I know many people considering real estate as an investment. It is a standard ‘go to’ idea for anyone looking to build wealth.
While you can definitely create wealth with real estate, it certainly isn’t the sure thing many people think. Indeed, real estate investing is high risk (high leverage and high concentration) and a huge pain in the ass (3am clogged toilets, destructive tenants).
To gain perspective, investors need to consider real estate against other investing options.
Toronto real estate is in a bubble. Over the past decade, houses in Toronto have appreciated by over 120%. Many people therefore conclude that a house in Toronto would have been a fantastic – if not the best – investing choice over the past decade.
They are wrong.
The following chart shows 10 year returns for Toronto real estate, stocks, REITs and real estate equities. As you can see, housing price increases lagged.
So how do real estate investors get rich? Leverage. But if you applied the same leverage across the comparison, the relative performance differential would remain.
To be fair, the return for houses was calculated on a price returns basis whereas the other indices are showing total returns. Total returns include the income earned by holding the asset – dividends for stocks and rent for real property. Incorporating rental income would definitely improve the comprison. But would rent have tripled the return to match that of REITs? Probably not. Especially after considering risk, maintenance expenses, taxes and property management costs.
(Note: in an ideal world, I’d incorporate a $ rent assumption to recalculate Toronto real estate returns as a total return. Unfortunately, I don’t have the base data to recompose the returns.)
Despite the wonky comparison, the chart still disproves the incorrect assumption that owning a home was the easy, low risk way to build wealth – even during the biggest real estate bubble in Canadian history.
During the next decade, it’s not reasonable to expect the pace of Toronto real estate returns to continue at the same pace. A more conservative returns estimate would put Toronto real estate at a further disadvantage to other assets.
Moral of the story: do the math, compare against alternatives and factor in all risks before investing in anything.
One of the best ways for the average person with a steady, middle class 9-to-5 job, kids and a mortgage to build wealth and avoid going broke is to not fuck up.
If you want to build and keep wealth, you need to pay attention to the bottom line. That means controlling personal expenses to ensure something’s left at the end of the week.
The average person can build wealth by avoiding massive mistakes that drag them into a spiral of deterioration. Honestly, it’s unfortunate I have to write this because this is the type of advice our grandpa would have taught us. Indeed, they’d probably slap us upside the head for some of the financial choices we make nowadays.
Anyways, here’s a list of things that will seriously fuck up your chance to build wealth. If you want to avoid going broke, stay away from the following:
Gucci taste but H&M income.
Are you trying to keep up with a lifestyle you can’t afford? Perhaps you’re entitled to it? Perhaps you deserve it? Well, you can’t afford it so neither of those are true.
I’m not just talking about clothes here. Vacations, cars, dinners out, bars, weddings and so on. If you’ve got an H&M income you need to be down with H&M. Sorry…no more Gucci for you.
Consumer debt.
Gucci taste requires money. Do you subsidize your income by putting everything on credit?
Everyone knows credit cards charge ridiculous fees so eventually you consolidate that debt into a line of credit. Great, but you’re still in debt for something you’ve probably long forgotten about.
Consumer debt is bad debt. It erodes wealth. Not only are you spending money on things you shouldn’t be, you’re spending money on interest to pay for the loan to buy the things you shouldn’t be. Sounds absurd, doesn’t it? Yet nobody is surprised when they hear a friend is $30, 40, 50k in debt.
Consumer debt. Unless you can pay it off within a month, just don’t.
Payday loans.
Payday loans are pure fucking evil. Once you’re sucked in, you’re trapped forever.
Think about it this way: you’ve borrowed against your next paycheck, which means the next paycheck needs to re-pay the loan. But then you’re left with no more money so you borrow again. And again. To infinity and beyond.
Moreover, the interest rates (sometimes called ‘admin fees’) are astronomical. They make credit cards look like a charity.
Seriously, it’s really difficult to break out of that cycle. Often the only way is to borrow from somewhere with more flexible terms (like mom).
Don’t ever borrow against your next paycheck if you want to avoid going broke.
Marrying the wrong person.
The roads would be much safer if it weren’t for all the bad drivers out there, right? Well, just like car accidents, marriage breakdown is always the other person’s fault, right?
OK, I know we’re more mature than that, but most people lose their rationality in the beginning of a relationship. The first 1-2 years of a relationship are as good as it’s gonna get. But we don’t admit that. Instead, we truly believe we can change people or at least accept their faults.
But what was once cute, becomes insufferable. And what was once “loves the finer things in life” is now “we may be eating cat food in retirement” because you’re lover is flushing cash down the toilet.
Worse yet, maybe your better half now hates your guts and is screwing the gardener, but will still walk away with half your stuff and half your future income. You’d need to clone yourself to come back from that fuckup.
So instead of jumping face-first into marriage, put some rational thought into the massive economic decision you’re about to make. Do your due diligence and know what you’re getting into. Ask some experienced people what they’d do differently. Ask them what red flags they should have seen. It could save you a ton of misery and moola in the long run.
Hard drugs.
If this one isn’t obvious, maybe it’s time for a stay at the Betty Ford Clinic.
Being lazy.
Most people I meet aren’t fundamentally lazy. They may have lazy moments, but they’ll get shit done when they need to.
Most people are able to hold down a job – a source of income. They show up, they take (or fake) interest, they are respectful, they make their boss’s life easier, they get things done. This is all it really takes to have a career and steady income.
Of course, climbing the corporate ladder involves an entire set of additional political skills, but that’s not what I’m talking about. That’s not a requirement.
You can build and maintain a solid source of income throughout life just by giving a consistent 7/10 effort. And that’s all you really need. More money obviously helps you get there faster. In contrast, if you can’t hold down a job you’re never going to build wealth.
Not learning to invest.
People with money constantly get asked to part with their money. As you build wealth you’ll notice if the way people treat you changes. Stay true to your friends and watch out for gold-diggers.
But even the person with average wealth will have people trying to siphon their wealth. Many of these people wear suits and call themselves financial advisors. Some of these people charge exorbitant fees (either explicit or embedded) for the pleasure of investing your money. Over a long time these fees eat up a big chunk of your retirement portfolio.
On the other hand, you might make your own investing decisions. While you could save a big amount on fees, you also could potentially accidentally murder your portfolio.
Watch out for those ‘sure things’. Because there are none. If you want to avoid going broke, assume every investment you hold could go to zero – in other words, only invest in single stock, bond or whatever the amount you’d be willing to lose. Don’t think you’ll be the one to get out at the top. You won’t be.
Also, diversify. Learn how different asset classes can be combined to create a more stable portfolio. This is fundamental to investing.
Finally, look at investing as a long, slow, boring adventure. If you are getting a few percent each year in returns you’re doing well. Don’t chase high returns because you will likely get burned. Most wealthy people didn’t build their wealth in the stock market. They created it elsewhere and invest it to stay ahead of inflation and generate some additional income.
Can’t you picture grampa giving you that kind of advice? Now go ahead and build some wealth. Do it for Gramps!
Once in a while I get the urge to buy a condo in Toronto to rent out. Everyone seems to be doing it, right? So it must be a money maker? Right? Wrong! Let’s look at the numbers.
The following is an approximation that leaves out a few minor details for simplicity’s sake. Please feel free to point out things you’d change or add in the comments below.
The Property
Today I’m looking at a 1 bedroom plus den at the luxury condo called “Sky Tower at Eau Du Soleil”, located at 30 Shore Breeze Drive & 2183 Lake Shore Blvd W, Etobicoke.
This is a gorgeous location with AMAZING amenities, including a indoor salt-water pool, hot tub, fitness centre, rooftop deck, media room, meeting room, yoga studio, squash court, rec room, outdoor patio, tennis court, visitor lounge and more. You get the picture. This is luxury living.
Currently, several units are for sale. A 643 square foot 1+1 including parking is listed at $749,000 with a $449 monthly maintenance fee. A couple others are also listed at a similar price.
With a 20% deposit ($149,800) and 25yr mortgage at 2.79%, this property could be yours for $3,221 per month all-in.
So Would this Make a Good Investment Property?
A similar sized condo on the same floor rents for $2,200 per month. That’s an instant monthly loss of $1,021 per month, or $12,252 per year. Not only that, you’ve suddenly tied up $149,800 in liquid assets and are now $599,200 in debt. Sounds like a shitty place to be. Especially considering you could have been EARNING $7,490 a year from the $149,800 deposit (assuming a reasonable 5% annual return).
But instead of sitting back and watching your portfolio grow, you’re chasing people for rent and fixing toilets at 3am. And basically paying $1,021 a month for the privilege. But some of that monthly all-in payment is going towards building equity in the house, right? Well, because of the monthly negative cash flow you’d only accumulate $27,954 in equity over five years. Alternatively, you’d have earned $37,450 on the investment portfolio.
To make up the gap you’d have to depend on the condo price to appreciate . Unfortunately, Toronto real estate is in the midst of a massive bubble and it could burst any time. I’d say it’s pretty ballsy to bet your future on the forecast that prices will keep rising.
And that – ladies and gentlemen – is how I eliminate the urge to buy a condo in Toronto to rent out.
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