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The Money Management Newsletter: General Interest
Garth Turner.. Homeowner's Guide Reviewed

Garth Turner's book The Strategy purports to be "a homeowner's guide to wealth creation". The main purpose of the book is to show new homebuyers how to purchase the right kind of real estate, pay the mortgage down quickly and then use the equity as security for a tax deductible investment loan to finance future retirement needs.

There are a few recurring themes throughout the book. One is the necessity to purchase real estate with a future view to selling it. Mr. Turner contends that the two story, multi-bedroom luxury homes that have been built extensively in the 1980's and at present will become white elephants as the baby boom population ages. This generation has, for the most part, been the buyer of such homes, but will eventually move to retirement homes or small bungalows close to high end recreational facilities. The sheer size of boomer downsizing and the lack of succeeding buyers from following generations will make most of these houses unsaleable in his forecasts.

A second intertwining theme is that interest rates will remain low, inflation is dead and that real estate will not be an asset in itself because, with low inflation, property values will not appreciate significantly in the future. Throughout the pages, Mr. Turner reminds us to think of real estate only as a shelter and not as an investment.

A third theme focuses on the rosy prospects of the stock market as boomers sock away money for retirement in a low interest rate, low inflation environment. The book maintains that the long term trend of the stock market is up and that homeowner's should either sell their future white elephants now and invest the equity in the market or borrow to invest using existing home equity. This, in essences, would turn a non performing asset (real estate) into a performing one.

Mr. Turner, in his opening caution to readers, describes the content of the book as "aggressive and extreme" and encourages readers to put it down if they cannot bear the thought of placing their home on the line to invest in something that might fall in value.

Certainly some of the leverage advice (borrowing to invest) is well beyond the limits of a conservative investment philosophy. I particularly disagree with the illustration that describes a young couple borrowing against a paid up home to invest in mutual funds and then pledging the mutual funds as security for a further investment loan. The scenario suggests withdrawing from the investments to pay the loan interest and writing off the interest expense against income tax. This is where the book fails the reader. It throws out concepts such as these without outlining the potential pitfalls or tax considerations. The write-off figures that he uses are not proven and do not make sense.

His comparison of mortgage rates shows how mathematically challenged he is. There is no mention made of the huge tax liabilities that may occur from distributions from the investments, or the risk of job loss that may result in having to sell the investments in a down market. The illustration claims that there is $35,000 less interest paid during the five year term on a $100,000 mortgage at five per cent than at seven per cent. The difference is actually about $9,700.

The tone of the book is somewhat evangelical and stresses the aspect of borrowing to invest without suggesting alternatives. Certainly someone with a paid up home can now, each month, invest the amount of previous mortgage payments without the expense of borrowing (even though loan interest is tax deductible you still have to pay the difference out of your pocket). Systematic purchases over time take advantage of market fluctuations and are preferable to worrying that the market will correct.

Parts of the book are informative however. The section on what type of home to purchase, selecting an agent and arranging a mortgage are instructional and a good tool for both new and repeat home buyers.

A reader should consider the broad suggestions in the book about stock market directions, low interest rates and the effects of the boomer group on various goods and services and incorporate these in their investment planning, but not necessarily to the extremes suggested. Borrowing to invest is not for everyone although it can be lucrative if stock markets remain robust and interest rates low.

Whether or not the future will unfold as the book predicts is anyone's guess. Other factors, such as increased immigration levels and seniors remaining in their homes during old age because of reduced costs will reduce the likelihood of white elephant homes.

All in all, the book provides some food for thought but remember that not all advice is good. It is you, not the advice giver, will be the one to suffer of things do not work out.

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© , Fiscal Agents Money Management Newsletter
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