Welcome back for another Canadian Physician Finance Grand Round
Personal finance is about getting the big things right. One of the big things is real estate, and that will be the theme this month.
Housekeeping – This past month on Loonie Doctor:
Swap ETF Basics: We reviewed how swap ETFs work and their general risks in April/May. This month, we looked at using the risk premium to get a sense of how much more return you could get for taking the risk of using a swap ETF compared to a conventional ETF.
Is HBB The Little Blue Pill for bonds? We compared how the Horizon bond total return index bond ETF might perform compared to a conventional bond ETF in a personal taxable account. The results were arousing, but could be doused by politicians ruining the mood.
Understanding corporation GRIP and how it can save tax. We had to spend some more time learning accountant Klingon. This account can be used to help flow eligible dividends tax efficiently from your corporation if used properly. But, be careful, if you don’t have a good grip on GRIP, it can cut both ways.
HBB versus ZDB versus The Legislator. With the Legislator attack, professional corporations that hold bonds could see their returns terminated. In this simulation, we look at how we can repel that attack using our Klingon RDTOH, GRIP, and the Horizon HBB bond ETF. We also talk a bit about discount bonds as an alternative.
Introducing Money & Mistakes Rounds. Part of helping physicians avoid making financial mistakes is for us to learn from each others mistakes. The Physician Financial Independence Canada Facebook group is like a medical staff lounge for informally doing this. I will have some more detailed confessions for us to learn from, like an M&M round, on Loonie Doctor.
Real Estate and Physicians
Real estate is one of the major asset classes that physicians, dentists, or other high income professionals hold or consider holding. This is a broad description and in this round up of blog posts, I wanted to highlight something from each area:
Active real estate investing, like becoming a landlord or house flipping
I am not going to dwell much on this option. It basically means taking on another job outside of medicine. If you enjoy that work, great, it is an option. To be a successful active real estate investor requires time and effort to find the right deal. Additionally, it then requires either more work to manage the property unless you sacrifice some income to hire a property manager. Passive Income MD has a well developed site about side gigs outside of medicine, and gives some good pointers when considering an investment property. It is in the American context, but many of the same principles apply here.
Passive real estate investing
Dr. Networth is more my real estate investment speed. I don’t want to burn too many calories trying to achieve morbidly obese FatFIRE. His focus is passive real estate investing. There are a number of lower work options to make money in real estate using REITS, mortgage lending, or joining a private equity group or joint venture partnership. Dr. Networth describes these approaches to passive real estate investing on his blog.
Holding Real Estate In A Professional Corporation
The advice that docs get on how to do hold real estate in relation to their corporation is variable between accountants – although it is ultimately your bottom on the line. Dr. Networth recently put together a general review of how medical professional corporations holding real estate investments should structure their empire. It even has nice pictures and flowcharts for guys like me.
As a practicing physician or dentist, owning your building is a form of real estate investing that could have advantages. There is potential for a tax-free capital gain on sale assets used for active practice. Those capital gains also would not count as passive income for the new small business tax rules. I have had a hard time finding a good article about this one. If you have any, please post them in the comments section below.
Our Personal Residence
For most of us, our home is our main real estate holding. Financially Free MD (FFMD), wrote an excellent detailed analysis of investment returns from your principal residence. There is controversy about whether to consider your residence an asset or a liability.
As FFMD describes in the above article, personal real estate as an investment can have some behavioural advantages. It makes use of leverage, is relatively illiquid making it less prone to panic selling, and the time horizon for most is long. That said, it is still possible to misbehave. If I had a house like the one of the left, I would have to pay for my inevitable indiscretions with several hours on a treadmill. While, I did not overspend in an affordability sense on my own house, I did learn some lessons from building my monster home.
Residents and Real Estate
One of the reasons that I was able to financially get away with building a castle is that I did it later in life. After getting my financial house in order. While there is a strong cultural and human emotional drive to own your home, the White Coat Investor (WCI) gives 10 reasons why residents should not buy a house.
A second home or cottage
A common piece of financial advice for physicians is to only have one house. However, with summer here, I am sure that many are vacationing. With those stays at laid back locals often come the thoughts of “wouldn’t it be nice to have our own place here?”
Having a second home or cottage is generally an expense compared to renting. However, with careful purchasing, there is the potential for it to be a good or bad investment. Personally, we decided to forego a cottage. That is partially why we ended up building a country home to achieve many of our “cottage” needs. However, a few years ago we did get a second home for vacationing… a motorhome. It does not have the potential to appreciate, like real estate, or even retain its value. A terrible financial investment. However, it has been the best bad investment that I have ever made and I’ll expand on that in some future posts.