The Real Numbers Behind Renting & Buying

[00:00:00] Welcome to the Canadian Real Estate Investor, where host Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio. To buy or not to buy, that is the question. Okay, slow down their Shakespeare.

[00:00:20] Today we are going to be discussing probably the most controversial topic in Canadian Real Estate. Is it 15 minutes it is? Nope. Is it foreign investment? Nope. Is it money laundering? Still no, rent control. Good guess but no, gentrification. Well that's nice but not that one either.

[00:00:42] Okay, just tell me what it is and it is. It is the age-old question. Should I buy or rent my primary residence? And what is the answer to that question? Well Dan the answer is a 45 minute podcast episode which you and I are about to do.

[00:01:03] Okay, cool let's do it then. Okay well before we get into it don't forget make sure that you register for our first Take it educational event called unpacking multiplexes that we're doing with rehousing.ca. Yeah and I have to make a correction here.

[00:01:20] I totally wrote their website description down wrong and recorded it into the episode about the event so let me make it clear. Yeah that's classic me rehousing is a non-profit focusing on housing creation through applied research

[00:01:33] consultation and education their website is designed to empower citizen developers which is a wicked term In converting single family homes into multi unit housing which seems to be something that people who listen to this show are pretty interested in.

[00:01:50] Yeah well I mean we've talked about it seems to be one of the remaining viable investments strategies but Dan well we're on meet up some glad you Wrath it up.

[00:01:58] I want to say a quick thank you to everyone that came out to our meetups last week again second Tuesday every month We had a huge turnout in tons of cities across Canada which is kind of wild since its summer and we all know that Canadians don't really

[00:02:13] want to do a whole lot in the short summer months that we do have. Yeah and yeah I was honestly impressed by the numbers we're still growing over 3,000 members

[00:02:24] Coast to Coast now huge milestone for us we're going to have 5,000 by the end of the year I'm sure of it so yeah we are Yeah as a reminder we have 20 plus cities across the country from west to east Victoria has a vacancy

[00:02:38] We are looking for a host there sunshine coast in BC was hosted by our listener and realist.ca Premium member Cam and Anne Amory his wife shouldn't give us shout out to them they'll be emerging there's in Vancouver and starting to attend there

[00:02:50] I think but awesome guy awesome listener and really appreciate him Vancouver while I'm on it big shout out to James Anderson the only person I think in the world with a nice or massage than you Nick

[00:03:00] Oh, I don't know if that's a compliment or an insult but I'll take it there Yes James great face yeah Calbury we were just out there for the what is probably going to be coming in you will

[00:03:12] West Coast aggregator event the real estate rodeo hosted by cash and homes and calvert mortgage great partners out there And that's where it all began the whole meet up things so get it up baby. That was a good time

[00:03:23] Yeah Edmonton's meet up is hosted by realist.ca premium member Nia and his friend Cody it has a host seat and sponsorship available Saskatoon will be launching in September with Carla Brown Kitchen water Lewis hosted by Zach Dijong London Ontario Big Shadow to Cam Vandercewees

[00:03:40] I think one of us is going to be out there in August Hamilton hosted by Aaron and Josh of finally mortgage group and Zach Wills of Royal of Hades commercial

[00:03:49] These are just the reason I'm naming these out is so that you can go find these people and attend their meet up

[00:03:54] By the way if you follow Nick and I on Instagram you'll see a sharing all of the content that they share if you're interested in investing in that market

[00:04:00] Or in that market already follow them because they are becoming the local market leaders who are going to give you all the information about that market Peter were hosted by Sean Pierce of Tamark Marna Associates which we got from Mitch who is our partner in realist.ca

[00:04:16] Vaughan Mike Kardashian absolute beauty contractor and realtor doing a lot of garden sweet stuff Toronto is hosted by Valerie dot CA real estate group Durham region hosted by the legendary Tom Cousstra Peel region we are coming Yeah, peel region we got coming soon York region is Tony Riali

[00:04:36] Barry Patrick is set autoa. We would love to find a host sponsor probably the biggest market we have unclamed autoa and Montreal Sudbury Darren and Catla Blanc who I think are like the top realtor's in Sudbury actually just to give you a kind of an idea of

[00:04:51] Caliber of the people that are hosting these things monkey new brands with big shout out to Canberra Halifax I think we are coming soon. We met somebody from Halifax in Calgary at the event very cool

[00:05:03] Yeah, P.I hosted by Zach Denny and St. John's will be coming soon as well in September hosted by Evan Hall it I know that was a long little list but we want to give our host some love because they are awesome

[00:05:17] They're the ones putting it together and doing this on a monthly basis for all of you so make sure you give them The respect and love they deserve

[00:05:25] Yeah, exactly Dan and just three more quick things well were on house keeping I guess you're before we try to answer the age old Question of bivours is rent

[00:05:35] We will do in monthly check-ins with all of our hosts so that you can hear what's happening in the local market We just did the first one. We're going to be editing into an episode and it's a really really cool National insight in kind of perspective chat

[00:05:50] So as we mentioned we're still looking for a few Hosts and a few cities auto autoa when a peg Montreal Victoria and Halifax reach out if you want to get involved

[00:06:00] Contact us through either the podcast email social media if you want a host and of course number three As this tradition will be attending meetups every month Dan and I like to go out either together or separately and

[00:06:15] Try to meet all of you because that's why we started this whole thing Yeah, so one of us will be in London on Tereo with cam and the other will be in Peterborough I believe with Tamer and and Sean and And Two I guess those are two pretty

[00:06:32] Great investment markets within a stone so from Toronto like they've all both kind of come down to the point where you can actually Maybe do a deal there yeah, let me speak in of deals and

[00:06:43] Investible markets in September Dan you and I are flying out to Saskatoon for that lunch Launch sorry not lunch. I'm sure we'll be lunch hopefully Just like we didn't Calgary for this month Yeah, Calgary was was wild

[00:06:59] Yeah, it really wild was the the wild wild west really was the the way to describe it the real state Rodeo is definitely going to become an annual thing

[00:07:07] It seems to be like a good Western Canada aggregator event because we have people come from all over the place BC all over Alberta Saskatchewan again is you said Dan had people fly out from Halifax Which was amazing? We've only got to meet a bunch of our

[00:07:22] Realist members in person and and obviously a ton of other beauties from from Calgary. Yeah, I feel like like everyone owns like a six-placks in that city And that's

[00:07:32] What we're gonna be talking about is why that is and we'll do a full episode on the kind of the kind of Calgary experience and a debrief of our experience There's so stay tuned for that

[00:07:42] But what are we starting off with here Dan? Let's give it a go. I think while we're talking about everyone owns a six-placks Let's just do a quick deal of the day because we haven't done that in like a year and we want to bring it back

[00:07:51] Yeah, we've been wanting to bring that back and probably like you know provide it as a spot for some of our meet-up posts as a thank you So you got an Edmonton six-plex deal from our Calgary meet-up hosts cash in homes. It's in central McDougal

[00:08:05] 1960s build four one beds and two two bath. They're sure two two beds And oh why is 51 thousand so pretty juicy cap rate of 6.25 Percent at a purchase price of 825 thousand and they're looking for an August closing

[00:08:22] So it's Edmonton so I'm guessing you could qualify for M.I. Select on a fortability So give us a shout if you want to if you want more info on that And we'll connect you with our meet-up hosts who sent us that deal

[00:08:34] Okay, now let's get to the meet of the episode would be a video a couple of little tidbits to keep you excited But what are we actually starting off with famous rich people? I think okay

[00:08:46] I like it famous rich people see a bit of a weird place to start this episode and we're talking about buying versus renting But please go on Dan on you've I'm intrigued. Yeah, so you might have heard of this guy Elon Musk

[00:08:57] He has sold seven homes for nearly 130 million after vowing to own no house the Tesla CEO now rents in Texas after selling his California homes So one of the richest men in the world is

[00:09:11] Attent now well we're on subjects of richest men in the world Jeff Bezos on the other hand has been making news for spending money on houses Mr. Bezos just dropped 90 million dollars on a third Indian Creek island property

[00:09:27] The Amazon founder has met nearly a quarter billion dollars buying up homes and This one's known as Miami's billionaire bunker. There you go. That's And like said I mean it seems he looks pretty exposed to be a bunker really. I'm looking at this most

[00:09:45] Ice group yeah picture the ice for a great. It's mostly underground Yeah, and then finally to balance it off Warren Buffett's 31,000 $500 house that he bought in Omaha long time ago is now worth 1.4 million but he says he would have made far more money by renting instead

[00:10:08] Okay, so we've talked about Bezos Buffett and Moskin another gentleman who doesn't really quite fit the caliber of those three But it's still well known quote here from Grant Cardone who whether you like him or not clearly has some sway in the real estate space He says

[00:10:28] Do not buy single family homes if it's got one door living it don't own it. I rent where I live Does anyone in the room feel bad

[00:10:38] About me like Grant is a loser because Grant rents I rent where I live and I own five thousand apartments that pay me Every month And I go out with from a long time ago Cardone capital is real estate portfolio now has over 14

[00:10:52] 1000 apart million it's across 41 multifamily properties along with over 500,000 square feet of commercial space So grants stepped it up over the last couple years. Yeah, and I feel like that judgment like public perception

[00:11:06] Peace that he mentions about renting is actually probably an important factor in why some people don't rent I think

[00:11:15] So there are a few good perspectives here from people who are rich and a lot of people tend to trust people who are rich because they seem to have a good track record for Managing money So which of these Rick people is right

[00:11:31] It's a good question damn, but it turns out the answer isn't so simple and well I hate to say it because sounds like a cop-out. It really does depend So maybe we'll start off with some data if you follow us on Instagram

[00:11:45] You've probably already seen us post these charts one recently got like 300,000 views on Instagram It went pretty viral it got a lot of people upset in the comments which we're gonna talk about oh Yeah And if you don't follow us on Instagram

[00:12:00] Come on, what are you what are you doing? Click that follow up button. Please make sure you follow the podcast Instagram as well But let's look at the national bank economics and this is the premium of mortgage payment over rent

[00:12:14] Going from the highest to lowest okay, so we'll start with the highest you guessed it bank over Your mortgage payment is 66.3% premium over your rent Hamilton mortgage payment is 63% premium over rent Victoria British Columbia mortgage payment is 45% premium over rent Montreal

[00:12:36] Your mortgage payment is 41% premium over rent Toronto 40% Quebec City 18.9 Calgary 16.5 Winnipeg 15.8% premium over rent Edmonton down to 10.5% and Ottawa coming in to round off the list At 9.2% premium over rent now

[00:13:00] This isn't just a Canadian thing Dan this also applies to the US as well a recent article in Kippling or personal finance has the following headline which reads Renting is cheaper than buying in all 50 states How does your city compare?

[00:13:20] I mean that is a pretty eye catching headline. I would say and this has been shared a lot Renting is cheaper than buying in all 50 states how does your city compare?

[00:13:28] And it says according to a new bank rate survey in 21 US metros the monthly cost of owning is at least 50% More expensive than the monthly cost of renting Yikes yeah, the that controversial article says record high house prices

[00:13:44] Near record mortgage rates and a record low inventory have made it challenging for many people especially first time buyers to buy a home The upside is now is a great time to rent yeah, I would I guess that is kind of what

[00:14:01] What it to do is this recent bank rate survey which I've pulled up here for those who are falling along on video But bankrate dot com if you're just Google bank rate and then like rent versus buy it

[00:14:12] There's some good charts as a February this year the typical monthly mortgage payment for a median priced home Which in the US is four and twelve thousand dollars which honestly isn't it sounds like a lot less than can it

[00:14:22] But that's in USD and that's like six hundred k Canadian so that's pretty really similar or 650 150 off there which is actually like an important context because when we get to this you're gonna realize like everyone's obsessed with like

[00:14:35] Oh, I'm gonna go buy in the US and invest in the US and it's it might not actually be that compelling What yeah, so So that median mortgage payment was $2,700 Well the typical rent was $1900 That's a difference of nearly 725 750 dollars monthly or more than $8,600 per year

[00:14:59] Yeah, it's a good chunk of change now. I clicked into the bank rate survey and we got some US cities where we can look at that gap to Compared to Canadian cities now the buy to rent ratio compares typical monthly mortgage payments to typical

[00:15:17] Monthly rent payments and in five metros with the narrowest monthly cost difference between renting and buying to buy The budget rent ratio ranges between two and 20 percent It's pretty bigger range actually so you would assume

[00:15:32] The lower the buy to rent ratio the better investment will perform from a yield perspective because the rents in that city are high when compared to

[00:15:41] How much you would pay for a mortgage and this is the rent or the kind of close to like the ratio of your rental income to the property value

[00:15:47] So similar to a cap rate, but for the whole market. Yeah, so this could also be an easy way to compare weather or not the Markets in the US can even outperform Canadian markets on an investment basis and I know that's what a lot of Canadians

[00:16:02] Think about well I can't afford Canada. It's gone too expensive let me look it down south We might just be able to debunk that right now National bank Canadian data Doesn't even include some of Canada's most Investible cities like Regina Saskatoon, Munkton, Halifax St. John's and more

[00:16:21] And then we've talked about this many times the lack of data up here for certain markets really does hinder Investors and end users alike. I can almost guarantee this data will surprise you. So let's dive in US metros with the smallest gaps between monthly renting and buying costs

[00:16:41] Detroit Warren Dearborn Metro area typical monthly rent 1,400 typical monthly mortgage payment 1423 by the rent ratio 2% Pittsburgh metro area so that's a that's a more affordable market to own then you know A close to affordable market to own a rent Pittsburgh metro area by the rent ratio 5.2% Philadelphia

[00:17:00] Candid Wilmington metro area 8.7% by to rent ratio Those some pretty good ratios now this one might shock you Cleveland the Ohio metro area the fourth best market on the Biterent ratio and a popular choice for many Canadian people to invest in the US

[00:17:22] and one that is currently being pumped by tons of Canadian gurus trying to capitalize on the frenzy of people going to the US markets because you know they either can't or suck that investing here again

[00:17:33] But let's hit the typical monthly rent 1377 typical monthly mortgage payment basically $200 more at 1537 That gives you a buy to rent ratio of a 11.6% which is a worse ratio than Ottawa on terio Okay, that means that Ottawa is a more favorable investment market based on the

[00:17:58] Bivorous rent metro yes you heard that correctly now imagine how much better That ratio would look in places like Saskatchewan, Manitoba, Noescozian New Brunswick, Newfoundland and Lann Brador next we've got Buffalo Cheetahwaga New York metro area

[00:18:14] Another very popular investment location for Canadians given it is basically in the greater Toronto area at this point especially if the hover link ends up happening which is a proposal for a Weatherproof hovercraft service from St. Catherine's to Toronto have you heard about this?

[00:18:28] I saw something I didn't know if it was like completely fake news but I don't know either But it's pretty funny so that would transport up to 180 passengers across lake Ontario and only 30 minutes

[00:18:38] It's like only 40 kilometers. If like lakes are they they're inconvenient the way they what they put them there back in the day So Buffalo Typical monthly rent about 1300 bucks typical monthly mortgage payment about $1550 So the buy to rent ratio is 20.2% that's the gap between the rent and buying

[00:18:58] Which is what we were saying before which is worse than Quebec City Calgary Winnipeg Edmonton and Ottawa and all the other cities that And we have didn't have the data for like you mentioned so probably you're Saskatchewan, Halifax I know this goes into brands like it's settler

[00:19:15] Really interesting stuff now Dan for the sake of our audience. I'm gonna ask you a question Now if rents are low how can we even stand to make money as real estate investors right?

[00:19:29] We look as rent as our yield so if rents are low is that a good thing or bad thing for real estate investors Yeah, so you know there was this big plot twist that completely changed the world of real estate investing in the last few years and

[00:19:45] How we need to change the way we think about real estate investing to Accommodate for that and that was that interest rates went up You need to buy multiple units which means that investor capital is creating housing rather than destroying it by buying one single house

[00:20:01] This is an easy distinction when interest rates are into decline in the profits are in the market or driven by capital Appreciation it encourages people to speculate and just buy a scarce asset and in a housing crisis a single family home

[00:20:14] Is the most scarce asset because there's only one that you're buying at a time When profits are driven by rental income or a yield rather than capital appreciation which is the market that we're in now You have to get more yield for less money and

[00:20:27] Pretty much the only way to do this is with more units Yeah, exactly then now people are Naturally gonna complain about the data comparison we just Made saying that the buy to rent ratio isn't a fair comparison but

[00:20:45] owning a house isn't just the expense of a mortgage payment as many people commented on that incident post It's actually profound observation from the rocket surgeons on that one. I'm assuming they mean to say it doesn't include the fact that you're paying principle when you pay a mortgage

[00:21:02] Yeah, you know there they're not wrong and we will do the math on that in a second They're also just ignoring the double edge sword though because it doesn't include things like taxes Maintenance and insurance all things that that owner of the property is responsible to pay for

[00:21:20] Yeah, good old TMI my favorite thing to put into a Excel model You would the king of excel this is probably one of the most important and most common terms in real estate investing For the uninformed Dan is just acronyming what I said before so

[00:21:39] TMI in real estate stands for taxes maintenance and insurance I guess in real-life TMI stands for too much information but in real estate you Me that information no such thing is too much information

[00:21:50] Not in real estate transactions. That's for sure now TMI these are the additional costs that come with only a property beyond Just your standard mortgage payment okay, so taxes that includes the property taxes at the homeowner must pay annually to the local government

[00:22:08] Maintenance making up the M&TMI of course ongoing costs to keep the property and and conduct your repairs and then of course the I is insurance where homeowners ensure to protect against damages or losses

[00:22:23] Now these expenses can significantly impact the overall cost of home ownership and are important And necessary to consider when comparing Renting versus buying you're not seeing renters pay TMI Yeah, so for perspective here let's just pick our enemy deal

[00:22:41] Let's say you buy a house in the GTA for a million dollars and probably one of the worst markets for like that rent to own ratio But you know prices have come pretty come down pretty hot pretty well in the GTA and

[00:22:53] Some markets are settling so like you know We'll kind of average it out and try and be fair on the rent here as well You put 20% down so that's like $200,000 But it is $200,000 that you can invest in let's just say the S&P 500 index

[00:23:10] Yeah, but I mean you wouldn't be doing that you'd probably be putting in Dogecoin in the video wouldn't you? I mean and that's the shocking truth behind this whole thing is that despite what you make think Not everyone is a financial wizard especially me in in fact

[00:23:23] I lose money if I try to manage my own investments and stocks or crypto and so that's the point of real estate for me I'm bad at saving money and I'm bad at investing in traditional methods So a primary residence and real estate investing makes sense for me

[00:23:36] Because it forces me to save money and it forces me to store that money in a hard asset That's why I use the S&P index as my recommendation most Canadians would probably be the same as me and earning

[00:23:47] Returning closer to the risk free rate of a GIC which is like four to five percent or probably like zero or negative four to five percent Which is my track record when I'm not investing in real estate

[00:23:56] So we have a low savings rate in Canada and we're not good at investing so that is probably why Canadians like real estate so much Thanks for being honest there Dan if Dan opens a stock portfolio guys do do not invest with him

[00:24:12] Okay, let's get back to our example that one million dollar house that you brought up Dan with a 20% down payment so you've put 200,000 Into something You can't get can't go lose that on stock market But now you've got an $800,000 more gauge

[00:24:31] Now this is kind of that scary math and nobody wants to do on their mortgage is now that interest rates have gone up $800,000 more gauge at five percent interest my mortgage payment would be $4,600 over a five-year mortgage term which means that I would pay

[00:24:49] My monthly payment 60 times 12 times a year for five years. I will pay two hundred and seventy thousand dollars in mortgage payments. Wow. Yeah of that $270,000 About 33 percent or 91 thousand is principal which is equity that I'm paying into the house and 67,000 six or a 67% or 189,000 is interest now that

[00:25:14] 189,000 you just mentioned in that's something that you're not Investing into dogecoin or nevilius simply because you want to be a homeowner So the average on a monthly basis is your paying $1,500 Principal per month and about 3,150 dollars In interest monthly so huge disparity there on the principal versus interest

[00:25:39] And this is where the math gets truly out of control if I were to rent that house I would say I could get conservatively like 3,000 dollars to 3,500 per month

[00:25:50] Drent the whole house so each month that I rent that house I would be paying close to the same amount in interest As I would be paying in rent so to make the math easy for people to follow on on the pot on a podcast like

[00:26:02] While you're listening not looking at it. Let's just say that that house would rent for $3,150 Since that's what the interest payment is on average over the course of that mortgage term

[00:26:12] Now remember this is a bit hack on the math because I'm trying to do it so you can fall along verbally But a mortgage payment typically does have Decreasing monthly interest and increasing monthly principal payments because of the mortgage

[00:26:26] Amortization schedule yes, exactly. And we've covered that many times here in the on the show This is the absolute biggest way that you can make money in real estate It isn't discussed very often other than on this show when you're buying real estate investments

[00:26:41] You benefit from owning the asset sooner and holding them longer because the longer you own the faster they pay themselves down Now a mortgage amortization schedule works like this Early on most of your payment goes towards interest because the principal balance is high

[00:27:03] Interest is calculated on their remaining principal and as you pay down the principal The interest portion at the same time begins to decrease with each payment made More goes towards reducing the principal and less of that money towards the interest

[00:27:19] So this is a good thing we actually start to own more of the asset more of our capital is actually going into the Principal rather than the interest and then of course over time the interest portion of Each payment decreases and the principal portion increases

[00:27:36] This ensures that you pay off the loan in a timely and predictable manner with interest payments Decreasing and principal payments increasing over time so I will add a few more assumptions to further

[00:27:50] Simplify this can you just recap what the assumptions we've made are so far because whenever you're modeling something I think I'm making assumptions you need to be clear on what those are yeah for sure

[00:27:59] And so the assumptions we've made thus far are first the home that we're working off of here is One million dollars we're putting a 20% down payment and taking an 80% mortgage This means that I have eight hundred thousand dollars in debt and two hundred thousand dollars into the deal

[00:28:17] Plus whatever sunk costs of legal fees and land transfer tax and that kind of stuff Which was probably about 16,500 Rough math the Principal average is about $1,500 a month over the first term and the interest payments are 3,150 dollars

[00:28:36] Okay, so now let's just assume your house goes up at the same rate as the S&P 500 index something like 10 10.64% over the last one hundred years even though the real number of house price appreciation is like six

[00:28:49] Point two percent per year the reason I'm equating them is because then we kind of don't have to Model each deal independently like we don't have to say oh this one went up at six and this one went up at ten

[00:28:59] But just for the we'll go back to the the six percent but I just want to kind of really put them side by side That means each year the house is going up by 106 $440 before compounding and before your expenses and before a land transfer tax

[00:29:14] Which would be like a 50% ROI on your down payment of 200 thousand dollars now in order to get that 106,400 dollars of ROI you also have to pay Expenses that you wouldn't have to pay if you were renting right remember

[00:29:33] TMI let's talk about interest first of all 3,150 dollars. That's the interest portion of Your payment times 12. That's 37,800 Okay now let's talk about utilities in most cases You'd have to pay utilities as a tenant and an owner so we'll just make those exclusion area for now

[00:29:52] Because that's very subjective to how you've got your lease structured So let's move on to insurance call it two to five thousand dollars per million so that brings us To about $40,000 annually and then of course maintenance this can be a big one

[00:30:08] I'm gonna use about ten thousand dollars due to the 1% rule people often use 1% of the property value for annual maintenance as a general rule of thumb to Estimate the cost of maintaining that asset or that home

[00:30:24] This rule provides a simple way to budget for regular upkeep and repairs the idea is that over time Very's components of the house will need maintenance or eventually replacement Think about your roof or your appliances your each-vac systems and your plumbing

[00:30:43] By setting aside a 1% of the properties value each year Homeowners can feel comfortable and likely ensure that they have the funds available to eventually cover these expenses Without facing any major financial surprises so that brings us to a grant total around $50,000

[00:31:01] So we've covered the eye and the M That's the insurance and the maintenance in the TMI portion so not damning it toss over to you for the T Which represents taxes Yes, so there's such a massive

[00:31:17] Variance in property taxes across Canada is one of those things that is different around the country and a place an important role in modeling out Investments as it can be a big cost for example

[00:31:26] You might want to invest in Winnipeg Manitoba, but then you realize that they have the highest tax rate in the cities across Canada So based on the city you're in

[00:31:34] Taxes could be as low as $2,700 on a million dollar house in Vancouver where the tax mill rate is 0.27% of assessed

[00:31:41] And on the high end you could pay 26,000 and when a peg where the tax mill rate is 10x that at or almost 10x that at 2.64% of the assessed value Toronto is 0.66% of assessed value but on terrors assessed values are not really real

[00:31:57] So that tax number basically means nothing as a function of the Million dollars so that's kind of one of those Statistical anomalies that's hard to reconcile for at least in the province of Ontario where you know

[00:32:09] House that's assessed at a million dollars is probably actually worth 1.5 or 2 million so Nicolette's quickly go through this list and then we can use the median which seems to be around $10,000 so out another $10,000 so it was annual expenses

[00:32:22] Okay, cool yeah, let me start things off on the low end here crazy that we're talking about the low end and starting with Vancouver It seems to be the opposite of of every other list of Vancouver makes but on the low end

[00:32:34] Let's start with Vancouver habits for the Colone and Victoria you'd pay less than $5,000 dollars Annual property tax on a one million dollar home You know a BC just making me proud with these cheap taxes. I guess that's the the big win there

[00:32:50] And then you move over to Montreal, Calgary Toronto St. John's Burlington, Quebec City and Edmonton Which all have taxes in the five to ten thousand dollar range on a million dollar house Let's bridge London, Halifax, Ottawa, KW, Gwelf, Saskatoon and Frederickton

[00:33:08] Or all in that one to one point five percent tax range so call that about ten to $15,000 in annual taxes and then the expensive cities Regina St. John Charlotte town Su Samory and Winnipeg you're paying over 10,000 in taxes annually where their rates are 1.5 to 2.6%

[00:33:29] Yeah, it's so funny to see you know places like Regina and Charlotte town in Su Samory Much more expensive than then you know Vancouver and Colone and Victoria but anyways we can reduce that annual growth from let's say 100,000 to 40,000 so your gross return was 10 percent

[00:33:49] But your net return was 4% per year on the house price So 40,000 per year on that original 200,000 right that's that $200,000 down payment that $200,000 of cash You put into that million dollar home. That's still like 20% so it's a great return don't get me wrong

[00:34:10] But it's it's not exactly as it appears and it's crazy because in that example we were saying How much prices would go up by 10 percent to make it more easily comparable to the S&P 500 index

[00:34:22] But they actually go up like 6 to 7% so they would have gone up 70,000 per year which means when we deduct that You know 50 to 60,000 expenses from before so from your gross Let's call it appreciation or gross return and arrive at this sort of net profit on your house

[00:34:39] Your actual net growth on your house would be like 10,000 per year close to a 1% of the value of the home So 10,000 profit on 200,000 is 0.05 or a 5% annual return so after five years you've made roughly 60,000 profit after compounding on your $200,000 down payment on your house

[00:35:00] So in order to beat home ownership You would need to be able to earn a return greater than 5% on your down payment in the scenario You have your $200,000 down payment 60,000 in capital appreciation on your house 90,000 in principle that you paid into your house over the 5 year mortgage term

[00:35:18] Totally about 60,000 return on a $290,000 or a 30 to 40% return over 5 years in a final value of 350,000 and these numbers are Important because we're gonna use the same kind of comparison make it really easy for all the rest of the Methods of investing that we

[00:35:36] Toss in here now keep in mind all of these gains are tax free here So you get to keep all of that money which is the probably the primary advantage that some of these other ones

[00:35:45] You're gonna have to pay tax and that will make them a little bit less compelling also keep in mind that in order to truly Realize those gains you have something called switching costs which means you'd have to pay a commission of three to five

[00:35:58] Percent to sell that house, which is going to eat away at those earnings a little bit if you want to cash out entirely Yeah, I agree point to Stan but also let's remember that your pain money into that house each month through

[00:36:10] Your mortgage payment which again has principal and interest now Assume that you're rent your house and take that same amount of money input it to an S&P 500 index ETF okay you'd have bought 200,000 of S&P originally We're at 54 937 shares at about $1500 dollars for each month totaling in

[00:36:36] 20 more shares now your final value would be Just under $450,000 at a return of almost 43% slightly beating the home ownership Before tax but after capital gains tax it may not even beat home ownership depending on your tax bracket

[00:36:55] Yeah, and that's where you know I mean most people wouldn't like most people I think would probably realize a return lower than the S&P 500 index because they're gonna Invest it in stocks or something lower risk and so and then you know you pay tax on it

[00:37:08] And so home ownership probably for the average below average investor let's call S&P the average the below average investor Home ownership makes more sense right but if you're a good investor or you know really talented stock

[00:37:20] Investor maybe listen to our podfathers Simone and break in and you put it into something like apple AAPL you'd have bought 200,000 dollars of shares Literally going back exactly five years from today July of 2024 so July of 2019 Five years ago and you bought

[00:37:38] $1500 worth of shares the principal payment on the house each month for 60 months So the same as the principal you were paying into your home that you own This would mean you now have 4.6 to know what is that? Sorry, 406 or in 28 shares or

[00:37:56] 1.05 million in apple shares or return of yeah return of 267.98% of the same period of time Which is subject to capital gains? Okay cool example now let's have some fun here Dan what if it was all invest and you were Early on to this let's go new video stock

[00:38:11] Yeah, if five years ago today you bought new video instead of a house you'd have almost seven million dollars like six point five Million more than you would if you bought a house and a two 3,300% gain But obviously that's an anomaly

[00:38:25] So if I went and bought new video stock I could afford a home and Toronto bank who were there What about let's let's have even more fun a little bit coin

[00:38:33] If five years ago today you bought Bitcoin instead of a down payment that $200,000 in Bitcoin would have gone up about 435 percent to $870,000 Then if you dollar cost average your monthly principal payment of $1500 each month you would also be

[00:38:50] Or that that dollar cost averageing would also be 273,000 dollars for an average return of Just shy of 200% and you would have combining those two 1.143 million dollars now if you chose to invest every like this is this is the important part

[00:39:08] Every dollar that you invested in a house in owning a house it would have to be every single dollar If you invested every single dollar in Bitcoin or in a video or whatever again We'll talk about that

[00:39:18] Okay, so Bitcoin great new video great, but let's let's get to bring about reality here Let's let's the actual purpose of being helpful here. Let's look at a more Realistically and less risky investment something that probably a lot of Canadians have exposure to one of the big banks

[00:39:35] Let's say RBC for instance Yeah, so with RBC five years ago you'd have about $500,000 with a $200,000 Starting investment and buying $1,500 worth of stock per month for a return of 71.75% over a five-year period So that would likely beat home ownership slightly even after the capital gains differences

[00:39:59] Okay now we've been talking in comparing Single family homes and user homes here today and what if they invest that save them on a money in a cash flowing multiplex? I'm very glad you asked because I mean this is the tail of two assets with real estate

[00:40:17] Let's break this one down step by step. So same property value and loan details purchase price a million dollars down payment 200 grand loan amount 800,000 Annual net operating income on an on an eight caplet say which would be a deeply cash flowing multiplex today You know that's probably

[00:40:36] An outlier but 80,000 dollars and this we're gonna do it. I will do a six cap as well because we presented a six cap at the beginning of this episode so Your interest rate we're gonna assume the same five percent five-year mortgage term

[00:40:50] Using a mortgage calculator that mortgage payment was about what was it? $4,500 $4,600 So you're paying about 54 or 55,000 a year and mortgage Annual mortgage payments 270,000 in mortgage payments over five years Using the amortization calculator the interest paid is that 170 to 180,000 principal paid over over five years is 90 to 95,000

[00:41:18] Again, it's gonna vary on based on your mortgage. So kind of trust trying to provide a range here But the important part to remember here is that somebody else is paying that principal not you when you own the home Right so that all of that is yield not

[00:41:31] Savings that makes sense does right? Yep, yeah, yes makes sense annual cash flow Just anything on top of your mortgage is about 23,000 on an eight cap so 80,000 and a Y minus 56,000 annual mortgage payment So total cash flow over five years would be 120,000

[00:41:49] Let's assume conservative appreciation rate of three percent per year half of what come on This is our gap, it's right and future property value after five years What that would make it 1.15 million initial equity 200,000 the principal you paid in 93,000 appreciation 160,000-ish Total equity after five years would be

[00:42:13] 452,834 dollars if we're being exact Plus the cash flow Oh that's like a total return to share so yeah, so total plus the cash flow 120,000 you're looking at so sorry cash flow 120,000 plus equity build up of 252-ish thousand

[00:42:33] 372,000 so your 372,000 divided by your two hundred thousand dollar initial down payment 1.86 or 186 percent over five years Okay and if I'm understanding this all correctly this example of an eight cap

[00:42:49] which is not an unheard of cap rate in a lot of parts of this country is closely comparable to a pre-tax Return to Bitcoin I mean to be fair an eight cap is pretty rare. I would say but even if you're in like the six to seven

[00:43:04] percent cap rate you're still Really beating the primary residence Okay, so let's calculate the return over five years for that million dollar investment property But let's shave a couple points off of that cap rate and drop it down to a six cap

[00:43:20] with a 80% loan to value okay I'm gonna break it down for you like a fraction here Our assumptions probably value million dollars cap rate six percent everything else the same We are LTV that's your loan to value 80 percent your mortgage interest rate we're gonna assume five

[00:43:36] mortgage term five years and net operating income your NOM is 60 thousand dollars Now the mortgage details the loan 800 thousand dollars so that's again 80 percent down payment is the remainder 200 thousand dollars That's what we put into the deal

[00:43:53] At leaves are monthly mortgage payment that about 4,500-ish and again that's kind of using a standard mortgage calculator at 100 thousand five percent over a 30 year Amortization Your total returns your NOM over five years that's 60 thousand times five so three hundred thousand dollars You would have paid

[00:44:12] 90 thousand dollars of a principal down and again assuming a three percent annual appreciation which is Realistically a super conservative estimate even in you know the non-crazy pandemic times I think we said is about six percent historically Property value after five years going up three percent has hit that 1.1

[00:44:35] Six mark so your appreciation gain is about a hundred and sixty thousand dollars now Let's look at the total return okay, so your total cash over your equity paid into it That's your NOM minus your interest payments

[00:44:49] But a hundred and twenty seven thousand dollars you would have paid down about 85 thousand dollars in principle And gained about a hundred and sixty thousand dollars in appreciation So your total return over five years that's your cash flow plus your principal paid down Plus that appreciation

[00:45:06] You're looking at about three hundred and seventy thousand dollars So what does that look like from an ROI perspective you return on Investment okay your initial investment which was your down payment. That's the cash that you put into that deal remember

[00:45:21] A hundred thousand dollar mortgage two hundred thousand dollars in so a Conservative total return it's about three hundred and fifty thousand dollars You know ish, okay, so your ROI over five years 350 thousand divided by two hundred thousand but 1.75 or

[00:45:38] 175 percent now the total return over five years for that investment property is about 350 thousand Which again translate to that ROI of 175 percent which looks pretty darn good when we lay it out like that Yeah, and that's only with buying the investment property that doesn't account for any diversification

[00:45:57] That you might do with all of the money that you now have because you know like so you could dollar cost average those monthly Difference in payments into savings account or GIC or the S&P or any of the stocks that we mentioned here

[00:46:12] Or start saving it or you know saving up that ninety thousand dollars over five years for Down payment on another cash flowing multiplex Which is exactly what you should be doing? You know, it's not hard to see why you know someone like

[00:46:26] Grant Cardone says that you should rent where you live So really begs the question then Dan if you can't make money or more money my investment properties

[00:46:38] Then the S&P 500 index or by dollar cost averaging into a safe stock like an RBC or something like an apple or something a bit more risky like new video or Bitcoin Why do people buy their primary residences?

[00:46:52] Yeah, so as someone who used to rent and invest my money like we're talking about here who now owns a primary There are a few reasons I can speak to for myself that I think would resonate with other people

[00:47:04] Number one is it's yours you can really make it at home You can make memories there you can renovate it exactly as you want your home to look

[00:47:10] Which you can't really do with someone else's house or someone else's asset and that has value to me at this phase of my life And this could be different for anyone depending on their phase of their life

[00:47:20] You know you and I could talk about the phase of life that you're in right? And I think you will when you talk about maybe why you choose to rent rather than own

[00:47:28] Depending where you are where you are in the country and the landlord tenant rules and who your landlord is You have more security of housing than if you own it or sorry, if you own it then if you rent it I honestly

[00:47:40] The biggest one for me is I didn't save the difference when I was renting like realistically, you know like when we talk about You know that how the difference if if the monthly rent was equivalent to the interest just the interest payment that you'd have

[00:47:53] $500 of extra money. I'm not saving that money realistically I'm not super financially disciplined when it comes to saving a lot of that money got spent on stuff Yeah, whatever put into putting into growing this business or you know, and that's technically an investment or other stuff

[00:48:10] Whatever and so I think that's a big reason that a lot of people don't do it Maybe it's a subconscious thing but a mortgage keeps them more honest to a savings plan

[00:48:18] Right number four for me was like got a good deal on the property and I felt like it was a good Asset that has good appreciation potential it fits my investment thesis Which is that it's on a big piece of land on a major arterial road

[00:48:30] So I got some investment value out of it as well and and more on the the savings pieces

[00:48:36] You know if I wasn't gonna save the money. I probably also wasn't gonna dollar cost average it into Bitcoin or Nvidia or Apple or S and P or RBC or whatever I honestly probably would have made some dumb trades

[00:48:47] I found on Reddit like I do and lose money and that's harder to do with property though not impossible If you got your real estate and vice from tick talk you're probably just as bad as I am at getting my stock advice from Reddit

[00:48:59] But the reality is in most cases it's less risky so realistically property is probably traditionally More stable than it's probably the most stable asset that most people are going to be able to invest in They understand it everyone lives in a house

[00:49:12] But historically it's probably more closely related to like a GIC and risk profile and if you get it Return the beats of GIC then you win I really appreciate you sharing all that data for people who've been listening to the show for a long time

[00:49:24] They know that this has been a constant discussion between us right you we both invest in real estate Rent where I live you have purchased where you live and for me honestly, Dan, they're just as many reasons why I like renting the first one being it's

[00:49:40] Not mine. It's not my home. I'm not attached to it which makes me feel a bit more free It makes me really mobile. I'm not tied down Which is you know a very valuable

[00:49:53] Position to be in at this phase in my life the second piece is I'm in the province of Ontario so I have a lot of rights as a tenant and it's harder for land or to a victim

[00:50:06] Attent you know in bad faith and it's it's just as hard for the bank to a victim An owner in some cases I try it's easier for the bank to a victim owner in some cases and you know the last point on make here is

[00:50:20] I do save the difference and I do invest that money that I save and I invest into you know the small stock portfolio Have a more heavily into our businesses right the podcast our course and community realist.ca my personal portfolio of investment properties outside of our fund

[00:50:37] So I do see the benefit every day But there are some months where I want to be able to take a vacation or something and I can just use that excess cash to fund that So the extra mortgage payment doesn't prevent me from you know

[00:50:51] Being that house poor person or that house poor mentality that you hear about I guess We should wrap up here maybe given been pretty long episode so I mean overall I think the preference is really what drives this decision but

[00:51:12] The reason we do these episodes we've done this episode a couple of times already We want you to think about doing the math on this stuff because

[00:51:20] Everything in life can be boiled down to a cost benefit analysis and this is one of those things and it's not complicated It's simple like don't make it too complicated I'm not saying over-analyzed your life. That's not a very fun way to live

[00:51:31] But run these cost benefit analysis. They're simple and everyone in our realist community is doing math like this every single day To totally optimize their portfolio and and Investment decision so make sure you check out realist.ca and join our free course and book a free consultation with

[00:51:49] Nicar myself to apply for our premium coin course and join three thousand other investors who are doing Meetups on the second Tuesday of every month Coast to coast and please leave us a review. It means so much to us and

[00:52:06] One last thing go ahead and share this episode with someone who asks you why you're Still renting your house. Thanks so much for listening. We'll see you next time The Canadian real estate investor podcast is for entertainment purposes only and it is not a financial advice

[00:52:24] Nick Hill is a mortgage agent with premier mortgage center and a partner in the G and H mortgage group Licent number one zero three one seven agent license m two one as zero zero four zero three seven

[00:52:39] Dino photos is a real estate broker licensed with rare real estate A member of the Canadian real estate association the Toronto real estate board and the Ontario real estate association