New Purchases – TMC and AI

Last week I invested roughly $5K into two new companies: Timbercreek, and Atrium. Both are mortgage backed securities called MICs and trade publicly on the TSX.

Timbercreek (TMC) is based out of Ontario, where it conducts most of it’s lending business. TMC recently lowered its interest payout to 7.8% a year, which is still pretty attractive 🙂 Its CEO recently said “Given our primary objective is preserving capital, we believe it is prudent at this time to reduce our payout to maintain credit quality rather than increase risk in the portfolio.”

Atrium (AI) has most of its portfolio in first mortgages. Its average loan to value ratio is only 64% so a small correction in Canada’s real estate market should not affect the company’s principal investments. Atrium currently pays 7.3% a year.

My new investments are generating $364 every year 🙂 That’s like $1 a day of passive income 🙂 #Winning! Some readers might be thinking “Yeah, but you have money to invest, Liquid. What aboot the rest of us who don’t have $5,000 to buy these MICs?” Well hold on to your toques because I didn’t have any money to invest either. In my latest net worth update I revealed that I only had $800 in cash. So here’s my secret – I used a retirement plan loan to buy these new stocks 🙂

I’m not sure if other countries have something similar but in Canada any major bank can give people short term loans to invest in their retirement accounts. These loans generally have to be paid back within a year via monthly installments. To get a retirement plan loan simply walk into your local bank, ask to take out an RSP loan, and a financial representative will help you complete the application. An RSP is Canada’s equivalent to the an IRA in the U.S. or SIPP in the U.K. I believe.

Earlier this month I got a $11,000 RSP loan at 4% interest rate. I’ve used $5K of this loan to buy the MICs, and plan to use the remaining $6K to buy some bonds later. But for the purpose of today’s post all we need to consider is a $5,000 loan.

So if we can easily borrow $5,000 at 4% interest, and then use that money to generate over 7% return from a couple of MICs, then that means we can still keep the difference of ($364-$200) $164, as profit 😀 It goes without saying that we should only borrow what we can afford to repay. I’ve been using RSP loans every year since 2010 and it’s really sped up my retirement savings!

But this plan does come with risks. First there’s the risk of not being able to pay back the RSP loan. Luckily this risk is reduced every month until the loan is completely paid off within one year. Then there’s the risk of the investments. A publicly traded MIC is like any other stock and we could technically lose all our money if the share price drops to zero. That’s very unlikely to happen given its mandate to preserve investor’s capital, but anything is possible 😕 Thankfully MICs are less volatile than other stocks in general. According to Google, the Beta for Timbercreek (TMC) is just 0.13. This means it only moves 13% as much as the S&P/TSX Composite. Here’s a graph comparing the last 6 year performance of TMC and the TSX Composite.

Judging by the graph I think history suggests that buying some MICs now would add stability to our portfolios and create lower volatility if another large recession hits. I suppose in a way borrowing money to invest, and using 100% leverage can actually decrease our financial risk because in this case it mitigates our exposure to a potential market correction. So when it comes to risk management, investing other people’s money isn’t necessarily a bad idea 😉

The $5,000 RSP loan will be paid off after one year. But our MICs shall continue to generate income for us, which by then will be $27/year more than the previous year thanks to monthly compounded interest. So it’s not hard to imagine that we could easily create $12,000 of annual passive income after consistently repeating this strategy every year for a couple of decades or so. Not a bad retirement plan eh? 😀

Investing is the great equalizer of wealth. It doesn’t matter if you’re rich or poor, self employed or office worker, have tons of savings or have tons of debt, because anyone can start making $164/year of pure profit today without using any of one’s own money, and continue to build an increasing stream of income, year after year, without doing any work.

If you’re not comfortable using short term loans to finance investments then this strategy may not be for you. But if the idea of getting rich using other people’s money sounds fun and exciting, then feel free to consult with a financial professional about this strategy. You can also put half the money into MICs, and the other half into REITs for more diversification.

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Random Useless Fact:

This is a Jewel Caterpillar which lives in the Amazon rainforest. It’s translucent body makes it look like a sweet, gummy treat 😀