Oliver Foote, Author at Oliver Foote

How to Get Started in Real Estate Investing or Flipping

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

People have been buying run down and dilapidated things, then fixing them up and reselling them for a profit for as long as there have been things that break. It has now taken on a style of it’s own when it comes to real estate. Some people might argue that flippers are just investors who take away supply from other potential buyers. But I can tell you from experience, that the majority of people who are in a position to buy a home they plan to live in prefer to have the home at least 90% complete and up to their standards before they move into it. The people who are ok with a home that requires a ton of work, or has been used as a hoarder home, or is a century home that’s half falling apart, are almost exclusively investors who are then competing with other investors. I think that investors and home flippers are doing a service by purchasing homes that no one else is willing to go near, then turning them into something that is liveable and will appeal to the mass market. If they make some money along the way, more power to them. Capitalism at work. Obviously, it has become clear that relying solely on the private market to manage the housing of an entire country is not the most ideal strategy, there are flaws in every system. That’s a discussion for another day.

For todays discussion I’ll focus on how flipping homes works and some things to consider if this sounds interesting to you. Firstly, you need to have a reasonable level of confidence in your abilities or your contractors abilities if you go the route of purchasing a run down home. With home prices where they are now in Toronto and the surrounding area, even a very poorly maintained home can fetch an absurd price because of the land value and other factors. If the move-in ready home is “only” 100,000 more, most people find it a very reasonable trade-off to pay a tad bit more and avoid the hassle of renovations. That leaves a select few people who are willing to pay the high price and take on the risk of doing renovations with the hope of possibly making some money on the sale. Over time as more and more people have learned about home flipping and the real estate market becomes more efficient, the “gaps” in the market become smaller and smaller which makes it more difficult to make a profit as an investor. You pile on a serious supply demand imbalance due to population and other factors and you find yourself in a bizarre situation where people will pay a premium just to simply get ANY home, regardless of condition. This is not an ideal market dynamic in my opinion for investors or end users.

When is a good time to flip homes?

People say that you can’t time the market, while there is some truth to this, I believe that you can absolutely make educated guesses about where the market will likely be headed. Let’s take a look at some recent examples. If you were considering flipping homes from 2020 to 2022 it would have been a good time to do so because the Bank of Canada cut interest rates at the fastest pace in recent history to prop up a potentially failing economy, and alongside the fed they effectively saved the stock market form complete collapse. This led to significant appreciation one year later. Real estate generally lags behind the stock market, and prices take a bit more time to move. But seeing the unprecedentedly low interest rates at which you could borrow money, locking in a 5-year fixed mortgage was a no brainer at the time. Even if your renovation took 1-2 years, with money being so unbelievably cheap, and so few people willing to put their homes on the market, it doesn’t take a rocket scientist to see how that equation would lead to increasing prices. After the development of a vaccine it provided people with the confidence they needed to be around others again and provided a visible pathway to the end of the pandemic. Around this time in late 2020 early 2021 all the stars were really aligning and they were pointing at the fact that the real estate market was going to get a little bit crazy.

Not every shockwave of the pandemic lockdowns could have been predicted. For example, tradespeople became very challenging to find, and this made home renovation projects more expensive and extended their timelines quite a lot. This is where having some backup plans for any risky investment is always a good idea. In the case of the covid real estate market, being willing to do some of the work yourself would have been a very useful backup plan if you were a home flipper as well as planning ahead and being flexible with the materials you used, since it was nearly impossible to find certain items in stores. A good majority of home renovations can be done DIY with YouTube and a small time investment you can learn how to do pretty much anything nowadays. I would only recommend the DIY strategy if you are willing to put a significant time investment into the home, and have some amount of prior experience, because even though it might be quick to learn it can take a lot of time to complete. It’s also important to factor in the carrying costs into your profitability equation and to budget at least 1.5x the amount of time you think it will take you to finish a project, and even then expect it might take longer than that. Hofstadter’s law states that a project always takes longer than expected, even when the law is taken into account. The best way to ensure that you come out ahead is to use a very conservative equation to manage your costs while also baking in some profit as a buffer.

Purchasing in a depreciating market on the other hand can lead to losing money on the renovation, which is why I like to recommend investors have multiple workable strategies for each investment. You can actually come out ahead by making an educated guess during a falling market as to where you think the bottom or near bottom might be. If you take this approach you need to have multiple strategies and be willing to weather a storm if it turns out you were wrong. If you were banking on the appreciating to get you out of a flip profitability and it doesn’t happen there are a few other options. For example you could turn the property into a long-term or short-term rental, you could get creative with the renovation by including a basement suite to turn the property into two units instead of one, which generally increases your potential rent and final sale price. If you do use the rental method as a backup, it’s important to understand that you will likely be leaving equity in the property which might prevent you from doing another deal in the short term and you also have to be ok with the risks and responsibilities of being a landlord. Making sure that a property has multiple workable strategies is very important to prevent you from completely losing your shirt, especially if it’s your first investment and if you’re unsure what the market will do in the short to medium term. It is also important to actively try and avoid risk. With the amount of information out there today it doesn’t take a genius to figure out that eventually the gravy train of appreciation in 2021 was going to come to an end. The actual end date was up for discussion at the time and I think many people assumed the fed and BoC would increase rates sooner than they actually did. This is where being cautious comes into play. It can be hard to think clearly when you get swept up in the FOMO of real estate news stories talking about people making crazy amounts of money. Getting swept up in the hype and not understanding your own risk tolerance (i.e. how you’ll feel deep down if you happen to lose the majority or all of your investment) is often what leads people to making mistakes and losing money. Ensuring that you are thinking clearly, understanding your own tolerance for risk (there’s nothing wrong with the slow and steady approach), and making sure than an investment will work on multiple levels are all great ways to hedge your bets as an investor.

What does the flipping market look like today?

In our current market there are still opportunities to renovate homes and be profitable, you just have to be more certain about your purchase + improvements price than maybe you needed to be in 2020. I’d consider our current market stable with respect to prices and appreciation. The next move from the Bank of Canada is largely anticipated to be an interest rate cut. So if you buy today I would say there is a reasonable probability that interest rates are lower a year from now which means that prices at the very least are likely to stay stable and more likely to appreciate a small amount from today. Don’t expect anything crazy, but if you buy at a great price there is still room out there to make money as an investor. I would say the biggest difference in this market is that carrying costs have increase significantly thanks to the increased mortgage rates. This means that if your project goes over time, it can cause a significant dent in your profitability. So I would highly recommend being even more conservative with timelines or baking in a higher percentage of profitability to make sure that you still come out ahead.

Many professional investors use various marketing strategies to find off-market properties to purchase (i.e. properties that are not listed on the MLS). A common one is sending out mail to houses in a particular area and offering a quick closing to a distressed home owner. There are companies out there who “wholesale” homes. Basically signing a contract with someone with the option to assign the contract to another person, or even with the option to list their home on the MLS. Sometimes these companies will act unethically and a homeowner will sign something without understanding that there is an option to assign in the contract or that this person will be listing their home and doing showings. Without saying too much on this topic, I want to make it clear that I find this approach to business deplorable. Honesty is extremely important with whoever you are doing business with even if that is the only time you will do business with that person. Your reputation is everything, so if you promise a potential homeowner something the expectation is that you follow through with the promise. There are people who wholesale homes and run their business in a very honest and upfront fashion, I have absolutely no problem with that if the homeowner knows all the facts and decides that is their best option. As a homeowner it is important that you read the contract you are signing, and ask around your network for a trusted lawyer to look at the contract if you are doing an off market transaction. To be blunt a big reason people end up working with Realtors is because it is their full-time job to make sure they have your back, and if they mess up you have someone to blame (and sue). But if you’re doing everything yourself you don’t have the level of regulation, expertise, or insurance that Realtors have in order to protect consumers when dealing with what is usually their largest asset. Of course you can just as well come across an unethical Realtor who is only looking out for themselves and does a poor job looking out for you. But at the very least you have some amount of recourse and consumer protections when working with them.

That was a bit of a tangent so let me wrap up here by discussing how to increase the chances of an investment working out. As I mentioned above, trying to find off market deals can be a serious win when it comes to purchasing a property at a great price. There are a myriad of strategies to find people who are willing to sell, whether that’s flyers, door hangers, door knocking and pitching your proposition to them, online marketing methods, networking with friends, family and co-workers. You do have to be somewhat cautious if/when you do find someone willing to sell and I would recommend asking the homeowners if they would be opposed to a home inspection or at the very least doing an inspection yourself. Sometimes the homeowner might be willing to sell you the home, but doesn’t want to have strangers coming through their home. This does make it a bit more challenging from the investors perspective and if you choose to go through with a purchase you have to be ready for pretty much any problem on the books since you couldn’t get an inspector in to see the property. Depending on how many properties you’ve invested in before or how much experience you have with home building or home inspection you may have enough personal expertise or a friend whom you really trust that can give you a reasonable idea of the condition of the home and if it’s worth offering something to the homeowner.

This is again where risk tolerance comes in, making sure your profitability equation bakes in some of these risks, and preparing multiple viable strategies for the end use of the home (e.g. flip, rent, wholesale). You can find potential homes on the MLS to purchase as well, many investors are quite successful through simply purchasing homes that are on the market and negotiating a strategy that works for them. If you are looking for a deal on a publicly listed home here are some tips. First, look for homes that have been on the market for a long time or have been badly mispriced. Beyond 30-60 days is when sellers tend to realize they may have mispriced their home and this can open them up to negotiations.

Second, find out what the sellers situation is. This is where I would recommend getting a Realtor you trust and are willing to work with to call up the listing agent and try to get as much information as they can about the sellers reason for selling, urgency, and what types of things would make the seller more likely to accept an offer or what kinds of offers they might consider. For example, maybe they have to close by a certain date due to starting a new job. Maybe they will only sell if there is a firm cash offer and are just “testing the market” (these types are generally very hard to negotiate with, since they have no urgency and only care about getting their price). Maybe they are willing to consider a Seller-Financing mortgage at a lower rate than the banks can give you. This can serve as an annuity for the seller (e.g. monthly income) and allows you to give them the final higher price they are looking for since the financing could be cheaper than the banks offerings. You would have to coordinate with your agent and have them work with the listing agent to call up a lawyer and write up a contract for the seller to become a lender. The seller would likely be well advised to do some due diligence on your ability to pay the loan, as well as including the usual provisions in a mortgage such as the right to repossess the home if you default. This can be a challenge to pull off, but working with the right partners can make it a possibility. The seller might be ok with an extended closing which gives you time to find more funds or research development or rezoning opportunities that add more value to the property than a simple renovation thereby making the deal possible.

Lastly, the seller might even be willing to come in as a joint venture partner (if you have a proven track record) and allow you to renovate the home while retaining most of the equity and provide a 50/50 split on any profits made on the renovation and sale of the home beyond a certain price after factoring in costs. As you can see there are almost limitless ways to structure an investment that works for both the buyer and the seller, much of it depends on your risk tolerance, skill set, and your team. Which brings me to my final point, regardless of the approach you take it’s important to assemble a team of people that you trust in order to be successful in your investing endeavours, that includes people such as a real estate agent, mortgage broker, lawyer, home inspector, city planner, and various tradespeople that you trust. Having a strong team of advisors can make or break an investment, especially when dealing with one that has so many moving parts. I would highly recommend if you are thinking of getting into real estate as an investment and are considering any of the more complicated strategies that you find an investor who has done what you are thinking about doing and see if they are willing to spend some time talking with you about their experience. Research online, listen to investing podcasts, and most importantly just get started. You can easily overwhelm yourself with information and prepare until your eyes bleed out but nothing beats real world experience. Be prepared that it may not go completely as planned, start small with something just outside your comfort zone then build on your experiences and improve each time.

Hope that you found this information useful or interesting, feel free to leave a comment with your thoughts on this topic. I’ll see you back here in two weeks with another post.

All the best,

Oliver Foote

Newsletter #10: Realtor Lawsuit, House Flipping and Investing, Bank of Canada Holds Rates

Another week another newsletter. This week some interesting news came out about the ongoing lawsuit in the US, it could have an impact here in Canada, only time will tell. It will be interesting to see what kind of impact this will have on the US real estate market and if there will actually be a noticeable change. I wrote a blog post about flipping homes but it sort of turned into a how to invest, when is a good time to buy, and how to avoid risk to make sure you come out alive. Enjoy!

This Weeks Blog Post:

How To Get Started in Real Estate Investing or Flipping:

My take on how to become a real estate investor with a focus on flipping
Understanding the risks, being risk adverse, and different investing strategies
Building a team of professionals to stay safe, and do it well

Read the full blog post here: https://oliverfoote.ca/2024/03/17/how-to-get-started-in-real-estate-investing-or-flipping/

Housing News:

Real estate fees could fall after settlement with US agents: https://www.bbc.com/news/world-us-canada-68582949
- Big settlement just came down where the NAR in the US has stated they will make it easier for buyers to negotiate their fees.
- A similar lawsuit is in the courts in Canada.
House flipping surges in Calgary’s hot real estate market: https://www.cbc.ca/news/canada/calgary/calgary-metropolitan-area-house-flipping-data-1.7143857
Experts are expecting more buying activity this Spring as first time buyers return to the market which could lead to an increase in prices. Helped by the somewhat lower lending rates banks continue to provide.
Bank of Canada Rate held rates on Wednesday March 6, 2024. Citing continued concern for the persistency of underlying (core) Inflation. Housing inflation continues to be elevated and is the largest contributor to inflation. They expect inflation to stay close to 3% during the first half of the year before gradually declining. Real GDP grew 1% in Q4 2023. Employment remains stable. This likely puts a potential rate cut into late Q3 or Q4 of this year, if at all.

Market Performance as of close Friday March 15, 2024:

S&P 500: 5,117.09 (+7.89% YTD)
NASDAQ: 15,973.17 (+8.18% YTD)
S&P/TSX Composite 21,849.15: (+4.68% YTD)

Canada CPI Inflation Jan 2024: 2.9% (0.5% Decrease from Dec 2023)
Current BoC Benchmark Interest Rate: 5% NC (Next Meeting: April 10, 2024)
Unemployment Rate Feb 2024: 5.8% (0.1% Increase from Jan 2023)
Hope you have an amazing week! Chat soon!

-Oliver Foote

Tax Benefits of Real Estate Investing

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

There are many tax benefits to real estate investing in Canada. The first and most obvious one is that you are not taxed on capital gains when you go to sell your primary residence. The idea is that a primary residence is not really an investment and can often cost a bunch more money than it makes you. So dollar for dollar you can move that money into a different home, minus realtor fees, lawyers, and land transfer tax (which don’t get me wrong, can add up). By contrast when you sell an investment property or stocks for that matter you will get hit with capital gains tax on 50% of the appreciation which gets added to your income and taxed at whatever brackets it fits into. This does not occur on your primary residence which is a very big advantage for people who are already in the property ladder and are either moving up or downsizing their home to fund their retirement. If you happen to have built up a good amount of home equity in your primary residence this can provide you with a significant amount of tax free money and save you hundreds of thousands of dollars on taxes in some cases.

Just because a primary residence is a very advantageous assets in term of tax benefits. Doesn’t mean you should discount the tax advantages of purchasing investment properties in the form of residential rentals or commercial properties. These have many similarities and differences. Depending on what type of property you want to manage you might prefer one over the other. You may want to speak with a tax accountant and a lawyer about the best corporate structures if you want to have a large portfolio of properties as they will be able to best advise you on your situation and how to make the most of the tax advantages. For now lets begin by discussing the tax advantages of investing in a regular residential investment up to 6 units (generally anything beyond 6 units is usually considered multi-family commercial). The first thing to understand is that the tax law views purchasing a rental property in a different way than purchasing a primary residence. The laws sees this as an investment with a profit motive, you can think of the investment home purchase almost as it’s own little business. Ideally it is making more money than it is costing the business to operate, or it is growing in value faster than the money you have to put into it to keep it afloat.

The first advantage to owning a rental property is something called depreciation. The CRA calls this CCA (Capital Cost Allowance). When you purchase an asset to run a business (a capital expense), you are allowed to depreciate it a certain percentage every year depending on which CCA class it falls into. The idea is that as you use the asset you bought to run your business, it wears and tears and may even require additional expenditures (such as paint, appliances or new wiring). All of these expenditures might be required to maintain the assets function to continue producing income for the business. However, over time the property will wear out beyond a useable state (this is more so the case with electronics and similar items, but the general idea still applies to rental properties for tax purposes). In this case the capital expense would be the cost of purchasing the home for the business. For typical residential rental properties the CRA allows a 4% depreciation rate per year (this varies depending on building uses etc). Depreciation can benefit you because it can be deducted from your rental income.

Similarly, you can deduct 100% of the interest portion of your monthly mortgage payments (ONLY the interest, not the loan principal you paid down). Loan interest on debt is seen as a cost of doing business. For example in a regular business the owner might take out a loan to purchase machinery for a factory and they owe interest every month. That interest is seen as a cost of doing business and can be deducted against revenues. Interest on a loan is categorized as an interest expense which means you get to deduct 100% of it against income rather than the depreciation expense of 4%. As an aside, when you go to sell and it turns out your rental property went up in value but you depreciated the entire thing. You will have to pay tax on the “recapture” of the depreciation. So you’re effectively deferring the tax burden to a later date, but it will still come (assuming the property goes up in value when you go to sell). Interest expenses are one and done, no recapture.

All of this jargon might be a bit confusing so lets take a look at a quick example. You purchase a home for $700,000 including lawyer fees and renovations and you rent it out for $3000/month. In the first year you would have access to 2% depreciation due to something called the half year rule. The year in which you make a capital expenditure is treated as if you purchased that property halfway through the year, thus giving you half the depreciation for the first year. This means that you can depreciate the rental property 2% in year 1 and 4% in the following years. So 2% of $700,000 is $14,000. Your total rental income is $3000 * 12 = $36,000. At todays mortgage rates of around 5% you would end up paying approximately $32,000 in interest on the mortgage in that first year (assuming you purchased January 1). So what you would do is deduct the interest first leaving you with revenues of $4,000. Then you would apply $4,000 of the available depreciation making your net income before taxes a big fat ZERO.

So what you effectively managed to do here is make an income from your rental property, and you found a way to pay zero tax on it. Over time the property will appreciate and when you go to sell you will owe capital gains tax since it’s a rental. Eventually the interest expense on your mortgage will shrink and the amount that you can depreciate the property will shrink and you will owe tax on the rental income. But in 25 years or so, you will own a completely paid off asset, that is generating you monthly income. With the home equity you’ll be able to take out a line of credit for about 65% of the homes value and do this all over again (or sooner than 25 years from now if it appreciates significantly). I think the best part about all of this that I’m glossing over a bit is that someone else was paying the mortgage and covering all (or most) of the expenses required to operate the home. You are effectively accumulating wealth at double speed assuming you also have a primary residence that you are building home equity in. If you add a third or fourth rental property you can see how this just continually compounds and doesn’t necessarily cost you a lot of money every month to carry the asset. In major cities around the Greater Toronto Area you will most likely face a negative cash flow scenario for the first 5 years or so of owning the property. But maybe somewhat counterintuitively now is a great time to buy a rental property while interest rates are still somewhat high. If you anticipate them dropping in the future, which I do. In 5 years from now when you go to renew your mortgage it’s very likely that your future mortgage payments will be lower than they are today and your rental income will likely be higher, closing the gap of negative cash flow. As another aside, I would recommend talking to an accountant or lawyer if you are going to do a big renovation and want to add it to your homes capital expense bucket because there are certain restrictions to what is or is not considered a capital expense.

We’ve gone over the basics of a simple rental residence that has one or two units. But lets say that you want to venture into the commercial real estate world and purchase a property with more than 6 residential units. What changes? Well the most important thing that changes is that commercial properties are truly treated as standalone businesses. Unlike homes where they are valued based on other homes, commercial properties are valued mostly on the income they are generating (or capitalization rate). Often times people will choose to set up a corporation to hold the property which then means dealing with corporate taxes. The corporate tax rate for small businesses making less than $500,000 is 9% federally and 3.2% in Ontario. Corporate taxation does get somewhat complicated, and as a business owner you can choose to either pay yourself a dividend or pay yourself as an employee, both of which are treated differently under the tax code (speak to an accountant). If you retain the earnings in the business and don’t pay yourself as an employee you will pay the tax rate on the income earned. Similar to the previous example you can deduct costs of running the business, expenses, capital gains, interest expenses, vehicle expenses, etc. all BEFORE you pay tax. This is different from you as an employee in one major way. On your earned salaried income you owe tax immediately and then you get to spend the remainder. Businesses spend first and get taxed later which presents some unique advantages and enables businesses to focus on reinvesting and can grow a business very quickly. Another aside, the rate of depreciation on a commercial property may be different and depending on the type of property the physical land, versus the building that is on the land may be treated differently under the tax code.

The end benefits of operating in a corporate structure is that once you begin to earn taxable income, the tax rates are much lower and it becomes easier to continue to invest within the corporation. You retain more of your earnings within the business which can lead to even faster growth in wealth and there are many more tricks that accountants and lawyers can do to defer your tax burden even further. See estate planning and setting up trusts. If any of this interests you further I would recommend studying the book, Legal, Tax and Accounting Strategies for the Canadian Real Estate Investor by Steven Cohen and George Dube. It was published in 2010, but there are still ton’s of relevant strategies in that book depending on what stage of investing you are in. I do highly recommend simply talking to another real estate investor who has done what you are considering doing as well as an accounting or legal professional as they will be able to best advise you depending on what you are interested in pursuing. It’s very useful to talk to someone who is already doing the thing you want to do because they will have come across many hurdles that you may be able to avoid if you ask the right questions. There are endless layers of depth to this discussion but to avoid an information overload I’ll save it for another time. I hope that between this post and the last post talking about the return on investment (ROI) of rental properties I have got you seriously thinking about the power of real estate investing. You can make it as simple or as complicated as you want and you can even become a developer! (Not for the faint of heart with all the red tape nowadays). Hopefully you found this article interesting or useful and I hope you have an amazing day!

All the best,

Oliver

Newsletter #9: Tax Benefits of Real Estate Investing, Government Program Shut Down

This Weeks Blog Post:

Tax Benefits of Real Estate Investing in Canada:

I discuss the ways in which the tax code is benificial to real estate owners and investors in Canada
How these tax benefits can help speed up your wealth accumulation even more
Differences between single-family rentals and mutli-family commercial rentals from a tax perspective

Read the full blog post here: https://oliverfoote.ca/2024/03/03/tax-benefits-of-real-estate-investing/

Housing News:

The CMHC is cancelling the First Time Home Buyer Incentive which was a program where the government would front 5-10% of the down payment required to purchase a home and share in the upside or the downside (up to 8% per year). It clearly didn’t catch on with consumers as they have decided to end the program on March 31, 2024.
Mississauga misses target to build homes set by Ontario government in 2023 (goal: 8800 housing starts. actual: 3470) losses out on millions in funding.
Toronto exceeds target and is rewarded $114 million through the “Building Faster Fund” (goal: 20,000 housing starts, actual: 31,656 housing starts).
Bank of Canada Rate decision will happen this Wednesday. Inflation and employment are both improving however they may still want to see even more data before coming to a decision to cut rates.

Market Performance as of close Friday Feb 16, 2024:

S&P 500: 5,137.08 (+8.31% YTD)
NASDAQ: 16,274.94 (+10.22% YTD)
S&P/TSX Composite 21,552.35: (+3.26% YTD)

Canada CPI Inflation Jan 2024: 2.9% (0.5% Decrease from Dec 2023)
Current BoC Benchmark Interest Rate: 5% NC (Next Meeting: March 6, 2024)
Unemployment Rate Jan 2024: 5.7% (0.1% Decrease from Dec 2023)
Hope you have an amazing week! Chat soon!

-Oliver Foote

Why Owners are 28x Wealthier Than Renters

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

I wanted to talk about the ever popular debate on renting vs. owning with a focus on how the finances pencil out at this moment in time, and which option makes more sense from a Return on Investment (ROI) perspective. Toronto is a notoriously expensive housing market, especially when to comes to ownership, and renting often times appears more affordable at a glance. For the same space in Toronto it is often much cheaper to rent than it is to own (although this gap has narrowed with increasing rents and a temporarily stable housing market), and this is true across many major cities in Canada. On the face of it most people would think, “I’m getting better bang for my buck renting! Why would I ever bother purchasing?” This is somewhat shortsighted in my view and I think many people do not run the numbers on why homeownership over the long term is a more beneficial route financially (plus having the freedom to do with the property as you wish and not having a landlord). There are many very important factors that people forget to include in their renting equation which I am going to be calling the 4 horsemen of real estate ownership.

There are a few reasons why people might be biased towards viewing renting as the better option in the short term. Firstly, it can be difficult to predict prices and appreciation in the short term. For example, if you purchased a home in 1990, it would have taken about 10 years for your home price to recover from the housing market lull. If you purchased a home in early 2022, the value of your home in the current market (February 2024) is likely below what it was in 2022 and may be for another 2-3 years until those prices come back. This is partly why if you look up renting vs. owning you will often notice that ownership becomes more beneficial the more long-term you plan to hold onto the real estate. Often times if you plan to stay somewhere short-term it may actually be more beneficial to rent. I always lean towards the side of ownership when possible because there are ways to own and manage property even if you are out of province or out of country. In many cities you also have various options whether that is renting your property short-term or long-term. If you can afford to stomach a month or two of rental vacancies, you will almost always come out ahead in a high demand real estate market.

I would encourage any young person to try to enter the property ladder as soon as possible, and I’m not just saying this because I have my real estate license. I have held this belief well before I had my license. Allow me explain why I think home ownership is so benificial with some data you may find interesting. According to Statistics Canada, in 2019 the average renter had a net worth of $24,000. You might be saying, “well that makes sense, it could be a demographics thing where younger people tend to rent and some people just can’t afford to save for a home.” According to the same study, the average homeowner, on the other hand, had a net worth of $685,400, or 28 times higher. There may be some truth to the demographics of younger renters and older owners, but I believe it’s more of an education and discipline problem. So allow me to explain why this gap is so massive.

The first reason deals somewhat with human nature, most people are not savers by habit, and our 6% national savings rate proves this, in the US it’s even worse at 3.7%. For people who are not the pro-active and disciplined type, “spending” money on a mortgage can actually turn into “investing” money into real estate. Paying down a mortgage becomes a “forced savings plan” for the average person. Furthermore, many people will lack the discipline it takes to budget and save 20% or more over a number of years for a down payment. It takes a different kind of mentality and work ethic compared to simply paying rent and neglecting to find ways to save some extra money. You might have to find a place that is not as nice and therefore cheaper, you might need a second job to squirrel away all the extra cash, and you may have to skip out on a few vacations. Many people are not willing to sacrifice in order to save a down payment or they make poor financial decisions taking on debt they should not have before they even think about saving.

Luckily, not everyone is a financial mess. For people who are savers they may just prefer renting for one reason or another, or have never been shown the numbers in order to pull the trigger on home ownership. So for these people let me begin by stating that the returns on real estate (can) surpass the stock market due to a combination of reasons. Being a home owner has almost a quadruple benefit compared to renting or simply investing the equivalent which I will explain next.

Firstly, as a homeowner you get to feel the joy (or pain) of paying your own mortgage rather than paying your landlords mortgage. From a selfish point of view, it’s nice to know you’re paying into something you own rather than something someone else owns. Down the line maybe you get a tenant of your own and have them help out with your mortgage, that is known in the business as Cash Flow. Often times even if a home is “negatively cash flowing” (i.e. costs you money every month to “operate”), the other three benefits can hugely outweigh this.

Secondly, every month a portion of your mortgage payment goes to interest and a portion goes to principal (i.e. the original loan amount). The part of each payment which goes towards principal is known as principal pay down, which becomes “equity” in your home. For example, if you purchased a $1 million home with a 20% down payment, immediately out of the gate you have approximately $200,000 of home equity and the other 80% is a loan. Lets say your mortgage rate in present day (February 2024) is 5.29% fixed for 5 years, with a 25-year amortization. By 2029, or the end of the first 5 year term, you will have paid down approximately $88,755 in principal and $198,392 in interest. In this case you now have approximately $288,775 in home equity, before factoring in appreciation. You might look at this and say, “hey! I just paid $200,000 in interest! That’s crazy, what a waste of money!” This is often where people forget that homes tend to appreciate in value over the long term. The value of your $1,000,000 asset likely increased to beyond $1,000,000. Therefore the equity in the home has increased, but the loan value DECREASES at the same time thanks to your principal pay down. Over a long time horizon these two lines diverge and what’s left in the middle is (often significant) home equity.

Thirdly, the GTA over the last 40 years has appreciated at approximately 6.7% per year (in the 10 years prior to 2020 it was closer to 10% appreciation due to continually decreasing interest rates, we likely won’t see that same type of growth again). Factoring this 6.7% appreciation into the equation, in 5 years the $1,000,000 home might now be worth $1,383,000. That’s an ADDITIONAL $383,000 of home equity. Combining the original $200,000 down, the $88,775 principal pay-down, AND the $383,000 appreciation, you now have $671,775 in home equity! If we take the TOTAL return on investment between principal pay down and appreciation, in just 5 years the initial $200,000 has grown by 235%! Even if you subtract the interest you paid over the loan term you are still sitting at a new net value of around $471,000, which is still over 100% ROI in 5 years. If you took that initial $200,000 and put it in the stock market at an average 8% return every year you would have $293,865 in 5 years. Which is not even 50% of the total home equity (i.e. $671,775).

Finally, you also have the ability to create “forced appreciation” by doing some simple improvements to the property, or dividing a property into 2 or more rental units to add value from an income generation perspective. There are a few well known improvements that can significantly increase the value of your property on the open market, and if you DIY it on the cheap you can add a ton of value while saving a good portion of the labour cost. That being said PLEASE hire someone if you’re not construction savvy, a hack job could actually cost you money in materials and hurt the value of your property. If done right, by not overspending or doing a poor job, this fourth horseman of real estate ownership can help send your return on investment even higher than I outlined above.

All of the reasons listed here prove why real estate ownership can be so powerful as a wealth building tool and why the average home owner has a net worth more than 28 times higher than a renter. Many people do not take the time to do the math on real estate ownership, or might not be aware of all the ways that owning real estate provides an amazing return on their investment. Naysayers might argue that the return is not guaranteed, well, neither is the stock market or pretty much anything else you invest in. However, real estate has the benefit of being a hard tangible asset compared to an intangible piece of paper (stock certificate). There is risk to any investment, your home could theoretically blow away or burn down. But you can mitigate this with insurance. Overall, you can make a good amount of money in real estate when you purchase at the right price. If you take the example about further you might also be able to see how owning multiple real estate investments can compound your wealth even faster, and it explains why many people who are well-off have a significant stake in real estate. Even if your home appreciates at a much slower rate than the one I present here, you are likely to come out ahead of the average stock market investor and well ahead of the average renter. I hope that after reading this you think about breaking into the real estate market sooner than later and begin to benefit from the 4 horsemen of real estate ownership.

All the best,

Oliver

P.S. When you sell a primary residence your capital gains are tax free, in Canada. Also, you can deduct mortgage interest from your taxes on an investment property and you can benefit from depreciation around 4% per year. I’ll cover these tips and more in later articles. The benefits to real estate as a tool for investment and tax deferral and wealth building is bar none in my opinion.

Newsletter #8: Why Owners are 28x Wealthier Than Renters, Real Estate News

This Weeks Blog Post:

Why Owners are 28x Wealthier Than Renters:

In this blog I show the numbers behind why home ownership can be so beneficial to growing wealth
I talk about the 4 different ways that real estate assets grow.
ROI of 235% over 5 years

Read the full blog post here: https://oliverfoote.ca/2024/02/18/why-owners-are-28x-wealthier-than-renters/

Housing News:

5-yr bond rate is ticking up slowly hitting 3.67%, some banks are continuing to offer declining mortgage rates.
TRREB market stats for January 2024 showed a decline in inventory across the GTA and a small uptick in prices from December. This is expected as December is seasonally the slowest month due to holidays. But there is indication activity will continue to pick up into the spring, especially if the Bank of Canada cuts interest rates.

Market Performance as of close Friday Feb 16, 2024:

S&P 500: 5,005.57 (+5.54% YTD)
NASDAQ: 15,775.65 (+6.84% YTD)
S&P/TSX Composite 21,255.61: (+1.84% YTD)

Canada CPI Inflation Dec 2023: 3.4% (0.3% Increase from Nov 2023)
Current BoC Benchmark Interest Rate: 5% NC
Current Prime Lending Rate: 7.2% NC
Unemployment Rate Dec 2023: 5.8% NC

Hope you have an amazing week! Chat soon!

Best regards, Oliver Foote