to be a natural way to leverage their savings. Just flip one at a time and declare it as PR.
For the fun of it...Keith
Phil D
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Re: Investing funds to be used ultimately as house equity

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kcowan wrote:Would she and her husband be OK with condo flipping? Given that they are not committed to Toronto, this would seem to be a natural way to leverage their savings. Just flip one at a time and declare it as PR.
I understand that investing in real estate would provide exposure to their ultimate objective. We did look at them purchasing a condo rather than renting but the economics were marginal unless there is continuing significant property price escalation.

On googling ' condo flip ' I learn that this refers to buying yet to be completed condos and immediately reselling. Neither they nor I have any experience in this sort of thing. I guess it probably works well in a hot market such as Toronto currently is, but we would be worried that the overheated market could turn at any time. By the way, the google search also turned up that CRA have quite a hard line on the taxation of flipping transactions.

Thanks for the responses pi and keith.
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Re: Investing funds to be used ultimately as house equity

Post by 8Toretirement »

Protection of capital is the most important priority in their situation.
They might do better in a high rate savings account, Canadian Western Bank has a 1.6% rate. Not sure they have a branch in the Toronto area.

Using the TFSA would be the best place for funds to be deposited.

A high rate of savings will determine the ultimate outcome vice return on savings.
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Re: Investing funds to be used ultimately as house equity

Post by Phil D »

Thanks, 8To,

I took a look at Canadian Western. Turns out that Ontario residents cannot have an account with them. But, they have an online subsidiary, Canadian Direct Financial, that any Canadian resident can open an account at. CDF's TFSA interest rate is actually a little higher , at 1.8%. And CDIC insured.

Cheers.
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Re: Investing funds to be used ultimately as house equity

Post by Koogie »

You can get 1.95% at Alterna Bank (CDIC) or 2.00% at EQ Bank (CDIC) just as easily.
You can always check for those deals on the GIC thread here or over at the forum at www.highinterestsavings.ca
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Re: Investing funds to be used ultimately as house equity

Post by cardhu »

Phil D wrote:I lean towards GICs with some split preferreds.
Splitco prefs are more stable than real pref shares, and some of them have a reasonable margin of safety so barring a catastrophe, should reliably spin out a lot more return than GIC/HISA would ... and if she’s going to be in the lowest tax bracket, there is the added advantage that dividends are negatively taxed ... there are obviously no guarantees with them, so they are riskier than GIC/HISA, but if well-chosen they are certainly a lot closer to the “relatively low risk” end of the spectrum than condo flipping would be, and without the added risk of running afoul of CRA.

My biggest individual pref holdings are splitco prefs. I’ve been following splitcos quite closely for over a decade and am very familiar with certain issues ... others not so much ... the trouble, at this point in time, is that the good ones are all trading at a premium to NAV. They do go on sale ever now and then, though. If she goes that route, she should keep them to the non-reg, leaving the TFSA to shelter the higher-tax-burden GICs & HISAs.

One of the downsides of splitco prefs when the goal is accumulation, is the constant spinning out of dividends that you have to do something with. These things can't be dripped, and I would never suggest a DRIP for a non-reg investments anyway. But one way to deal with it is to always maintain a slight debit balance in a margin account (ie. if she has $20k to invest, buy $22k of shares). The debit balance absorbs those pesky dividends on autopilot. When the debit balance drops to near zero, buy a few more shares to bump it up again.
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Re: Investing funds to be used ultimately as house equity

Post by Phil D »

Koogie wrote:You can get 1.95% at Alterna Bank (CDIC) or 2.00% at EQ Bank (CDIC) just as easily.
You can always check for those deals on the GIC thread here or over at the forum at http://www.highinterestsavings.ca
Thanks Koogie.

I had peeked in the ' high interest rates ..... ' thread a few times but not paid much attention. I'm currently a non resident and so not able to open any of these accounts. But I had missed that some CDIC insured institutions are offering rates which are about as good as the highest 2 and 3 year GICs. One of these will definitely be a good option for my daughter. I was also unaware of the high interest forum which is very helpful.
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Re: Investing funds to be used ultimately as house equity

Post by Phil D »

cardhu wrote:
Phil D wrote:I lean towards GICs with some split preferreds.
My biggest individual pref holdings are splitco prefs. I’ve been following splitcos quite closely for over a decade and am very familiar with certain issues ... others not so much ... the trouble, at this point in time, is that the good ones are all trading at a premium to NAV. They do go on sale ever now and then, though. If she goes that route, she should keep them to the non-reg, leaving the TFSA to shelter the higher-tax-burden GICs & HISAs.

One of the downsides of splitco prefs when the goal is accumulation, is the constant spinning out of dividends that you have to do something with. These things can't be dripped, and I would never suggest a DRIP for a non-reg investments anyway. But one way to deal with it is to always maintain a slight debit balance in a margin account (ie. if she has $20k to invest, buy $22k of shares). The debit balance absorbs those pesky dividends on autopilot. When the debit balance drops to near zero, buy a few more shares to bump it up again.
Thanks Cardhu,

I have quite a few split prefs myself. My ' approved ' list includes pvs, gcs, dgs, dfn, and lbs in the top tier with dfn, ftn, lcs, df, new, and ffn in a second tier. If you were prepared to share, I would be interested if these names overlap with your choices. I agree that none of them are on sale at the moment.

Regarding absorbing the dividends, I have drummed the risks of leverage in to my kids and, even though your suggestion is very mild, just could not bring myself to suggest to her that she borrow to invest. The pesky dividends will just have to sit there in a HISA until they build up.

Cheers.
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Re: Investing funds to be used ultimately as house equity

Post by cardhu »

DFN.pa and LFE.pb at the moment.

Both took a beating during the 2008/09 crisis, but as they were trading at FAR below NAV, we gritted our teeth and added to our positions.

The LFE holding has been interesting ... the original LFE.pa (5.25%) was redeemed and replaced, in a tax-free rollover, by LFE.pb (6.25%) at one of the “expiry” dates ... warrants were granted, in return for agreeing to the pa/pb rollover ... one warrant I exercised, the other I sold ... capital units acquired through exercise of the warrants were eventually sold ... etc. ... our return on LFE currently stands at 9.73%/yr, for almost 12 years ... not too shabby for a pref.

DFN has been relatively uninteresting ... just chugging steadily along, paying regular monthly dividends that more than cover the interest on the debit balances in our margin accounts.

Personally. I prefer the basket splitcos to the single-stock splitcos.
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