What I learned

  By Guest Blogger Sinan Terzioglu

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Fifteen years ago I was a New Yorker. Just 28 at the time, it was exciting. An adventure. I was single, no dependents and didn’t own real estate, so it was an easy move. For the first three months the bank I worked for put me up in a furnished apartment in the heart of the city. All I had to do was pack my suitcases and suddenly I was a resident of the Big Apple. If only life were always this easy!

Before the New York gig I’d been thinking about buying a condo in downtown Toronto.  Early on in my career I heard many people say renting was throwing money away – so in moving to one of the most expensive residential markets in the world and putting my purchasing plans on hold I feared I was falling behind.

As those three months of paid-for comfortable living came to an end, I had to find a place to live. The bank set me up with a rental agent to take me around the city. I was shocked.  I knew New York was extremely expensive but on top of that the standards were definitely not what I had become used to. The price range I initially set would easily pay for a nice apartment in Toronto but in New York it basically got a closet. Everywhere I went I discovered something else I couldn’t believe.

Like Toronto today, New York’s vacancy rate is extremely low and rents steadily rise most years. Most available units are gone in 24 hours. There were multiple agents showing dozens of people a single unit. Even if you decided to take a unit after seeing it there was a good chance someone who had just seen it was already in the process of filling out the paperwork. It happened to me several times and needless to say it was frustrating.

Like many people in Toronto and Vancouver today I felt owning would give me security so I started to consider buying an apartment. After the initial sticker shock wore off, I crunched the numbers and had a really tough time making sense of the valuations. Like in Toronto, it was cheaper to rent but my decision to stick to renting had a lot more to do with liquidity, flexibility and freedom. Everyone’s goals and circumstances are different and being single I had to worry about only myself. After going over all the numbers I couldn’t justify the large transaction costs. Unless I owned the property for at least 5 years (as a resident or landlord) it didn’t make sense to buy, since at least 5% would go to transaction costs. I was young and had no clue what lay ahead in the following few years with my career and personal life. I decided that based on my circumstances having flexibility was what I valued most.  So I happily became a renter and took advantage of the defined contribution plan of my employer as well as the US equivalent of our TFSA.  I still had the desire to own real estate but realized it was much more important to build the financial foundation of my life early on, so I didn’t have to worry about it later.

A few years into my days on Wall Street the financial crisis hit. Investment bank Lehman Brothers crumbled and Bear Sterns had to be rescued for pennies on the dollar. In a matter of months some of the largest investment banks and financial institutions in the world had turned to ashes. I couldn’t believe what I saw. Working on an institutional trading desk in those days was intense. All of a sudden industry colleagues lost their jobs. Some had expensive homes with big mortgages. Severance packages helped buy them time but their big lifestyles quickly ate away at the remaining cash until reality hit. Many had a mountain of mortgage debt and savings were raided to cover costs.  I was fortunate to still be employed, with the flexibility of liquid financial assets and no huge mortgage. I, too, could have been out on the street at any point. Sure my investment account was feeling the pressure but I took comfort in knowing I had a balanced and diversified portfolio of quality productive assets.

Toronto increasingly smells like New York to me. Lots of exciting growth especially in the technology sector but there’s no such thing as job security anymore. Just like my days in New York I think it is extremely important for everyone to ensure they build a strong financial foundation for themselves and households. The 2008 crisis proved anything can happen so risk management can never be taken lightly. I’ve worked with several people who never got back to their pre-crisis earnings and regret not saving and investing more. There are plenty of stories around the US of people getting greedy with real estate and eventually being wiped out. We know most don’t have pension plans nor save enough, so whether you are 30, 40, 50, 60+ you must always ensure you’re prioritizing the building of financial assets. If you need $60,000 net a year to live today, then in 10 years you will need the equivalent of $80,000 because of the consistent force of inflation. It’s the silent killer of purchasing power and you must have a strong plan to stay ahead of it.

I was recently asked by a 50-year-old if he should liquidate his entire portfolio and purchase a condo because he feared he would not be able to afford a place to live in Toronto one day.  It was emotional, as he’d recently divorced with no dependents. His portfolio was worth approximately $500,000 spread out across a RRSP, TFSA and non-registered account. No pension plan and income of about $90,000 a year. He wants to retire in a decade with $5,000 a month in net income – close to what he earns now.  If he is able to invest an additional $15,000 a year for the next 10 years and earn an average annual return of 6% his portfolio will be worth ~$1,100,000 by the time he’s 60. This would generate ~$65,000 gross a year in dividends, interest and growth.  Add to that CPP and he will have a good chance of meeting his objective so long as he stays invested. But if he liquidates his portfolio and buys a condo he runs the risk of not meeting his retirement goals.

As Garth says, stop worrying about a roof over your head because you can always rent one but you cannot rent cash flow. If you can afford real estate after you contribute to your financial portfolio, go ahead and buy but, but don’t make the mistake of thinking real estate is the only strategy you need.  If you want to retire at 60 you need to plan to grow financial assets that will take care of you for at least 30 years.

You have no idea what’s coming. So be ready. I was.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.