My dentist recently received a decent size inheritance. I advised him to put half in equities and half as a downpayment for a new home. He knows nothing about finance and finds the stock market a casino and “rigged”.
He is looking at 3 options for his inheritance:
Use 100% of the funds to buy a house (no mortgage required, home fully paid)
use 50% of the funds to buy a house and rent it out. Use the other 50% to buy a house (50% mortgage)
use 100% of the funds to buy a house (no mortgage required, home fully paid) and rent it out. He will continue renting (rent free in a way as the rent he is receiving pays off his own rent).
He is planning to keep the home (s) for decades.
I advised him to go with option 1, but now that I think about it further, if he is so risk averse, what will he do with all his savings? In cash? That’s too low a return going forward. If we are close to a low in housing and he expects to keep the property for a long-time, maybe options 2 and 3 seem more attractive.
If your dentist’s holding period is longer than a few years, I have a hard time believing the return on non-financial dividend paying blue chips would not beat the 3-4% interest rate on a mortgage. It looks like 11 of the Dow 30 are paying more than 3% in dividends.
I don’t know what the tax treatment of dividends is in Canada, but in the U.S. the dividends are (for now) taxed at 15% while you can deduct the mortgage interest against ordinary income tax rates (up to 35%) so there is some tax arbitrage as well.
Obviously this dentist would love to invest in gold. Tell him to stock up next time it pulls back by 10%. You’ll get free cleanings for the rest of your life.
Tell him to use the money to throw an orgy party of epic proportions. He probably has access to large supplies of Novocaine, so half the work is already done.