As promised, here is my strategy for getting a free car (which is working quite well for me at the moment). The trick, and there is always a trick, is that you need to have the money upfront to buy the car. Many people who do have the money in investments don’t want to part with their investments to buy a depreciating asset, but here is a way to get your car and drive it too.
First, pick the ultimate car that gives you that butterflies in your stomach feeling when it drives by. If you don’t have the money to buy a new car, start with a used version that you can afford to pay with cash. With my strategy you can keep trading up until you get the new one that you’ve always wanted.
Having cash to buy the car will get you a better price, especially in today’s market. The sweet spot for getting the best deal on a car is to get it when it is 1 or 2 years old. If you do decide to buy brand new try to get an employee discount or check to see if your employer is on a preferred vendors list for automotive manufacturers. This will get you a quick 3-10% off a new car which will help to offset the first year’s 20-30% depreciation.
The next tip, and my favourite tip, is to only buy luxury cars. This goes against almost every financial talking head’s opinion but I like to think outside the box to get the most “shazam” from things I buy. Luxury cars hold their value longer, are always the top cars in the industry quality reports, and always have demand for resale and longer warranties. They also have more and better features, which makes ownership that much more enjoyable.
When you’ve negotiated the best possible CASH price for the car, go to the bank and get an investment loan for the same amount as the price of the car. As an example let’s say that the car costs $60,000 including tax. You then get an invetment loan for $60,000 and re-invest it. Investment loan interest rates vary but you should be able to get one for prime plus .50% or 1%, which would make it currently 2.75 – 3.25% and an open variable loan amortized over 15 years. The huge benefit of the investment loan compared to a standard car loan or lease is that you can deduct the loan’s interest as an expense. You will also be paying a much lower interest rate compared to standard car loans due to the fact that the loan is pledged against the investments.
The bank will secure the loan with the investments and you have two options for investing. The first and easiest is a monthly income fund. My favourite income fund is the BMO monthly income fund. The units currently are around $8.00 and it distributes .06 per unit a month. .06 x 12 = .72 / $8.00 gives the fund distributions a 9% yearly yield. $60,000 / $8 units would give you 7500 units that would generate $450 a month in distributions to cover the monthly loan payments which would be $421.60. The natural balance of the fund having 50% in bonds and cash and 50% in blue chip high yield dividends provides a natural cushion for any market corrections. Through the worst part of the last correction the BMO Monthly Income Fund didn’t drop nearly as badly as the overall market. It is also reassuring that through the last two years of financial and world economic downturn the BMO Monthly Income Fund didn’t decrease it’s .06 distributions. In fact its distributions have been .06 since 2002.
The second option is for you to create your own monthly income fund within your own account. I love my money way too much to give up the 1.49% or $894 management fee for the fund, so I have purchased the following portfolio to pay down my investment loan:
I’ve purchased roughly $5k in each trust. They are properly diversified among many sectors and are all high yielders with upside potential due to market recovery or commodity price increases, such as oil. The basket of trusts generate $6k a year or $500 a month in income to cover the cost of the investment loan. They have all appreciated in price as the market has risen and I expect the oil trusts to increase their distibutions as oil continues to recover.
Dave
Hi, I went to BMO and bought myself 7806 units of BMO Monthly Income fund at 8.07/unit two months ago. I am thinking how you can drive a toyota corolla 2010 bought for by my 0.06 per unit monthly. After I sell the car after several years, I could cycle that money back in to repair any damage to my unit value if it has depreciated, and I probably could do this over and over for the rest of my life. Since the car payments will stop before the corolla will die, I can reinvest the money during the few years that I am not making car payments to, and buy a new car every 10 years. I probably will be able to pay for repairs by taking few distributions when it is not needing to make financing payments.
I am wondering if BMO Global Monthly Income would actually gain in value since it is only around 5.40/unit yeilding 5.5 cents. I feel that it will only go up in unit price as the equity market takes a rebound in 2010.
Hi Neal,
Your monthly distributions will pay down your investment loan. When you’ve eliminated enough debt you sell out the units and with the trade in of your current car, you buy another car cash. Then top up the investment loan with a new loan in the amount you’ve taken out to buy the car. Your distributions then start paying down that new loan. Repairs you would always have to pay for even if you leased or financed the traditional way.
Depending on your risk tolerance you could ad some BMO Global Monthly Income to the mix. I prefer the BMO Monthly Income because of its longer track record of distributions. Plus the BMO Global Monthly Income dropped -35% in 2008 and the BMO Monthly Income dropped -14%. My money is with the steady ship if things go wrong again.
Hi Neal, if you have bought BMO Global Monthly Income you would be able to make money if you are willing to buy and hold for the entire duration of your financing say 7 years, during by which time the economy would have the time to sufficiently rebound. I am sure that the portfolio will be managed in such a way that if India were to grow, they would simply shift the portfolio base to accomodate the world. I myself own 7418.5352 units bought on Janurary 21, 2010, and borrowed at 3.25% variable rate (prime +1). I do not expect to make money in the first two years, but as the debt is paid down $408.17/month for 2 years, even if the value dropped permanantly at $5.00/unit I would stand to win.
If you buy at today’s prices you get a 12% annual yield on the Global Monthly income fund. Just remember that there will also be higher volatility than with the BMO Monthly Income Fund.
Hi Neil and Naomi, your BMO Global Monthly Income will not rebound above 5.40 later. With that much capital return on a 12% yeild, it will be next to impossible for BMO Global Monthly Income to even maintain its NAVPS let alone grow. You will be lucky to break even Naomi, and that would be if the interest rates do not rise. And you know that they will. I recommend that the next time it reaches 5.40, that you IMMEDIATELY switch over to BMO Monthly Income fund because it will be the last opportunity that it will see that much value. Either that, or Curt Custard will have to cut the monthly dispersements lower. UBS Asset Allocation is not that actively managed so be careful.
Hi Danikka, you are so right, this fund is a bit scary. I switched out of BMO Global Monthly Income Fund yesterday to BMO Monthly Income Fund. Sure, I got away with it for a bit, but I am thinking that the DOW is overbought right now, and the 10500 resistance level is not breaking easily. I do see this as the top and I am going to curb my greed and stick to BMO Monthly Income Fund religiously.
Good Day,
I’m in the Forces(Navy) and have a little less than 6.5 years left before I retire. Presently, I have 10130 units of the BMO Monthly Income Fund and put $800/month into this fund and buy $800 into precious metals(Silver Bullion). My car is fine but I have a GIC which matures in Jan 2011 and will be worth $9k. I am thinking of trading in my 2000 Subaru Legacy Sedan which is in great shape and purchasing a new Infiniti G35. What would be a good way for me to do this?
Thanks,
James
Hi James,
The way that I use this strategy is to buy the car with cash to get the best price. Then get an investment loan to cover the amount you took out of your investments to purchase the car. Make sure it is an investment loan so you can write off the interest.
Then use the proceeds from the loan to invest in a high yielding balanced fund like how I use the BMO Monthly Income Fund. Your loan will be at prime plus a few basis points and the distributions from your fund will need to be higher.
By applying the payments to your loan plus any tax return money you’ll eventually pay off the loan and still have the car plus investments. Your investment guy or banker should review your situation to make sure that it suits your risk tolerance etc. So far it’s been great for me. Enjoy the G20!
Wow, and I mean wow! This BMO Monthly Income Fund has held up its value through up to now with the Sovereign debt crisis! This fund is a definite Volvo 850 in that it can jump off a cliff and still survive. It has withstood the Feb. 08 low and withstood this correction up to now. Now this fund is one that you can just buy and let the ship ride if it can whether the worst times of history in the current times, it can withstand anything. I think this fund should be the flight of safety instead of US treasuries. I think for anyone who doesn’t like volatility and doesn’t like playing with going in and out of Horizon Betapro ETF’s going short and long, and have the nerve of steel to short oil even at today’s prices ready for cliff diving, this fund is for you. I think this monthly income fund where I can just take my 6 cents each month and have it pay my bills reliably without eating away at my nest egg. A great way to build one’s own pension as one contributes!
I have been researching the M income funds for the last few weeks. I already have the TD version of this fund maxed out in my TFSA. I wanted to try to put the BMO MI fund in a non registered account and grow it as a start to another aspect of my overall retirement planning.
I see your strategy above, but come tax time you now have $5400.00 of added income to add to your total earned income for the year – how do you deal with that – just pay the taxes? You have to make sure you have $1500.00 laying around to pay that every April.
Hi Paul,
The two things we can’t avoid in life are death and taxes. When I was a banker in 2000 none of my clients wanted to sell their Nortel shares and pay the taxes. For anyone who had sold at the top they sure were happy to pay all those taxes when the market corrected. Having to pay taxes can sometimes be a good thing.
Deducting the investment loan interest will get you some money back to put towards your taxes plus the fund pays tax preferred distributions. If you compare writing off the investment loan interest, plus the fund income paying back your loan, and the portfolio you get to keep when the loan is paid off vs. buying a depreciating asset and paying a lease or car loan – it’s totally worth the tax bill.
Have a great week,
Dave
Good Day Dave,
Thanks for your reply to a previous question. My new question is the following. I have a little over 6 years left before retirement from the Forces(Navy) and have accumulated 10114 units in the BMO Monthly Income Fund. Do you think I should accumulate more units in this fund to supplement my retirement income when I retire in 2016? Also, as far as taxation purposes, is this fund decent in this respect?
Thanks,
James
Yes, this product is meant to be used as a retirement vehicle. BMO does promote that it is tax preferred stream of income.
Dave
Hy Dave
I have a question;
At the present I don’t need a new car. And if I understand the stratergy correctly I could just get an investment loan and let it pay itself off. What kind of garantees do you need to borrow with an investment loan. I now own 28,000 share of BMO monthly income fund ( 70 % non registered 20% RRSP and 10% TSFA )
Also you comment that you create your own monthly income fund to avoid the management fees. Could you ellaborate a little step by step to see if this could be an option for me.
bets regards
Hey Ben,
The banks approve you on investment loans like they would on any other loan. You need good credit and be able to make the payments within their lending ratios. That is awesome that you’ve got those investments working for you. Keep loving your money by investing it.
I build my own monthly income funds by buying income trusts/REITS that pay our monthly. I buy things that I know have upside like oil, pharmas and REITS and just buy the stocks right out. That way I save the management fee of a mutual fund and all my shares pay me monthly like the BMO Monthly Income Fund.
Have an awesome day,
Dave
Good Day Dave,
I was talking to a BMO Investment Loan Specialist and from what I understood from her is the following. She indicated that if I got the investment loan for example $30000 and put it back into my non registered investment account (BMO Monthly Income Fund), that I would need authorization from Bank Of Montreal to do further transactions such as buying, selling stocks which I do now in this BMO Investorline Account. Is she correct indicating this? I mean if she is right that would suck because everytime I want to add more to my BMO Monthly Income Fund or buy shares of stock or sell shares of stock I would have to get authorization from BMO.
Good Day,
I have taken out $30000 out of my non registered account which is in the BMO Monthly Income Fund to purchase a new car. The account is with BMO Investorline. I am thinking of getting an investment loan but the Investment Loan Advisor is thinking that if I put the $30000 back into the BMO Monthly Income Fund that the Bank of Montreal may want authorization if I want to do further trades such as buying or selling stocks in this account. Your insight regarding this would be greatly appreciated.
Thanks,
Jim
Hi Jim,
I have my leverage account as one account. And then the rest of my investments in another. If you leverage account goes below the loan value they will hold the funds in your account until the account balance goes above the loan again. I leave and extra whack of cash in there to make sure it is always above my loan amount. That way of have access to the income to pay down my leverage account. It works for me!
Dave,
So your saying to have the funds in another account “leverage” vice putting it in my non registered account to top up my monthly income fund. I mean I have over $80000 in my non registered account now. So, why would I have to have another account, the funds wouldn’t go below $30000 because I have investments in other stocks.
Jim
If you have lots of money in the account you won’t have a problem getting the monthly distributions out then. That is the only restriction I could think of. I don’t have any trading restrictions on my account but you’ll have to call your broker to see if you have any on your account.
Could you message me with any hints on how you made your blog site look like this, Id appreciate it!
Hi,
It’s a wordpress template. I just scrolled through the options and you pick one. Then I customized it with colours, fonts, and added my own logo. Easy as pie!
Hi Dave: Your comments about using BMO Monthly income funds to pay down loans has me confused. My wife has the BMO global Monthly fund and I see that virtually every penny of distribution in 2011 was Return of capital. How can you call that income? Am I missing something or would she be paying off a loan with her own money? Your comments will be appreciated. Bert