Everyone loves a good board game, especially when the internet goes down. In our house, during such times, it’s the tried, tested and true game of Monopoly that often appears on our dining room table. I’ve found that of the many lessons the game teaches, managing cash flow is the key to winning.
My secret strategy — hopefully my family doesn’t read this — is to begin by going after the rail roads: owning all four leads to a $200 charge per hit, which adds up fast and provides an excellent source of cash flow.
I also concurrently use my initial cash hoard to go after the low-to-medium-cost properties but I’m careful not to overdo it so that I can afford to add houses and/or hotels. This really helps build up a nest egg of liquid assets that keeps me in the game.
Trouble usually finds those who either buy too many properties or the most expensive ones, leaving them without enough money to convert those landing spots into cash-flow-generating assets. It then comes down to the roll of the dice.
While the saying goes it’s better to be lucky than smart, I find that being smart means playing the odds and increasing one’s luck. As in the game of Monopoly, Canadians are in love with real estate but often end up making the same mistakes as those in the game do, leaving themselves at the mercy of a dice roll when economic trouble hits.
Instead of keeping a close eye on managing their cash flow and building up a safety net, Canadians have instead gone on a buying binge so significant that residential real estate now accounts for approximately 60 per cent of our net worth, compared to only 40 per cent in the U.S., according to Statistics Canada and U.S. Census Bureau data.
As a result, household spending in Canada is also at 29.5 per cent of disposable income compared to 16 per cent in the U.S., according to OECD National Accounts Statistics. This doesn’t leave much of a cash hoard as deposits, mutual funds, and stocks account for only 28 per cent of Canadians net worth compared to 40 per cent in the U.S. Meanwhile, our household debt as a per cent of net disposable income is at 182 per cent compared to 105 per cent in the U.S.
This helps explain Statistics Canada figures that show that 20 per cent of mortgage borrowers do not have enough liquid assets to cover two months of mortgage payments
So what happens if such a borrower loses their job, or becomes unable to collect rent from an income property or rent it out as an Airbnb?
According to the Canadian Bankers Association, so far more than 700,000 Canadians have opted to defer or skip payments. Should things get worse, unfortunately offloading some of these properties may not be an option with April home sales in Canada falling 57.6 per cent from the same time last year and posting the lowest volume of transactions for the month since 1984, according to CREA.
Then there are those telling investors to buy even more residential real estate within their investment portfolios. While this makes sense for larger multi-family offices and ultra-high-net-worth individuals, remember that they have significantly more cash flow with a lot less liquidity needs and as a result have a much greater ability to stay in the game than you do.
For the average Canadian, it’s not too late to change one’s strategic positioning. A great place to start is by determining how much of one’s balance sheet consists of liquid and illiquid assets and, most importantly, identifying any risks to cash flow. While this approach isn’t as much fun as immediately buying Boardwalk or Park Place, with a bit of luck and some smart repositioning you may not only be able to own them one day but also have the ability to turn them into the powerhouse cash-flow machines they can become.
Martin Pelletier, CFA, is a Portfolio Manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.) a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.
