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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