Where The Rich Go To Get A Loan

[Rickson9]

For those who may be interested.

"Scotiabank has stolen the march on its rivals in the race to provide simplified lending to the 1.1 million Canadian families with net worths of $1-million. Scotia Private Client Group has formally announced a program that`s been in the pilot stage since April: 200 affluent clients already use its Total Wealth Credit Solution."

Financial Post

Personally, I found the following parts interesting:

"Michael Nairne, whose Tacita Capital Inc. caters to ultra-wealthy clients...most of his own clients `have no debt or if they do it`s for interim purposes. It makes no sense for them to borrow: they`re better off cashing in high interest savings accounts or short-term bonds. We normally suggest clients keep their debts in one place and their assets at another.`

"Tom McCullough, president of Toronto-based Northwood Family Office, says Total Wealth is a "positive thing" but not relevant for his clients, who have net worths ranging from $10 to $250-million."

From investing primarily in family owned business trading on the U.S. Stock market I`ve noticed that all of them employ no debt.

Best regards.

 

[Thomas Beyer]

QUOTE (Rickson9 @ Nov 7 2010, 12:39 PM) ......most of his own clients `have no debt or if they do it`s for interim purposes. It makes no sense for them to borrow..different strategies for

wealth creation

vs.

wealth preservation

If you`ve got millions .. then yes, no debt is a good option !!

if you`ve got little or only a few million or a few hundred thousand .. [and many but not all REIN members fall into this category] buying an appreciating asset with debt is prudent too .. as long as the asset cash-flows enough to cover the debt !!

 

[gwasser]

QUOTE (ThomasBeyer @ Nov 7 2010, 11:54 AM) different strategies for wealth creation

vs.

wealth preservation

If you`ve got millions .. then yes, no debt is a good option !!

if you`ve got little or only a few million or a few hundred thousand .. [and many but not all REIN members follow into this category] buying an appreciating asset with debt is prudent too .. as long as the asset cash-flows enough to cover the debt !!

Indeed, leverage is a method to grow your wealth (ROI) faster but it also increases risk. So those more intent on wealth preservation are often not highly leveraged. Also, they tend to have so much cash around that taking out loans while their cash makes 0.5% in a money market fund does not make sense.

I think there is a happy medium because, although wealth preservation is important, those who don`t grow their assets in a capitalist setting tend to stagnate and lose it. As usual, nothing is straight forward.

Hence, I see being wealthy as having under your management a lot of assets (often more than you need to live from) that are under your guardianship during your life for the good of society. The higher powers in life (whatever they constitute) will give you more to manage (more wealth) when you prove you can handle it and you will lose it if you are no longer on the ball. Life is not something intended to be done by sitting on your laurels, there is always new stuff to learn and experience.

 

[Rickson9]

Speaking for myself, I would disagree. I don`t believe that there is a relationship between an individual`s net worth and wealth preservation or wealth growth (ie. just because an individual has a few hundred million doesn`t mean that their primary concern is wealth preservation).

I only buy stock in family run businesses and from what I can tell they are seeking wealth growth. Examples include Hirshfeld (Buckle), Schottenstein (American Eagle), Jannard (Oakley), etc.

Personally I believe that the use of debt is more related to an individual`s personality than their net worth. For myself, I see little need for debt and would only use it if I had no money (nothing to lose). Again, I am only speaking for myself and each individual should obviously do what is best for their situation.

 

[Thomas Beyer]

QUOTE (Rickson9 @ Nov 7 2010, 03:20 PM) ..

Personally I believe that the use of debt is more related to an individual`s personality than their net worth. For myself, I see little need for debt and would only use it if I had no money (nothing to lose). ..
so, Rick, are you saying that one should NEVER borrow money ?

Why not borrow at, say 3-4% .. and invest at 6-12% ? Is this not prudent ?

Most companies issue debt (corporate bonds) because they know how to invest it for a multiple of the borrowing cost. Why not on a smaller, personal, level ?

 

[Rickson9]

QUOTE (ThomasBeyer @ Nov 7 2010, 04:51 PM) so, Rick, are you saying that one should NEVER borrow money ?

That is a good question! To answer I would say that I said,

"Personally I believe that the use of debt is more related to an individual`s personality than their net worth." and that I "would only use it (debt) if I had no money (nothing to lose)."

So I can only speak for myself. I`m not qualified to suggest if debt is approrpriate for another person.

QUOTE (ThomasBeyer @ Nov 7 2010, 04:51 PM) Why not borrow at, say 3-4% .. and invest at 6-12% ? Is this not prudent?

That`s another good question. I`m involved with companies and real estate purchased at double digit earning and rental yields respectively so why not leverage. The obvious answer would be that my personality isn`t comfortable with it so the answer is that it isn`t prudent for me. It also doesn`t appear to be prudent for the owners of Fossil, The Buckle, Columbia Sportswear, etc. (who are compounding money at far greater rates than I am) either. I`m not sure why they don`t leverage their ability to compound money. It seems to depend on the individual`s personality.

QUOTE (ThomasBeyer @ Nov 7 2010, 04:51 PM) Most companies issue debt (corporate bonds) because they know how to invest it for a multiple of the borrowing cost. Why not on a smaller, personal, level ?

You are correct about companies with regards to corporate debt. Again, I don`t invest in those companies. I invest in family run businesses that don`t use debt. The answer to your question, I guess my personality does not feel that the trade off between risk and reward is enough for me to consider using debt.

Why don`t individuals like those who run the businesses that I`m invested in, who have hundreds of millions or billions of dollars, use debt? As I mentioned before, I believe that the use of debt is related to an individual`s personality and that each individual should invest in the way that makes them comfortable.

 

[ChoiceInsuranceofArizona]

QUOTE (Rickson9 @ Nov 7 2010, 02:20 PM) Speaking for myself, I would disagree. I don`t believe that there is a relationship between an individual`s net worth and wealth preservation or wealth growth (ie. just because an individual has a few hundred million doesn`t mean that their primary concern is wealth preservation).

I only buy stock in family run businesses and from what I can tell they are seeking wealth growth. Examples include Hirshfeld (Buckle), Schottenstein (American Eagle), Jannard (Oakley), etc.

Personally I believe that the use of debt is more related to an individual`s personality than their net worth. For myself, I see little need for debt and would only use it if I had no money (nothing to lose). Again, I am only speaking for myself and each individual should obviously do what is best for their situation.


Investing in family run businesses is an interesting investing philosophy and one I had not considered. Debt is a big obstacle to most when it comes to wealth accumulation. It may not be an obstacle once a person attains that level of wealth but going from zero to that point debt is a drawback.

 

[Thomas Beyer]

QUOTE (ChoiceInsuranceofArizona @ Nov 9 2010, 10:31 AM) It may not be an obstacle once a person attains that level of wealth but going from zero to that point debt is a drawback.
why ?

debt for cars or vacations: YES

debt @ 3% for invest property yielding 8% --> worth considering !!

 

[2ndstory]

QUOTE (ThomasBeyer @ Nov 9 2010, 10:32 AM) why ?

debt for cars or vacations: YES

debt @ 3% for invest property yielding 8% --> worth considering !!


When it comes to property, I leverage it. For me, and most of us, there isn`t really away around it. The goal in a long term real estate portfolio is to hold until it is leveraged very little or not at all. Since, especially in MB where I`m invested, most real estate appreciates, the risk is low imo, as long as the leverage is reasonable. The past two properties I`ve purchased are 25% down to exclude any CMHC.

I agree with Jim though regarding the stock market. I`ve been researching and investing in a simulator for a while now and am ready to put down cash before the 2010 fiscal year ends. This will be cash only. The market is too volatile imo, and like Jim said, I too would not be comfortable with leveraging in the market. That being said, I`m not waiting until my 6% interest LOC is paid off. I`ll be investing into an RRSP account so I can take advantage of the tax savings today.

Nik

 

[gwasser]

QUOTE (2ndstory @ Nov 12 2010, 11:13 AM) When it comes to property, I leverage it. For me, and most of us, there isn`t really away around it. The goal in a long term real estate portfolio is to hold until it is leveraged very little or not at all. Since, especially in MB where I`m invested, most real estate appreciates, the risk is low imo, as long as the leverage is reasonable. The past two properties I`ve purchased are 25% down to exclude any CMHC.

I agree with Jim though regarding the stock market. I`ve been researching and investing in a simulator for a while now and am ready to put down cash before the 2010 fiscal year ends. This will be cash only. The market is too volatile imo, and like Jim said, I too would not be comfortable with leveraging in the market. That being said, I`m not waiting until my 6% interest LOC is paid off. I`ll be investing into an RRSP account so I can take advantage of the tax savings today.

Nik
I suggest you use your RRSP to get a tax refund next year and use the refund to invest in a TSFA (tax free savings account). RRSPs have the disadvantage that you are getting taxed at your top margin rate for every withdrawal. So in the very end you do pay top tax dollar on the withdrawal of contributions and profits.

Although you do not get a tax refund from contributions to a TFSA, any withdrawal is tax free (provided you limit the number of withdrawals and don`t use the TFSA as a substitute for your short term savings account or for your chequings account).

 

[2ndstory]

QUOTE (gwasser @ Nov 12 2010, 01:32 PM) I suggest you use your RRSP to get a tax refund next year and use the refund to invest in a TSFA (tax free savings account). RRSPs have the disadvantage that you are getting taxed at your top margin rate for every withdrawal. So in the very end you do pay top tax dollar on the withdrawal of contributions and profits.

Although you do not get a tax refund from contributions to a TFSA, any withdrawal is tax free (provided you limit the number of withdrawals and don`t use the TFSA as a substitute for your short term savings account or for your chequings account).

What if the RRSP discount brokerage account is something that I see as long term? When I retire, my bracket should be lower, correct?

Nik

 

[gwasser]

QUOTE (2ndstory @ Nov 12 2010, 12:42 PM) What if the RRSP discount brokerage account is something that I see as long term? When I retire, my bracket should be lower, correct?

Nik

TSFA is long term as well and you will not be forced to put your investments into a RIFF and closedown the RRSP when you`re 70. For many succesful investors your tax bracket is likely to be higher. It depends on how rich you are when you retire/ withdraw from the RRSP. It also depends on whether income taxes in general are higher at that time or not. Think Obama deficits and potential tax increases; this may happen in Canada`s future as well; it certainly happened in the past. Tax regimes are unpredictable so that is why investing in TSFAs should be condsidered to be a very important part of a diversified portfolio.

Many high wealth people tried to use universal insurance policies with super high management fees. Now this is obsolete thanks to the TSFA and it is now part of the investment tool kit of all Canadians, high wealth or low. The Harper government does sometimes things right.

Gordon Pape has written some easy to read books on RRSPs and TSFAs and updates them annually. Highly recommended reading for any tax-conscious investor.

 

[bizaro86]

QUOTE (2ndstory @ Nov 12 2010, 12:42 PM) What if the RRSP discount brokerage account is something that I see as long term? When I retire, my bracket should be lower, correct?

Nik

That is the conventional assumption, but I question why anyone would plan to have less money later than they have now. I certainly plan to have my income be higher in retirement than it is now, since I plan to travel more, etc. Other may have a different plan, but to me, planning to "live poor" doesn`t sound like much of a retirement.

Of course, your intention may be to live off real estate positive cashflow, and to shelter that income with depreciation, in which case your lifestyle may not fit your tax bracket.

Michael

 

[2ndstory]

QUOTE (bizaro86 @ Nov 12 2010, 03:05 PM) That is the conventional assumption, but I question why anyone would plan to have less money later than they have now. I certainly plan to have my income be higher in retirement than it is now, since I plan to travel more, etc. Other may have a different plan, but to me, planning to "live poor" doesn`t sound like much of a retirement.

Of course, your intention may be to live off real estate positive cashflow, and to shelter that income with depreciation, in which case your lifestyle may not fit your tax bracket.

Michael

I didn`t mean to hijack Jim`s thread, maybe a new thread is warranted.

Nik