Tuesday, July 3

Rethinking my asset allocation

Well June's net worth was down - no surprise there as I had to write much larger cheques to CRA than I hoped. And I still have more pain to go through as my installments for this year are larger and I need to do some catch up payments. Plus there was another big expense that came through this month... yup, all down.

Okay, enough of that topic!

I've been thinking about where I have my money and wondering if I am doing it right. Using June's numbers, I figure my asset allocation, in broad terms, looks like this:

46% - stocks and stock-based mutual funds
37% - home equity
7% - cash
6% - retirement accounts
4% - assorted other stuff

When you consider that my retirement accounts are also stock-based mutual funds, you can see that I have over 50% of my assets in this category. So what I'm thinking is approximately this... what if I took some of this money out as a down payment on another property?

Why would I do this?

Well, first off, the house I'm living in right now would be better off as a rental. If I moved out it would be cash-flow positive, probably by $1000+ a month. That's huge. In fact, including the principal amounts that the renters would be paying, I would be expecting 7-10% return on the equity that I have in the place. Even with vacancy, it would stay cash flow positive.

Secondly, this place is really too big for me. I am taking up space that is worth more than I would be willing to pay for just myself but I don't even like being in a big place. I'd rather move into a smaller house or even condo and have only the space I need.

Thirdly, I don't like living above my basement suite. I'd like to be either in a house on my own or a concrete building where I don't hear my neighbours.

And then there is the asset allocation side. I feel that perhaps I have overweighted myself in equities. Also, real estate seems to be better at producing cash flow than the stock market and with my declining earnings this is a factor for me. And it is the investment with the benefit of providing a place to live.

And finally, there are the tax advantages. I need to check with my accountant, but I believe that the plan would be to sell my house to my company, triggering a tax free capital gain for me personally and building up a large amount of money that the company owes to me and that I may withdraw tax free.

So this is something that I have just recently started considering very seriously. I will probably be able to provide further updates over the next couple weeks as I start to look into it in more detail.


FourPillars said...

I'd say that having 37% of your equity in one house is not very diversified but so what? That's true of every homeowner.

I wouldn't worry about asset allocation too much, if you want to change where you live and owning two properties fits your situation better than go for it. You're pretty young so you have plenty of time to get back into the equities game.


qcash said...


If you sell your property to your company, the revenue is considered passive income and gets taxed accordingly. Not saying it is a bad idea, but just be aware of the consequences.

Also, if a certain percentage of the income of the company is derived by assets that are not generating active income, it could eliminate your CCPC exemption too.


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Nabloid said...

Just remember, renting out properties is more work than a high paying REIT... repairs, vacancies, late payments... all that fun stuff.. You can probably get above 10% on your money with a good REIT.

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