The Accredited Canadian's Toolkit: Recent Episodes

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Canada's Liberal government released their budget yesterday, and I've included some highlight that will be of interest to Accredited Canadians.

Happily, there was no significant tax increases. No increase in capital gains, no wealth tax, no tax on the sale of a principal residence, and no large increases to income taxes. There is however a 10% tax on vehicles and airplanes over $100,000, and boats over $250,000.

There is a lot of spending announced, with pundits calling this an election budget. I watched with interest Pierre Poilievre's reaction to the budget and as usual learned interesting history and facts. I had the pleasure of meeting Pierre at a wine and cheese last year and we debate the merits of universal basic income. What stood out to me in his speech yesterday was the following points:

Drs. Reinhart and Rogoff from Harvard are the authors of the widely acclaimed book on the history of financial crises going back 800 years, the book is called, This Time is Different. Pierre goes through the five leading indicators of a debt crisis and how they relate to Canada now. He says:

Number One: Canada has declining output, last year we lost 120B in GDP

Number Two: Large and sustained current account deficits (net importer of goods), yes for the last 5 years Canada has had $300B in current account deficits

Number Three: Asset Price Inflation - Canadian housing has been up over 20% in many markets where the income has dropped. Vancouver and Toronto are among the top 10 most expensive housing markets on the entire planet.

Number four: Rising houshold leverage ie. $1.75 of debt for every dollar of take home pay, the highest ratio in the G7 and nearly a recording in Canadian history.

Number five: A rise in the overall debt across the economy. Last year the debt was equal to 17% of GDP, the largest single amount since WW2. As a share of GDP the debt was 2x the size than in WW1, 3x the size as the great depression, and 4x the size it was in the great global recession.

All leading indicators are satisfied, and Pierre Poilievre says that this time is NOT different, even though we want to believe it is. Pierre argues we have been here before in the 1980s under Prime Minister Pierre Trudeau, back then he was running a deficit of 11% of GDP compared to a deficit of 17% of GDP in 2020. Back then there was money printing, also known as an increase of the M2 money supply, the printing was 15% compared 13% now. Back then Federal Government spending was over 20% of GDP, now it is almost 30%. We had stagflation in the early 1980s, there were 650,000 more Canadians in poverty over 4 years, a 25% increase in poverty from 1980 to 1984. Inflation hit 12%, and unemployment hit 12%, both all time highs. There was also an all time high in interest rates at 18%.

Pierre brings up the terrible outcome that could await Canadians, and brings up the Misery Index where unemployment and inflation are added, and shares that when the Misery Index increases, suicides go up. In the 1980s Canada saw the highest incidence of suicide ever at about 15 people per 100,000. Data around the world shows financial crisis cause on average the unemployment rate to rise 7%, and according to the University of Calgary for every 1% increase in unemployment there is a corresponding 2% increase in the suicide rate.

(To be fair, R&R's findings, methods and rationale are disputed and for good reason, read this article to learn more: https://www.theguardian.com/commentisfree/2013/apr/16/unemployment-reinhart-rogoff-arithmetic-cause)

I don't agree with Pierre's recommendation to harken back to the 1940s era where the silent generation worked off the WW2 war debt by 1947, and the economy grew by 35% per year from the end of the war to 1973. This was largely due to industrialization and increased production, coupled with an explosion in population known as the baby boomer generation.

While Pierre is right that we have a technological revolution happening now that will enrich everyone, technology is in fact deflationary as I covered in Podcast episode 9 where I reviewed Jeff Booth's book.

I think the best model for our future is actually the 1995 budget, a Liberal government where Jean Cretien and Paul Martin were leading. The budget in 1995 involved modest cuts to government and programs that didn't impact average Canadians, and this was supported by Canadians of every stripe. We also need to either have a ton of babies, or allow a lot more immigration of people under 45 so we can get back to a healthy consumption led economy.

Regardless what I think, that increasing the money supply by printing dollars isn't a great solution, it looks like this is exactly what Liberals want to try doing right now. Spending a record level to stimulate the economy and buy votes, and printing like mad to monetize the debt looks attractive, but in fact it steals productivity from hard working Canadians.

I don't know what the future holds, but the fact a Canadian politician like Pierre is speaking about this debt crisis in the house of commons lifts up my spirits, it means even politicians who are clueless about what they are doing to Canadians by printing so much money are at least hearing this point of view, and may take pause before voting in free stuff so fast that the system collapses.

It looks like we have another year before large tax hikes, so the takeaway now is to prepare for future tax increases, and consider taking some money off the table in markets that have raced higher and faster than we've seen in a long time. You may soon be able to redeploy the investment in growth markets, or to be ready to snap up discounts and weather the storm if and when it arrives.

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Yesterday's experience preventing the waste of several thousand dollars in plumbing costs reminded me of a book I thoroughly enjoyed. It's Sam Zell’s book “Am I Being Too Subtle?”

There is a wealth of wisdom here, from a man who narrowly escaped execution at the hands of nazis while his mother was pregnant with him, and who went on to build a real estate empire in America, and later a business empire worth Billions.

I love the audio book version, and the fact it is narrated by Sam Zell himself and not some voice actor.  There is an element of humility present as well, where Sam describes how his personal life suffered from his business aspirations, and you can hear some lamentations about his failed marriages.

Hearing Sam’s raspy voice tell his life story makes me feel like I’m sitting in person at the feet of this great man. 

The top 3 lessons I learned from Sam Zell upon my first couple times listening to this book can be summarized as:  1. business is about risk, 2. how to have effective meetings, and 3. most importantly that an ownership mentality is critical.

Number One. Business is About Risk: In chapter 4, Sam Zell describes his view on how simple business really is.  Besides understanding and acting on supply and demand, business is about managing risk:  “If you’ve got a big downside and a small upside, run the other way.  If you’ve got a a big upside and a small downside, do the deal. Always make sure you’re getting paid for the risk you take. And never risk what you cannot afford to lose. Keep it simple. A scenario that takes 4 steps instead of 1 means there are 3 additional opportunities to fail.”

Number Two. How to have Effective Meetings: * All materials are prepared in advance, and written material is expected to be read before the meeting. * The purpose of the meeting is to create robust discussion, not for written materials to be presented.

Number Three. The Importance of Ownership Mentality: In discussing a new board Sam Zell joined, he describes a very boring meeting where the large board were falling asleep while the others talked, and just waiting their turn to talk for 10 minutes.

He says: “The experience was shocking.  I realized then the danger or boards that were beset by cronyism and [lack of] inertia.  As if appointment to a board were a perk. a retirement benefit. Or a no strings attached gift to a golfing buddy.  My philosophy on board composition and culture is the antithesis of what I saw in the Santa Fe board.  As the chairman of public companies I’ve always selected board members based on the assumption they were cheap consultants to the business, not potted plants.”   He then describes the importance of having a board of directors with an ownership mentality.    “My experience with Santa Fe gave me a heightened awareness that companies need engaged owners.

It’s an owner who is willing to give up short term benefits for long term gains. 

It’s an owner who who uses vision to steward a company and guide management. 

And it’s an owner who brings in resources: additional capital, financial expertise, banking relationships, whatever it takes to […] succeed!” (emphasis added)

As an Accredited Canadian it's important to ensure people and businesses you invest in bring to the table an ownership mentality and “skin in the game.”  By partnering with someone with an ownership mentality, you will have someone completely aligned with your goals. If the person you have aligned with has reasonable intelligence, you can trust they will make decisions in their own best interest, and this will in turn benefit you too.  No management company or fee-for-service advisor will ever be as invested in the results of a business as the right equity partner.   That being said the only thing more dangerous than misaligned goals or outright criminal activity, is incompetence.   If you ensure your Co-owners compensation is aligned with how you make money in the investment and it's hard to go wrong with a competent person with a proven track record leading that business.  A competent person with ownership responsibilities will do whatever it takes to succeed, and that's what you want!

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Today I is my birthday, and this has caused me pause for reflection over the year it has been. The pandemic has disrupted life to a degree no one thought possible, and has provided an opportunity to test for personal resilience and adaptive ability. The K shaped recovery is real, with many people doing very well, and many people suffering. My observations have been that those with the proclivity to learn have quickly acquired the skills needed to thrive, while those unwilling or unable to learn are being left further and further behind. Those able to adapt thrive, those who do not suffer the loss of income and health.

A quick summary of my year:

• On the personal side, my family moved, my sister moved, and my parents moved, all within a few months of each other. In each case welcome changes to better homes, but as you know moving is a lot of work!

• We also buried my grandmother and a day later my uncle. The were not COVID deaths, but losing both so close to each other during lockdowns and in the background of the pandemic made saying goodbye under these circumstances feel increasingly difficult.

• I've found myself caught in the cliche of the tweener generation with young children and aging parents relying on me. It's a joy to be of service to the people you love, but as anyone who's been in this place can attest, also a burden at times. My wife and I also experienced a health scare that turned out to be nothing, but nevertheless that brought the brevity of life into full focus.

• My rental business has grown and expanded into 2 additional markets, both into towns of about 10,000 people, one in BC and one in AB. This has involved hiring more staff and implementing new software.

• I've simplified life by selling some townhomes during this bull run in real estate, and also sold a couple houses with partners, helping them realize gains of 207% in 7 years, 177% in 7 years, and 1000% in 10 years.

Key takeaway - I recently listened to Megan McArdle's interview with Russ Roberts on his show EconTalk. They talked at length how it is impossible to be ready for every disaster scenario that may occur, and actually a bad idea because the insurance for prevention comes with opportunity cost. I'll read Russ' comment because no one says it better than he did:

"I would argue that that is the single biggest lesson of the pandemic: that, it's not, 'What do we do to prevent the next one?' And, I think this is true for all of the examples that you give--the power grid, the Yellowstone volcano--it's not, 'What do we do to prevent the next one?' It's, 'What do we do to adapt to the next one?'

And, the insurance for adaptability I would argue is cheaper than the insurance for prevention. And, one of the reasons is that the insurance for prevention is a really bad idea if that thing never comes back again. But the insurance for adaptability has lots of applications. And the vaccine is a perfect example. We're going to get all kinds of pleasant things, I think, out of the science that went into that. There are all kinds of ways when adaptation is possible for dealing with more than just this crisis. "

So there you have it, the key to surviving and thriving in the year behind us and the years ahead of us is to always ensure we have the capacity to adapt to the world around us.

Source: https://www.econtalk.org/megan-mcardle-on-catastrophes-and-the-pandemic/#audio-highlights

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Today I’ll be answering a question from Heidi who asks "Can I have some advice on how to rent out a basement for my in-laws' home? We just bought a second house in town here and we are renovating it to turn it into a rental. We will have a legal suite downstairs and the plan is to try and move my husbands parents into the upstairs. My dad rightfully suggested I get in touch with you to see what advice you might have on becoming a landlord and preparing to rent out the basement suite. We are also probably going to rent the upstairs for a 6ish months before his parents get out here from eastern Canada.”

Thanks Heidi. Now I am not a financial advisor, or a licensed realtor or a financial planner, or a lawyer or an accountant so I cannot give out advice to anyone. I do have opinions and ideas that I’ve developed with experience, and am happy to share so after chatting with Heidi for about half an hour I learned her inlaws are on very fixed income so the plan was to purchase this rental property, rent out the upstairs for whatever her in-laws can afford, and rent the basement to a tenant who will pay the mortgage. The hope is that the house will break even or be in a slight cashflow positive situation which is possible because in her market a basement suite could rent for close to $2000/mo. Now, this is not an ideal real estate investment because rent is discounted in the upstairs rental unit from the getgo. But, this scenario fulfils the personal goal of caring for aging parents who are ill prepared for retirement, without the inevitable conflict that will arise from sharing a living space, or the full financial burden of paying outright for their housing costs. In all, without exploring every other possible alternative, I think this a prudent move by Heidi and her husband because they are able to meet the goal of helping his parents with a place to live, and at the same time get into direct real estate investing and take advantage of all the benefits of owning rental property.

This scenario brings to mind the question, should healthy / wealthy people look after thier less wealthy / healthy family members? This situation reminds me of the fable of the grasshopper and the ant. You know the one where the grasshopper lounges all summer while the ant builds up stores for the winter, only to beg the ant to share its stores when bad weather finally hits. I think the grasshopper is left to freeze and starve, and although most of us wouldn’t do that to our parents, it still feels inherently unfair to the ant to share limited resources with the grasshopper who didn't prepare adequately for the future. If the familial relationship is important to you, and presumably it is since you’re considering providing financially for a someone else, it’s important to resolve to yourself as the "ant" in this situation to set aside feelings of resentment if things don’t work out as you envision. For some people this will not be possible to do this, and especially in some cases where the expectation for you to pay for the lifestyle of others is becomes abusive. Giving money to someone who wastes it to the point you are unable to provide for your own family or to effectively plan for your own retirement is unhealthy, and the expectation or pressure to do so is a form of emotional abusive. Like in all cases of abuse, sadly the only solution may be to end the relationship. For the purposes of answering Heidi’s question, I'll put aside this broader question of should this kind of help be provided at all, and focus on how to mitigate the downside risk of proceeding with this plan.

Number 1. Treat your real estate investing like a business. The underlying principal to remember and guide you through every decision you make with a tenant is that you need to treat this as a business. It's prudent to get into business with someone who is creditworthy (you don’t want a tenant spending more than 40% of their income on housing or you will start to have trouble collecting), who respects the rule of law and will abide with the conditions of a contract, someone who is gainfully employed or otherwise has reliable income, and someone who has a history of positive interactions with other human beings. This is why work references and character references are so important when screening.

There are a lot of people who may apply for your place to rent who don't meet these criteria. It's not the responsibility, nor is it within the means of the private landlords to solve social problems, that is why we pay high marginal tax rates. This is not social housing, this is an investment, and your responsibility as a housing provider is to provide a safe place to live, and you have the right to receive fair payment, on time and in full each and every month.

1. Protect your investment. You’ve saved for years and have now invested hundreds of thousands of dollars into a rental home, and since by renting the home you are extending credit to someone with very little at stake, you must ensure your underwriting of that person is at least as stringent as your mortgage lender is for you. Also ensure you have adequate reserves. Having three to six months of expenses on hand in cash at all times is critical because things will go wrong.

2. There is strength in numbers - ask for help! Join local and provincial landlord groups. Social media makes this easier than ever, and your don't have to look far to find support and information from others in the same business as you.

Seek out professionals and advocates in your industry. One I cannot recommend enough is Al Kemp, he like me is a former police officer, and he provides advocacy and information very useful for landlords in BC, you can find him at help4landlords.ca. His monthly subscription costs are minimal, and information learned can help to avoid costly mistakes and is at a fraction of the cost of legal advice.

All this can seem overwhelming as a new landlord, and especially so with all considerations to renting a space when family occupies part of it. Ironically, you will find yourself breaking some of these rules when renting to family members. If your family were credit worthy or had reliable income, you wouldn’t be put in this situation in the first place.

When one of the occupants of the home you are renting is a family , it blurs the line between business considerations and the personal preference of your family member. Personal preference for noise, use of space, pets, cooking smells are all luxuries they can ill afford, but you can be sure that you will be mediating any disputes that arise between your parents and the tenants you choose to have them live with.

But, I just went through a similar situation myself when finding basement tenants for my parents and it seems to be working out so far. It did take a lot longer to find the right tenant who was the right fit, but it did happen. My #1 advice is to be patient, do a lot of research, and only walk into a situation like this after doing a LOT of research.

I’ll close with a quote about tenants I like to bear in mind when going through all the pain and difficulty land-lording can entail.

“Your tenant is a partner in business who will open up shop each

morning and lock it up at night. They will look after security &

inform you of potential problems in the business. They will cut

the grass, rake the leaves, shovel the snow, and pay all the

utilities. They will even pay all of your mortgage payments and

taxes. Then, in the end, they will relinquish all monetary interest

in the business and walk away, leaving you with the profits.”

Thanks Heidi for a great question. If you have a question of broad interest you’d like answered on the ACT Podcast, please email question@ACTpodcast.website. That’s question@ACTpodcast.website.

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Yesterday I talked about the insurance crisis in Canada, and how it’s tied to the bond market. Today I’ll be answering a question from Dean.

Dean has a second home located at a ski hill that he also rents out on a short term basis as a vacation rental. Dean called me to ask about a request he had for a family to live in his vacation rental while they were building a house. This was looking like a good arrangement, because he could rent out his property during the summer when the would usually sit empty, and the family could live in their desired neighbourhood while waiting for their house to be built.

Dean was concerned that the family could see delays in completion because this often happens when building, and that the family would want to stay in his vacation rental and not move out in December as they are promising to do now. Dean would miss out on the Christmas season rentals that represent a large percentage of the income for the property, and that he’d miss out on his family’s tradition of staying at the property during their vacation.

Dean is right to be concerned. The BC landlord and tenant laws were changed in recent years to prohibit fixed term rental agreements, and eliminated must-vacate clauses. This effectively gives a tenant control of the property until they decide they want to move out, the only exception if is a landlord or a close family member wants to move in. A landlord must give two months notice to move in, and even this can get gummed and be delayed by many more months up if the tenant makes application with the residential tenancy board to stay.

If a landlord does move into their rental unit, they or their family must stay for 6 months or face stiff fines for an illegal eviction.

If a property owner decides they don’t like laws that dictate what they are allowed to do or not do with their own property, and try to be sneaky to get around it, this can be very expensive if a tenant displaced tenant finds proof that you or your family members are not intending to move in, for instance finding the property listed for rent on AirBnB .

In one decision from Sept 3, 2020 that I reviewed this was a $18,000 windfall for the tenant who was displaced when the landlord’s mother didn’t move into the unit as intended, as shown by her visiting visa that was only for 1 month.

However, as Dean correctly pointed out, the Residential Tenancy Act in BC doesn’t apply to vacation or travel accommodation, that is a stay less than 30 days. I haven’t been able to find any BC court rulings, or RTB arbitration decision that discuss the issue of a vacation rental guest turning into a tenant. I did find a six year old blog post from a local law firm that suggests the length of stay could be irrelevant, but that the predominant purpose to run a short term rental would be the factor that decided if a person occupying the property was a guest, or a tenant under the BC Residential Tenancy Act. Factors that decide this question could include what type of services are offered during the stay (like room service), if cleaning is included, if the innkeeper can enter the unit at will, if there is cooking permitted in the suite, and if the stay was intended to be somewhat permanent by the occupier moving in any furniture, or decorating by hanging painting or photos.

Some people view the lack of clarity between a person being a tenant under the Residential Tenancy Act or a guest under the innkeepers act as a loophole that bad actors are exploiting to flout the rules. There are affordable housing activists who are pushing for vacation rentals to be shut down and added to long term housing supply. There is a hashtag trending on Twitter called Occupy Airbnb, and organizers are encouraging people to move in and assert squatters rights. I’ll read some of the comments so you can get a flavour of the attitude of these people, but I’ve changed the names for privacy:

One poster wrote: Hey Vancouver, please boycott (name deleted) a social parasite contributing to the housing crisis by running an illegal Airbnb hotel.

And another one

“Airbnb hosts are social parasites. Despite all efforts by @VISTRO11, @Miteymiss, @brettdr and many others, @CityofVancouver

has done nothing against them. It's time to engage in civil obedience and flex our legal rights and #OccupyAirbnb. I urge everyone to do the following:

1. Book an airbnb unit for a single night.
2. Move in and asserts your rights as a residential tenants by demanding a residential tenancy agreement, and dictate the term of the agreement
3. If they refuse take them to the residential tenancy branch
4. If the hosts harass you or try to forcefully throw you out, call the police

Someone Commented on this: Wouldn’t this be dangerous? What if they call the gangsters to kick you out?

OP: Did Canadians run away from Vimy Ridge?”

I know people post a lot of silly things online. It’s one of the pitfalls of self publishing being available to the masses. But the anger by the people concerned about the high cost of housing is real, and it is misplaced. I did a review of decisions on BC’s residential branch website for “airbnb”, of the first 30 disputes I read, only 2 had owners kicking out long term tenants to rent to someone else or to use as an air bnb. Most other decisions were actually landlords seeking to end the tenancy of someone who pretended to be a long term tenant, but instead starting running an airbnb business out of the property.

People are correct to feel disenfranchised, but taking away the property rights of landlords will not work and will make the problem worse as owners will be unwilling to risk renting out their property at all, with the exception of landlords willing to engage with people who incite violence, like the #occupyairbnb twitter account I quoted above. This will further exasperate the problem of affordable housing. New supply of housing is the real solution, and that is frustrated by government regulation. The true common enemy of Canadians is policy makers and central who steal productivity from everyday people by printing money.

I’ve had short terms rentals before, both in a separate house a short drive away, and in the basement suite of my former primary residence. For the most part, guests are great. Most guests were respectful and clean, with the odd exception. I stopped doing it because it is running a business, and requires a lot of work. For the separate house, I found myself making a lot of trips to deal with Check-ins, check-outs, cleaning, laundry for bedding, all part of the regular duties. Like any business, doing these activities at scale can be profitable, but requires expertise, systems to run efficiently, and work can be hired out. Hiring out the work without spreading the cost of the help out over a larger portfolio decreases net income to the point that this strategy doesn’t earn much more money than a long term tenancy. Vacation rentals are not free money, and there are problems that need to be solved on a regular basis, like the one Dean shared today.

If I was Dean, I would factor in the cost of having the family stay in the home permanently, and offer a tenancy agreement with a rent that reflects that. Let’s imagine Dean would earn, $30,000 for the December / January vacation rental season at a rate of $500 per night, and would earn $18,000 for the remaining 10 months of the year at $60 per night. This $48,000 annual income equals $4,000 per month. Dean could offer the family a one year lease with a rent of $4000 per month. If the family moves out in time for Dean to use the place for his family vacation, and to rent the place out for his vacation rental business, he could offer them a refund of some of the rent paid, and release them form the contractual obligation for the rest of their tenancy agreement.

This arrangement would align the family’s financial incentive with Dean’s circumstances.

If the family decides not to take the deal that is up to them, but Dean is not taking a risk without appropriate compensation for that risk.

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Yesterday I shared how low interest rates and low bond yields create counter-party risk. What is good for borrowers is bad for lenders. Today I’ll discuss how lenders pass that pain off to everyday Canadians, with some sad stories about rising insurance causing real suffering to normal people.

I owned 4 rental townhomes in a 59 unit self-managed strata that has some aluminum wiring. They have been a good investments for the past few years, seeing good appreciation. This strata saw premiums increase from $19,000 last year to a whopping $150,000 this year on renewal. The council members are not business people and most are retired or still woking, and they followed the bad advice of an insurance broker saying it was either buy this $150,000 policy, or rewire the entire complex. A rewire wasn’t feasible because initial estimates for a complete rewire was $3.5M. Strata council ended up buying this expensive policy in a panic, resulting in a $130,000 budget deficit. Paying for this 790 percent insurance increase means upping monthly strata fees by $200, and this is a hardship for many of the owners who are on fixed incomes, and who don’t have the luxury of selling like I do.

A solution has since been found to obtain $40,000 insurance by pig tailing the aluminum wiring, but not without paying a $75,000 penalty to break free from the old insurance policy. The volunteer strata has since been replaced by other owners angered by this mistake. I have lobbied the other owners to hire a professional management company to avoid mistakes like this in the future. This one mistake of buying the wrong insurance could have paid for a decade of professional property management services with experience in negotiating large contracts. Since these owners are pennywise and pound foolish. I think they will continue with self management with this new strata. I did try to educate this group of owners, and I served on strata council when I first bought these units, but I found I was outvoted too often so I didn’t seek reelection. All but one townhome is now sold, and I am working to sell the last one this year, not because of the aluminum wiring and insurance issue per se, but instead so I can realize significant gains, and to break ties from this group of owners who are penny wise and pound foolish.

As an apartment building owner, I am also seeing premiums increase significantly across the portfolio, in one case about 5x higher on renewal, and we’ve had more than a few stressful renewals where looking for any insurers willing to underwrite the risk at all. I am also seeing deductibles so high in the apartment building space that I would never make a claim except in the case of a catastrophic loss. In many cases deductibles are no longer zero or in the 10s of thousands of dollars, but instead in the 100s of thousands. Suddenly, prudent business practices require a much larger contingency reserve on hand than in previous years, that is cash sitting idle in the bank,.

• I count myself and my shareholders lucky compared to real estate operators in other segments of the market. My insurance broker told me that I’d be shocked to learn that the majority of hotels during the pandemic were uninsured. Revenues were zero thanks to lockdowns, and with costs up so high the only choice for some owners was to roll the dice and be uninsured. This would cause a default on any mortgages on these hotels, and it’s a wonder we haven’t seen a wave of hotel foreclosures yet. I know of retail locations and hotel owners who have seen revenue slashed during the lockdowns, and these rising insurance costs are yet another headwind they are facing. Hopefully things turn around for them in a big way once things fully reopen.

If you read news articles on the topic, and I’ve linked some of these articles in the show notes, you’ll see skyrocketing insurance is hurting a lot of people.

The huge increases in insurance premiums is partly to blame on regulations that ironically are designed to protect consumers. Insurance companies in Canada must follow rules that restrict them from investing in what regulators regard as riskier investments. The idea is that insurance companies should have plenty of liquid investments where the principal amount is safe that they can easily convert to cash to pay out claims. So, insurers are forced to invest heavily in bonds, which unfortunately have been yielding negative nominal interest rates .

Failure to maintain enough enough investment bonds results in intervention by OSFI, and so for years up to half of an insurance company’s investments have been in low or negative yield bonds. Compounding this problem, there have been more claims in recent years due to natural disasters, think of the all the floods and fires in the news recently. In short, profits are down, and insurers have acted in lockstep to increase premiums or drop customers altogether. Consider this.

• Aluminum wiring in Canada is not actually very risky, there is a simple fix. A problem occurs if the electrical fixtures are changed repeatedly as will happen in an aging building when they wear out or styles change. The aluminum wire becomes fatigued when repeatedly manipulated, and the metal fatigue can increase the electrical resistance, causing the risk that the wire can heat up, potentially increasing the risk of fire. A simple exam of the building with a handheld FLIR device can identify any hot spots, and the issue can be permanently fixed inexpensively by pig tailing every electrical device. This involves using a marrette and lubricant between the original aluminum wiring and a short copper wire, known affectionately as a “pig tail”, presumably because the copper wire is short and curly. This copper pig tail makes the connection between the old wire and any new electrical devices safe, and costs less than $1000 per unit in materials and labour depending on the number of electrical devices present.

It’s Simple to fix! I believe what is actually happening with aluminum wiring is that insurers have come to terms that the bond market is going to stay low for the foreseeable future, and so are using trumped up risk factors (like aluminum wiring) as an excuse for obscene increases in rates, and to make changes to policies to eliminate insurable risks. One of our insurance companies we’ve been with for years decided to withdraw from underwriting all risk except for brand new buildings in AAA rated markets. They looked for any excuse to drop a client they’ve had for years. New requirements are being sent out before renewal to the point that insurance wouldn’t be required at all. For instance, in my rental houses I’ve seen request that every unit must have fire extinguishers mounted in the kitchen, that closers be installed on all exterior doors, limits have been introduced to the age of perfectly serviceable equipment like water tanks and furnaces that have plenty of economic life remaining, and in one case the insurer even required for a buildings to be rewired.

The fact this is all happening across the hundreds of insurers in Canada sure smells like collusion, but it probably isn’t.

More likely is that insurers are acting rationally in an irrational situation to preserve shareholder profits. it’s getting close to a time where if costs continue to rise, it will make sense to self-insure. Maybe insurers will get the competitive bug before then and start competing again in the next few years, but prices rarely drop so I am not holding my breath. More likely is government will step in with yet more regulation when there is enough public outcry, even though regulation with unintended consequences is what got us in this mess in the first place.

So in my opinion, risk to physical buildings hasn’t increased, and what is actually happening is insurers have seen increased claims, but they’ve actually taken a beating to profits because of such low bond yields for such a long time. Insurers are handcuffed by capital reserve requirements are enforced on them by a bygone era where bonds were deemed “safe.” In my view, it’s part of the problem with an ever growing nanny state, because regulation frequently has unintended consequences.

Thankfully for my shareholders, the benefit of the bond market’s influence on low cost of borrowing outweighs the drag on the expense side of the income statement. Furthermore, multifamily income have proven to be very stable, even during the pandemic.

If you’re buying a building in the future, be sure to be careful to negotiate a large discount on a building with aging components.

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Too few people understand the bond market, or how critical a bond market is to financial systems. It’s the next most important thing to the rule of law. I’ve emphasized the importance of the bond market in ACT 8 when I reviewed Jim Rickard’s book “The New Great Depression - Winners and Losers Post Covid World”. The bond market is critical, and today’s show examines how it impacts Canadians in massive ways without them even realizing it.

Bond yields have been dropping for 20 years. The government of Canada Benchmark 10 year Bond Yield saw a high of 5.95% on May 29, 2001, and a low of 0.46% on June 31 2020. The real return of the long term bond has been flirting with zero percent since 2015, and has been LESS than zero for seven months strait starting in July 2020. Yes you heard me right, owning bonds recently means you would have earned a negative real return on investment.

Low bond yields have been great for borrowers, and the low cost of debt has helped push up the prices of rental property and contributed to compressing CAP rates. With more money in the system and lower mortgage payments, people can afford to pay more for real estate. This means anyone who wants to own a piece of property can bid up the price of the property higher.

For example, let's say I want to buy a building with rental income that will support a $6000 per month mortgage payment. Let’s say the building is in great shape, so I can get the lender to agree to have the loan amortized over 30 years. My combined principal and interest payment of $6000 per month is one million dollar mortgage. If interest rates drop to from 6% to 1%, that same million dollar mortgage now has a payment closer to $3000 per month.

In fact, that same building that can support a $6000 monthly payment can now support a 1.8M mortgage, so someone in the marketplace may now be willing to pay up to $800,000 more for that same building, just because interest rates have lowered. This is a simple example of how lowering interest rates can increase the price of assets.

The capitalization rate is compressed when building rise in value. Since buildings are also valued using the income approach, when CAP rates compress, small moves in the income can make big differences in the building valuation. When a building operator like me purchases a building and renovates, the building can command higher rent and also will have Lower expenses. This increases the net income of the building, and with a prevailing market CAP rate of 5%, every dollar of net income = $240 of building value.

To illustrate this point, a 35 unit building I own increased in value by over $1.6M dollars in only 2 years thanks to a substantial renovation. This is how the bond market impacts my business, and how I came up with the title to this episode.

The bond market giveth, and the bond market al taketh away. Let’s discuss the taketh away part now.

There is a concept called counterparty risk in investing. The liability on one person’s balance sheet is an asset on another’s. In the above example, the lowered cost of the mortgage makes for a cheaper liability on my balance sheet, and I think that is great. But that mortgage is packaged up by the bank and sold to large investors like pension funds and insurance companies. The low yielding mortgage is an asset on these investors balance sheets, and a terrible performing asset lately because interest rates are so low. Large investors are earning less on mortgages and on bonds than inflation, are effectively losing money, and have been doing so for a long time.

The bond market is something few people give a second thought to, but it is responsible for very large changes to many other markets, including insurance. Historically low interest rates and low bond yields are contributing to an insurance crisis in Canada that no one is talking about. The market for insurance has harded to such a degree that it’s really hurting Canadians. Next episode we will dive into the details of that, and I’ll share some stories about what we’ve been going through lately.

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Yesterday we reviewed Jim Rickard’s book “the new great depression” and today we will turn to Jeff Booth’s work - “The Price of Tomorrow - Why Deflation is the Key to an Abundant Future”

Vancouver based Jeff Booth is the author of the “Price of Tomorrow” and he offers a fascinating analysis and argument for deflation in the long term due to technology.

The premise of Jeff’ book is summed up by his analogy:

Engineers in Canada get an iron ring that represents a bridge collapse in Montreal in the 1920s. The ring means "our work has consequences”. Most people in technology companies are trying to make the world a better place, but the increased efficiencies and lower costs they create through their work has consequences. Ultimately that efficiency comes at the cost of jobs over the long term. - Jeff Booth

The idea is that improved technology increases efficiency. With increased efficiency there will be permanent job losses, which is deflationary. Deflation is the result of getting more of something for less money.

For example, in the past, a technology that gives someone access to the cumulative knowledge of all of humanity would be priceless. Today this is commonplace. If you’ve ever seen a homeless person with an iPhone, that is deflation.

Deflation isn’t a bad thing in Jeff’s view, but it will change who are the winner and losers in an economy. Instead of winners being those who benefit from inflation because they own assets, tomorrow’s winners will be those who create real value, as I believe it should be.

Jeff says that since technology is deflationary, our inflation-based system is impossible to continue forever. He believes that the existing inflation-based economic system will break eventually and technology like Bitcoin will enable peer-to-peer banking that will form the next economic system.

Until then, with government printing happening in a big way, asset classes like stocks, technology monopolies, and real estate will see increased prices. Jeff warns that since most people don’t own investments, there will be huge increases in taxes on all assets to pay for the cost of living for the majority of people who own zero assets.

Jeff says if central banks keep printing, the next problem will be much bigger. I quote “Putting out a small forest fire leads to a buildup of fuel for a more massive fire later.” When the dust settles, we will have a way larger debt and way smaller economy, leading to a loss of trust in government currencies.

Jeff expands on his book by answering questions in interviews, linked in the show notes.

When asked a question about who can participate in his endgame economy, where things are being automated, A.I. is doing thinking for us, and energy is extremely cheap. Jeff says UBI (universal basic income) isn’t the final answer but is probably part of the solution. What is interesting to me is we’ve seen UBI tested in the form of CERB, the Canada Emergency Relief Benefit, and now we are seeing it in the United States stimulus cheques, both these programs are a response to the pandemic, but also serve as an interesting test on the impact of giving money directly to consumers.

When asked on what he prefers, Socialism vs (crony) Capitalism? Jeff's response is:

Both are wrong! He says we have a misallocation of capital with the printing of currency. He says “As we print more, the prices run away on you.” Those with assets get rich, those without assets see the value of their “money” destroyed. They get very angry and the government taxes heavily to give to those without assets. This is crony capitalism and is as harmful as socialism. Both steal from the efforts of the industrious and disincentivizes them. Modern economics is not about value, it is about scarcity, and since technology creates abundance, modern economics will die. Capitalism will work very well when the system is reset.

Jeff says a revolution of our economic system will result in a rise of a peer-to-peer currency like Bitcoin overtaking the US dollar and other government currencies. Jeff thinks the path to this new world of abundance is going to be painful and will mean things like way higher taxes on wealth to pay for the people who have dropped out.

Jeff Booth’s outlook for longer term investments are outlined in another interview. He says it depends on what central banks will do. If banks don't print more currency, you will want to be in cash. If they do print more (very likely as seen in the last year) you need to be in the market. Stocks, technology monopolies with “network effects”, and in real estate. You must be aware that much higher taxes are on the way, so making sure some of your portfolio is liquid / mobile. That is very important. Jeff especially recommends some “asymmetric bets” like Bitcoin, read it on Medium here. After reading it, I was convinced to buy some bitcoin as an insurance policy against currency risk.

Jeff doesn’t think a financial or currency reset will happen in the near term because the US is printing like crazy to keep up the status quo, but much of what what he wrote about in his book seems to be happening now in real time.

A summary of his book and a link to his interviews is in the show notes that you can find at www.actpodcast.website.

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Yesterday I covered part 2 of Life after Globalization. Today I’m going to introduce James aka Jim Rickards. Who makes predictions for the rest of 2021.

The amount of new debt being created all over the world being and purchased with printed dollars seems alarming. Will this debt shake up the world order? ie. Will the U.S.’ 1974 Petrodollar system survive? Will the US’ world reserve currency status remain & will subsequent asset inflation worldwide continue?

Jim Rickards is an American lawyer, economist, investment banker, speaker, media commentator, and New York Times bestselling author on matters of finance and precious metals. His recent comments during interviews promoting his book that was released last month are interesting. The book is called “The New Great Depression - Winners and Losers in a Post Pandemic World” and it sheds insight into the question of printed dollars.

On the world’s reserve currency:

Jim pointes out that 60% of global reserves are in Dollars, and 25% are in Euros. He states Reserves aren’t held in currencies, they are held in securities (ie. treasury notes), and that A bond market is a prerequisite to a reserve currency. A bond market is no small thing. You need to have: bonds in all maturities, liquidity, primary dealers, auctions, settlement payments, repos, forwards, when-issued-trading, hedging, and the basis for all this is the rule of law. You need all this stuff to support a bond market (especially the rule of law), and that is why the U.S. with a navy / military larger than the rest of the world combined will continue as the owner of the world reserve currency.

Jim also makes the point that Alternatives to the U.S.’ reserve currency status that are suggested by pundits (the Chinese Yuan or Bitcoin) don’t have, nor will they have in the foreseeable future, a bond market. Neither do SDRs (special drawing rights, the IMF’s version of a currency). The only conclusion to draw is that because there is no other bond market, and no other rule of law, nothing is replacing the U.S. Dollar any time soon as the world reserve currency. There is simply no alternative, and thus the ever increasing debt and budget deficits will continue.

On the question of inflation:

Jim is asked if Will we see Inflation / stagflation / or deflation? Likely inflation, but Jim Rickards says owing gold is great in inflation or deflation (he also happens to sell gold so take that with a grain of salt). Since I’m a real estate guy I’m interested in real estate price, and if Jim’s right about coming inflation, real estate prices will increase while the cost of repaying the debt decreases (as we’ve seen for the past 5 years). If stagflation, assets will rise in price despite the decreased economic output.

If we enter into a period of deflation, real estate (and all assets) should decrease in price. However, when looking at Alberta’s long recession, we’ve seen that prices are quite sticky, with no large decreases in prices (and few significant buying opportunities). To protect against deflation and real estate price decreases, buying assets with sufficient rental income to cover all debt and expenses is critical, as this gives staying power, and protects investors from loss of investment capital.

Stock market predictions:

The S&P 500 is more like the “S&P 6”, ie. 25% of the index is apple, Microsoft, amazon, Tesla, amazon, Facebook and google. (AAPL, MSFT, AMZN, TSLA, FB & GOOGL). These tech stocks trade at a high multiple of earnings. ie. TSLA has a P/E ratio of ~140X, that is a value of 140 times earnings. Similarly, the P/E of AMZN ~96X. AAPL ~13X , MSFT ~37X, FB ~32X, GOOGL ~36X. Are these price-to-earnings ratios reasonable?

• Jim Rickards predicts that by the end of 2021 / beginning of 2022, the S&P500 will drop from its current ~3800 to 1750, citing low employment (60% in the U.S.).

Jim recommends selling or going short on these losers:

Commercial Real Estate;

Stocks;

Corporate Bonds.

Jim suggests owning these winners:

Gold;

Residential Real Estate;

US Treasuries.

I think Jim’s predictions would be correct if we were talking about the real economy. Based on what central banks are doing and how far away we are getting from a real economy, I think he is wrong about the massive drop in the S&P, and we could continue to see record high numbers.

You’ve got to admire his guts for taking a position on this, because predicting the future is not easy, although he has had a lot of practice as he has been comfortable in predicting a crash for the past 30 years. One of these days, he’ll get it right and look like a genius.

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Yesterday I began to summarize Peter Zeihan’s recent speech called Life After Globalization, and discussed how Americans are abandoning their role as world police. Today we will summarize what that looks for the coming decade, and how Accredited Canadians can position themselves to benefit from this trend.

In his 2021 Land Investment Expo speech given on Jan 25th, Peter reiterates For an economy to grow, you need consumption led demographics, meaning a population pyramid with lots more babies at the bottom than elderly people at the top. Young families spend and borrow, middle aged people save, and old people invest. Economies and investments grow because there is more demand for money than there is money is available. Less savers than spenders means savings are worth more, and competition for these savings means lenders / investors can demand higher interest and higher investment returns.

• The world is aging very quickly, and China is the fastest aging society in the world, and I quote Peter here: ”they have already aged past hope of becoming a consumption led system, and are enjoying a moment in time right now where they are export led but that will end by the end of the decade". Most developed countries have population pyramids with a similar huge bulge in the middle, and will in a few decades look more like a top than a pyramid.

• Americans are an exception to this, their demography is quote "not perfect, but it is by far the best in the world".

• Peter classifies countries in three categories

• Consumption led (ie. growth),

• Export based, and

• Worst of all, Post Growth.

The year 2020 shows the U.S being a consumption led (ie. growth) system, China being export led, and only Japan classified as post growth. But By 2030, China and many other countries demography will see them join Japan as being post-growth, with more old people than young people and an upside down population pyramid.

Peter's 2021 Predictions in this talk was tailored to his audience at the Land Investment Expo are that

• 2/3 of the UK's food will need to be re-sourced due to them leaving the eurozone and that can't help but benefit American agriculture

• The old US Trade representative was a tough negotiator, who put in place new deals with half of American trade partners (listed as Japan, Korea, Canada, Mexico and soon the UK). The new US trade representative appointed by the Biden administration is a trade lawyer, so there won't be any new trade deals for anyone else, just lawsuits.

• The US has placed tough tariffs on China, and these will likely increase under Biden, further angering the Chinese.

• Americans are moving West and South for a lower cost of living (this is millennials), better weather (this is baby boomers), and to get away from mass transit. The 2020 /2021 movements is greatest internal migration since the GIs came home from the war. Cities and land in the West and South areas will see real estate prices rise.

My opinion on the best way I believe the way to Act on this information is to:

First. Focus on investing in winning nations, and segments of the market likely to benefit from the demographic trends.

Second. If buying investment real estate or a business, take the long view and buy where consumption, populations and jobs are growing (for example, the American midwest and south, some Canadian cities like North Bay ON, Chilliwack BC, Lethbridge AB, and St John NB). It’s easier to ride a demographic wave of an area than it is to pick good deals in a stagnant market. The forthcoming Canadian census data being collected in 2021 should help bring growth areas worthy of targeting into focus.

Third. Money for Investment capital will only get cheaper as years go by in the areas with an aging demography as more people look to invest money in increasingly scarce deals. There is real opportunity to move cheap capital from post-growth markets into growth markets.

I’m not a financial advisor, so don’t take any action without first consulting your own professional advice.

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Geopolitical strategist Peter Zeihan is one of the thought leaders I watch carefully. His books tell the story (in real time) of the U.S.A.’s withdrawal from the world, and what that means for Americans and their closest allies (Canada being on this short list). Peter’s regular updates are free, but serve as teasers for his $1000/seat webinars where the really good stuff is, so I really enjoy it when conferences he is hired to a speak at put out a video of a recent speech. The 2021 Land Investment Expo published his speech from Jan 25th, and I was glad the YouTube algorithm knew I'd be interested. In summary his presentation covered an update on American politics, a Covid update and predictions for 2021.

U.S.A. Politics:

• Democratic Party is participating in year 5 of a 12 year cycle, the end of globalization will continue despite the change of governing parties.



• Transitions are painful, loud and messy, but this is the U.S.A.’s 7th political transition so “we will get through this”, and now is the time to act if Republicans want to take their party back from the Jan 6th rioters and Trump crowd. 
 
COVID Update: - India numbers are down because they stopped testing (but their hospitals are a disaster)

 - Vaccines are rolling out, and Peter's favourite is the Johnson & Johnson vaccine. It should be out to everyone in the U.S.A. by June 1 (only needs 1 shot can be stored in a fridge and thus distribution much easier), so there may be a recovery this summer if lockdowns are lifted. 


U.S.A. Geopolitical Situation:



• Peter does a great job summarizing the past century in his many talks and books, so I won't go into detail here. Suffice to say that at the end of WW2 the U.S.A. bribed up an alliance to win the Cold War, but that war ended 30 years ago. To maintain a global system you need:

• First, You need a political culture that agrees a global trade is important. Bush, Clinton, Obama, and Trump all engaged in policies that alienated all but 2 allies (Mexico and Canada). 



• Second You need global interests. The U.S.A. has never had that, and remains the least involved economy in the world with the lowest imports and exports in the word as a percentage of GDP. 

 There is a chart depicting this in the show notes at www.accredited.website were you can look at for yourself.

• Third You need a global military presence. U.S.A. troop deployments are currently at their lowest point since the 1920s. (Americans still have a larger navy than the rest of the world combined by a wide margin. It will take 200 years for the rest of the world to equal the US Navy's capabilities at the current rate of buildout. Also of note, the 1st, 2nd and 3rd largest airforces in the word are all US flagged. They are the The Air Force, the Navy and the Army.)
 
 - The conclusion Peter makes is that Americans are abandoning the world as international policeman, and he cites a recent theft of a Korean oil tanker by Iran being ignored by Americans as indication of what is to come. 

 - Americans will pay for abandoning the rest of the world and losing so many allies, but not for a very long time. 



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A friend I met back in 2003 while playing in the CJFL called me today to ask a me a real estate related question, let's call him Dave. Dave explained he runs his practice out of a rented space, and told me that his landlord recently increased his rent by 40%, citing an increase in costs. This has Dave thinking about purchasing an existing building and renovating, or building a new building and moving his practice there.

I know Dave already owns a building an hour drive from where he lives, and that he keeps an office there for himself where he sees patients a couple days a week. Part of that building is rented out to someone else.

Dave got a verbal quote from a local builder to build an office for his primary business about $500,000 and he wanted to know if in my opinion if this made sense, or if I he should buy an existing space and renovate.

I told Dave that I am familiar with the cost of building new residential property in BC, somewhere between $180-250 per square foot, but that material costs have really skyrocketed since the pandemic, with lumber moving from under $400 per thousand board feet in early 2020, to now closer to $1000 per thousand board feet. I am not familiar with the cost of building a commercial building and told him a local builder would be a better resource to ask for an updated quote.

In my experience, on a square foot basis, it’s usually cheaper to buy an existing building at the outset, but the effective purchase price is actually a lot higher than you think due to maintenance costs in the first few years of ownership depending on the extent of the renovations and upgrades needed.

comparing purchasing new vs old, Red tape may be reduced with the purchase of an existing building and permits to renovate may not be needed, or permits can be obtained much faster than building new, with a faster turnaround on inspections too. Owning an older commercial building may also make sense if it’s located in an existing neighbourhood with a demonstrated pattern of customer traffic to other nearby popular businesses. This will help attract potential tenants when Dave eventually retires.

The decision on building or buying a new building really depends on Dave’s local market. He’ll need to assess the availability of buildings for sale or vacant lots available for sale in his desired business location, he’ll need to consider the condition of the prospective building he is looking to purchase, and on the intended use for the property. If Dave plans to operate out of that building for the next 30 years, there are long term maintenance costs to consider. A new building will have very little maintenance costs, and an old building will have a lot of aging components that will need to be replaced in the coming years. The roof, wiring, plumbing and building envelope are all large expenditures, and in an older building these have a much shorter remaining economic life, and these components were built with old building standards and building materials that may be at the end of their useful life. Some materials like aluminum wiring, cast iron sewer pipes, or polly B plumbing are at the end of their useful life and would need to budgeted for replacement immediately after purchase.

I’ve been looking at commercial property for lease for a hair salon business, and I can tell you that as a prospective tenant, newer buildings are more attractive from a design standpoint as well. They have better lighting and more modern designs, with better service, making them more attractive aesthetically and reducing the cost of tenant improvements.

Commercial leases are typically triple net, meaning the tenant is responsible for insurance, taxes and maintenance on top of the rent. This means that other prospective commercial tenants will be more attracted to newer buildings because of the lower cost of maintenance.

The type of building Dave buys will also dictate certain closing costs. GST is applicable on commercial buildings whether they are new or not, unlike residential building where used buildings are GST exempt, and mixed use buildings have GST applied pro rata based on the square footage of commercial space vs residential space.

Some investment risk to consider are:

As an Accredited professional, your greatest asset is your future income. Should you acquire more investments where the performance of that investment depends on your future ability to work? Would it be less risky to diversify into other types of investment with a similar or better expected return?

Is there an opportunity cost to owning your own building?

What is your exit strategy?

Business risks to consider include asking yourself:

If you chooses to continue renting, could the rent increase again? Could you negotiate a better long term lease?

Will you lose many customers / patients by moving locations?

If you are the sole tenant of your own building, will you be able to sell or rent the building when you retire?

If you are one of many tenants in a building you own, would the investment make sense if one or more of the other units became vacant? Would you be able to fill the unit and manage the building yourself, and if not is a professional property manager available?

Would it be a problem if the other tenants knew you were the owner? Could the potential for business disputes, spill over into your practice? For example if you took enforcement action for non payment of rent, could the disgruntled party disrupt your office assistant or patients in your waiting room?

Besides those business and investment risk questions, there are Tax implications to consider if you are determined to own your building. You should, talk to your accountant to determine the best way to purchase your office building and what ownership structure to use . Should you own it in your professional corporation, or in a separate holding company?

To expand on this, the type of building matters when considering ownership structure. A small building where you are the only / majority tenant is plainly an asset used inside the business, and it’s probably ok to own this inside your professional corporation. Purchasing your building inside your professional corporation can be preferred because you’re investing with more money than if you pay yourself personally and use the money to set up a holding company. To see what I mean, imagine you’ve eared $1 in your professional corporation which pays tax, leaving 85 cents. You can choose to have your professional corporation invest the 85 cents and have it own the investment. Alternatively you can have your professional corporation pay you, leaving you with 55 cents in your personal name to invest personally, or to fund the purchase through a new holding company.

A large multi-tenant building like a strip mall, or a mixed use building with residential apartments above and storefronts on the main floor could be determined to be an asset NOT used inside the business, and this is an important distinction. While the business risk of owning your own office may be lowered by owning a larger building, thanks to a more diversified tenant base, the future impact on your Small Business Deduction when you sell should be considered. In 2018, changes to the SBD means that when a corporation has investment income over $50K/yr, the active income threshold shrinks by $5 for every $1 of passive income. If you already have investment income in your professional corporation, you may not want to add a building with rental income to its investments. While you can use capital cost allowance to depreciate the building and reduce net income of the building to zero for most of the time you own the investment, when you eventually sell the depreciation you enjoyed is recaptured. If you sell in a fiscal year that you are still working, and your taxable gain is over $50,000, you would erode your small business deduction on all your earned income and pay a lot higher tax that year compared to if you held the investment in a separate Holdco.

In summary, buying a building to operate your practice out of is an individual choice, and depends on a lot of personal factors. The added complexity of owning the building you practice out of should produce a corresponding return on investment high enough to make it worthwhile. Get professional advice, do your own research, and run the numbers. Your path is in the math!

Thanks Dave for a great question. If you have a question of broad interest you’d like answered on the ACT Podcast, please email question@ACTpodcast.website. That’s question@ACTpodcast.website.

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Last episode I explained how the United States became dominant superpower after WW2 thanks to their unfair advantage, which is having double the navigable waterways as the rest of the world combined. Over the next few episodes I will continue to share how the history of the US has impacted Canadian investors, and how we can draw on lessons from history to chart a course for the future.

When the wars were over, the US started the United Nations and associated entities like the IMF and world bank. That is why the UN is headquartered New York City. The US bribed everyone to be on their side against the communist Soviet Union by promising to secure the world waterways and allowing all countries to sell goods to anyone else. Everyone has been getting rich since 1945 by trading with each other in relative peace provided for by American lethal overwatch. The US has been importing goods from the rest of the world and paying for for those goods with US dollars, which was backed by gold.

An event in 1971 called the Nixon shock rocked the world. The US went off the gold standard and could effectively print dollars at will. The US dollar became a true fiat currency. The US also coerced OPEC to accept only US dollars as payment for oil, and I’ve linked an excellent article about this period in the show notes if you’re interested in the details of this history.

Most countries are net exporter of goods but the US is a net importer of goods. The Americans do not need to be importing, but they have hog tied themselves with shipping laws like the Jones Act that encourages import of foreign goods. The Jones Act requires goods shipped between U.S. ports to be transported on ships that are built, owned, and operated by United States citizens or permanent residents. This makes shipping domestically and domestic consumption more expensive, incentivizing imports from other countries where wages are cheaper. At the stroke of a pen they could make domestic trade a lot cheaper and curtail imports but they don’t. They have been deliberately using their consumers to bribe up an alliance that eventually won them the Cold War.

The US has been the winner in this arrangement because they now can monetize their debt, and for decades they have been importing all the finished goods (TVs, cars, computers) from places like China, and exchanging these finished products for their fake US dollar monopoly money.

After decades of this, the U.S. has all the finished goods, China and the rest of the world has the monopoly money.

You might be asking yourself, why does the world put up with this arrangement?

One answer is countries have been getting rich from this arrangement faster than their wealth has been eroded by American money printing. That may still be true, but with the accelerated rate of money printing aka QE since 2008, it may not be true for much longer.

Another answer is that the countries of the world have no choice. Almost all international trade (85% of it) travels on the open ocean, and the US keeps trade safe by policing the world’s waterways with its massive and technologically superior navy, including and it’s devastatingly powerful fleet of aircraft carriers. Smaller ones are called jump carrier. The larger ones are called supercarriers. It takes 8 jump carriers to destroy one supercarrier. There are 21 of the smaller jump carriers in the world of these 11 are American. There are 12 Supercarriers, and all of them are American. China owns 2 of the smaller jump carriers, both are former Casinos. The point is Americans own 96% of long range global firepower, and at the current rate of global navy buildout, the combined nations of the rest of the world will not have a navy equal to the American Navy’s strength until about 200 years from now. They also own the largest Airforce in the world. In fact, the first, second, and third largest airforces in the world are

1. The US Airforce
2. The US Navy, and
3. The US Army

Who has the largest military is an important thing to remember. Through the course of human history, violence is the true gold standard, thus whomever is capable of the most violence holds the all power. If your rich crazy neighbour who has 96% more guns than you is very friendly, is keeping you safe from bandits, and is eagerly buying everything you make with handwritten IOUs, you’ll probably stack those IOUs high feeling really good about yourself.

After all, what other choice do you have?

That’s it for geopolitics this week, and tomorrow we will take a break to answering a question from a medical professional about buying his own office building. On Monday I will return to macroeconomic themes, namely at how the end of globalization as we know it is coming, and how I think about how to prepare for it.

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Last episode I discussed the Canadian economy, and why so many economic commentators watch the United States so closely. The reason we watch the US is because they are Canada’s largest trading partner for both exports and imports. Over the next few episodes I will share how the history of the US has impacted Canadian investors, and how we can draw on lessons from history to chart a course for the future.

I am borrowing ideas from a geopolitical strategist named Peter Zeihan. Like most people, Peter is not infallible in all things, but I find him to be approximately correct in general on matters of the United States’ geopolitical position. I discovered Peter’s body of work a couple years ago, and his presentations and newsletters are worth studying, and I find a section on his website called “know your world” very interesting. Peter points out that in the not so distant past, we didn’t trade goods, we traded bullets. And the most important bullets were actually traded at sea. The reason for this is because that even in the middle of large landmasses, transportation before our modern road and railroad networks was dependant on navigable waterways.

If you look at a map of European settlement of Canada, you’ll notice that the oldest major cities are all along the water. I was home schooled for several years, and my frenchspeaking mother had a keen interest in French Canadian history, so I learned more about the exploits of early explorers than most people. French Canadian heroes like Jaques Cartier, Samuel Champlain, and the men known as “les voyageurs” were all masters of transportation on the water. It was “les voyageurs” who made the lucrative fur trade possible by transporting heavy bundles of furs with large canoes over long distances, and their trade networks followed navigable waterways of Hudson Bay, the Great Lakes, and the St Lawrence River, with the men carrying everything between waterways including the cargo, provisions and the boats in portage.

Even in today’s modern age, floating something from A to B is the cheapest way to to get it around. Access to water and trade via waterways is so important that Part X of the United Nations Convention on the Law of the Sea gives landlocked countries a right of access to and from the sea without taxation of traffic through transit states.

Since floating things is the cheapest way to move them, countries with the best access to navigable waterways have a big competitive advantage over others. According to Peter Zeihan’s website, navigable waterways are defined as waterways with access to populated areas that are at least 9 feet deep, for at least 9 months of the year. Canada doesn’t even make it on the list because our waterways freeze over, but the ranking of countries with the best internal access to navigable waterways are:

1. Saudi Arabia - zero miles

2. Brazil - Zero miles (the Amazon doesn’t count because it doesn’t flow through populated areas)

3. Russia - zero miles (the 2500 miles of the Volga System are unusable during Russian winters

4. Turkey - 300 miles

5. Japan - 600 miles

6. France - 1,350 miles

7. Argentina - 1,900 miles

8. China - 1,950 miles

9. Germany - 2,400 miles

And taking up spot #1 is the United States with more than 20,650 miles.

So there you have it. Within the borders of US, there is twice amount of navigable waterways than the rest of the competition combined. And since floating things is the cheapest method of commerce, Americans has a massive competitive advantage thanks to their geography. They have exploited this unfair competitive advantage since formation, and especially in world war 1 and 2. While the world fought each other, the US got very rich by loaning the fighting nations money, and selling them ammunition, tanks, boats and planes that they were able to build in massive quantities thanks to their unrivalled industrial output. Winston Churchill was in awe of the US’ industrial might, and when the American isolationists finally agreed to join in WW2 he said “I can’t describe the feelings of relief with which I find . . . the United States and Britain standing side by side,” Churchill told the press. “It is incredible. Thank God.” Americans literally can’t screw this up. Thier competitive advantage cuts through agency bias, cults, populism, mass shootings, and all manner of idiocy that regularly makes the news. They cling to power - and over 20 thousand miles of navigable waterways is the reason why.

Tomorrow we will explore the state of the world after WW2 was won, including the formation of the United Nations, the world bank, and how the cold war with the USSR spurred global trade.

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Today’s episode is a brief overview of the state of the economy in Canada. As an Accredited Canadian it’s important to understand Canada’s place in the world so you know how best to invest your money.

Explaining in exacting detail how the economy works is beyond the scope of this podcast, but I’d recommend watching Ray Dhalio’s “how the economic machine works” by Ray Dhalio, an American billionaire for a 30 minute comprehensive summary on the topic to whet your appetite for further research.

Suffice to say, investing your money in companies and assets in a growing economy is how to turn your earned income into investment income. One of the most common measures of growth in an Economy is called Gross Domestic Product. The definition of GDP Investopedia is:`

GDP growth leads to job growth, which leads to in-migration to fill those jobs. This means population growth. Population Growth leads to more demand for goods and services in that area. Investing your money in places with GDP growth will see your investments grow in the future. For instance, and in my industry of real estate investments, a growth or shrinking of GDP is a leading indicator of the price of rent and price of houses, with an 18-24 month lead time in either direction.

What I just described is a bit of an over simplification. In light of the recent trend to work from home, which many people adopted in earnest during the pandemic, many jobs that used to cause in-migration can now be done remotely. However in Canada we are rich in natural resources, and so we have low productivity compared to other countries. This means we need more people physically present to get the job done. 30% of Canadian exports are unfinished goods like crude oil, coal, wheat and metals, many jobs require people to be physically present run mining equipment, running sawmills, driving trucks and running farming equipment. These kinds of jobs can’t be done remotely, you need people to live near the natural resources. Every one of these primary sector job supports about 10 secondary sector jobs that produce finished goods, people doing work like manufacturing cars or car parts, or making flour, or cutting potatoes, or butchering animals. And the primary and secondary sector jobs support the tertiary sector jobs, also called the service industry. You might need 100 people in the service industry including cooks, wait staff, grocers, mechanics, car salesmen, teachers, police officers, doctors and dentists and all the people you need to make a society function well, you may need 100 jobs to service each person working in the primary or secondary industry job. Also remember that since each person with a job may have a family with a few people in it, one primary sector job could be supporting as many as 1000 people who may not be in the workforce. That is a lot of demand and consumption for things people enjoy, like food, housing, transportation, education and entertainment. So you see how small changes in GDP can have a large impact in the population of an area, and the demand for goods and services in that area. This is why GDP is so important to pay attention to.

If you’ve been casually following headlines for your investment news, you may be wondering why so many Canadian market commentators are focused on the United States, and why they use so much U.S. data. The reason is because Canada’s largest trade partner by a wide margin is the United States, so like it or not, we are heavily influenced by our southern neighbour. The United States have the largest economy in the world, and as the world’s only superpower, the policies and economic welfare of the U.S. directly impacts Canadians, including Accredited Investors.

Source: https://oec.world/en/profile/country/can?comparisonDeltaYear=customYearDelta5&depthSelector1=HS4Depth&initialComparisonDate=exportDateAvailable37&tradeFlowSelectorComparision=flow0#trade-services

On the next episode of the A.C.T. podcast, we’ll be discussing Macro Economics in more details, and explore the future of world markets and how Canadians like you and me can position ourselves to prosper from the coming trends.

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This is the first episode of the A.C.T. Podcast and I’ll just spend a few minutes to explain who it’s for The A.C.T. Podcast is dedicated to Canadian professionals like you who are busy contributing to the wellbeing of others. You’ve spent decades educating yourself in your field, and your greatest assets are you intellect, your work ethic, and your future income.

This podcast is especially designed for you if you’re focused on practice, and haven’t yet had time to put your full attention into matters about investing. By virtue of your education and work ethic, you’ve been suddenly thrust into an income level that bestows upon you the label “Accredited Investor”. Maybe like many new “Accredited Investors”, you become one by accident. The Accredited Investors I know are incredibly talented and hard working professionals, but their high incomes are ancillary to their true calling which is to serve their fellow humans. I share this interest in promoting human flourishing, that is why I worked as an RCMP officer for 9 years, it’s why my wife and I adopted three wonderful children, it’s why we support various charities, and it’s why I now focus on making communities safer through real estate investing. I have great respect for people who work to make the world a better place, many of whom I have the privilege to count among my friends, family and colleagues. The label "Accredited Investor” opens up an entire new world for professionals like you, with unique opportunities and landmines.

I started this podcast to shine a light on the tools available to help deal with these opportunities and landmines. One opportunity being an “Accredited Investor” it that allows is to plan ahead for major life events. Whether you’re planning for income disruption due to disability or illness, or income disruption from raising a family, or you’re planning for a career change, or planing for a future sabbatical or you’re planning for your eventual retirement, there are plenty of strategies you can put in your toolkit to trade your current earned income for future investment income.

The faster you can trade your high earned income for investment income the better you can ride the ups and downs of income fluctuation that life will inevitable throw at you. The biggest challenge to do this is landmines that waste your time and money, The more secure you’ve made your financial future, the more security you can offer to your family and loved one.

This podcast will be focused on introducing one idea per day to help Canadian professionals like you navigate the world as an Accredited Investor. It’s my hope these ideas will help you make choices that will lead to your desired outcomes.

This podcast is not legal or tax advice, what will be shared here are ideas and opinions that I’ve formed in my journey to becoming and serving “Accredited Investors” like you.

Positive outcomes live within Action, so If you enjoy episodes of the A.C.T. podcast, it’s your turn to ACT! Subscribe so you’re notified about the next show, and I’d love it if you’d leave a review and share the show with a friend. Talk to you next time on the ACT Podcast!