Stubborn

DIRT modified

I’m feeling fragile. Time for more fan mail.

“House prices in Canada have gone up substantially since you started your stupid blog,” writes Paindu. “Any sane person would have stopped long ago. I salute you for being such a stubborn loser!”

Well, Paindu, somebody’s gotta do it. Without irritating little Cassandras like me, who knows how many more moist virgins would trade their liberty for amortization, or house-rich, asset-poor Boomers face a cash-starved retirement. Nothing goes up forever, especially on a foundation of debt, so it’s just a matter of time before our real estate excess is undone. In other words, it’s not different this time. Trust me on this. And prepare.

Now, for Dave in Victoria, this brings up another valid question.

“I have introduced your not-pathetic blog to co-workers.  It has been a refreshing counterpoint to what they had heard to date. My question is we have a broker who for eight years has told us REITs were not a good investment, that rates were going to rise, and stocks and bonds were the only way. We don’t quite believe that story and have diversified.

“I think I’ve missed eight years of 8-9% returns from some notable REITs and I’m thinking it is too late now to get into those. Have you looked at or given thought to how Cdn REITs would suffer if real estate prices dropped significantly?”

Sure have, Dave. And while guys like Paindu have swooned over 5% real estate returns (accompanied by massive buy and sell costs), investors in real estate investment trusts have been collecting doubled or even triple those returns – probably with less risk, and certainly with more liquidity.

REITs, in general, are companies which buy income-producing properties, manage them and pass on the rental cash flow to investors. The building where I am often held captive in downtown Toronto, all 68 floors of it, for example, is owned by two REITs that paid more than a billion for it, and collect boatloads of rent from rich tenants. Some trusts specialize in office towers, others in shopping malls, and still others in blocks of rental apartments or even nursing homes.

So, these REITs don’t buy houses or condos and rent them out – they leave that for loser investors like Paindu. But because these trusts spend billions buying commercial properties, they borrow lots of money, which makes them sensitive to interest rate fluctuations. A year ago when we first heard the Fed would start dismantling its stimulus spending in the US, investors were spooked at how rates might jump, and REITs were sold off. That’s when I told you to buy a mess of them. Hope you did. Big recovery since.

But that was just one buying opportunity for assets which have consistently performed well. I noticed Motley Fool piece this week that made the point nicely. If you owned a house for the last decade in Canada, you probably made 70% on it. If you owned Canada’s largest REIT (RioCan), you scored 207%, if you reinvested the dividends. That’s 13% annually. Canadian Apartments REIT has delivered 14% a year on average for the past ten, while $100,000 put into Boardwalk REIT in 2004 is worth $600,000 now.

Why? Because unlike houses which cost money to own, REITs pay a regular income based on real assets churning out real rent. In a low-yield world when bonds pay little and deposits yield nothing, investors lap this up. REITs have proven to be reasonably predictable, extremely liquid, and consistent in turning out cash flow – sometimes taxless because it’s constructed as return of capital.

Besides the income, real estate investment trusts often churn out capital gains. So far this year the REIT sector has handed investors a total return of about 10%, and prices have climbed back towards the highs of last Spring. CIBC’s Alex Avery the other day recommended REITs which own bustling office towers and industrial properties in Toronto and Calgary, where vacancy rates are miniscule, meaning buildings average 95% occupancy.

Among his picks are Combie, Artis, Northern Property and Milestone Apartment REIT in the States. Or, to make things simple, you can simply buy an index of REITs, gaining valuable diversification.

But, hey, what about Dave’s question: when the dirt flies and real estate does correct, with Paindu moaning and gnashing, will REITS also be hit?

Of course not. My office building is not going to empty of bankers and lawyers because the residential real estate starts to descend, or stays comatose for years. Cash flows will not diminish from major shopping centres where tenants come and go but traffic stays consistent. A housing correction in Canada will not crash the economy or plunge the country into a riveting recession – just ruin the lives of people silly enough to stuff all of their net worth in one asset. In fact, when real estate stops booming, renters stop buying, and this is great news for REITs that own all those thousands of apartment units.

In short, there’s zero connection between the house hornies and REIT investors. Except the pity.

162 comments ↓

#1 Role on 06.17.14 at 5:59 pm

How man can do reit if none other then picking a lotto number? If its not never easy how come more people dont never do it?!?

You can type? — Garth

#2 Jack Henning on 06.17.14 at 6:06 pm

Unrealistic annual investment returns of 8% to 9% for the next 10, 15, 20, 30 years etc. is ending.

It does not matter where you invest. Get ready to get red hosed by taxes, fees, expenses, costs, tolls, levies, inflation etc.

These important, necessities of life and pushed on us by laws are going up by 8% to 9% annually. I think the best line the reds liked is just watch me. Just watch them!

Silly, unsubstantiated words. Worry more about deflation and inflation. — Garth

#3 Big Sexy on 06.17.14 at 6:10 pm

Buy buy buy!

#4 happity on 06.17.14 at 6:18 pm

The debt is not just in real estate…

Try $29 trillion in the global $62 trillion equity market.

Governments are saddled with debt.

Students are over their heads in loans.

The list goes on.

#5 Saskatchewan Skeptic on 06.17.14 at 6:22 pm

Every day after reading your blog, I hit the Regina reator.ca page, followed by a quick dash of news from the Association of Regina realturds and finish by checking into Regina’s newest equity trap known as Harbour Landing. Yesterday, I came across something new for the prairies. Oak Park Living is offering $10,000 towards a downpayment and 5 years with no property tax! They call it a grant, complete with a 500 word submission form to explain why you deserve the grant. Anyone with half a brain knows that this form is just there to give the salesman a chance to build his sales pitch to you. Although, the downpayment is the biggest hurdle I am facing right now and was hoping to wait about 2 years for the Regina market to ‘stabilize’ (or freefall ;P), this deal seems like not such a bad option. If the property taxes are around $10,000 over 5 years, thats $20,000 of the price of a 2 bdr unit for $209,000. Thats a 10% cushion for when the market drops and in 5 years, I will have built some equity, rather than renting. I have a decent job that pays in the 70’s and am just starting out in the game. Garth, what should this Roughrider fan do in the land of potash and government jobs? Heres the link for those who are interested, big smiling lady at the top of page, and pictures of house horny 20 year olds posing in their new stainless steel kitchens. I think one of them works at the Best Buy across town:
http://www.lovelifeinregina.com

#6 Retired WI Boomer on 06.17.14 at 6:22 pm

My ONE REIT holding:

VNQ (ETF)

year yo date up 15.42%

Last 5 year average cup 22.77%

FEW RE prices can beat that record in the US.

Of course, individual investing is subject to risk, delusion, naysayers, fits of emotion when markets break, and plain lousy investing advice, poor socialization, and of course human interference by parental units on the young among us, the old can’t remember why they’re investing anymore

#7 Son of Ponzi on 06.17.14 at 6:24 pm

Devore.
Lay off the Old Man.
He’s probably already forgotten more than you’ll ever know.
There’s more to life than knowing how to switch on a computer.

#8 Liquid on 06.17.14 at 6:26 pm

I like both physical properties and indirect real estate exposure through REITs. There are some types of lucrative land like shopping centers that is difficult for retail investors to tap into so REITs are great for that. I personally have Riocan and Allied Properties and am quite happy with their performance over the last several years. I think buying a home and renting out the basement can also be a good idea because it gives one a place to live, and provides rental income. But more leverage is usually used, which can be for better or worse depending on what the market decides to do.

#9 Ralph Cramdown on 06.17.14 at 6:32 pm

Many REITs are good at breaking down their financing terms and how much debt comes due each year, as well as their customer concentration (in case one that’s leasing a lot of space goes broke). In their annual and quarterly reports, available on their websites.

They make a good read to see how professionals think about real estate.

On the flipside, to see how yield is sold to amateurs, I recommend
http://www.canadianmortgagetrends.com/a-threat-to-private-financing-3.html/

http://www.fisgard.com/default.aspx?PageID=1001

Usually the material is full of pictures of management or financed properties, but this one is full of (stock?) photographs of investors like you, as if to say “See! We haven’t lost our shirts yet!”

Don’t forget to download the investment booklet and notice how their returns never dip below 5%, but often touch exactly 5.00%. Return of capital? Fees foregone if performance hurdles aren’t met? Fees cranked up if they are? Don’t buy investments where the pitch focuses on you and how much money you’ll make, and disparages other investment vehicles as “speculation.”

#10 kommykim on 06.17.14 at 6:38 pm

RE:#1 Role on 06.17.14 at 5:59 pm
You can type? — Garth

At least there were no spelling errors and only one punctuation error. LOL.

#11 Jonathan on 06.17.14 at 6:45 pm

Northern Gateway “approved”, LOL.

Harper is so fracked.

A CBC poll this hour shows over 45% of BC voters say this will change whether or not they support their local CPC MP.

The government is doomed. Lawrence Martin said it best today:

http://www.theglobeandmail.com/globe-debate/if-logic-prevailed-the-pm-would-pass-the-torch/article19193195/

I have actually heard and read a few people proclaiming that Harper is intelligent in all his machinations. Idiots, if you ask me. Putting yourself and your party in a predicament like he has is nothing short of mental defect.

This is the beginning of the end of the conservative era. Hudak, Harper, Ford, etc,,, and all their stupid, corrupt, self-dealing nonsense that we have put up with for so long. Like the coming RE melt, it will be here in due course.

Get ready to hear the word ‘Trudeau’ a lot more. Has his faults, but they will be so much better than any of the neocon morons we’ve had to suffer through.

#12 james on 06.17.14 at 7:08 pm

#11 Jonathan

Can you knock of the political rants. This is a real estate blog.

#13 Please and Thanks on 06.17.14 at 7:13 pm

Can u ban Devil’s Advocate again?
my finger hurtz from scrolling through

#14 eddy on 06.17.14 at 7:16 pm

#8 Jonathan said-
Get ready to hear the word ‘Trudeau’ a lot more.

I hope so..a name with built in nostalgia.. Life was simpler in the 70s..suede jackets with fringes.. Prime Ministers paddled to work in canoes speaking of the 70s

Here’s one for #Nemsesis, he likes singing dinosaurs and trumpets.
It’s a reunion worthy of Oprah, but Garth will do.
In the early 70s singer Rick Stevens got fired from his band, after one hit. Rick went on to do 36 years in prison, including death row for murder. Now he’s back on the streets, his band is Still active, Rick sits in:

http://www.youtube.com/watch?v=K-Sh_guUEVY

Just say NO to drugs

#15 OwlEyes on 06.17.14 at 7:18 pm

Meanwhile, in Vancouver:

This is amazing.

http://www.vancouversun.com/life/Vancouver+school+board+approves+policy+addressing+transgender/9945194/story.html

The Board has madated the use of the gibberish words “xe, xem and xyr” in place of “he/she” or “him/her”. This is to allow not just for actual gender, but “perceived” gender, i.e. the gender the student identifies with, as opposed to the gender on their birth certificate.

The kicker? While civilization is collapsing, THIS is what Vancouverites are worried about: “Ken Clement, a board trustee, called comments made last week by opponents to the new policy that it would harm real estate prices in Vancouver “frustrating.””

#16 Realtor # 1 GTA on 06.17.14 at 7:20 pm

CHMC returns to lower risk roots – article in the Globe.

In the article you will find that they now are worried about the risk, but was more interesting is the CEO Siddall adamantly says that the new rules was not imposed by Ministry of Finance

Early we saw Poloz not interfere in the mortgage rate wars which.

It suggests that if there is a correction Poloz doesn’t want to be perceived that his interference was the cause of it.

#17 Tony on 06.17.14 at 7:21 pm

I remember Garth as writer for the Toronto Sun in 1987 with a headline ( Nov 1987 ??) stating real estate prices were going to crash. Well they basically doubled from then on. Starting in May of 1986 they were going up $20,000 a month.

Now…listen to me very CLOSELY. The real estate prices in
Toronto have just started their final ascent into la la land prices and the parabolic state is yet to come. Flaherty was ‘gonned’ so this can happen. The people from China are going to be buying it all up now like you never seen…bidding prices up $100-200 thousand over asking. Anybody who tries to stop this….is ‘gonned.’

The music will stop….when? Not so soon….prices are going where nobody believes it will go. I know when it will stop…..so then I can be in Lewis book…’Short’

Seek and ye shall find…..nobody seeks…they all listen to pun-dits…pun…ditso!

Actually I started to warn people in 1988. In 1991 the market went into a 30% correction which was not reversed for 14 years. Sounds like you didn’t heed. — Garth

#18 OwlEyes on 06.17.14 at 7:24 pm

Readers might like this research piece by Tullett Prebon from last year. David Ricardo fans might not like.

http://www.tullettprebon.com/documents/strategyinsights/tpsi_009_perfect_storm_009.pdf

#19 Harbour on 06.17.14 at 7:30 pm

“I think I’ve missed eight years of 8-9% returns from some notable REITs

———————————————————–

Nope but you’ve missed them on a 500K box called a house that you can also live in.

End of story

#20 devore on 06.17.14 at 7:33 pm

#7 Son of Ponzi

Oh, sorry I ruffled your feathers.

Look beyond the branches and trees, and take in the view of the forest. It’s not about what or how much you know, it’s about knowing what you don’t know, and deferring to people who know what they are talking about, instead of spinning wild conspiracy theories based on your ignorance. Seriously, 99% of conspiracy theories can be trivially dispelled by asking someone even moderately knowledgeable in the subject. Not someone who claims they are, but someone who actually is.

This wasn’t normally a problem, these weirdos kept to themselves and each other, but the reach of the internet allows them to spread this nonsense to otherwise reasonable people. It used to be you could only hurt yourself, but now it’s a communicable disease.

#21 Mark on 06.17.14 at 7:39 pm

REITs are doomed as the long-term interest rate cycle turns. If you look at most of them, they have very little in terms of GAAP-compliant earnings. Indeed, the REIT promoters actually tell you to ignore the GAAP reconciliation and have created “other” metrics which they demand you use instead.

Since REITs and residential RE draw upon the same assets in their construction, maintenance, and financing, they’re highly correlated over the long term. Don’t let the REIT promoters fool you — Real Estate is real estate, and it will all suffer as overcapacity becomes increasingly severe. REITs may not disappear, but a few decades of low returns while active common stocks leave them in the dust is a likely scenario.

Usually you’re smart. What happened? — Garth

#22 Old Man on 06.17.14 at 7:42 pm

I have just experienced the ultimate control over real estate by the elite with a resort. One can go into their website and google has fashioned a private mapping just for them. Then go to the new and improved public mapping and all roads are closed off to drive near it and get this; the resort does not exist. Now that is power.

#23 Mark on 06.17.14 at 7:44 pm

“Cash flows will not diminish from major shopping centres where tenants come and go but traffic stays consistent. “

Are you kidding Garth? When disposable income is largely flushed away as higher mortgage financing costs take hold, that’s not going to have a major impact on the tenants in those places?

Some of the REITs’ practices I’ve seen are beyond ridiculous. Like refusing to negotiate with the ShoppersDrug chain for reduced rent when half the mall is empty (they found another location and relocated, the lucrative revenue stream forever lost!). Or in one case I’m familiar with, literally not replacing the floors in over 30 years and leaving the roof to leak.

Just look south to see what’s happened to the shopping malls. Canada immune to this? Of course not.

Major malls owned by major REITs will remain buoyant for a long time. I am sure you will have a decade to adjust if it becomes otherwise. You’re being a drama queen. — Garth

#24 Godth on 06.17.14 at 7:47 pm

#20 devore

The Brutal Logic of a Self-Seeking Empire
http://www.counterpunch.org/2014/06/17/is-open-ended-chaos-the-desired-us-israeli-aim-in-the-middle-east/

#25 Son of Ponzi on 06.17.14 at 7:55 pm

#15
“whom the gods want destroy, they first make mad”

#26 Mike T. on 06.17.14 at 7:59 pm

#13 Please and Thanks

this poster you refer to will inevitably get himself removed from the website once again

un-fortunately we will suffer through the process, but a clear pattern has been established indeed

#27 Son of Ponzi on 06.17.14 at 8:03 pm

About the pic.
Modern Terra Cotta Warrior?

#28 };-) aka Devil's Advocate on 06.17.14 at 8:08 pm

#149Snowboid on 06.17.14 at 7:25 pm

Gee Snowboid that was an AWESOME personal profile of the prolific, almighty, omniscient Devil’s Advocate. Although I did try find where I called anyone an “asshole” (yesterday) and could find none. (1) Even today when I wrote “Bullcrap” it was with great trepidation as, really, it’s just not something I’m inclined to do in writing especially in a public forum. Think it? Yes. Write it? Not so much. And so too do you stretch the truth on other descriptions of my participation on this blog.

Anyway I am noticing that I am spending too much, pro bono, time on this blog trying to save people like you from yourself. You definitely ain’t pickin’ up what I’m puttin’ down. So… there are things you can change and things you cannot. You be one of those that can’t be changed. Good luck with that.

Catcha on the flipside as they say.

(1) Quick search tip; go to the page you accuse me of doing so (Yesterdays blog). While holding down the “Ctrl” Key hit the “F” key. Type in the field that pops up the keyword you are looking for, in this case “asshole”. Let me know how you make out with that or anybody else that wants to verify Snowboids own integrity.

#29 TurnerNation on 06.17.14 at 8:09 pm

Whatever the economic question Dollarama is the answer. The poor, middle classes never had it so good.
Candy bars .77 vs. 1.49 elsewhere.
Name brand household and personal items for $1, 2 which I see at Loblaws (who owns Shoppers Drug Mart also) for $3-4.

Here’s looking at their stock at $91 again, perhaps a run to $100 this time or not.

#30 };-) aka Devil's Advocate on 06.17.14 at 8:13 pm

Snowboid:

I went back a number of days trying to find that “asshole” comment from me or anyone you might have mistaken for me. None… not a single “asshole” to be found. Of course I did not check the thesaurus for synonyms to the handle Snowboid.

#31 MikeS on 06.17.14 at 8:16 pm

Hey guys, inflation numbers are out in the US today. They continue to increase, which is expected. Their economy is doing pretty well all things considered.

Now here’s where it gets interesting. A few years back Paul Krugman built a model track how inflation and unemployment relate to the Fed’s key interest rate. The model suggested that the past few years rates should be about -7.5%. Negative rates, which aren’t really *that* possible, current EU stuff aside.

Except now look at what the equation suggests:

https://pbs.twimg.com/media/BqXJSHQCIAAucvJ.jpg

(I re-ran the model with today’s numbers)

They’ve stated they’re not planning on raising rates until 2015, and this gives further evidence of a coming rate hike.

#32 Realtor # 1 GTA on 06.17.14 at 8:21 pm

If you owned a house for the last decade in Canada, you probably made 70% on it. If you owned Canada’s largest REIT (RioCan), you scored 207%,

….. you still would of made more money buying a home

10% down on 500K =50K –70% of 500k = 350K
50K in a REIT @ 200% =103K

You forget buying, selling and financing costs. — Garth

#33 GTA Observer on 06.17.14 at 8:22 pm

Have prices really gone up, or has the AVERAGE price gone up in the largest markets?

In the 905 it appears that a lot of houses under $1M are sitting, sometimes dropping the list price, and certainly not listing for the increase trumpeted by the realtors. Prices seem more or less stuck where they have been for the past little while.

Whereas houses $1+, 2, even 3 million — buyers unconcerned with insurance – are selling. One or two of those a day will skew that average dramatically to the right. So yes, the average price is up, but what does it mean? With more houses sitting and waiting for buyers, watch this space.

#34 saskatoon on 06.17.14 at 8:32 pm

garth,

what’s the skinny on PRIVATE reits?

good/bad idea?

Often awful. — Garth

#35 Nemesis on 06.17.14 at 8:38 pm

#SomeREITsAreBetterThanOthers. #FingerLickin’Good!? #WhenTenanted. #TheDevilMadeDoThat. #WhenInDoubtConsultTheColonel. #HeHasAtLeastElevenSecretHerbs&Spices!

http://tinyurl.com/lsjarjm

#36 kiLLAbOY49 on 06.17.14 at 8:39 pm

It’s tough to make predictions, especially about the future.

#37 Hawk on 06.17.14 at 8:44 pm

Ok so here’s your fan mail.

“Paindu” = “chump” in Hindi/Urdu (although its slang jargon) ………no I have not made that up.

I don’t know what Paindu’s parents were thinking giving him a name like that, guess they were more Paindu than Paindu.

#38 Chickenlittle on 06.17.14 at 8:47 pm

Hey, Mark: How much money did you say you had by the time you were 30?

You are the same guy, right?

#39 Paul on 06.17.14 at 8:51 pm

“That’s when I told you to buy a mess of them. Hope you did. Big recovery since.”

except mine. :(

#40 Harbour on 06.17.14 at 9:02 pm

If you owned a house for the last decade in Canada, you probably made 70% on it. If you owned Canada’s largest REIT (RioCan), you scored 207%,

….. you still would of made more money buying a home

10% down on 500K =50K –70% of 500k = 350K
50K in a REIT @ 200% =103K

You forget buying, selling and financing costs. — Garth
………………………………………………………………………

You forgot the 40% capital gains tax on the REIT

Nobody in Canada pays 40% cap gains tax. — Garth

#41 lee on 06.17.14 at 9:06 pm

Should we keep reits under 10% of a portfolio?

As suggested previously, yes. — Garth

#42 Happy Renting on 06.17.14 at 9:11 pm

Thank you for the primer on REITs and for sharing some of your love letters/fan mail. You probably won’t get a message ending with hearts and kisses (à la Darlene) from Paindu when the tide turns… But if Dave and his coworkers throw you a party I think you should attend. :)

#43 Harry Wilson on 06.17.14 at 9:14 pm

re #5 Saskatchewan Skeptic

Hi Sask; do you know if the City of Regina government has anything to do with these ‘grants’? Have you ever heard of the grants outside the context of this house-flogger’s website? As they capitalize the word ‘City’ repeatedly, it makes it appear to be a City of Regina government initiative.

On their site, they refer to this money as “The City of Regina’s Affordable Housing Capital Contribution Grant” and other terms incorporating the phrase ‘City of Regina’, but I couldn’t find any reference to this grant on the City of Regina website. In fact, a Google search of the phrase (in quotes) “Affordable Housing Capital Contribution Grant” yields only one result, that being from lovelifeinregina.ca.

I’m not in Saskatchewan, nor am I looking for a townhouse, but I would still hate to see them using the City of Regina’s good name to move their merchandise. Since it’s a local call for you, maybe you should call your local councillor and mention what they’re doing.

Keep us posted!

#44 espressobob on 06.17.14 at 9:14 pm

REITs are a component of a diversified portfolio. Rebalancing deals with the rest.

Garth made a good call last year. Glad I listened.

#45 -=jwk=- on 06.17.14 at 9:25 pm

@#33 GTA
Have prices really gone up, or has the AVERAGE price gone up in the largest markets?

In the 905 it appears that a lot of houses under $1M are sitting, sometimes dropping the list price, and certainly not listing for the increase trumpeted by the realtors. Prices seem more or less stuck where they have been for the past little while.

In the GTA anything less than a million is snapped up instantly. Less than 600k, prepare for all out war. Less than 600k in good shape, be prepared to pay cash on the spot or forget it.

Garth says I suffer from ‘recency’. yeah, this has only been happening for a few *years* now. House around the corner – was beautiful and listed at 549. yeah, right. Realtor had the SOLD sign in his car and put it up after the open house. I happened to be walking the boys when he did this. I said “really?”. He said yes, keeps the calls down. I guess it went for 150 over asking.

#46 Nemesis on 06.17.14 at 9:29 pm

#TheColonel’sOthersSecrets… #”FreshChickenMakesTheBestChicken!” #It’sBetterDownUnder! #TennesseeFord&MinniePearlAgree! #TheColonelNeverForgotHisFirstTime #TheDevil&BudVarMadeMeDoThose

http://youtu.be/nuwAMztxL1E

http://youtu.be/hQSkjHysqKk

http://youtu.be/cF4ph_gKcpI

http://youtu.be/7pOEW6bGK1I

[NoteToGT: I’m going to be BannedForLife, right? Sorry about that… but, I took advantage of a brief intermission in OtherChores to whittle away at my ChickenStrips today. DamnMichelins! I may have to go back to DiabloRossoCorsas.]

#47 Harbour on 06.17.14 at 9:34 pm

Not only saving on capital gains tax but you also covered your accommodation for the last 8 years owning a home vs investing in a REIT

Apples and oranges. — Garth

#48 Harbour on 06.17.14 at 9:44 pm

Apples and oranges. — Garth
………………………………………………………..

You need a place to live, where else could a 25 to 35 year old be able to finance 95%, you ain’t doing it buying a REIT and you ain’t paying capital gains on your profits.

Buying a house has blown away any REIT investment.

End of story

Hardly. A one-asset strategy seldom works. — Garth

#49 Shawn on 06.17.14 at 9:51 pm

Special Accounting for REITs?

Mark at 21 and 23 mentioned some worries about REITs

they have very little in terms of GAAP-compliant earnings.

Or in one case I’m familiar with, literally not replacing the floors in over 30 years and leaving the roof to leak.

*******************************************
Some of these issues have long mystified me.

REITs steadfastly pretend that depreciation is not an expense (and IFRS accounting agrees with that). There is no money to fix floors and roofs since all cash flow was considered income and distributed out.

New share units are constantly issued when money is needed. Many of them pay out a big dividend and then try to get as much back as possible through DRIPs. Sucking a and blowing at the same time.

Constantly lower interest rates and expansion has covered a multitude of sins.

REITS have done very well.

Long term government bonds have done well and are now demonstrably horrible investments. (i.e 3% annually if held to maturity in a decade or three).

REITS share some of the same features. Difficult to deliver 8% returns while investing at cap rates of 6%. And where the cap rate itself may make no provision for major capital repairs.

To each his own but I am not comfortable with certain aspects of REITs and have avoided them. So far that does not look to have been a wise move, but time will tell if it is a good idea to avoid as of today.

Actually, my first ever equity investment was the Canadian Property Investors Trust a REIT-like thing which owned among other things the Fort Mall in Ft. Saskatchewan, Alberta and had headquarters (or at least an office) on Spring Garden Road Halifax. I bought in around 1982 and several years later it was wound up for about 50 cents on the dollar as Alberta was crushed in those days. They had assured that they had long-term tenants and leases…

That is not why I avoid REITs, but it was a painful lesson.

#50 the jaguar on 06.17.14 at 9:53 pm

Garth:
7:46. Just arrived home to my area near the river in the city of Calgary. Water is shut off in the building and there are “fresh water trucks” outside lining the streets. City of Calgary official posted signs on the building advising us how to ‘tough it out’. (use the water trucks and if you need to flush dump water down the toilets)
Lots of expensive retrofit stuff done these past 12 months along the riverway to offset damage from last year and fix up the storm sewer issues.
Been raining for a day or so now. Media keeps trying to calm fears. Noted the bicycle paths under some of the inner city bridges are almost submerged by the river water. Friends in Banff tell me the snow pack is not down yet. Supposed to rain tomorrow again. I wonder what some of those people who didn’t take the government buyout are thinking tonight.
Anybody want to buy some real estate on the flood plain on which the entire downtown of Calgary is built upon? Mercy. Sure glad I am sitting on cash and down own in this neighbourhood. Can you Fed Ex Bandit out in case it gets a little lonesome here, Garth?

#51 Alex on 06.17.14 at 9:56 pm

REIT’s are great but if your young and you believe the US is not Rome then put that $$$ on Bank of America. 200% gain since 2011 and another 150% gain by 2017. Once in lifetime opportunity for us Millanials that don’t have the options that we’re squander by these Boomers that are still in debt with a mortgage when every last one of them should have no liquidity problems.

#52 Patient on 06.17.14 at 10:01 pm

REITs are well aware of their debt risks. The good ones have planned their maturity dates on their debt so in each year only a small portion of their debt matures. This way they are protected if interests creep up in any given year.

#53 small steps on 06.17.14 at 10:03 pm

Stuck in Condo Land
http://www.torontolife.com/informer/toronto-real-estate/2014/06/11/stuck-in-condoland/

#54 Smoking Man on 06.17.14 at 10:04 pm

I either have the worced cooled ever, or Lung Cancer..

If it’s a cooled, it will pass, if it’s lung cancer..

A beauty of a morphine ride to the end…

Anyway.. I will either get better, with earth shattering posts, or, I’ll get supper high, with earth shattering posts..

Stop emailing me dogs, not losing interest, just supper weak..

#55 Nemesis on 06.17.14 at 10:06 pm

#BonusChickenStuff. #HopWilson&Friends. #NickPark:ChickenRun.

http://youtu.be/BVIMTevvE_0

http://youtu.be/AImXP2gQKu0

[NoteToGT: As if I had a choice…]

#56 Willdaman on 06.17.14 at 10:15 pm

Not only saving on capital gains tax but you also covered your accommodation for the last 8 years owning a home vs investing in a REIT

Apples and oranges. — Garth
———————

Yep, Garth is right, comparing an investment in REITs to buying a home is apples and oranges….but wait minute, who was the one that made the comparison in the first place again?

Hope this doesn’t devolve into a “buy vs rent in last ten years while investing in REITS” shouting match with pages of calculations.

#57 Shawn on 06.17.14 at 10:38 pm

No Comparison?

Not only saving on capital gains tax but you also covered your accommodation for the last 8 years owning a home vs investing in a REIT

Apples and oranges. — Garth

******************************************

Exactly, so why say a REIT did better than investing in a house while ignoring the “dividend” of rent or a place to live on the house. Then there is the difference in leverage. Not comparable. Apples and Oranges, exactly.

“If you owned a house for the last decade in Canada, you probably made 70% on it. If you owned Canada’s largest REIT (RioCan), you scored 207%…” Apples and Oranges indeed!

But no argument, REITs have done VERY well!!

#58 Nemesis on 06.17.14 at 10:40 pm

#TelstarSabbaticals. #BackSoon. #Saturday?

http://youtu.be/2Ir1Es4ZjN8

http://youtu.be/WPDvsLSnUGc

#59 Jack Henning on 06.17.14 at 10:46 pm

Property taxes, gas prices, heating costs, electricity costs, water bills, home, auto and all types of insurance, materials and labor costs for car, houses etc., medical and healthcare costs, food and everything else we need and have to pay for is going up.

It will always go up and deflation is only in peoples pay, incomes, assets and investments coming soon.

If you read what I stated, you would have no responded in such a rash and inexcusable way.

#60 Ralph Cramdown on 06.17.14 at 10:53 pm

Thanks for the postcard, Nemesis. I made an annualized 55% on that one. Finger licking good, indeed.

#61 TurnerNation on 06.17.14 at 10:57 pm

We beat the lefties, Nimbys? I’m not really a rightee but…if you don’t like pipelines feel free to disconnect the Nat Gas supply from your abode and stop pumping gas. No stone age here.

(Else ‘They took our jobs; Derker der’)

Federal gov’t approves Northern Gateway pipeline
CTV News – 14 minutes ago

The federal government has approved Enbridge’s contentious Northern Gateway pipeline project, contingent on the same 209 conditions recommended by the Joint Review Panel.

#62 Jack Henning on 06.17.14 at 10:58 pm

Northern Gateway pipeline approved. This gives shivers to the green energy, environmental wackos especially those in Ontario and BC.

The other green energy, environment wacko president in the U.S. has just missed the last real opportunity to approve the keystone pipeline.

Now, Asia is going to get our oil. Ask all the people in Ontario and B.C. that live near wind turbines with many health problems. They hate that green energy crap.

Electricity bills up over 100% in Ontario in 11 years and another 50% over the next 4 years. Wait until you guys get your property assessments.

You would wish you were never born in Ontario and BC. Suckers!

#63 Bob Rice on 06.17.14 at 11:08 pm

“A housing correction in Canada will not crash the economy or plunge the country into a riveting recession ”

it will in toronto

#64 Omar on 06.17.14 at 11:10 pm

I’m a little late to your blog but have been avidly reading for the past few weeks.

What is your prediction ala Canadian REITs? With the way interest rates are, would REIT prices not go down with a, potential, increase in the interest rates.

On the other hand, with the markets rising as they are coupled with the threat of a possible correction, I feel, the Central Banks will be forced to keep rates low (to stimulate the economy plus making it easier to refinance their debt).

As always, I am not seeing the full picture and would appreciate your (and the forums) input into REIT allocation (Canadian and US).

#65 Pope Nosty666vkVlad the Snugglebombed on 06.17.14 at 11:15 pm

#14 eddy on 06.17.14 at 7:16 pm — “I hope so..a name with built in nostalgia…”

Speaking of nostalgia, a newer, jazzier and burning version of Light My Fire.

My investments (including REITs) are doing nicely nicely. Thanks Garth!
*
Re: ISIS — this explains it a little better, which leads Iran offering to help Iraq. Yellen and Carney Birds of a feather . . . So much for Farmer’s Markets in the US. A plethora of MH370 stuff.

#66 Bob Rice on 06.17.14 at 11:19 pm

You are way off… I live in the ‘905’ and in a prime area (King Township). anything over 850 K will sit unless it’s underpriced.. under 850, it’ll move if priced correctly… stuff over 900 doesn’t move… 1 mill? Sits for 2 years…

#67 Nemesis on 06.17.14 at 11:19 pm

#DurkaDurka,Ralph. #IGetAround.

http://youtu.be/DIlG9aSMCpg

http://youtu.be/MDIBMaCTwFw

TeeHee!

#68 dave on 06.17.14 at 11:20 pm

The example given comparing a house investment to an investment in a REIT is incorrect. Sure the house may have ‘only’ appreciated in value by 70% over the last decade – what this example fails to show is that in addition to the appreciation there is also income that the property returns to the investor each year. That’s the major error in the example given. The other error is not identifying how a leveraged purchase of the house increases the cash-on-cash return of the income property investment. Don’t even get me started on the tax advantages of rental properties….such as: amortizing the property value to reduce/eliminate taxes owing or the powerfull effect of implementing a cash-flow dam strategy to reduse your non-tax deductible debt.

An income property (purchased at a reasonable valuation) will almost always provide a higher return then any REIT.

However Garth brings up many good points that need to be factored into your risk tolerance for making a decision on purchasing an income property. They are a long term strategy with high transaction costs that can be very illiquid and most importantly – owning an income property is a job. So part of your higher return on investment is thanks in part to the time you allocate to managing the property. It’s a business.

#69 Drunken stupor on 06.17.14 at 11:21 pm

Smoking man, you might hv a chest infection. Some of them dont show on xray. Try Echinacea&goldseal tincture in healthstore. 2-3 times a day works magic altho tastes awful…

#70 james on 06.17.14 at 11:25 pm

#61 TurnerNation and #62 Jack Henning

Can you knock off the political rants. This is a real estate blog. Keep it on that topic only, thanks.

#71 Tony on 06.17.14 at 11:35 pm

Re: #53 small steps on 06.17.14 at 10:03 pm

The author of the article Philip Preville seems to be misinformed about the birth rate in downtown Toronto. It’s actually falling not rising.

#72 Larry1 on 06.17.14 at 11:38 pm

How would house-lusters’ and REITers’ price exposure to interest rates (modified duration) compare to that of say an S&P500 EFT holder?

#73 Spectacle on 06.17.14 at 11:43 pm

Good read tonight Garth, thanks.

#22 Old Man on 06.17.14 at 7:42 pm
I have just experienced the ultimate control over real estate by the elite……….. google has fashioned a private mapping just for them. ……Now that is power.

Im interested to view more of this geographic / real estate related topic. It fits very nicely with the financial disruption/corruption of the “Agenda-21 ” topics.

Care to share a link or something Wise OM?

Thanks

#74 Teacher's Ass-istant on 06.17.14 at 11:43 pm

“#30 };-) aka Devil’s Advocate on 06.17.14 at 8:13 pm
Snowboid:

I went back a number of days trying to find that “asshole” comment from me or anyone you might have mistaken for me. None… not a single “asshole” to be found. Of course I did not check the thesaurus for synonyms to the handle Snowboid.”

Maybe walk into your bathroom and look in the mirror?

#75 Tony on 06.17.14 at 11:50 pm

Re: #17 Tony on 06.17.14 at 7:21 pm

Funny you took the first line that I wrote about 16 months ago on this blog changed it slightly “I remember Garth as writer for the Toronto Sun” and added total malarkey to it. The opposite of what you state will actually happen whomever you are.

#76 Hulot on 06.17.14 at 11:59 pm

There will definitely be a crash in RE in the future. Only we will have already died of mold from living in our basements before it actually happens.

#77 For those about to flop... on 06.17.14 at 11:59 pm

#54 Smoking man.Maybe while your tucked up in bed you can cuddle up with a dictionary and learn how to spell!

#78 KommyKim on 06.18.14 at 12:11 am

RE: #34 saskatoon on 06.17.14 at 8:32 pm
garth,
what’s the skinny on PRIVATE reits?

You will be skinny when you lose all your money and cannot afford to eat. Usually more risk and illiquidity with a private vs public offerings. Ask anyone who invested in League.

#79 Jon on 06.18.14 at 12:17 am

money is still easy to get i asked for a 5000 loan to make a purchase and my bank, Bmo, suggested not to bother but said hey why not get a 60k line of credit and we will give a lower rate. This is nuts how easy it is to get money i never ever carry any debt for more than a few months and they wanted me to sign up for 60k!

#80 NotAGreaterFool on 06.18.14 at 12:18 am

Garth – Given what we know now (and what is reported in MSM), I am wondering if your prediction for a long thaw across Canada has been modified? If so, how?

#81 KommyKim on 06.18.14 at 12:29 am

RE: #61 TurnerNation on 06.17.14 at 10:57 pm
We beat the lefties, Nimbys? I’m not really a rightee but…if you don’t like pipelines feel free to disconnect the Nat Gas supply from your abode and stop pumping gas. No stone age here.
(Else ‘They took our jobs; Derker der’)
Federal gov’t approves Northern Gateway pipeline

“stop pumping gas” you say? The Northern Gateway pipeline will supply ZERO gas or diesel to North America. That heavy oil is destined for Asian markets. In fact it’s very existence will RAISE fuel prices in North America because it will fetch higher prices over seas and North American refineries will have to compete for it at a higher price than they now pay. Enjoy the bump at the pump.

#82 Mark on 06.18.14 at 12:37 am

“Have prices really gone up, or has the AVERAGE price gone up in the largest markets?”

Price have actually gone DOWN in Vancouver, Calgary, and Toronto. But what the Realtors are transacting in has changed significantly, the result of the CMHC changes.

The average home owner reads the newspapers, and the various other Realtor-generated propaganda and basically just shakes their head. At least in Regina, the local Realtors were honest enough to warn that the ‘average’ numbers had been so significantly skewed by a shift in the “sales mix” that nobody should just blindly assume that their individual house went up in value.

This sort of phenomena was seen in California circa 2006-2008, after the housing market peaked and was well on its way down.

#83 Joe2.0 on 06.18.14 at 12:41 am

Its tough for the sheeple when the mans preaching material lust.

Called TD today re a banking question.

The on hold ad campain was massaging my want or as they put it, deserve mechanism.

A sultry voice whispering ear candy and sweet dreams….come on use the equity in your house to do a reno or buy that new car or go on that trip or get a boat or a bike…

Houses always go up don’t be a wimp.

Sheeple are doomed it’s called a system for a reason.

#84 Waterloo Resident on 06.18.14 at 1:01 am

All that quantitative easing the U.S. government created simply went into the balance sheets of the banks. The banks don’t want to hold onto cash forever, so they are now pumping it into stocks. This is not only pushing stocks higher, it is also stoking inflation, and that will push interest rates higher.

So the thing to remember here is that stocks will double in value and interest rates in the U.S. will double in size, and when that happens our real estate will be even less affordable to all the Millennials who want to buy houses just like their parents have.

So if you have any cash; buy stock, sell bonds, sell houses, rent.

House prices in Toronto have such MASSIVE upwards momentum that it will take at least a full 1% increase in rates to simply make prices level off, so prices will probably keep going up for another 2 or 3 years, simply on the momentum alone.
———-

Northern Gateway pipeline approved: GREAT NEWS! Who cares which pipeline it is, any pipeline is better than no pipeline.

#85 Flawed on 06.18.14 at 1:20 am

King Harpo is really going to be screwed when ET energy technology is finally released to the world. Anyone who believes ETs don’t exist needs to get a for real reality check.

https://www.youtube.com/watch?v=n156EREgzHM

#86 Nathan on 06.18.14 at 1:21 am

Personally I prefer a globally diversified portfolio of index funds (albeit with a moderate small/value tilt) rather than worrying about REITs or physical investment property. I have yet to see convincing evidence that overweighting REITs compared to their market cap provides any discernible long-term, risk-adjusted benefit. That said, holding a bit certainly wouldn’t be a bad idea, but more than 5 or 10% of a portfolio just looks like chasing returns.

Have to say the same about preferred shares, although I know Garth is a big fan. In a taxable account, a small allotment can make sense. (I own shares of MAPF in a taxable account.) But if you’re just buying them for the attractive looking yields, especially in a tax-free account, you have to realize that yield is proportional to risk. (As a rule of thumb, a portfolio of Canadian preferreds tends to act roughly like 2/3 bonds mixed with 1/3 stocks.) The likelihood of a large drop is small, but certainly not insignificant.

Again, if you’re using them in moderation (say no more than 20% of a portfolio) for the tax benefit, that makes sense. In an RRSP or TFSA though, a simple portfolio of index funds mixed with a GIC ladder or bond fund to meet your risk tolerance (canadiancouchpotato style) is a heck of a lot simpler, safer, and in the long term, likely to outperform.

#87 Tom from Mississauga on 06.18.14 at 1:24 am

MST.UN is a great REIT. Most of the property is in Texas which is having a jobs bonanza.
NPR.UN will likely continue to raise its distribution as the new units they’re building are occupied.
AX.UN I also own but not excited about.
Crombie, don’t know that one, have to read up.

#88 sheane wallace on 06.18.14 at 2:01 am

reits in north america will do great in nominal terms, poorly in real terms. with this debt this part of the world is done.

look for raits in developing countries – turkey, brics, even europe where economy actually is thriving.

#89 800 RMK on 06.18.14 at 2:15 am

To #5 poster above.

I hope your joking, don’t waste you’re money on one of those oak park units in the city that rhymes with fun. I rent a similar unit built buy Oak Park and I feel bad for anyone buying one of these units. These units were built by Complete hacks . Poor parging job, bad grading and back fill along foundation, plumbing job and drywall both brutal. I ve helped build two houses and am by know means a tradesman and I would have done a far better job on plumbing and drywall then what the builder did. Oh and did I mention two years old and doors jams are nowhere near square do too foundation shifting.

#90 rob on 06.18.14 at 4:38 am

Thank you Garth, rebalanced into REITS last year, very very happy, and personally as all my dividends are being re-invested I prefer flat to declining prices.

BUT your calling of correction was a bit off, sold when I shouldn’t of, but it was a great learning lesson, buy cheap and don’t sell

#91 Big John on 06.18.14 at 5:20 am

Garth : But, hey, what about Dave’s question: when the dirt flies and real estate does correct, with Paindu moaning and gnashing, will REITS also be hit?

Of course not. My office building is not going to empty of bankers and lawyers because the residential real estate starts to descend, or stays comatose for years. Cash flows will not diminish from major shopping centres where tenants come and go but traffic stays consistent. A housing correction in Canada will not crash the economy or plunge the country into a riveting recession – just ruin the lives of people silly enough to stuff all of their net worth in one asset. In fact, when real estate stops booming, renters stop buying, and this is great news for REITs that own all those thousands of apartment units.
——————————-

All true, but this doesn’t stop REITS getting crushed when interest rates rise, because they behave like long term bonds. They used to (2004) yield 10%, now they yield 5%, that’s why they doubled. Interest rates fell. If rates rise (or are expected to rise) again, REITS fall, just like they did last year.

#92 neo on 06.18.14 at 6:13 am

Effectively coordinated central bank monetary and fiscal policy only started after 2008. But nice try. — Garth

Nice try yourself. So the central bank policy had nothing to do with the Great Depression? They came into existence in 1913. Shortly thereafter we had the roaring 20′s and then the Depression of the 30′s. Even since then we have had boom/bust credit cycles that have been facilitated by the Federal Reserve.

What does “effectively coordinated” even mean other than going from a free market to a centrally planned one?

Just what it says. — Garth

#93 bobbytwoshoes on 06.18.14 at 6:15 am

Garth

You shouldn’t try to predict the occurrence and the date of the housing correction … be like Buffet and his prediction on the demise of the internet stocks … you know it will happen but you don’t know when it will happen.

You mean it won’t happen on October 9th? — Garth

#94 Jack Henning on 06.18.14 at 6:30 am

James has no original thoughts a robot because he or she has nothing else to say but the same old thing over and over.

He lives in a vacuum and the red robbers don’t impact his financial and other aspects of his or her life!

Money morons and all types of morons are abound.

#95 Jack Henning on 06.18.14 at 6:34 am

Correction to my last post above. James has no original thoughts and is a robot…….

#96 The real Kip on 06.18.14 at 6:58 am

Garth. You actually make a convincing argument in favour of RIET’s. If I didn’t have everything invested in my own house I’d consider it.

#97 tell it like it is on 06.18.14 at 7:45 am

you fail to mention that people buy houses with 5-10-15% down. would you have margined your REITS to the same extent? i think not… since you would have totally been wiped out in the 2008 collapse.

someone who bought a $400,000 house with 5% down, and is up $280,000 on a $20,000 down payment.

Extreme leverage, however, works both ways. When house prices correct, the severely indebted are squished. Do not ignore risk. — Garth

#98 Mr. Frugal on 06.18.14 at 7:59 am

The question isn’t whether you need a house or not; it’s the price which is the big question. Some people try to rationalize an expensive luxury house purchase by using the argument that it’s going to appreciate forever. Well, so do rare cars. So, based on this logic, I’ve decided to buy a 1937 Mercedes roadster. After all, I do need a car to get to work and I can’t possible be expected to take transit!

#99 tell it like it is on 06.18.14 at 8:59 am

Extreme leverage, however, works both ways. When house prices correct, the severely indebted are squished. Do not ignore risk. — Garth
___________________________________________

there are no margin calls with owning houses, or rental properties. unlike REITS.

and there is no risk any more, central banks will just print as much money and keep rates at 0% for as long as they wish.

What margin call? As for rates, dream on. — Garth

#100 Patricia on 06.18.14 at 9:03 am

Garth you are the only person in Canada with a brain and foresight. You should be our leader. And you look very snappy in that photo of yourself in the black leather jacket.

Hope you get over feeling fragile. We all need you strong.

#101 Shawn on 06.18.14 at 9:10 am

Risk Adjusted Return = Nonsense?

Nathan at 86 mentions Risk Adjusted Returns on REITs, saying:

I have yet to see convincing evidence that overweighting REITs compared to their market cap provides any discernible long-term, risk-adjusted benefit.

*******************************************
The concept of adjusting for risk may be useful when it is future expected returns that are discussed.

But it is often applied to past returns where the return has already happened and the risk is gone and that seems like nonsense.

Basically someone in a low risk portfolio with a low return looks at a more aggressive investors who made 12% on average for a decade and sniffs that the 12% is lower after it is risk adjusted. Really? It has to be adjusted for risk that can no longer happen given that this is a past return?

When equities returned 0% for a decade nobody adjusted them UP for the risk that they could have been higher. So when someone makes 12% in equities why adjust that down? (In some cases they may have sold those stocks by now)

The whole concept of risk-adjusted returns is deeply flawed in my opinion.

#102 Ralph Cramdown on 06.18.14 at 9:45 am

#92 neo — “So the central bank policy had nothing to do with the Great Depression? They came into existence in 1913. Shortly thereafter we had the roaring 20′s and then the Depression of the 30′s. Even since then we have had boom/bust credit cycles that have been facilitated by the Federal Reserve.”

The sad thing about Fed bashers is that they are either completely ignorant of 19th century gold-standard pre-Fed economic conditions, or they think everyone else is. Here’s USA real per-capita GDP growth from 1890 to 1910. If you feel nauseous while examining these numbers, please signal the attendant to stop the rollercoaster.

Year | Level | YoY change
1890 | 3392 | 1.86%
1891 | 3467 | 2.21%
1892 | 3728 | 7.52%
1893 | 3478 | -6.70%
1894 | 3314 | -4.71%
1895 | 3644 | 9.95%
1896 | 3504 | -3.84%
1897 | 3769 | 7.56%
1898 | 3780 | 0.29%
1899 | 4051 | 7.16%
1900 | 4091 | 0.98%
1901 | 4464 | 9.11%
1902 | 4421 | -0.96%
1903 | 4551 | 2.94%
1904 | 4410 | -3.09%
1905 | 4642 | 5.26%
1906 | 5079 | 9.41%
1907 | 5065 | -0.27%
1908 | 4561 | -9.95%
1909 | 5017 | 9.99%
1910 | 4964 | -1.05%

http://socialdemocracy21stcentury.blogspot.ca/2012/09/us-real-per-capita-gdp-from-18702001.html

#103 calgaryPhantom on 06.18.14 at 9:45 am

REIT prices factored in the QE tapering, last time the dropped. There is another drop coming, when feds talk seriously about raising interest rates.

Don’t count on it. Check the bond market, if you know how. — Garth

#104 Herb on 06.18.14 at 9:46 am

#94 Jack Henning,

“… has nothing else to say but the same old thing over and over.”

Great literary criticism of your own comments spreading the Neanderthal Conservative doctrine already seen under many handles.

Are you making like a moron because you get paid to do so, or because it comes naturally?

#105 Herb on 06.18.14 at 9:57 am

#81 KommyKim,

Applause! “Eastern bastards” will again be invited to “freeze in the dark” or pay “world” prices.

#106 Ray Skunk on 06.18.14 at 10:09 am

Another side-effect of overpriced homes, being mortgaged to the hilt, and not having any cash for upkeep?

http://news.nationalpost.com/2014/06/17/enraged-flower-lovers-losing-battle-to-keep-plant-stealers-at-bay/

#107 Big Brother on 06.18.14 at 10:12 am

#54 Smoking Man on 06.17.14 at 10:04 pm
You are so predictable Smoking Man, so your weekend casino jaunt will still happen.
We know who you are too “H.T” ha…..

#108 rob on 06.18.14 at 10:13 am

Canadian REIT

bit dated bur excellent information on what to look for in a REIT

#109 rob on 06.18.14 at 10:14 am

http://canadianreit.ca

#110 Ralph Cramdown on 06.18.14 at 10:31 am

#101 Shawn — “The whole concept of risk-adjusted returns is deeply flawed in my opinion.”

The concept isn’t flawed at all. It’s pretty easy to construct a portfolio that will return decent numbers that don’t fluctuate much nine years out of ten, but lose 50% every once in a while. For example, buy short investment grade bonds and write a lot of out of the money puts on the S&P.

Or maybe you hold a portfolio of highly leveraged energy producers in a time of high or rising energy prices. You win the bet, but what would have happened had oil prices dropped?

There’s many a portfolio manager who turned in good numbers for a long period, but then completely blew up. Investors want to measure how to avoid those. And capital allocators for leveraged investment firms need to know how much capital to allocate to a given portfolio to ensure a 99% chance that it won’t get a margin call tomorrow and have to sell at a low.

The problem with many of the methods, though, is their underlying math, which is flawed. They count ‘good’ volatility (i.e. wins) equally with bad, and assume price changes are random and distributed normally, even though ‘fat tails’ were proven decades ago.

It’s still better than nothing.

#111 calgaryPhantom on 06.18.14 at 10:41 am

REIT prices factored in the QE tapering, last time the dropped. There is another drop coming, when feds talk seriously about raising interest rates.

Don’t count on it. Check the bond market, if you know how. — Garth
—————————————————————–

What is so extra ordinary about Bond market? Like REIT and PREFs it too took an exagurated beating, on the word “taper”, last year. All three have not recovered to their original values.

When the interest rate hike talks get some serious air, all these will fall again. That would be the time to load more of these.

#112 Cautious on 06.18.14 at 10:45 am

Good read: Four investment ‘megatrends’ to chart the next decade

http://www.afr.com/p/four_investment_megatrends_to_chart_kzfptWAiqJApGq2tntdb5I

#113 shawn on 06.18.14 at 10:56 am

Risk Adjusted Returns = Deeply Flawed

The idea that, for example, a risky 10% EXPECTED return on even a broad portfolio of equities (let alone on one stock) is somehow equivalent to a say a 4% certain return on a government bond after accounting for risk is sheer nonsense. (Capital markets Line, Security Markets Line, CAPM)

There is NOTHING equivalent about it. The risk cannot actually even be measured accurately.

All that risk adjusted returns do is work with the average market required EXPECTED compensation for the extra risk.

ACTUAL returns on equities (especially over shorter periods) are by definition unknown and so cannot be adjusted to equal a certain known return.

Any individual’s required compensation for risk can be vastly different than the market average.

Investors get rich by ACCEPTING risk and the usual high EXCPECTED and and ACTUAL compensation that results in the long term.

Investors that put too much attention on avoiding all risks will never become truly rich through investing.

Rather than avoid risk learn how and arange your life to live with it.

Do avoid stupid risks like investing in poor companies or at obvious bubble prices.

#114 Vamanos Pest on 06.18.14 at 11:10 am

#101 Shawn

I respectfully disagree on risk adjusted returns. It is an invaluable measure of performance of one’s portfolio. The way I think of it is: take 2 (pretend) portfolios, one very aggressive and high risk, while the other is far less aggressive and much less risk. Now assume these portfolios both returned %5 last year. Without adjusting for the risk of these investments, they would look equivalent in their performance. It’s only after the risk adjustment that the safer portfolio is seen to outperform (despite an equal return).
I follow your comments and I know you do quite well with your portfolio, so not giving advice at all, but I think risk adjustment is an important thing to look at when evaluating the performance of an investment portfolio, strategy, or security.

#115 Catalyst on 06.18.14 at 11:15 am

I see the big cheese rolling into Calloway REITS head office on his helocopter daily. Not even the banks brass are rolling this deep. When he downsizes to a ferrari I will take it as the time to sell.

#116 Randis on 06.18.14 at 11:19 am

Realtor #1 @ 32

You are wrong. You compared apple to orange.

The real estate purchase in your example is leveraged 1:9 (i.e. 10% down with the 50k), which magnifies return

The REIT investment in your example is not.

If you do the math properly and compare them with same leverage (i.e. 25% down with the 50k for RE; margin account of 1:3 for the REIT, hence making both cases a LTV of 75%) then you will see the REITS > RE.

#117 rosie "moving forward" in the knowledge that, "this won't end well" on 06.18.14 at 11:32 am

I always found math rather difficult. All those formulas to remember. This looks much simpler.

http://www.biv.com/article/20140604/BIV0111/140609973/do-the-math-vancouver-house-prices-will-reach-7-million

#118 Son of Ponzi on 06.18.14 at 11:39 am

#110

The problem with many of the methods, though, is their underlying math, which is flawed. They count ‘good’ volatility (i.e. wins) equally with bad, and assume price changes are random and distributed normally, even though ‘fat tails’ were proven decades ago.
——————
Well said.
In addition we are only humans, prone to emotional reactions.
Irrational Exhuberance comes to mind.

#119 Old Man on 06.18.14 at 11:46 am

Northern Gateway sounds like a movie script for a restricted horror flick. It will never be built and if such occurs years into the future who benefits? Even China is saying dah we might not need it years from now as other sources will be cheaper and we are switching to natural gas now. The worse case scenario is that Asia will say costs too much, and said dirty oil will be flogged for a net loss. Oh my, the horror of it all!

#120 Holy Crap Wheres The Tylenol on 06.18.14 at 11:59 am

#119 Old Man on 06.18.14 at 11:46 am
Northern Gateway sounds like a movie script for a restricted horror flick. It will never be built and if such occurs years into the future who benefits? Even China is saying dah we might not need it years from now as other sources will be cheaper and we are switching to natural gas now. The worse case scenario is that Asia will say costs too much, and said dirty oil will be flogged for a net loss. Oh my, the horror of it all!
_____________________________________________

Well a horror flick but not a comedy, it will get built, we will ship oil east, we will make money. Asia has an insatiable appetite when it booms and as always oils will increase in price as a function of supply and demand. Right now is the time to build and be ready when demand is high. Build for the future!

#121 TurnerNation on 06.18.14 at 12:00 pm

KommieKim, how long have you been ‘bleating your strife’? ;)

I am pro environment recycling everthing I am able, and riding the Proletariat Chariot (transit) as have no car.

But this golden pipeline means jobs for twerking families!! More 80″ tee-vees and jacked F350s for all.

#122 James on 06.18.14 at 12:01 pm

Extreme leverage, however, works both ways. When house prices correct, the severely indebted are squished. Do not ignore risk. — Garth

Sure but for those who bought in 2009 are have nothing to worry about. The consensus is a soft landing in RE with 10% correction on average. Btw, price are up 7% year or year in Toronto. What is the fuss.

If stocks were 7% higher and at record levels, you’d run away. When houses represent the same risk, you embrace. As I said, do not ignore risk. — Garth

#123 Ralph Cramdown on 06.18.14 at 12:15 pm

#115 Catalyst — “I see the big cheese rolling into Calloway REITS head office on his helocopter daily.”

Here’s my favourite REIT head office (not favourite REIT, just head office). On the 2nd floor, over the store. A larger property company wants to take them over, and part of the pitch to minority investors complains that “Head office isn’t ‘corporate-style’ enough.”

https://www.google.ca/maps/@43.709535,-79.384585,3a,75y,164.92h,91.31t/data=!3m4!1e1!3m2!1s2U0TbPoBtFb6dz3DLVvFeg!2e0

#124 Shawn on 06.18.14 at 12:21 pm

Risk Adjusted Returns

Vamanos Pest at 114 responded to me:

It’s only after the risk adjustment that the safer portfolio is seen to outperform (despite an equal return).

*****************************************

Sure, the concept has merit when considering future returns from the two portfolios you mention.

But it is simply not mathematically possible to “accurately” adjust for the return. And even the esitamtes are really not worth much.

As far as past returns, they have been made and the risk is gone.

The main message is more people should learn to live with and embrace efficient and rational risks.

Adjusted returns as done in Finance is an academic pipe dream and mostly it’s nonsense. Based on flawed assumptions of normal distributions and efficient markets. Does more harm than good. Also it is vastly misinterpreted by practioners ALL the time.

#125 Old Man on 06.18.14 at 12:34 pm

#120 Holy Crap – you are wrong because you have no idea of world oil reserves which are massive. Now if a boom comes in your words oil will increase in price as a function of supply and demand. In Canada its all a matter of costing and dirty oil along with royalty grabs and high expenses will meet international competition. Now with higher oil prices those hidden reserves will come out to meet the demand and Australia is sitting on a potential $22 trillion for example; not to mention the other finds during the past few years.

#126 Cici on 06.18.14 at 12:42 pm

#119 Old Man

You are absolutely right. What a hoax this Northern Gateway pipeline is…if indeed it even gets built. Canada is not an energy superpower and China can already get all of its oil much more easily from Australia, Russia, and the Middle East. All this pipeline will do (if anything) is create pseudo jobs for a couple of years while they pay people to work on the logistics of a project that may not come to fruition, but if it does actually ever see the light of day, it will jack up the price of gas for everyone in the country, thereby contributing to more inflation and greater manufacturing and transport expenses, costing companies more profits and Canadians more generalized job losses. Not to mention the almost-certain environmental damage off the West Coast (and tourism losses) if we can count on the big players’ track records.

But if it’s good for a few fat Cats in Calgary, it must be good for the rest of the country, right?…even if high gas prices suck the life out of the real economy–you know, the other 97% or so of GDP.

#127 Shawn on 06.18.14 at 12:47 pm

Goals and Risks

We all have different goals and risk capacities and risk tolerances.

My goal is to get stinkin’ rich and I have a high financial capacity for risk and have learned to increase my emotional tolerance for risk.

A retiree living on a portfolio has a vastly different situation.

In either case you can’t eat from risk adjusted returns, just from the actuals.

If you are still deep in the savings phase of life and want to get stinkin’ rich you need to develop a high risk capacity (steady income and pension outside your portfolio is ideal) and learn to increase your risk tolerance through education and practice. Just like riding a roller coaster, do it and live and you are willing to try again.

Government bonds and GICs and “high” interest savings accounts are the equivalent of the kiddie rides. But sometimes that is appropriate.

#128 Jack Henning on 06.18.14 at 12:57 pm

To Herb #104

I know blood suckers like you that steal taxpayers money using the bully called public sector unions.

The real morons like you are people that believe that this is sustainable for the next few years and decades.

It is no coincidence that the color of socialism and communism is red. Just like the reds everywhere in Canada.

Cannibals and parasites die when they can’t eat anyone else. Don’t get too full!

That just got you banned. — Garth

#129 Saskatchewan Skeptic on 06.18.14 at 1:12 pm

#43 Harry Wilson

I received an email back after submitting a case and the grant falls under the City of Regina under its Capital Housing Incentive Policy. It is to help residents of Regina who make a total household income of less than $74,000 a year and a $1000 refundable deposit is required. Applications are accepted based on need. So the grant is there to grab people with low incomes to push them into the game with little equity. Interestingly, the homes that qualify are only the $134,900 1 bedrooms OR the $260,000 3 bedroom with attached garage. I asked about the $199,000 2 bedroom ‘Garden; model (which is perfect) but of course it doesn’t qualify… I assume this is because it is their most popular model. Why discount that one when everyone will want the 2 bedroom model. They have 2 of the 1 bedrooms left, but I didn’t want to give her my number yet for fear of diving in and becoming another casualty. Garth, do you think the RE landscape will look more reasonable next year at this time? Even 10% lower would help. So far this year, Regina has the biggest price drop at 1.4%. I want a deal! I’m looking at buying late 2015 to mid 2016 (after the election, when our world up here blows up and everyone is crying and realizing they are not worth what CBC told them)

#130 Son of Ponzi on 06.18.14 at 1:37 pm

Risk is not an absolute.
The working stiff who put all his savings into BreX took on much more risk than the tycoon who just invested some “playing money”.

#131 Phil on 06.18.14 at 1:43 pm

I am sure readers of this blog will enjoy this:

http://themashcanada.blogspot.ca/2014/06/829-manning-avenue-seaton-village_17.html

Condemned small house with no parking near downtown Toronto sell for 629k.

#132 Son of Ponzi on 06.18.14 at 1:44 pm

# 127
Roller coaster and kiddie rides.
Superb analogies.
But remember, you can easily get off a kiddie ride.
On the roller coaster you’ll never know when you’ll puke.

#133 Rational Optimist on 06.18.14 at 2:18 pm

130 Son of Ponzi on 06.18.14 at 1:37 pm

You’re confusing risk with impact.

#134 Holy Crap Wheres The Tylenol on 06.18.14 at 2:31 pm

#125 Old Man on 06.18.14 at 12:34 pm
#120 Holy Crap – you are wrong because you have no idea of world oil reserves which are massive. Now if a boom comes in your words oil will increase in price as a function of supply and demand. In Canada its all a matter of costing and dirty oil along with royalty grabs and high expenses will meet international competition. Now with higher oil prices those hidden reserves will come out to meet the demand and Australia is sitting on a potential $22 trillion for example; not to mention the other finds during the past few years.
_____________________________________________

Yes massive is correct and the public really doesn’t know how much we are sitting on or near in this Northern rock. I do know what the world reserves are like as I manufacture electronic equipment for the industry. However it is finite and when the economy starts cranking again all of the refineries and producers can not keep up with demand. Royalty’s or sin tax or whatever you want to call it, the government will cave and sell at market value to make the gas cronies happy and provide jobs for the average guy. As for reserve stocks in the USA, I can tell you back in the gas shortage days I remember oil tankers full to the brim on the Delaware river for 6 miles long just sitting there. Gas shortage my ass. Pumped up the price though!

#135 David W on 06.18.14 at 2:34 pm

I’m in my mid 20s and looking to start investing. Any advice where to put my money ($25K) right now or should I wait for the market to pull back a little, seems like its had a crazy run up.

#136 Flawed on 06.18.14 at 2:35 pm

*
Re: ISIS — this explains it a little better, which leads Iran offering to help Iraq. Yellen and Carney Birds of a feather . . . So much for Farmer’s Markets in the US. A plethora of MH370 stuff.

****************************************

Today’s spy satellites can read the VIN on your car. But they cannot find 10 sq miles of debris? This MH370 stuff is getting old. There will either be another False Flag attack or there wont (because of writings like this). Every false flag has been exposed with facts. Unfortunately the controlled main stream media will not run the stories which is why they are dying and internet news is growing like crazy.

#137 Flawed on 06.18.14 at 2:43 pm

#102 Ralph Cramdown on 06.18.14 at 9:45 am

The sad thing about Fed bashers is that they are either completely ignorant of 19th century gold-standard pre-Fed economic conditions, or they think everyone else is. Here’s USA real per-capita GDP growth from 1890 to 1910. If you feel nauseous while examining these numbers, please signal the attendant to stop the rollercoaster.

***************************

Anyone can post stats Ralph. Why don’t you read these facts and then tell us how you feel about the all wise “privately” controlled non-federal Federal Reserve.

Here is one:

#24 According to Article I, Section 8 of the U.S. Constitution, the U.S. Congress is the one that is supposed to have the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”. So exactly why is the Federal Reserve doing it?

http://www.globalresearch.ca/25-fast-facts-about-the-federal-reserve-biggest-ponzi-scheme-in-world-history/5373609

#138 Old Man on 06.18.14 at 2:45 pm

#128 Jack Henning – I just put on my Tommy Bahama summer shirt which is patterned in all red designs just for you. In fact get compliments from the ladies as they know real men wear red.

#139 Ralph Cramdown on 06.18.14 at 2:47 pm

#127 Shawn — “In either case you can’t eat from risk adjusted returns, just from the actuals.”

Absolutely true. And when you’re managing your own money, you (hopefully) have a good idea of the risk and possible returns of all your positions, and of their sum.

People who actively manage their own stuff should at least know whether they’re beating indexes, because if they’d be better off in ETFs and out playing golf…

But when you’re paying somebody else to manage your money, you should be paying for risk adjusted returns — they’re the added value. Survivorship in the money management world goes to the good AND to the lucky. Telling them apart is difficult. Most retail investors don’t try hard enough, and wealth management firms have no real incentive to care.

#140 bigrider on 06.18.14 at 2:49 pm

#122 James- Garths Response- “If stocks were 7% higher and at record levels you would run away. When houses represent same risk you embrace ”

Garth’s response in essence, summarizes the average Canadian mentality to a tee. I would add that the average Joe blow dummy Canadian (or new Canadian) looks for every reason to sell any financial asset holding he may have for any reason (ie.market has gone up when is it gonna crash again..market is going down , I think it’s crashing again time to sell yadda yadda yadda) yet looks for any reason to buy real estate on the premise that it’s always a good deal at any price.

In addition, every new buyer of a new piece of RE immediately believes that the place has appreciated ( don’t believe me, just ask a recent purchaser ,afterall no one to tell him or her otherwise until the sell..no red and green arrows like on BNN). It is self reinforcing behaviour that perpetuates the belief system that RE ‘only goes up”.

The psychological scoring system for RE verses financial assets is so incredibly different.

#141 Lol on 06.18.14 at 2:53 pm

# 61 turner nation:

hey dummy, it’s a bitumen pipeline, not a nat gas pipeline.

#62

Hey dummy, it’s a bitumen pipeline and has nothing to do with electricity or green energy.

#142 bigrider on 06.18.14 at 2:57 pm

Next time a real estate humper of any kind refers to investing in the equity or financial markets as “playing the stock market” make sure you respond equally with real estate investors as “playing the real estate market”

Dumb, brick licking, roof rumping , land laying, stone stroking, interlock inserting, copper eavestrophe ejaculating, granite grinding , freaks everywhere in the GTA

#143 Aggregator on 06.18.14 at 2:58 pm

Either Vancouver or Toronto or both will be the next Renminbi settlement centre. So far Vancouver is more favorable as the North American gateway to the Pacific.

This will change everything. Expect an announcement soon. Dump your loonies, buy RMB.

#144 Roy on 06.18.14 at 3:04 pm

Wanna see how far gone people are?

Striking BC teachers open food bank for themselves
http://www.cbc.ca/news/canada/british-columbia/b-c-teachers-strike-food-bank-opening-for-surrey-teachers-1.2679584

Average teacher here makes $70K/year

#145 Old Man on 06.18.14 at 3:28 pm

This was lots of talk the other day about retirement benefits and from the past 4 questions come to mind. Why in Toronto, does such still exist, is this all across Canada, and who is paying the freight. My walking territory during the first part of the 1970’s was from Brunswick to Bay and my friend from N.J. and I came across an exclusive club for men; we lived in the same grad residence.

There is this stretch along Bloor north that we passed dozens of times near Bloor and St. George with this 9 foot brick wall going on forever. One day we decided to see what was behind it, so turned up St. George north walking on the east side. Before us was an open gate and a huge mansion in a park like setting all in mint state. We walked up these wide steps and said this must be a museum so lets go inside, but the door was locked. There was a brass plate that said for guests to buzz in, and a butler appeared with white gloves and said yesss.

This establishment was a private club for retired Naval Officers living the good life, so who paid the freight? I am not sure from memory if it was St. George but was just west of the Education Building where the $1.00 movies took place as that is where we took our dates.

#146 bdy sktrn on 06.18.14 at 3:40 pm

oh the horror of a single pipeline across a vast empty unused , unvisited arces of rocks and mtns.

now what would really be bad is pipelines through areas where people might be found. like a city. like vancouver. with THOUSANDS of underground pipes transporting a POISONOUS, EXPLOSIVE, INVISIBLE hazardous material throughout ALL areas of the city. (shockingly even onto private lands and INSIDE homes, schools and hospitals – WHAAAAT?)
Insanity, i know. Which is why i am digging up and ripping out the gas line to my house right now. Pipelines are baaad, mkay?

However the parasite class, which is most opposed, needs to be funded by govt, so the pipeline will go ahead for increased royalties, jobs and taxes to pay for the leeches.

#147 Gyga on 06.18.14 at 3:40 pm

Followed Garth’s advise to get into REIT’s, so opened TFSA, bought soem REIT’s, so far so good

#148 Obvious Truth on 06.18.14 at 3:42 pm

Risk adjusted returns.

Agree with Shawn. But maybe do the get wealthy part different. Some of us need to eat part of what we make. We aren’t contributing anymore and as markets go straight line it raise our antennae. I see risk that I’d like to mitigate. So after a run like this in H1 we harvest.

For me personally many sectors look tired and xlu just broke out.

And it’s time to enjoy summer so 30% cash works.

Management of risk can take many forms. Individuals have to decide that for themselves.

Garth gives everyone who reads this blog great advice on portfolio construction and rebalancing. He gives you a roadmap and outlines real risks for most people.

I’m guessing Shawn and myself do this for enjoyment as much as financial security. Not what most do.

Shouldn’t use risk adjustment as an excuse. Individuals should just work toward the proper goal for themselves

#149 bdy sktrn on 06.18.14 at 3:43 pm

not to mention the jet fuel, oil and other pipelines already running through the heart of largest population center west of TO.

#150 bdy sktrn on 06.18.14 at 3:46 pm

new LNG pipelines and plants- under construction

gateway pipeline – coming soon

keystone – coming a bit later

good high paying jobs for the eco-warriors – never happen

#151 Retired WI Boomer on 06.18.14 at 4:19 pm

#86 Nathan

Agree on the index Funds. Disagree on the simplicity of owning a REIT INDEX as well. They exist in both mutual fund form, as well as an ETF.

I own he ETF called VNQ a Vanguard REIT here in the US.

Same advantages as any index and low expenses.

Year to date is up 15.42%

5 year Average is 22.77%

The ETF version has not been around for 10 years but the similar mutual fund has, and it have averaged over 9% not bad considering the period covered.

Garth’s REIT exposure is about 10% I believe in a diversified portfolio. (the 10% REIT would come off the equity side not fixed income side).

Hope this helps you to re-evaluate your ideas.

#152 Son of Ponzi on 06.18.14 at 5:00 pm

Old Man says:
In fact get compliments from the ladies as they know real men wear red.
—————
The men wearing red jerseys were just eliminated from the World Cup.

#153 JSS on 06.18.14 at 5:20 pm

TSX breaks record

#154 Golly Gee on 06.18.14 at 6:01 pm

I bought Pure ( AAR.UN) ……for the industrial content and the fact that they are and can raise rents faster then the trad tower REITS….pays a great divvie….every month.

#155 [email protected] on 06.18.14 at 6:09 pm

My advisor is suggesting BMO Nesbitt Burns Quadrant Program SEI Investments. Anyone have any honest feedback on this?

Be careful investing in anything with seven names. — Garth

#156 Nathan on 06.18.14 at 7:39 pm

#151 Retired WI Boomer

Absolutely, nothing wrong with owning a low-cost REIT index, or even a basket of individual REITs if you’re so inclined, for up to 10% of the portfolio. Sometimes it will outperform; sometimes it will underperform. I personally haven’t seen any convincing evidence that it helps risk-adjusted returns over the long term compared to the broad stock market, but it certainly may – many intelligent people definitely believe it does.

My concern is more with people looking at those double-digit returns and loading up on REITs expecting more of the same. It’s a decent addition for a few percent of one’s portfolio – taken from the equities side as you say – and could potentially add a bit of diversification. If you get much beyond that though your portfolio starts to get quite concentrated, adding unnecessary risk.

#157 James on 06.18.14 at 7:46 pm

So Feds even lowered their long run rates. Sub 4% for the next decade is a given now. Good for hard assets.

#158 Nathan on 06.18.14 at 7:54 pm

#101 Shawn: Perhaps we have different interpretations of the phrase ‘risk adjusted returns’. Here’s how I look at it. Setting REITs aside, say you estimate that an all-equities portfolio has an expected long-term real return of 7%, while a portfolio of 60% equities and 40% fixed income has an expected return of only 5%. Does that mean the all-equities portfolio is better? Not necessarily, because we also need to take into account risk. If a person _needs_ to earn 7% to meet their retirement goals, maybe it is. If they only need to earn 4%, the safer portfolio probably makes more sense.

So when I talk about risk-adjusted returns, I’m basically talking about maximizing the return you can get for a given level of risk. I have seen some evidence that adding a small percentage of REITs to a portfolio increases risk-adjusted returns (giving a slightly higher expected return for the same level of risk, or slightly less risk for the same expected return*). I have also seen evidence that it doesn’t. Personally I prefer to try for the same benefit with a moderate small-value tilt, but the philosophy is largely the same. And either way, the likely effect is small (as long as you don’t go overboard with it). So in my opinion most people who don’t enjoy this stuff as a hobby are better off keeping it simple – a low-cost portfolio with a Canadian index, a US index, an international index, and a bond fund or GIC ladder is all the vast majority of people need. (Or for something even simpler, an all in one like a Tangerine balanced fund.)

*Note: you can also exchange one for the other. If adding REITs decreases your risk (by adding diversification) without affecting returns, you could choose to shift your asset allocation a bit toward equities in order to bring your risk back up to where it was before, and instead slightly increase your expected earnings. Or vice-versa.

#159 boopsie on 06.18.14 at 8:04 pm

#17 Tony
Just to back up Garth’s comment…was purging some very old files today. Noticed that the condo of 1200 sq ft with 2 park and locker that we bought in 1993 for $160 000 was originally listed in 1989 for $269 000. Sat vacant 4 yrs. Happily lived there for 12 years; came time to list…our asking was ..guess what..$269 000. Got a bit less, but hey, appliances, etc were all now 16 years old. So, stuff does happen.

#160 Snowboid on 06.18.14 at 10:36 pm

#74 Teacher’s Ass-istant on 06.17.14 at 11:43 pm…

Sadly one trait the golden god doesn’t possess is the ability to read…

And I quote: “…But for those new to the musings of the great golden god of RE, Chris put it best back in 2010…”

To explain this in terms the golden god may understand…

It is currently 2014; the 2010 post is almost four years ago, from Nov 30th, 2010.

This means the ‘ass-hole’ reference was posted the day before Nov 29th, 2010.

And even though ‘Chris’ wrote those poignant words almost four years ago, the GG of Kelowna real estate hasn’t changed one iota!

#161 Harry Wilson on 06.19.14 at 12:45 am

re #129 Saskatchewan Skeptic

Thanks for the reply; looks like a case of good intentions meeting not-so-good houses. Lest you get too interested in their deals, check out comment #89 from 800 RMK above.

Good luck, and talk to the appropriate city government office to find out what other builders may qualify for this grant. You may find a better deal.

#162 Dave from Victoria on 06.20.14 at 1:35 am

Really appreciated the quick response Garth.
You mentioned that private REITs are not often the best crop to pick from and you don’t have to go far than League Financial Partners to what a lack of oversight can do. There are good private REITs too-a closer look at the financials will help but the lack of SEC oversight is a problem. The part I like about private is that everytime China sneezes and the markets react the private REIT doesn’t. Oh well, I’d be interested in other posters comments. As far as I see I’d take residential over commercial because folks still need to live somewhere.
As far as house vs REIT, I was fortunate to have a dad who showed me how to fix my house. We put a lot of sweat equity into our houses to trade up but not expand mortgage. If anything I could recommend on this again stated not pathetic blog it is that even if you don’t know which end of a hammer you’re to hold start small with something and learn.
Apologies for the length.
Garth, all the best.