June, 2023 - Millionaire on the Prairie

My Rambling Thoughts on the Empty-Home Tax

For the past 2 years, I’ve been reading articles the lack of housing affordability and the impact of an empty-house tax. In short, fewer and fewer people can afford to rent property at current prices. This is troubling for a lot of reasons. Allow me to say that I’m not an expert in this area. I’m not giving you advice about what I think you should do. This article is just a few of my rambling thoughts about the proposed solutions that I’ve heard thrown around.

A Couple of Basic Premises

Renters have seen rental rates skyrocket since the end of the pandemic. As I understand what’s being reported in the media, it’s becoming increasingly common for people to face rent increases of hundreds of dollars if they want to renew their leases. Moving to a new place is also a shock to the system. The next place is not going to be any cheaper than the current one, and is likely to be even more expensive. Some renters would prefer to buy, if they could.

The law of supply and demand is also at work. When there are insufficient rental homes to satisfy rental demand, then the cost of rent goes up. Conversely, when there are more rental properties than there are renters looking for a home, then the cost of rent goes down.

If the empty-house tax doesn’t increase the supply of rental accommodations, then it similarly will not decrease the cost of rent. I’m happy to be proven wrong on this point.

Empty-House Tax

One of the proposed solutions is to force owners of to pay an empty-home tax if they own more than one property. I think the idea behind this proposal is that the owners will rent their empty homes to someone in order to avoid the tax. Personally, I don’t think that will happen on a grand scale. (And if I’m proven wrong, then I’ll say that I was wrong.) What I think will happen is this.

The Very Rich who don’t want anyone else using their pied-a-terre while they are living elsewhere will view the tax as a nuisance and pay it. The same applies to the Somewhat Rich and the Barely Rich. Those who have the money and don’t want others living in their property will simply pay the tax. This means the home stays empty and doesn’t go on the rental market. Renters will not have access to those homes, just as they don’t have access to them now.

The Very Rich, the Somewhat Rich, and the Barely Rich who don’t want to rent their properties will be motivated to sell their properties to someone else. Such an action means that the houses will not be sitting empty. There is no guarantee that the next buyers will add those houses to the rental market. The next buyers might actually want to live in those homes. In such a situation, renters are no better off. Some of them might be able to buy a few of the empty-homes. After all, an influx of homes for sale means an increase supply so the price of homes should fall. This doesn’t help renters though. It helps buyers.

At the end of the day, it would be dumb to believe that homes sold to avoid the empty-homes tax will become part of the rental pool. They won’t, which means that they will not help to drive down the price of rental accommodations.

The Very Rich, the Somewhat Rich, and the Barely Rich who want to keep their property and avoid the empty-home tax will add their properties to the rental market. However, I’ve yet to hear from anyone who has the hard data of whether there will be enough new homes on the rental market for everyone who wants one to get one.

Remember, real estate investors who want to rent their properties are already doing so!!! The empty-homes tax is targeted at people who can afford to have one home sit empty for considerable periods of time. I would venture to guess that this a much a smaller pool of property owners. They’ve already signalled that they don’t want to be landlords. For whatever reason, their properties sit empty. Owners of these properties know that money could be earned yet they choose not to become landlords.

Even if every single one of them rented out their empty-home to avoid the tax, I’m doubtful there would be enough new rental properties to satisfy the current demand or to appreciably drive down the price of rental accommodations. In other words, only a few renters would benefit and the problem of unaffordable rents would remain.

Increasing the number of rental properties

In my humble opinion, the empty-home tax does not appreciably increase the number of rental properties available to renters. Similarly, it doesn’t decrease the cost of rent.

I don’t have any good answers. Truly, I wish I did. Renters deserve to have homes, just like owners. Having a safe, clean, and comfortable place to live is something that everyone should have. Again, this is just my opinion. The empty-home tax does little, if anything, to ensure that renters have greater access to the kind of living conditions that they want. I’m willing to be persuaded otherwise. It strikes me that the empty-home tax might increase the number of homes available to buy. I’ve yet to be convinced that it will increase the number of homes available to rent. The empty-home tax does not help renters in any appreciable way.

Simple Ways to Save Money

I have learned that there are 3 foolproof and simple ways to save money. These methods work for me. I’m going to share them with you. If you want to use them, great. If they work for you, also great! And if you think that they don’t work for you, then so be it.

Stay at home.
Stay off the internet
Use the word “No”… a lot.

Stay At Home

When I’m at home, there are precious few ways for me to spend my money. At home, I have many free things to do. I can read books. My garden and yard always need attention – watering, fertilizing, trimming, picking up litter, weeding, transplanting. Being outside in my yard offers the triple benefit of fresh air, free exercise, and no opportunity to spend money.

As soon as I leave my home, it’s a completely different story. Sit back and let me spin you a tale…

I needed gas for my vehicle, so I went to Costco. My goal was to spend no more than $40. (To preserve my sanity from the exceedingly high price of gas, I fill up when my vehicle is down to half a tank. The price is less palatable, even though I might be going more often. We do what we need to in order to protect our mental health, right?)

While standing at the pump, I remembered that I needed to buy some bread. Costco sells the bread I like in a 3-pack, which means I can stash a couple of loaves in the freezer until I need them. So I went inside the Costco store. And on my way to bread section, I remembered that I was running low on fish and that I’d been hankering for some fish. So I stopped at the meat section. I grabbed my chicken – a package each of thighs and breasts – then grabbed one package of salmon. My planned spend of $40 turned into $119 in the blink of an eye.

How did it happen so fast?

Easy! I left my house. And while I was ought spending as planned, I remembered other things that I needed. Since I was already there, didn’t it make sense to spend my money right then and there on the things that I needed instead of making a second trip another day? Did it really matter that I hadn’t planned to spend an extra $79 that?

When I want to save money, I just stay home on most days of the week. This way, I know in advance that I’m going to be spending money on those days that I do leave the house and I can plan for it.

Stay Off the Internet

At home and outside is a highly effective situation in which I don’t spend money. Indoors, there’s a lot more advertising coming at me. I gave up cable in 2015 and switched to streaming services. Cutting the cord eased the pressure on my wallet, and streaming services deliver the same quality of TV as cable. Sometimes it’s even better. I’m always a year behind on Grey’s Anatomy, but that’s okay. It’s just TV – it won’t go bad if it’s not consumed right away. As a result of my choice to cut the cord, the only advertising I see comes in the form of embedded marketing. Heaven help me if I go anywhere else online!

Nearly every website has some kind of advertising! This shocks absolutely no one. However, what I’m finding is that the advertising is getting to me. I used to be able to block it out, but now… not so much. Thanks to the ads on multiple pages that I visit, I’ve come to discover that my life simply won’t be complete until I have a pergola & composite deck installed at my house and buy some brand-new patio furniture. Can you believe that I’ve lived this long without these things?

I’d thought my sense of apprehension about the future was due to climate change, severe income inequality, and deeply embedded social problems. Turns out, those slight yet ever-present bad feelings in my tummy were due to the fact that I don’t have a backyard worthy of a magazine cover on Home and Garden. If I just spend some money to make my backyard look great, then I will be happy.

Thank Deity-of-Your-Choice for the advertisers who planted this idea in my head! <sarcasm off!>

If I want to save money, it’s best if I just stay off in the internet and avoid the ads.

Use the word “no”… a lot!

I’ve spoken before about the importance of prioritizing what you want from your life. This way, hopefully, you spend your money on the things that matter most to you. After all, you work hard for your money. When you spend it, that money should be working hard for you too.

The only reason that I haven’t run out and bought myself an even prettier backyard is because I know that there are more important things for my money to do. I still plan to travel. That’s a little luxury that’s going to cost me more than it did pre-pandemic. Flights, hotels, food, souvenirs – I want these things more than I want a pretty place to sit while mosquitoes eat me alive.

The word “no” is tiny but tough. It’s a powerful little thing! I say it to myself when I want to stop at the drive-through instead of eating the food in my own fridge. That little trip to Costco I mentioned before? It could’ve been a $200 wallop to the wallet, instead of only $119. My store still has some lovely gardening planters that I’ve had my eyes on for a little while. And there were so many lovely, delicious things in the bakery. I told myself “No!” instead of filling up my cart.

Keeping focused on my priorities makes it a lot easier to say “no” when it’s required.

Looking back over my life, there is only one time that I regret that I said “no” to myself. My second cousin had invited me to her wedding in Paris. I didn’t know her very well and accepting the invitation would’ve meant travelling to Europe twice in the span of 4 months. My budget simply couldn’t swing that kind of travel, so I had to decline the invitation. After seeing the wedding photos and how stunningly beautiful everything was… <big sigh goes here>… Well, everyone has a regret or two, right?

For the most part, I use the word “no” a lot when I want to save money.

So that’s it. Those are my simple ways to save money. Take what you need from this post, leave the rest. The choice is always yours. If these rules don’t work for you, that’s okay. I’m sharing my bits of wisdom in the hopes that they help. You may just need to come up with your own rules, habits, mantras, incantations, spells, whatever in order to save your money.

People Should Always Have Atleast Two Bank Accounts

Today, I was reminded of why it is essential for people to always have atleast two bank accounts. It’s to protect your money from a bank’s right of offset.

What is “offset”?

Very simply, it is the power of the bank to raid your accounts in order to satisfy a debt that you own to the bank. You might now realize that you agreed to allow them to do this… but, rest assured, you did. Read the terms of your banking agreement and you’ll learn that you’ve given them pre-authorization to take your money if you can’t pay your debts.

If you always pay your loans on time, then this article isn’t for you. Similarly, if you know without a shadow of a bout that you’ll always be able to pay your loans on time, then this article probably isn’t for you. These words are for everyone else.

Let’s say you have a mortgage, a line of credit, a credit card, a chequing account, and a savings account with Bank X. Without fail, you’ve paid your loans (mortgage, LOC & CC) from your chequing account. However, something happens and you can’t pay your bills. Maybe you lost your job, or you’re too sick to work. Whatever it is, you’re not in a position to pay so you don’t.

Your bank gets concerned. After all, they lent you the money and you promised to pay them back. Now, you’re not paying back your loan. Your bank may or may not understand why you can’t repay the loan, but they can’t make profits off of understandings. They make money from loan repayments. So the bank starts eyeing your savings account. Maybe this is your emergency money, or travel money, or stash to move across the country. Whatever the money’s for, the bank sees that it’s there and they decide to take what they need to satisfy the loan that you took from them.

See? They used the right of offset to take money from your savings to pay the debt that you owe them.

How can you thwart a bank’s right of offset?

It’s very easy. Get two bank accounts at two different banks. Bank X can only use the right of offset for accounts held at their bank. If Bank X wants to get their fingers on your money at Bank Q, then they have to go to court and get an order to do so. It’s a far more expensive and lengthy process to get money out of an account at a different bank.

My advice to you is simple. Always have atleast two bank accounts. Keep them at different banks. You can still set up an automatic transfer of funds. The transfer will just be from one bank to another. This allows you to build your emergency money, or short-term goal money, without fear that the bank holding your loan will raid your funds.

Ideally, you will borrow money and pay it off as fast as you possibly can. Debt is still bad, but sometimes you have to use it. When you take out debt, do not forget that the banks can take money from any of your accounts with them to repay that loan. If you have money that you absolutely do not want your lending bank to access, then put that money into an account at a bank that hasn’t given you a loan.

To be clear, I am not telling you to avoid repayment. You borrowed the money so you owe a debt. Not paying your mortgage is a financially destructive choice, which only hurts you. I would strongly urge you to avoid that course of action causes because it will cause significant problems in many other areas of your life. If you take out a loan, then pay it back as fast as you can!!!

What I’m telling you is to keep all of your money safe from lenders for as long as you can. Put it somewhere that your lending bank cannot touch without a court order. Normally, that safe place is found at another bank. You should always have atleast two bank accounts, and they should be at two different banks. Be honest with yourself. Don’t you work too hard for your money to lose control over how it’s used? I think we both know that the answer to that question is “YES!”

Not all advice is for all people

As I’ve gotten older, I’ve had to realize that some of the nuggets of wisdom that I hold dear won’t work for everyone. Even my cherished belief that everyone should live below their means is flawed. It is literally impossible to follow the LBYM edict if you most basic needs – food & shelter – outstrip your take-home income. Advising everyone to “live below your means!” is tone-deaf to the reality that not everyone has sufficient means to survive.

Another bit of wisdom that I’ve always questioned comes from the blogger behind GreaterFool. Prior to the pandemic, this blogger encouraged everyone to sell their home, invest the proceeds in the market, and live off the dividends and capital gains. Quite wisely, he took the position that cash flow is more important than net worth. Beneficiaries of outsized tax-free capital gains on their home would be smart to sell it and invest the proceeds in a diversified stock-and-bond portfolio. In turn, the portfolio would churn off enough money to pay rent to a landlord somewhere.

The blogger explained how landlords were effectively subsidizing their tenants. In his view, home prices were going to drop drastically so homeowners would be better off selling their home at high price points and becoming tenants. Before the pandemic, market rental rates were less than the landlord’s expenses to own and operate rental units. The landlord couldn’t increase the rent too much or the tenant would walk away and find somewhere else to live. At the higher end of the rental market, this was a serious concern.

So if a homeowner could sell their home, and their proceeds could cover the rent of a comparable rental property, then it would make sense to sell. The homeowner-turned-renter would realize the tax-free capital gains of their home and move into a landlord’s property. According to the blogger, their invested proceeds would generate enough dividends and capital gains to cover the cost of market rent. The landlord would cover the difference between the rent received and the costs of owning the unit. The homeowner-turned-renter could then cover the rest of their expenses with income from their employment.

The first time I heard this financial advice, I was really impressed. It sounded like a very good thing, but then I started asking questions:

what if there was a dividend cut or the capital gains dropped?
what if rents went up faster than growth on the invested portfolio?
what if the portfolio was compromised somehow?
what if the portfolio’s generated returns weren’t enough to rent in the first place?

These are the questions that would keep me from sleeping well at night. Never worrying about how I’m going to pay for my shelter is one of the very best benefits of having a mortgage-free home. Others may feel differently.

I’ve no doubt that the blogger’s proposed financial path would work for some people. After much careful reflection, I realized that I wasn’t one of them.

This advice never sat well with me, even though I own a mortgage-free home. Yes, selling my own home would give me a six-figure sum to invest. In my case, the resulting dividends and capital gains wouldn’t be enough to cover rent for a comparable property in my city. I would have to keep working way beyond my intended retirement date. It would be years and years and years before my portfolio would be generating enough money to cover all of my expenses.

Once again, I’d be sharing walls with strangers and living without those little extras a house brings to one’s life: added privacy, extra room, green space. Undoubtedly, my rent would increase every year and I’d be without any guarantee that my investments would churn out enough money to cover those rising costs. Finally, if I was living off my dividends and capital gains, then I wouldn’t be able to have them automatically re-invested. In short, I’d lose the benefit of compound growth.

Nope. This blogger’s advice was not for me. There were too many drawbacks and too few benefits given my preferences and how I want to live my life.

That said, I could certainly see this advice working for people whose homes were worth over $3,000,000. At a conservative 5% return, there would be $150,000 of favourably-taxed income to spend every year. With that many millions to invest, there might even be enough money to cover inflationary pressures and rising rents.

In my humble opinion, an investment portfolio of less than $3,000,000 wouldn’t work for me. That’s not to say it wouldn’t work for someone else. Again, not all advice is for all people. In my head, going into my dotage while still paying rent to a landlord is rarely a wise course of action. Rents tend to go up. Without the benefit of compound growth over the long term, my dividends and capital gains would eventually become insufficient to cover rising rental rates.

For the record, my house is not worth an amount anywhere close to seven-figures. Investing its proceeds might generate $1000 per month. In my city, that’s currently not enough for the average 2-bedroom apartment. Why would I move from a comfortable-for-me-sized house to an apartment with half as much space, no yard, and less privacy?

With my own paid-off house, I benefit from compound growth of my dividends and capital gains while I’m still working. Yes – I still pay property taxes, insurance and repairs for my home. However, those aggregate costs are far less than what I would pay in rent to a landlord, year-in-year-out. When I eventually stop working, I don’t have to worry about rental increases because I own my home.

The only benefit I see to the blogger’s proposed course of action is immediate lump-sum investing. Someone following his advice would be able to invest a big chunk of money today and benefit from long-term growth. The stock-and-bond portfolio would grow over time and possibly make the homeowner-turned-renter wealthier that someone like me. I rely on consistent bi-weekly contributions from my paycheque to dollar-cost my way into the market. In short, my chosen path was to pay off my mortgage in under 5 years then build an equity-based, buy-and-hold investment portfolio. I’m making contributions but I’m not going to receive the benefits that come from investing a huge lump-sum immediately. This is because it’s always better to invest as much as you can, as soon as you.

The blogger in question is writing for a wealthier audience. I’ll still visit his blog to learn things and to get a perspective on how some of the Wealthy handle their money. I’m seasoned enough to know that I won’t agree with everything this blogger writes. Those best-served by his views are those who have a considerably higher level of wealth than I do.

As you continue to learn about personal finance, you’ll come across many suggestions about what to do with your money. Think carefully! Every money mistake can be undone, given enough time. Yet, wouldn’t it be nice to avoid those mistakes in the first place? Just because something is a good idea or it’s works fabulously for someone else doesn’t mean that it’s the right move for you. It never hurts to remind yourself that not all advice is for all people.