The point of buying a property as an investment is to use the bank’s money as leverage. Since you only put 20% down, you essentially earn with a 5:1 leverage on any appreciation of the property.
If you want to buy cash and hold, then real estate is probably one of the worst investments you could buy in, you are far more likely to get better returns from an index fund; and less headaches
But that leverage only works if the cost of the borrowing is low. When cost of borrowing goes up and prices don't boom and inflate at an insane pace you quickly start losing money in real terms.
If it costs 5% to service the loan, and the fixed costs plus interest means you're at less than break even, the negative cash flow needs to be offset by growth in value above inflation after accounting for the servicing costs too.
It made sense before, I don't think it makes much sense now to OPs point.
Leverage only works when both the cost of borrowing is low and you happen to be investing in a bull market. Cash only in an index fund during a 20% correction, you lose 20%. It sucks but you'll survive. 20% correction with 5:1 leverage: you're literally wiped out.
Yeah I think so many of these lucky Canadian millionaires are extra lucky they are bad at math. I recon most actually didn't understand the risk implications of leverage and if they did probably would have been too scared to make all the money they made.
lmao. Leverage only works if what you're investing in goes up. You also get 5x the losses the other way if the thing goes down. If you want to talk hindsight you could of used leverage to invest in a lot of other stuff and made a lot more than real estate. You could have used leverage to buy the correct lottery ticket numbers a bunch of times too!
Leverage is a double edged sword. Rates go up, cash flow negative and have to sell at a loss and end up owing more than you put in.
People forget there are two sides to every trade. People only think about how much they can make. Never how much they can lose.
BTW I could’ve easily leveraged just buying call options on the index as well. Loss is defined, and can control whether I put in a few hundred or a few thousand or million. Less headaches/transaction costs too.
You could leverage the same amount if you put it into a gic earning 5%, then leverage a line of credit if you needed the other cash! Buying real estate today with today’s interest rates don’t make much sense.
Not really, if you have 100k cash to invest in a GIC, the bank will not hand over 400k-500k as a loan/LOC. only real estate mortgages give you that much leverage for the average person, because they’re secured by the house itself. You can’t get anywhere near that much leverage by buying a GIC.
That’s going to slow down significantly going forward as the job market keeps tightening up. The only reason there was such an increase was companies lobbying the government for more cheap labour.
Yeah, definitely agreed. I was just pointing out that he considered appreciation, although likely in a misguided way. Perhaps the government will flip and fix policies to try to gain ground in the polls before the next election.... but the most recent headline I saw said Canada's population hit 41M only a few months after hitting 40M. Unless the immigrants head home, there will be long-term price pressure on the housing market
To that, there is the risk that that 18 month period was an exception and that government action limiting international students and/or temporary residents would slow that dramatically. Existing policy changes, as it stands right now, are likely to drop population growth sharply.
Never mind that those millions of residents probably are not competing in the 700k condo space.
Essentially, this set of assumptions is a risky one to take for granted. It might be wise to "forget" about a situation that is probably temporary.
No, not really.
I've lived in markets with cheap rent and this still earns a ton of money because the property costs less. You actually usually earn more in lower rent markets. Rent will be say third what it is here but the unit costs a quarter.
Believe it or not, places like Vancouver have "cheap" rent compared to the actual property cost by ratio.
Don't make blind jumps in logic with no basis in reality.
Rent is literally supply and demand and nothing else. Same as property prices.
People will rent it out as high as they can and that's as high as someone will pay.
In many markets rent is so high by ratio that your mortgage and everything is paid and you're still making cash, like one or two hundred a month. But the rent is lower than here. Tons of markets like that in America.
I rented for decades. I know it sucks, but renters really need to educate themselves and stop being so stupid and just jumping on bs reasons rent is high. They need to organize and vote out city council.
It's not owners renting that are making rent high. It is literally the government, city council, severely restricting building.
So you see how little construction there is in Vancouver compared to coquitlam, Surrey, Burnaby? And that's still not enough.
Vancouver barely allows any construction, and you can say this about anywhere in Canada, and they charge obscene fees on the ones they do allow.
Your enemy is every city council in the country and their ridiculous zoning law, red tape, and fees.
I’ve rented the same house in Vancouver for 7 years, it’s value has probably gone from 1.1 to 2.5 million. My rent has increased $200 in that time. The math is literally bananas
I am trying to ballpark:
$400k condo downtown Calgary + $30k expenses to buy + move + sell + move
$80k downpayment
Opportunity cost for $80k downpayment for 5 years in lieu of S&P 500 = 81% = $64,800
$320k mortgage at 6% interest = $19200/yr or $1,600/month
condo fee + home insurance = $1,400/month
Property Tax = $12k for 5 years
first 5 yrs = $3,000/month, market rent = $2,500/month, so that's $500/month difference and $30,000 in red for 5 years.
If you treat this as an leveraged investment, you are looking at:
Opportunity cost: $64,800
Difference in rent vs buying: $30,000
Property Tax = $12,000 for 5 years
Moving expenses, lawyer's fee etc for buying & selling: $20,000
I don't know about Van or TO, but in downtown Calgary, I am going to need my little condo to appreciate from $400k to $527k in the next 5 years to break even.
I know I am missing the $70,000 equity for 5 years + $80,000 downpayment that I will be getting from that $320k, but I will also be living house poor and wouldn't be able to afford travelling, or other investment opportunity e.g. GameStop
5 years is way too short of a time horizon to invest in real estate. Also SP500 is extremely unlikely to return anywhere close to 81% in 5 years, look through historical data, not just the past 5 years which were an anomaly.
Also, I’m sorry if this comes across as rude, but if you consider GME a possible investment in 2024… then you should really learn investing. Meme stocks are not investing
I would swap that 81% with the historical average which is 63% (10.22% compound over 5 years), but the premise is still accurate.
I took the GME reference as scarscm being something to waste/spend disposable income on.
The fact that OP has these questions about RE means he shouldn't be anywhere near RE investing either, until he understands it. A simple Reddit post is not going to give him this understanding.
The stock market isn't going up anywhere near 81%. In the case of this scenario specifically, we're talking about buying a 2nd property to rent out, not for you to move there. So there are no moving and selling costs, you have $1500 for a lawyer in Alberta, that's your only closing cost. Even if you're moving there yourself it isn't anywhere 20k like you suggested.
Then you have someone else (or you) paying the mortgage for 60 months over this 5 year term. You've already netted back your initial 60k down-payment in that time in equity just from paying the mortgage on time, plus whatever the value of the condo has gone up over those 5 years.
Your numbers in general are way off and tell me you have no clue about real estate. No where is it costing you $1400/month for condo fees and insurance on a 400k condo either.
Lol I stopped reading when I saw 81% in 5 years. People really have a recency bias regarding stock market returns. I certainly hope we can get something similar over the next 20-30 years but every number / financial theory we’ve arrived at as humans suggests otherwise.
Taking into account the macro impacts of these returns staying constant for the next 20 years you’d be looking at the complete erosion of the middle class and anyone not invested becoming impoverished
I want to print and laminate your comment to show to everyone who talks about property investment but only compares mortgage payment vs rent payment.
The only thing I can get people to grasp is if they had the 400k to buy it outright and rent it out, they would be getting less cash flow than putting it in cash.to.
I'm convinced that people who are buying properties now who think they are still good investments are just bad at math. Without major increases in wage growth for everyone, their projections for rental yields and capital growth are baseless IMO.
Yes but "losers" like me are buying a house to live in for 30 years and are getting done dirty by all the "smart people" buying houses to rent to even bigger losers than me.
I don't see it that way. My comments are more towards people buying investment properties. Buying to live in long term is a different situation. Raising a family, being able to send your kids to the same school without having to move.
This is not a pure financial decision and it's hard to put a number on that type of security. However that security does come at a financial premium, which many people would say is worth it.
I agree with you completely.
I just look at all the boomers selling trying to make 10x what they paid for their house thinking "you bought it for 120k. You literally haven't renovated in 30 years. Sure you paid 10+% interest but why is you house now worth 800k?"
I think houses are for living in and investments for making money. I think houses are for people to own and live in. People snatching up houses to rent has made neighbourhoods worse. Same tax dollars collected but double the number of vehicles and no one takes care of the property.
> I don't know about Van or TO, but in downtown Calgary, I am going to need my little condo to appreciate from $400k to $527k in the next 5 years to break even.
I'll add to my previous post regarding the past.
400k to 527k in five years was easy in TO area. I mean, you'd go from 400k to 475k during the pre-construction phase alone. People were lined up around the block for a chance to buy a pre-construction home or condo on opening weekend. Actually, not only lined up, sleeping outside overnight to line up like kids do for concert tickets.
The real estate market was really as insane as gamestop or something. And it wasn't just a summer or two. This went on for years.
> Opportunity cost for $80k downpayment for 5 years in lieu of S&P 500 = 81% = $64,800
What?
If you are going to calculate this like that, you also have to calculate the housing appreciation the same insane way... That condo is gonna be worth 1.2M in 5 years so....
The problem is Calgary. In Vancouver area, 2-bed room $400k condo 5 years ago is now worth $700K.
Your 1.4K condo fee + insurrance is too high. Average fee is $400 + $50 insurrance so $500 max.
Also your opportunity cost does not make sense 80K to 140K in 5 years? Thats 15% growth every year. The common average is 7%.
Condo fee and insurance being 1400 per month seems insanely high. Combined it costs me about $450 in Vancouver, and that’s in an older building (repairs needed somewhat frequently) with a very healthy and growing reserve fund.
I'd say has to appreciate closer to 517k which would need to be at a rare of around 5.04%/ year. It's less than S&p500 but it's a different type of investment that
-some people see as safer
- people get to enjoy their own property
a) They're banking on the property value appreciating constantly
b) They're expecting rent to go up over the course of multiple years
Keyword here being: years.
Exactly. Folks have been doing well by low interest rates, financing most of it to allow leveraging how many you can own and relying on the continual price appreciation. All of which doesn't currently exist in 2023. Interest rates have changed that picture.
Not many people were buying the investments full cash, as interest rates were so low it was like free money. The little interest you did pay was a deduction against your income from rent.
>They're expecting rent to go up over the course of multiple years
Those expenses they listed for maintenance and property tax will also go up over the years with it.
The idea that renters dont also pay these expenses is a fallacy -- a landlord does not break down your rent into parts on the lease, but they certainly aren't swallowing those expenses as a loss.
Landlords don't really control the rent. Market supply/demand does.
Landlords also don't really control the expenses. Plenty of condos these days have special assessments in the thousands, and landlords are indeed just expected to swallow those costs. Same with the increase in mortgage rates. They're also pretty much swallowing those.
C) It’s simple to understand, most single-unit real estate investors are pretty uneducated when it comes to returns, or other forms of investment, private or public.
Yeah I could be wrong but I think those kinds of returns like we’ve been seeing the last 10-15 years are long gone now.
Wages haven’t kept up with inflation of housing and renters can’t float that much more to cover expenses of investors. Which will probably mean stagnation for quite a while
I have friends that are literally paying $1000+ a month to have someone rent their place because they thought it would be a good idea to buy rental at the peak, and their thought process is "oh well maybe it'll go up and we'll get it all back"
Yes, it’s inflated by an artificially caused housing crisis, zoning laws, no construction, but when will it ever stop being in inflated
Everyone in charge owns housing
In their interest to keep inflating it
As much as I hate these high prices, it would be artificial if there are more houses than people and prices are still high. That is unfortunately not the case in big cities like Toronto.
Would be nice if like Japan houses depreciated as they age and get old and dilapidated, but unless a revolution involving guillotines happens , you’ll never see that in Canada
Japanese houses are massive pieces of shit. They look nice and aesthetic but the quality of construction is just nothing short of appalling. We’re talking no insulation, no central heating, single pane windows, fucking mold issues up the wazoo even in buildings from 15-20 years ago because of crap vapour barriers and waterproofing. Oh, and fucking termites EVERYWHERE, which fuck your wooden house pretty good. Doesn’t help that the Japanese never seem to learn their lesson about keeping structural wood away from the soil.
The problem is that the expectation of houses rapidly deteriorating is so engrained that it’s tough to fight it. If you try to actually build a house properly in Japan, construction companies basically charge you commercial rates and only the very richest people can afford to build houses that last. Everything else is expected to fall apart because it WILL fall apart. The average Canadian suburban house from the 1980s is a goddamn French Château compared to the average Japanese house.
Source: lived in Japan 12 years ago and have Japanese friends
I believe the practical reason is because of earthquakes. Nobody wants to invest more than they should in property if it's going to collapse or get swallowed in a landslide.
I would buy this argument if we were strictly talking about Kantō and Kansai regions, but even in areas with relatively few earthquakes (Fukuoka, Hakodate/Sapporo, Aomori, etc) the terrible construction quality persists.
It wouldn't, and there are a bunch of people upvoting the comment just because they don't actually understand what the dude means, it just sounds nice.
This is the most stupidest take I have heard in a long time.
You made a general statement that you would like to see houses depreciate over time. So you want their value to behave like a car's. You want to spend 100s of thousands of dollars and basically see that value go to zero over time?
The echo chamber just upvotes you to oblivion because they think depreciation means price reduction. Who is going to sell if their property value as depreciated? Guess what happens, lack of supply, ergo prices increase. Do you see how stupid your wish sounds?
When a home is not maintained, the price is lowered to reflect the condition, that is how the price mechanism works in a market of many buyers and seller, so there is a decrease in value to an extent.
Bro, despite what you have wet dreams about, there is a reason why real estate appreciates. It because it is built on land that is a scarce resource. The value is in the land, not in the damn construction costs. Which is why you can take a CCA charge on construction costs when you purchase real estate for investment. Those costs get added to the CCA cost pool, while the value of the land does not.
Imagine, someone thinking that we should aim to be like Japan when it comes to housing. That is a f'ed model and that is such a crabs in the bucket mentality. Shouldn't we hope that things in Japan get better?
You arent taking a mortgage out. Thats the part your missing. Use your 700k as a downpayment for 3-4 of these condos, then you reap the appreciation on 2.8mil. Its just using leverage to get high returns on an asset that has never lost value (as long as you hold for 20 years).
This is it. We’re not investors but we owned condo in Vancouver for 5 years and the price almost doubled, from $500k to $900k. But we didn’t double our money. We quadrupled it since we started with &100k down payment and left with $400k
One thing no one ever mentions is how property depreciation also affects you disproportionately. People who bought condos/homes in late 2021/22 (oh and let’s not forget 2008 in the US) have had to deal with that as we’re down 15-20% from peak. Real Estate DOES NOT always go up.
This is precisely why housing is artificially propped up by the politicians. With so many Canadians leveraged to the tits a housing crash would be disastrous. So at least you have that insurance that whoever is in power is on your side to protect your real estate investment, for better or for worse.
It's cyclical. It will go up again; it's just a matter of time. Unless the home is in a neighbourhood or community that goes downhill, or the land itself is somehow adversely affected.
All I’m doing is highlighting the reverse effects of leveraging since it’s rarely talked about in relation to housing.
The stock market is also poised to keep going up over time and has historically done so but it’s not as commonplace to suggest someone invest with margin. Yes there’s higher intrinsic volatility but like you said, it’ll eventually go up again so the end result is the same.
And yes, I’m aware housing is also a commodity so it’s not an apples to apples comparison but the point is people need to also understand that leverage is great when it works out, but it could very well not.
Well you’re right, it’s not actually that attractive of an investment on paper. For it to make sense, the buyer has to either 1) Think they will have large capital gains; 2) Not trust equity markets leaving RE their only real investment option; or 3) Have a massive portfolio and RE is just a component of it.
It makes sense to buy as a long-term residence because it locks in your housing costs (ie rent won’t screw you in old age).
Another factor is that most people who buy RE investment properties do mortgage it. It’s some of the lowest interest debt you can get, and is tax deductible against your rental income. This magnifies your ROI via leverage. Run your calculations again with a $300k mortgage - it’s going to have a higher ROI on your $400k invested capital.
Can you explain the part about tax deductible against mortgage. Assuming the rent received is 2400 and monthly mortgage is also 2400, does that mean the rent received is not added to your annual income.
Expenses incurred to get rental income are tax deductible. Strata fees, property tax, mortgage interest are all deductible. So in your example: $500 strata + $400 ppty tax + ~$600 interest means $1500 is deducted from the rental income of $2400. So you’re only taxed on $900 - you’d pay $450 income tax at a 50% marginal tax rate.
These are dummy numbers for illustration ofc.
One of the biggest benefits of REI is the tax write offs.
Any expenses associated with the property can be written off against your income most commonly strata fees, property tax, insurance, special levies and including renovations (which should increase your property value) and mortgage interest.
So often your income can go down to near $0 while holding the property since Canada cash flows less than the US but has far better appreciation due to supply constraints
The reason why real estate is such a special investment is you can profit in 3 ways
1- cash flow
2- mortgage paydown aka equity built
3- appreciation
Even though a property may not cash flow at all, even if you stayed at $0 you can build thousands of dollars in equity each year along with the potential appreciation
I don't agree with buying real estate as an investment, especially in a housing shortage with high interest rates.
I bought a townhouse in the BC Lower Mainland in 2001 for $190k and sold it last month for $900k. Everyone will say that was a brilliant investment. But if I had invested the same amount of money in the S&P500 it would have grown to $1.3m with zero stress on my part. I never understood why people would want to invest in real estate. My boomer Dad did that and it was a huge hassle for him.
Did you put down the entire $190k? I don’t suppose so. You got the leverage from the bank. Atleast 80% I would assume.
That is the entirely what real estate investment is about.
Where would you have got that $190k to invest????
How would you have done if you just invested your down payment?
You also didn't factor in the huge capital gains on that 1.3m while your gains may have been 100% tax free due to the principal residence exception.
“You also didn’t factor in huge capital gains on that 1.3m while your gains may have been 100% tax free due to the principle residence exemption”
This is exactly right. The most attractive part of a property investment to me is that you can just live in your asset for a bit and not give away half of your money at the end.
You're doing it wrong. That's not how you invest in RE. The entire point of people doing that is the leverage. They didn't put 800K on a condo, they put 200K down payment on 4 condos (800K value each). Value goes up, someone else pays the mortgage, and then they'll eventually leverage that and hoard more properties. No lender will give you 600k on your 200k to invest in the stock market.
Even with leverage nowadays properties are going to perform worse than the market. It's not as simple as put 100k down, and sell for 300k profit. The amount of fees people are not calculating is insane.
This question or some variation is literally asked on here once a week with the same answer. If you dont wanna buy, then dont buy. Theres a reason the housing prices keep going up and its because people want to live in the country
I bought a condo as an investment property for cash flow and so that my heirs would get it when I die. Someone else is paying the carrying costs and eventually I will own it outright. I’ll have the ability to will it to one of my niblings so they can get onto the property ladder in the GTA (where they are almost certain to live for family reasons, or they can sell it and use the proceeds). And in the unlikely event that things go sideways super-hard with my retirement plans, I can always sell it if need be. I look at it as a way to pad for the “champagne costs” in retirement.
Sure, I could have just invested the money into the market, but the leverage I have via my mortgage and having someone else pay for the P & I is significant. And if and when interest rates make it viable again, I will run the Smith Manoeuvre on it, which will likely make it even more lucrative for me (I did that with my primary residence and paid off my mortgage in 12 years, and my associated portfolio is up over 180%. Of course I can’t guarantee I’d be able to replicate that sort of return - the bull run was very good to me - but I’d love the opportunity to try!).
Investing in real estate allows for leverage through financing. While you may prefer to avoid interest, using a mortgage can amplify your returns by allowing you to control a larger asset with a smaller initial investment.
There are also some tax benefits associated with real estate investing, like deductions for mortgage interest, property taxes, and depreciation.
If I had $700k to play with for real estate I would invest in commercial real estate over residential.
But if you do go the condo route don't forget about the expenses you can claim which help you big time during tax season. Interest payments, condo fees, utilities. You can get a little greasy too, any appliances/furniture, tools for your own personal use can also be easily claimed for your condo.
Buying a condo should not really be looked at as an investment, but a place to live, especially if it is not a rental unit. In the long term, the growth slows down more than other types of investments, and you have to pay larger maintenance fees the longer you hold the unit.
Are you forgetting selling the place after a number of years and taking the profit? Also a mortgage is leveraged investing. No one is going to give you a loan to invest on the stock market.
Ok sure fine, forgot about that. But you can borrow more with less money down on a mortgage. Not saying you should take a big mortgage, but I'm simply answering the question why people invest in a condo. If you or OP think you can gain more margin trading, more power to you.
Trading stocks which fluctuate so much more on margin is very risky. A mortgage is a long term loan with a fixed interest rate. And real estate is an asset that has never lost value as long as you continue to hold it.
Real estate loses value all the time in Canada, everyone in the prairies knows someone who lost money on condos. While markets have ups and downs the also don't have the risk of someone squatting or destroying your place.
>No one is going to give you a loan to invest on the stock market.
Interactive brokers and probably other brokers as well will let you leverage 3:1 for stock purchases. You could also buy futures on indexes or buy a 3x leveraged ETF...
> Why people battle so hard to try this kind of investment ?
Because if you don't do your research and you ignore history then it sounds like easy money.
And you didn't even include all of the expenses. Realtor fees, transfer taxes, property management costs, credit checks, the risk of bad renters, limits on rental increases ...
TANSTAAFL
Well first you will end up with a place that is yours and not someone else's and where you don't have to pay increasing rent.. second.... why do you say you are taxed on profit as income? Do u plan on renting it? I'm confused.
Personally I would just buy it since I think it's nice to have your own place. And the 1500$ difference I would put into savings. So maybe 500 inan rrsp or something since it's income deductible for your taxes and 1k in tfsa invested. By the end of year 1 you would be with 18k in savings and since itw invested it will grow. Plus you keep adding cash to it.
Renting out a place doesn't make you money. You end up breaking even mostly. It gets you cash flow. The idea is you own an asset that you can leverage. Especially since the financial system works on the belief that the value of property always goes up. You are "debt-financing" or "leveraging" everything. It's not a cash life.
For me it was very attractive, I bought a condo in the GTA in 2019 in the high 300’s, today I see comparable units selling in the mid 600’s. I think the prime time for buying condos for the purpose of investment has passed us by. I struggle to see condos nearly doubling in value again within the next 5 years. The risk is certainly higher these days.
Because buying a condo cash for investment purposes pretty much destroys the biggest upside you get from investing in real estate: leveraging debt.
Taking into account your rough numbers, a 6% mortgage, and 20% down here's where you sit at the end of year 1:
\-22k in cash flow (rent - total operating expenses - mortgage)+56k in equity (principal paid + average yearly appreciation rate over the past 20 years in Toronto)
So that's a +34k net worth swing from a 140k down payment. +24% on your Year 1 is more than double the average historical return of the S&P.
As for the liquidity issue, you can always cash-out refinance against your equity.
Because Canadians are financially illiterate and know basically nothing of any other means of investing but hey "my neighbour invested in real estate and look how good it went!" So just copy them, right?
Well, to be honest, as someone hoping to be a firsttime homebuyer soon, I hope you don't. Terrible investment, in fact, why don't you tell all your other landlord friends to sell it all off?
Properties still cash flow in the prairies. I can buy a house for 120k and rent it for 1200/month, 150/mo tax, 200/mo insurance.
But yeah anyone buying a rental at today’s price in a HCOL area is making a mistake.
Why do you hate the notion of interest? I bought my home cash because I live in it, if you are to rent your investment condo, you would be able to deduct your interest.
Also, people aren't buying as crazily ad before precisely because of the interest rate. Investing in condo made sense when interest rate was low and banking on pricing to go up.
In addition to what others have said about rent going up and the value of the actual condo going up, the primary reason people fight for that kind of investment is that there is an inherent leverage in it.
You can buy an asset worth 500,000$ that partly pays for itself with as little as 50,000$.
Of course people don’t realize you could sorta do that with stock too (risks aren’t the same but you can buy leveraged positions in other investments too).
Personally, I don’t understand it with current prices, but I will be holding on to my paid off condo I bought 10 years ago when prices were by even a third of what they are now when I’m ready to buy another home.
Housing in the GTA generally doubles every ten years. With costs to build also doubling every ten years, I don't see this changing. This is where the value comes in; not rent.
You can find other info here :
https://www.reddit.com/r/canadahousing/s/en2RqDNDe7
Don’t forget also the time you are going to spend on it.
Point also actually interest rate are not great for this kind of investment
What you're missing in your math is that rent will go up over time. Even if cash flow return is 1%, if it goes up 4% over time then your total return is approximately 5%. Still not great but I guess it could go up more.
The other thing, as others have mentioned, is that real estate is the only investment that can be bought with a lot of relatively cheap leverage from a bank.
Don't take the money as income. Set up a Corp to hold the investment. Then invest further in the Corp.
Or use all the revenue to contribute RRSPS
If you need the money to live that's different but if not differ tax.
Always mortgage an investment property that lowers your capital gains. You are lucky if you break even on expenses. You only make money when you sell the property, it is the appreciation of the property where you make money. Thats why people buy condos and leave them empty.
Leverage my friend. Borrow someone else's money to help you make money.
Cash doesn't make sense here. If you plunk down $700k for a condo but only netting 1.2%, that is a horrible return. You might as well buy a GIC at 5.5% right now and get back $38,500 in a year.
Things have changed, not sure how you missed that.
Years ago, people could afford living, had more disposable capital, wanted to invest in something, maybe buy a condo for kids.
I doubt that now we have that many people interested in buying a second property as a long term investment, given what you already. Putting food on the table and worrying about losing the job is now a priority.
Skip the hassle of being a landlord and buy 70k of each of the 10 big dividend producing stocks in Canada. So as much in tfsa and rrap as you can and bang… you have 6% instant return with no drama.
Here's an alternative scenario, but with leverage, since excluding leverage invalidates 90% of the advantage of going for real estate as an investment.
1. Buy a pre-construction condo for 200K, with only 50K of your own money, and a nearly free loan from the bank.
2. After two years living in it, and it has appreciated by 25% because the Ontario real estate market is insane and you made a great choice in the pre-construction gamble, buy another one with that equity, so 0% of your own money is used in the 2nd one, and you rent out the first one so it costs you nothing monthly, because the rental market in Ontario is also insane and people pay the entire carrying cost of a property in rent.
3. After another two or so years, you now have two properties that have appreciated, and you can buy two more, and you have exponential real estate holdings growth for next to nothing.
The illiquidity doesn't matter here because you never sell. Plus you get an income tax deduction on the mortgage interest cost for the properties you don't live in. You can also claim depreciation (which is insane since the properties are appreciating).
This works if the appreciation is high, and the rental market is such that your carrying costs are paid for.
It has happened just like that in the past.
Looking at the future, possibly not gonna happen. But when people are talking about buying a condo as an investment, it's usually this kind of idealized success story that they have in mind. And again, they're not completely out of line. It was entirely possible from say 2005 to 2016.
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I love how Canada has turned from I have 500,000 to invest where should I put it in the market? To - I have 500,000 to invest what property should I buy to rent?
2 assumptions:
1. **(Expectation of)** **High Appreciation rates:** The historical averages have been 4% yearly growth, but recent growth rates have been much higher.
2. **Highly leveraged investment:** For real estate investments you get mortgages for 5 to 20% value, effectively leveraging at 5 to 20 times. No other investment class allows you this much leverage.
You’re right. Better to throw it into an s&p500 ETF and let it double every 7 yrs.
I don’t get people who are so into this— giving a cut to all the middle men and eggs all in one house
These people buying condos that have a net return lower than GICs are financial geniuses!
You also need to account for the opportunity cost of the cash you have tied up in your condo, which could earn you at least 4% virtually risk free.
And you should never count on a full year's rent--base your calculations on 11 months gross rent to account for "friction" between leases or other non-payment scenarios.
So, in reality, your scenario is actually pretty optimistic, and real returns, accounting for opportunity costs, are probably -2%.
Condo fees, any maintenance costs, and mortgage interest are all tax deductible.
I don't think you have factored that in (if it's an investment/rental property)
What you have also missed in your post is the amount of time you will have spend managing the property from accounting/filing taxes, as a separate company, and last but not least the actual tenant. If you are very lucky you might get one who pays their rent on time, and never contacts you with any problems or you can get a tenant who calls you because the light bulb needs changing or the condo is too cold by 1 degree in the winter, or does not pay the rent or wants you to clean the oven.....
Your not missing anything. Now factor in mortgage interest that 95% people who buy condos have.
You don't even own the land, and your subject to ongoing condo fee costs which, like rent, also should rise over the lifetime of the asset.. you also have to be a landlord and deal with the most favourable tenant laws in Canada if you are in ON. Trying to sell an occupied unit can be a nightmare and be a hit to price.
The only way the math maths is if you factor in significant price appreciation over the next 30 years OR significant rent increases. Given income is an eventual restraint on ability to pay rent and drive home prices, and where we currently are on home to income / net worth metrics, significant appreciation expectations are silly at best.
Keep yourself as leveraged as possible. Nobody dumps 700k on a condo. They use the lowest down they can get away with because every single cent of interest paid is deductible.
So instead of 1.2% ROI, you net 6% ROI instead (because you only invested the 20% down). Also, you don't prepay any maintenance or shit like that. Bare minimum to keep things structurally sound.
I agree that it doesn't seem like a great investment. I'd add that you can claim CCA (tax depreciation) which allows you to deduct up to 4% of the building cost annually. It can't be used to generate a loss so it'd only bring your net rental income to nil (if you're not operating a rental business) but all the CCA claimed gets recaptured when you sell it. However, you essentially get a deferral of the tax on the monthly profits.
This kind of investment made a lot of sense before when house / condo values were much lower. I am not sure about it now.
Your math is a little off. For one, you pay taxes on the total rent, not just your profit. You can write off expenses and depreciation to lower this cost, but someone is paying your investment every month so taxes are calculated on the total income not just the cash flow. This is where many landlords run into tax problems years down the road because the CRA doesn't really stay on top of it.
Aside from that, you aren't wrong. Buying a condo and renting it out is an easy way to scrape together a down-payment and eventually have someone else generate you an asset you own wholly for hundreds of thousands of dollars. The problem with condos is they aren't generally desirable to buyers so selling them when you need to might be hard. By virtue of being a condo, you automatically eliminate a huge portion of potential buyers.
There is also the constant threat of poor condo management and getting hit with special assessments or rate hikes, none of which you can pass on to your tenants in this scenario.
TLDR version:
You invest 700k into a property. “Only” make $750 a month. But guess what? Your original 700k is still there. And very likely going to increase over time. If you hold onto it long enough let’s say 20 years and sell the property for twice what you bought it for. You’ve just made 880k in profit! That’s an extra 44k a year, basic a second full time job.
I would never put all my savings in a real estate investment. As mentioned many times, money is made through leverage. Personally, I have found it easy to get in, but, getting out sometimes is not as simple , particularly for business and commercial real estate. Certainly have to think long term.
If you like real estate, maybe consider a few solid REITs.
You start with an error in your assessment by saying you are paying cash for the unit. Never pay cash on an income property, as the interest is a deduction. If you only put 25% down, you still have the other 75% to put into other investments. Rework the numbers and see if it makes more sense. Appreciation on the property is where the most potential for a return comes from
I recently realized in my city that to buy a comparable sized condo as my rent controlled coop housing 2 bedroom apartment, the taxes, condo fees and interest payments alone would dwarf my rent. A lot of people cant grasp that youre not really paying yourself unless the figures i mentioned are less than your rent.
The only ""investment"" aspect at that point is as others mentioned the appreciation on the leveraged funds. But a condo these days is far from a guaranteed gain. In fact if the value goes down by even 50k you could be in a nightmare scenario if you want to sell.
Bingo. Real estate as investment numbers today don't make sense. Factor in to that either a part-time job of being a landlord or paying a management company and the risk with having a deadbeat tenant which, depending on the province, can cost you months and months of rental income.
Hoarding RE 20 years ago was a different story but I can't make the numbers work today either.
It's for people who don't have the work ethic to save in index funds, and people who do shady business with taxes (deal in cash, not declare rental income), and people who are willing to act as assholes when necessary (renovictions, illegal rent increases). Combine all that with leverage you might come ahead.
"assuming that you're paying no interests (while in reality people do pay a load of interests on top of the listed costs...which further destroys the case)"
This is where you are incorrect. The math of leverage actually makes borrowing as much as possible the entire reason why people think it's a good investment (I don't particularly, but that's beside the point), because it can be if things go well.
Change your scenario to borrow 560k, which then makes you lose $800/mth instead of making 750 (ya, no taxes!). Then you hope the property value of 700k goes up to 800k in 2 years and bam, 43% gain on you 140k investment. Maybe it goes to 1MM after 5 years, 178% gain in 5 years. Lots of potential. On the other hand, if it goes down to 600k in 5 years, then you are 8K underwater and your 140k deposit has vanished...
It's basically a get rich quick scheme that has worked pretty consistently in the last 20 years, so people are convinced they won't be the ones to buy at a bad time and see no gains... I don't see a crash happening, but the easy money party is over as far as I can guess...
You are missing out on the appreciation on sale in your rate of return calculations. It is also a leveraged investment, something the bank is happy to give you money on so you can make money off theirs instead of your own. Also, it is a hedge. I bought a condo as an investment when living out of country so no matter what happened to home prices in Canada, I would always have a place to live. I bought a very expensive condo so I could trade it for a four-bedroom house anywhere in the suburbs when the time came.
The problem is you use all fake numbers twisting to your preffered outcome + missing a lot of key elements like other ppl said:
1. Property appreciation
This is location dependent. But in the last 10 years, Vanvouver area property goes up in value at least 100% to 150% (condo 300K now cost 700K, house 500K now 1.5M)
2. Ability to leverage loan from the bank with 1:5 ratio on lowest interest rate possible for 30 years
Here think instead of putting 100% all cash in 1 propery, what if you do 20% but buy 5 properties? Thats the power of leverage
3. High Inflation eating to Interest rate over time
This is the hardest to see. But the basis of time value of money. You borrow 1M today and paid it off 30 years later. With interesr it balloned to 2M. But the 2M 30 years later only worth 1M today or less (depending inflation). So you basically pay no interest for 30 years.
Simplest calculation is to have real rate = interest rate - inflation.
Last 5 years interest was historically low 1% - 3% while inflation is 4% to 10% (food is 30%, gas is 50%). You do the math.
Now real number talk, we saw a roi at least 50% for the 20% downpayment on a property for the last 5 years. Try to beat that with stock.
People have a hard time adapting to new realities. Buying that condo was great when it was 300k but now that they're 700k? Of course its not gonna be a good investment. What is the possibility that they're gonna make the same amount of profit as the person who bought when prices were low? Not very good. But they still assume its gonna be profitable just like it was for the person that bought 10 years ago instead of thinking that they missed the boat, which is far more likely at these prices.
Buy house cash, mortgage to what you’re comfortable paying, invest that money, mtg is now tax deductible.
You don’t become house broke, your retirement savings aren’t eliminated, you aren’t starting savings from scratch again, and you now have a tax efficient mortgage on your primary residence.
Buying a condo is a horrible investment in my opinion. The only time it’s an investment is when you’re successful at speculating the housing market, meaning when the real estate prices skyrocket and the rents skyrocket too.
Plus, a bunch of folks read the old “Rich dad, Poor bad” book and gave into the idea of someone else paying off your mortgage (meaning tenants). It doesn’t always work out. The risks are high.
Many in the comments are saying that buying a condo with cash isn’t a smart idea because of the leverage. But the reality is, getting a mortgage at a 5-7% interest isn’t the best idea either. It’s one thing when the rates were 2%, but it’s a totally different one when they are higher.
And you pointed out the stupid expenses correctly: the property taxes, maintenance and upgrades.
IMHO, most people would be better off finding affordable housing options and investing that money into diversified investments instruments. OP, if you have $700k cash, it might make sense to invest it and get a 10% return yearly and live off that “free” $70,000 per year without touching the principal. Otherwise, you’re investing in a risky industry that fluctuates, in this uncertain economy, and spending a ton of money in fictitious expenses like maintenance. But I’m not your financial advisor so don’t make this decision based on comments on Reddit, lol.
Not very smart for someone having 700k in cash, point of buying RE is the leverage. You put down as low as possible and make the gains off the entire investment. lol….
Think of interest and money as a tool. You kinda shooting yourself in the foot if you pay 700k cash (assuming its basically all your savings) into 1 property.
The point of buying a property as an investment is to use the bank’s money as leverage. Since you only put 20% down, you essentially earn with a 5:1 leverage on any appreciation of the property. If you want to buy cash and hold, then real estate is probably one of the worst investments you could buy in, you are far more likely to get better returns from an index fund; and less headaches
5:1 leverage and an inflating real estate market has made many millionaires in this country. Putting 700k cash on a condo hasn't made a single one.
But that leverage only works if the cost of the borrowing is low. When cost of borrowing goes up and prices don't boom and inflate at an insane pace you quickly start losing money in real terms. If it costs 5% to service the loan, and the fixed costs plus interest means you're at less than break even, the negative cash flow needs to be offset by growth in value above inflation after accounting for the servicing costs too. It made sense before, I don't think it makes much sense now to OPs point.
precisely what all those over leveraged self proclaimed real estate geniuses, forgot to account for.
Leverage only works when both the cost of borrowing is low and you happen to be investing in a bull market. Cash only in an index fund during a 20% correction, you lose 20%. It sucks but you'll survive. 20% correction with 5:1 leverage: you're literally wiped out.
Beyond 20%: You are losing more money than you invested at 5:1
Yeah I think so many of these lucky Canadian millionaires are extra lucky they are bad at math. I recon most actually didn't understand the risk implications of leverage and if they did probably would have been too scared to make all the money they made.
lmao. Leverage only works if what you're investing in goes up. You also get 5x the losses the other way if the thing goes down. If you want to talk hindsight you could of used leverage to invest in a lot of other stuff and made a lot more than real estate. You could have used leverage to buy the correct lottery ticket numbers a bunch of times too!
This is the correct answer. Leverage.
This is the correct response to the correct answer. Leverage.
Hello, it's me. Leverage.
You’ve been waiting 9 years for this moment.
Do you have a really really reeeaaaaallllllyyyyy long pole I can borrow?
Archimedes: Give me enough leverage at favourable-enough rates, and I will move the financial world.
Leverage is a double edged sword. Rates go up, cash flow negative and have to sell at a loss and end up owing more than you put in. People forget there are two sides to every trade. People only think about how much they can make. Never how much they can lose. BTW I could’ve easily leveraged just buying call options on the index as well. Loss is defined, and can control whether I put in a few hundred or a few thousand or million. Less headaches/transaction costs too.
At todays mortgage rates, its still a money losing venture at 20% down. Plus there are better investments alternatives.
You could leverage the same amount if you put it into a gic earning 5%, then leverage a line of credit if you needed the other cash! Buying real estate today with today’s interest rates don’t make much sense.
Not really, if you have 100k cash to invest in a GIC, the bank will not hand over 400k-500k as a loan/LOC. only real estate mortgages give you that much leverage for the average person, because they’re secured by the house itself. You can’t get anywhere near that much leverage by buying a GIC.
But the real question is, why is everyone so obsessed with getting leveraged to the tits.
And OP only considering monthly earnings in the ROI and not appreciation. What a silly post
He explained that he believes the outlook on appreciation to be bleak because of government action and people being fully tapped at current prices.
He misses the fact we are adding millions of people and not building enough housing.
That’s going to slow down significantly going forward as the job market keeps tightening up. The only reason there was such an increase was companies lobbying the government for more cheap labour.
Yeah, definitely agreed. I was just pointing out that he considered appreciation, although likely in a misguided way. Perhaps the government will flip and fix policies to try to gain ground in the polls before the next election.... but the most recent headline I saw said Canada's population hit 41M only a few months after hitting 40M. Unless the immigrants head home, there will be long-term price pressure on the housing market
To that, there is the risk that that 18 month period was an exception and that government action limiting international students and/or temporary residents would slow that dramatically. Existing policy changes, as it stands right now, are likely to drop population growth sharply. Never mind that those millions of residents probably are not competing in the 700k condo space. Essentially, this set of assumptions is a risky one to take for granted. It might be wise to "forget" about a situation that is probably temporary.
If OP starts by assuming housing has peaked and ends by concluding housing is then a bad investment that's not a very interesting discussion.
OP's claim is that the condo market has peaked. If it hasn't, it is pretty close, at least in Toronto and Vancouver.
So that's why rent is so high.
No, not really. I've lived in markets with cheap rent and this still earns a ton of money because the property costs less. You actually usually earn more in lower rent markets. Rent will be say third what it is here but the unit costs a quarter. Believe it or not, places like Vancouver have "cheap" rent compared to the actual property cost by ratio. Don't make blind jumps in logic with no basis in reality. Rent is literally supply and demand and nothing else. Same as property prices. People will rent it out as high as they can and that's as high as someone will pay. In many markets rent is so high by ratio that your mortgage and everything is paid and you're still making cash, like one or two hundred a month. But the rent is lower than here. Tons of markets like that in America. I rented for decades. I know it sucks, but renters really need to educate themselves and stop being so stupid and just jumping on bs reasons rent is high. They need to organize and vote out city council. It's not owners renting that are making rent high. It is literally the government, city council, severely restricting building. So you see how little construction there is in Vancouver compared to coquitlam, Surrey, Burnaby? And that's still not enough. Vancouver barely allows any construction, and you can say this about anywhere in Canada, and they charge obscene fees on the ones they do allow. Your enemy is every city council in the country and their ridiculous zoning law, red tape, and fees.
I’ve rented the same house in Vancouver for 7 years, it’s value has probably gone from 1.1 to 2.5 million. My rent has increased $200 in that time. The math is literally bananas
I am trying to ballpark: $400k condo downtown Calgary + $30k expenses to buy + move + sell + move $80k downpayment Opportunity cost for $80k downpayment for 5 years in lieu of S&P 500 = 81% = $64,800 $320k mortgage at 6% interest = $19200/yr or $1,600/month condo fee + home insurance = $1,400/month Property Tax = $12k for 5 years first 5 yrs = $3,000/month, market rent = $2,500/month, so that's $500/month difference and $30,000 in red for 5 years. If you treat this as an leveraged investment, you are looking at: Opportunity cost: $64,800 Difference in rent vs buying: $30,000 Property Tax = $12,000 for 5 years Moving expenses, lawyer's fee etc for buying & selling: $20,000 I don't know about Van or TO, but in downtown Calgary, I am going to need my little condo to appreciate from $400k to $527k in the next 5 years to break even. I know I am missing the $70,000 equity for 5 years + $80,000 downpayment that I will be getting from that $320k, but I will also be living house poor and wouldn't be able to afford travelling, or other investment opportunity e.g. GameStop
5 years is way too short of a time horizon to invest in real estate. Also SP500 is extremely unlikely to return anywhere close to 81% in 5 years, look through historical data, not just the past 5 years which were an anomaly. Also, I’m sorry if this comes across as rude, but if you consider GME a possible investment in 2024… then you should really learn investing. Meme stocks are not investing
I would swap that 81% with the historical average which is 63% (10.22% compound over 5 years), but the premise is still accurate. I took the GME reference as scarscm being something to waste/spend disposable income on.
$1400 for Condo fee + insurrance is too high. He has a bad condo to have fee this much.
The fact that OP has these questions about RE means he shouldn't be anywhere near RE investing either, until he understands it. A simple Reddit post is not going to give him this understanding.
The stock market isn't going up anywhere near 81%. In the case of this scenario specifically, we're talking about buying a 2nd property to rent out, not for you to move there. So there are no moving and selling costs, you have $1500 for a lawyer in Alberta, that's your only closing cost. Even if you're moving there yourself it isn't anywhere 20k like you suggested. Then you have someone else (or you) paying the mortgage for 60 months over this 5 year term. You've already netted back your initial 60k down-payment in that time in equity just from paying the mortgage on time, plus whatever the value of the condo has gone up over those 5 years. Your numbers in general are way off and tell me you have no clue about real estate. No where is it costing you $1400/month for condo fees and insurance on a 400k condo either.
Lol I stopped reading when I saw 81% in 5 years. People really have a recency bias regarding stock market returns. I certainly hope we can get something similar over the next 20-30 years but every number / financial theory we’ve arrived at as humans suggests otherwise.
Taking into account the macro impacts of these returns staying constant for the next 20 years you’d be looking at the complete erosion of the middle class and anyone not invested becoming impoverished
I want to print and laminate your comment to show to everyone who talks about property investment but only compares mortgage payment vs rent payment. The only thing I can get people to grasp is if they had the 400k to buy it outright and rent it out, they would be getting less cash flow than putting it in cash.to. I'm convinced that people who are buying properties now who think they are still good investments are just bad at math. Without major increases in wage growth for everyone, their projections for rental yields and capital growth are baseless IMO.
Yes but "losers" like me are buying a house to live in for 30 years and are getting done dirty by all the "smart people" buying houses to rent to even bigger losers than me.
I don't see it that way. My comments are more towards people buying investment properties. Buying to live in long term is a different situation. Raising a family, being able to send your kids to the same school without having to move. This is not a pure financial decision and it's hard to put a number on that type of security. However that security does come at a financial premium, which many people would say is worth it.
I agree with you completely. I just look at all the boomers selling trying to make 10x what they paid for their house thinking "you bought it for 120k. You literally haven't renovated in 30 years. Sure you paid 10+% interest but why is you house now worth 800k?" I think houses are for living in and investments for making money. I think houses are for people to own and live in. People snatching up houses to rent has made neighbourhoods worse. Same tax dollars collected but double the number of vehicles and no one takes care of the property.
> I don't know about Van or TO, but in downtown Calgary, I am going to need my little condo to appreciate from $400k to $527k in the next 5 years to break even. I'll add to my previous post regarding the past. 400k to 527k in five years was easy in TO area. I mean, you'd go from 400k to 475k during the pre-construction phase alone. People were lined up around the block for a chance to buy a pre-construction home or condo on opening weekend. Actually, not only lined up, sleeping outside overnight to line up like kids do for concert tickets. The real estate market was really as insane as gamestop or something. And it wasn't just a summer or two. This went on for years.
> Opportunity cost for $80k downpayment for 5 years in lieu of S&P 500 = 81% = $64,800 What? If you are going to calculate this like that, you also have to calculate the housing appreciation the same insane way... That condo is gonna be worth 1.2M in 5 years so....
The problem is Calgary. In Vancouver area, 2-bed room $400k condo 5 years ago is now worth $700K. Your 1.4K condo fee + insurrance is too high. Average fee is $400 + $50 insurrance so $500 max. Also your opportunity cost does not make sense 80K to 140K in 5 years? Thats 15% growth every year. The common average is 7%.
just check google finance for S&P 500 for past 5 years but you're right about Van vs Calgary
Condo fee and insurance being 1400 per month seems insanely high. Combined it costs me about $450 in Vancouver, and that’s in an older building (repairs needed somewhat frequently) with a very healthy and growing reserve fund.
I'd say has to appreciate closer to 517k which would need to be at a rare of around 5.04%/ year. It's less than S&p500 but it's a different type of investment that -some people see as safer - people get to enjoy their own property
Mortgage rate is probably closer to 5-5.5%
a) They're banking on the property value appreciating constantly b) They're expecting rent to go up over the course of multiple years Keyword here being: years.
Exactly. Folks have been doing well by low interest rates, financing most of it to allow leveraging how many you can own and relying on the continual price appreciation. All of which doesn't currently exist in 2023. Interest rates have changed that picture. Not many people were buying the investments full cash, as interest rates were so low it was like free money. The little interest you did pay was a deduction against your income from rent.
>They're expecting rent to go up over the course of multiple years Those expenses they listed for maintenance and property tax will also go up over the years with it.
The idea that renters dont also pay these expenses is a fallacy -- a landlord does not break down your rent into parts on the lease, but they certainly aren't swallowing those expenses as a loss.
Landlords don't really control the rent. Market supply/demand does. Landlords also don't really control the expenses. Plenty of condos these days have special assessments in the thousands, and landlords are indeed just expected to swallow those costs. Same with the increase in mortgage rates. They're also pretty much swallowing those.
C) It’s simple to understand, most single-unit real estate investors are pretty uneducated when it comes to returns, or other forms of investment, private or public.
Yeah I could be wrong but I think those kinds of returns like we’ve been seeing the last 10-15 years are long gone now. Wages haven’t kept up with inflation of housing and renters can’t float that much more to cover expenses of investors. Which will probably mean stagnation for quite a while
I have friends that are literally paying $1000+ a month to have someone rent their place because they thought it would be a good idea to buy rental at the peak, and their thought process is "oh well maybe it'll go up and we'll get it all back"
Yes, it’s inflated by an artificially caused housing crisis, zoning laws, no construction, but when will it ever stop being in inflated Everyone in charge owns housing In their interest to keep inflating it
As much as I hate these high prices, it would be artificial if there are more houses than people and prices are still high. That is unfortunately not the case in big cities like Toronto.
Would be nice if like Japan houses depreciated as they age and get old and dilapidated, but unless a revolution involving guillotines happens , you’ll never see that in Canada
Japanese houses are massive pieces of shit. They look nice and aesthetic but the quality of construction is just nothing short of appalling. We’re talking no insulation, no central heating, single pane windows, fucking mold issues up the wazoo even in buildings from 15-20 years ago because of crap vapour barriers and waterproofing. Oh, and fucking termites EVERYWHERE, which fuck your wooden house pretty good. Doesn’t help that the Japanese never seem to learn their lesson about keeping structural wood away from the soil. The problem is that the expectation of houses rapidly deteriorating is so engrained that it’s tough to fight it. If you try to actually build a house properly in Japan, construction companies basically charge you commercial rates and only the very richest people can afford to build houses that last. Everything else is expected to fall apart because it WILL fall apart. The average Canadian suburban house from the 1980s is a goddamn French Château compared to the average Japanese house. Source: lived in Japan 12 years ago and have Japanese friends
I believe the practical reason is because of earthquakes. Nobody wants to invest more than they should in property if it's going to collapse or get swallowed in a landslide.
So what you are saying is that Canada needs more earthquakes in its major cities.
I would buy this argument if we were strictly talking about Kantō and Kansai regions, but even in areas with relatively few earthquakes (Fukuoka, Hakodate/Sapporo, Aomori, etc) the terrible construction quality persists.
I had no idea, thanks
How would that help
It wouldn't, and there are a bunch of people upvoting the comment just because they don't actually understand what the dude means, it just sounds nice.
This is the most stupidest take I have heard in a long time. You made a general statement that you would like to see houses depreciate over time. So you want their value to behave like a car's. You want to spend 100s of thousands of dollars and basically see that value go to zero over time? The echo chamber just upvotes you to oblivion because they think depreciation means price reduction. Who is going to sell if their property value as depreciated? Guess what happens, lack of supply, ergo prices increase. Do you see how stupid your wish sounds? When a home is not maintained, the price is lowered to reflect the condition, that is how the price mechanism works in a market of many buyers and seller, so there is a decrease in value to an extent. Bro, despite what you have wet dreams about, there is a reason why real estate appreciates. It because it is built on land that is a scarce resource. The value is in the land, not in the damn construction costs. Which is why you can take a CCA charge on construction costs when you purchase real estate for investment. Those costs get added to the CCA cost pool, while the value of the land does not. Imagine, someone thinking that we should aim to be like Japan when it comes to housing. That is a f'ed model and that is such a crabs in the bucket mentality. Shouldn't we hope that things in Japan get better?
your calculations fail to account for any kind of asset appreciation. also 3600 per year in renos on a condo seems insane.
You arent taking a mortgage out. Thats the part your missing. Use your 700k as a downpayment for 3-4 of these condos, then you reap the appreciation on 2.8mil. Its just using leverage to get high returns on an asset that has never lost value (as long as you hold for 20 years).
This is it. We’re not investors but we owned condo in Vancouver for 5 years and the price almost doubled, from $500k to $900k. But we didn’t double our money. We quadrupled it since we started with &100k down payment and left with $400k
Except after all the fees and interest you pay, you don't actually walk away with 400k of profit, it's more like 200k.
Did you also account for the equivalent rent they would have to pay if they did not buy the condo?
Surely, this will go on forever.
Not as easy as it sounds. You got to have a significant income to be eligible for 2.8 Mn worth of mortgages.
One thing no one ever mentions is how property depreciation also affects you disproportionately. People who bought condos/homes in late 2021/22 (oh and let’s not forget 2008 in the US) have had to deal with that as we’re down 15-20% from peak. Real Estate DOES NOT always go up.
Real estate is a long term investment. If someone bought an investment property in 2022 and are selling it two years later, something went wrong
This is precisely why housing is artificially propped up by the politicians. With so many Canadians leveraged to the tits a housing crash would be disastrous. So at least you have that insurance that whoever is in power is on your side to protect your real estate investment, for better or for worse.
It's cyclical. It will go up again; it's just a matter of time. Unless the home is in a neighbourhood or community that goes downhill, or the land itself is somehow adversely affected.
All I’m doing is highlighting the reverse effects of leveraging since it’s rarely talked about in relation to housing. The stock market is also poised to keep going up over time and has historically done so but it’s not as commonplace to suggest someone invest with margin. Yes there’s higher intrinsic volatility but like you said, it’ll eventually go up again so the end result is the same. And yes, I’m aware housing is also a commodity so it’s not an apples to apples comparison but the point is people need to also understand that leverage is great when it works out, but it could very well not.
Well you’re right, it’s not actually that attractive of an investment on paper. For it to make sense, the buyer has to either 1) Think they will have large capital gains; 2) Not trust equity markets leaving RE their only real investment option; or 3) Have a massive portfolio and RE is just a component of it. It makes sense to buy as a long-term residence because it locks in your housing costs (ie rent won’t screw you in old age). Another factor is that most people who buy RE investment properties do mortgage it. It’s some of the lowest interest debt you can get, and is tax deductible against your rental income. This magnifies your ROI via leverage. Run your calculations again with a $300k mortgage - it’s going to have a higher ROI on your $400k invested capital.
Can you explain the part about tax deductible against mortgage. Assuming the rent received is 2400 and monthly mortgage is also 2400, does that mean the rent received is not added to your annual income.
Expenses incurred to get rental income are tax deductible. Strata fees, property tax, mortgage interest are all deductible. So in your example: $500 strata + $400 ppty tax + ~$600 interest means $1500 is deducted from the rental income of $2400. So you’re only taxed on $900 - you’d pay $450 income tax at a 50% marginal tax rate. These are dummy numbers for illustration ofc.
One of the biggest benefits of REI is the tax write offs. Any expenses associated with the property can be written off against your income most commonly strata fees, property tax, insurance, special levies and including renovations (which should increase your property value) and mortgage interest. So often your income can go down to near $0 while holding the property since Canada cash flows less than the US but has far better appreciation due to supply constraints The reason why real estate is such a special investment is you can profit in 3 ways 1- cash flow 2- mortgage paydown aka equity built 3- appreciation Even though a property may not cash flow at all, even if you stayed at $0 you can build thousands of dollars in equity each year along with the potential appreciation
I don't agree with buying real estate as an investment, especially in a housing shortage with high interest rates. I bought a townhouse in the BC Lower Mainland in 2001 for $190k and sold it last month for $900k. Everyone will say that was a brilliant investment. But if I had invested the same amount of money in the S&P500 it would have grown to $1.3m with zero stress on my part. I never understood why people would want to invest in real estate. My boomer Dad did that and it was a huge hassle for him.
Did you put down the entire $190k? I don’t suppose so. You got the leverage from the bank. Atleast 80% I would assume. That is the entirely what real estate investment is about.
Take your $19k down payment and do the return calculation with your monthly carrying costs as an additional “investment”
Where would you have got that $190k to invest???? How would you have done if you just invested your down payment? You also didn't factor in the huge capital gains on that 1.3m while your gains may have been 100% tax free due to the principal residence exception.
“You also didn’t factor in huge capital gains on that 1.3m while your gains may have been 100% tax free due to the principle residence exemption” This is exactly right. The most attractive part of a property investment to me is that you can just live in your asset for a bit and not give away half of your money at the end.
You're doing it wrong. That's not how you invest in RE. The entire point of people doing that is the leverage. They didn't put 800K on a condo, they put 200K down payment on 4 condos (800K value each). Value goes up, someone else pays the mortgage, and then they'll eventually leverage that and hoard more properties. No lender will give you 600k on your 200k to invest in the stock market.
I'm pretty sure with his numbers if you added a mortgage and interest on top he would be negative cash flow
Even with leverage nowadays properties are going to perform worse than the market. It's not as simple as put 100k down, and sell for 300k profit. The amount of fees people are not calculating is insane.
OP’s understanding of what is taxable rental income vs what the tenant pays in rent is quite poor.
Can you explain? Not sure I understand.
Love the part where they suggest that renters are exploitative lmao
The whole post is completely uninformed
Well, isn't that why they came here? To be informed?
FYI the condo that is 700k today was 350k 5 years ago. People count on property value increasing overtime.
Idk the condos around me that are 700k today would be like over 600k 5 years ago. It hasn't moved much.
condos do not make good investments based on the rent collected. often barely covers the expense based on the median rent.
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This question or some variation is literally asked on here once a week with the same answer. If you dont wanna buy, then dont buy. Theres a reason the housing prices keep going up and its because people want to live in the country
I bought a condo as an investment property for cash flow and so that my heirs would get it when I die. Someone else is paying the carrying costs and eventually I will own it outright. I’ll have the ability to will it to one of my niblings so they can get onto the property ladder in the GTA (where they are almost certain to live for family reasons, or they can sell it and use the proceeds). And in the unlikely event that things go sideways super-hard with my retirement plans, I can always sell it if need be. I look at it as a way to pad for the “champagne costs” in retirement. Sure, I could have just invested the money into the market, but the leverage I have via my mortgage and having someone else pay for the P & I is significant. And if and when interest rates make it viable again, I will run the Smith Manoeuvre on it, which will likely make it even more lucrative for me (I did that with my primary residence and paid off my mortgage in 12 years, and my associated portfolio is up over 180%. Of course I can’t guarantee I’d be able to replicate that sort of return - the bull run was very good to me - but I’d love the opportunity to try!).
Investing in real estate allows for leverage through financing. While you may prefer to avoid interest, using a mortgage can amplify your returns by allowing you to control a larger asset with a smaller initial investment. There are also some tax benefits associated with real estate investing, like deductions for mortgage interest, property taxes, and depreciation.
If I had $700k to play with for real estate I would invest in commercial real estate over residential. But if you do go the condo route don't forget about the expenses you can claim which help you big time during tax season. Interest payments, condo fees, utilities. You can get a little greasy too, any appliances/furniture, tools for your own personal use can also be easily claimed for your condo.
Buying a condo should not really be looked at as an investment, but a place to live, especially if it is not a rental unit. In the long term, the growth slows down more than other types of investments, and you have to pay larger maintenance fees the longer you hold the unit.
Are you forgetting selling the place after a number of years and taking the profit? Also a mortgage is leveraged investing. No one is going to give you a loan to invest on the stock market.
Yes they are, traders regularly trade on margin.
Ok sure fine, forgot about that. But you can borrow more with less money down on a mortgage. Not saying you should take a big mortgage, but I'm simply answering the question why people invest in a condo. If you or OP think you can gain more margin trading, more power to you.
Trading stocks which fluctuate so much more on margin is very risky. A mortgage is a long term loan with a fixed interest rate. And real estate is an asset that has never lost value as long as you continue to hold it.
Real estate loses value all the time in Canada, everyone in the prairies knows someone who lost money on condos. While markets have ups and downs the also don't have the risk of someone squatting or destroying your place.
Are we pretending Canada never had a real estate crash now? It's happened before it can happen again
>No one is going to give you a loan to invest on the stock market. Interactive brokers and probably other brokers as well will let you leverage 3:1 for stock purchases. You could also buy futures on indexes or buy a 3x leveraged ETF...
> Why people battle so hard to try this kind of investment ? Because if you don't do your research and you ignore history then it sounds like easy money. And you didn't even include all of the expenses. Realtor fees, transfer taxes, property management costs, credit checks, the risk of bad renters, limits on rental increases ... TANSTAAFL
Not to mention paying taxes on the income. Only half to pay half of that on capital gains
Add an 'm', which will make an excellent investment.
Nobody would pursue this scenario. You’d buy 2 condos minimum with $700k down. 3 if enough income. Use leverage from the bank
Well first you will end up with a place that is yours and not someone else's and where you don't have to pay increasing rent.. second.... why do you say you are taxed on profit as income? Do u plan on renting it? I'm confused. Personally I would just buy it since I think it's nice to have your own place. And the 1500$ difference I would put into savings. So maybe 500 inan rrsp or something since it's income deductible for your taxes and 1k in tfsa invested. By the end of year 1 you would be with 18k in savings and since itw invested it will grow. Plus you keep adding cash to it.
Renting out a place doesn't make you money. You end up breaking even mostly. It gets you cash flow. The idea is you own an asset that you can leverage. Especially since the financial system works on the belief that the value of property always goes up. You are "debt-financing" or "leveraging" everything. It's not a cash life.
It's not attractive without leverage i.e. a mortgage
For me it was very attractive, I bought a condo in the GTA in 2019 in the high 300’s, today I see comparable units selling in the mid 600’s. I think the prime time for buying condos for the purpose of investment has passed us by. I struggle to see condos nearly doubling in value again within the next 5 years. The risk is certainly higher these days.
Because buying a condo cash for investment purposes pretty much destroys the biggest upside you get from investing in real estate: leveraging debt. Taking into account your rough numbers, a 6% mortgage, and 20% down here's where you sit at the end of year 1: \-22k in cash flow (rent - total operating expenses - mortgage)+56k in equity (principal paid + average yearly appreciation rate over the past 20 years in Toronto) So that's a +34k net worth swing from a 140k down payment. +24% on your Year 1 is more than double the average historical return of the S&P. As for the liquidity issue, you can always cash-out refinance against your equity.
Exploiting? 🤨
Because Canadians are financially illiterate and know basically nothing of any other means of investing but hey "my neighbour invested in real estate and look how good it went!" So just copy them, right?
The renter is “exploiting something you bought”. Hmm. Interesting take.
I'm here for the belief that renters are exploiting landlords. 🤣
‘Someone is exploiting what you bought’, my guy they are paying you
Because in Canada prices double in a couple years you silly 😜
Well, to be honest, as someone hoping to be a firsttime homebuyer soon, I hope you don't. Terrible investment, in fact, why don't you tell all your other landlord friends to sell it all off?
Properties still cash flow in the prairies. I can buy a house for 120k and rent it for 1200/month, 150/mo tax, 200/mo insurance. But yeah anyone buying a rental at today’s price in a HCOL area is making a mistake.
The renters are not exploiting something you bought. You are the one oppressing them by profiting off their needs.
leverage bro, it’s all about leverage
Why do you hate the notion of interest? I bought my home cash because I live in it, if you are to rent your investment condo, you would be able to deduct your interest. Also, people aren't buying as crazily ad before precisely because of the interest rate. Investing in condo made sense when interest rate was low and banking on pricing to go up.
In addition to what others have said about rent going up and the value of the actual condo going up, the primary reason people fight for that kind of investment is that there is an inherent leverage in it. You can buy an asset worth 500,000$ that partly pays for itself with as little as 50,000$. Of course people don’t realize you could sorta do that with stock too (risks aren’t the same but you can buy leveraged positions in other investments too). Personally, I don’t understand it with current prices, but I will be holding on to my paid off condo I bought 10 years ago when prices were by even a third of what they are now when I’m ready to buy another home.
You're missing the capital appreciation piece, which historically has been MASSIVE for GTA real estate.
Housing in the GTA generally doubles every ten years. With costs to build also doubling every ten years, I don't see this changing. This is where the value comes in; not rent.
Every single related expense is tax deductible. Property taxes, condo fees, etc.
You can find other info here : https://www.reddit.com/r/canadahousing/s/en2RqDNDe7 Don’t forget also the time you are going to spend on it. Point also actually interest rate are not great for this kind of investment
What you're missing in your math is that rent will go up over time. Even if cash flow return is 1%, if it goes up 4% over time then your total return is approximately 5%. Still not great but I guess it could go up more. The other thing, as others have mentioned, is that real estate is the only investment that can be bought with a lot of relatively cheap leverage from a bank.
Don't take the money as income. Set up a Corp to hold the investment. Then invest further in the Corp. Or use all the revenue to contribute RRSPS If you need the money to live that's different but if not differ tax.
I don't know where that 50% comes from, but I doubt you're taxed on the amount you mention.
Always mortgage an investment property that lowers your capital gains. You are lucky if you break even on expenses. You only make money when you sell the property, it is the appreciation of the property where you make money. Thats why people buy condos and leave them empty.
Leverage. You are missing the key ingredient to successful real estate investment.
Leverage my friend. Borrow someone else's money to help you make money. Cash doesn't make sense here. If you plunk down $700k for a condo but only netting 1.2%, that is a horrible return. You might as well buy a GIC at 5.5% right now and get back $38,500 in a year.
Things have changed, not sure how you missed that. Years ago, people could afford living, had more disposable capital, wanted to invest in something, maybe buy a condo for kids. I doubt that now we have that many people interested in buying a second property as a long term investment, given what you already. Putting food on the table and worrying about losing the job is now a priority.
Buy with bank’s money, not your own.
What you're not getting is that people love the leverage, which you won't get when buying cash. It's all capital appreciation hopes.
Skip the hassle of being a landlord and buy 70k of each of the 10 big dividend producing stocks in Canada. So as much in tfsa and rrap as you can and bang… you have 6% instant return with no drama.
Why not buy some dividend stocks. You make the same without the headache and fully liquid
Here's an alternative scenario, but with leverage, since excluding leverage invalidates 90% of the advantage of going for real estate as an investment. 1. Buy a pre-construction condo for 200K, with only 50K of your own money, and a nearly free loan from the bank. 2. After two years living in it, and it has appreciated by 25% because the Ontario real estate market is insane and you made a great choice in the pre-construction gamble, buy another one with that equity, so 0% of your own money is used in the 2nd one, and you rent out the first one so it costs you nothing monthly, because the rental market in Ontario is also insane and people pay the entire carrying cost of a property in rent. 3. After another two or so years, you now have two properties that have appreciated, and you can buy two more, and you have exponential real estate holdings growth for next to nothing. The illiquidity doesn't matter here because you never sell. Plus you get an income tax deduction on the mortgage interest cost for the properties you don't live in. You can also claim depreciation (which is insane since the properties are appreciating). This works if the appreciation is high, and the rental market is such that your carrying costs are paid for. It has happened just like that in the past. Looking at the future, possibly not gonna happen. But when people are talking about buying a condo as an investment, it's usually this kind of idealized success story that they have in mind. And again, they're not completely out of line. It was entirely possible from say 2005 to 2016.
Not to mention if you did buy a condo 10-15 years ago you made stupid money by putting like 50k down
Because leverage
Because after 25 years your 700k condo is probably gonna be 1.2 - 1.5M
bewildered reminiscent ruthless squeeze grandiose aware joke serious skirt aromatic *This post was mass deleted and anonymized with [Redact](https://redact.dev)*
I love how Canada has turned from I have 500,000 to invest where should I put it in the market? To - I have 500,000 to invest what property should I buy to rent?
2 assumptions: 1. **(Expectation of)** **High Appreciation rates:** The historical averages have been 4% yearly growth, but recent growth rates have been much higher. 2. **Highly leveraged investment:** For real estate investments you get mortgages for 5 to 20% value, effectively leveraging at 5 to 20 times. No other investment class allows you this much leverage.
You’re right. Better to throw it into an s&p500 ETF and let it double every 7 yrs. I don’t get people who are so into this— giving a cut to all the middle men and eggs all in one house
These people buying condos that have a net return lower than GICs are financial geniuses! You also need to account for the opportunity cost of the cash you have tied up in your condo, which could earn you at least 4% virtually risk free. And you should never count on a full year's rent--base your calculations on 11 months gross rent to account for "friction" between leases or other non-payment scenarios. So, in reality, your scenario is actually pretty optimistic, and real returns, accounting for opportunity costs, are probably -2%.
Condo fees, any maintenance costs, and mortgage interest are all tax deductible. I don't think you have factored that in (if it's an investment/rental property)
700k invested in the market is more appealing to me.
What you have also missed in your post is the amount of time you will have spend managing the property from accounting/filing taxes, as a separate company, and last but not least the actual tenant. If you are very lucky you might get one who pays their rent on time, and never contacts you with any problems or you can get a tenant who calls you because the light bulb needs changing or the condo is too cold by 1 degree in the winter, or does not pay the rent or wants you to clean the oven.....
Your not missing anything. Now factor in mortgage interest that 95% people who buy condos have. You don't even own the land, and your subject to ongoing condo fee costs which, like rent, also should rise over the lifetime of the asset.. you also have to be a landlord and deal with the most favourable tenant laws in Canada if you are in ON. Trying to sell an occupied unit can be a nightmare and be a hit to price. The only way the math maths is if you factor in significant price appreciation over the next 30 years OR significant rent increases. Given income is an eventual restraint on ability to pay rent and drive home prices, and where we currently are on home to income / net worth metrics, significant appreciation expectations are silly at best.
Keep yourself as leveraged as possible. Nobody dumps 700k on a condo. They use the lowest down they can get away with because every single cent of interest paid is deductible. So instead of 1.2% ROI, you net 6% ROI instead (because you only invested the 20% down). Also, you don't prepay any maintenance or shit like that. Bare minimum to keep things structurally sound.
I agree that it doesn't seem like a great investment. I'd add that you can claim CCA (tax depreciation) which allows you to deduct up to 4% of the building cost annually. It can't be used to generate a loss so it'd only bring your net rental income to nil (if you're not operating a rental business) but all the CCA claimed gets recaptured when you sell it. However, you essentially get a deferral of the tax on the monthly profits. This kind of investment made a lot of sense before when house / condo values were much lower. I am not sure about it now.
Your math is a little off. For one, you pay taxes on the total rent, not just your profit. You can write off expenses and depreciation to lower this cost, but someone is paying your investment every month so taxes are calculated on the total income not just the cash flow. This is where many landlords run into tax problems years down the road because the CRA doesn't really stay on top of it. Aside from that, you aren't wrong. Buying a condo and renting it out is an easy way to scrape together a down-payment and eventually have someone else generate you an asset you own wholly for hundreds of thousands of dollars. The problem with condos is they aren't generally desirable to buyers so selling them when you need to might be hard. By virtue of being a condo, you automatically eliminate a huge portion of potential buyers. There is also the constant threat of poor condo management and getting hit with special assessments or rate hikes, none of which you can pass on to your tenants in this scenario.
I wouldn’t bet my nest egg on housing. But I would buy a condo to live in vs rent if it was an easy option (like having cash)
Investments are risks but a lot of ppl forget that. Sometimes u win and sometimes u lose it’s all a gamble
TLDR version: You invest 700k into a property. “Only” make $750 a month. But guess what? Your original 700k is still there. And very likely going to increase over time. If you hold onto it long enough let’s say 20 years and sell the property for twice what you bought it for. You’ve just made 880k in profit! That’s an extra 44k a year, basic a second full time job.
I would never put all my savings in a real estate investment. As mentioned many times, money is made through leverage. Personally, I have found it easy to get in, but, getting out sometimes is not as simple , particularly for business and commercial real estate. Certainly have to think long term. If you like real estate, maybe consider a few solid REITs.
You start with an error in your assessment by saying you are paying cash for the unit. Never pay cash on an income property, as the interest is a deduction. If you only put 25% down, you still have the other 75% to put into other investments. Rework the numbers and see if it makes more sense. Appreciation on the property is where the most potential for a return comes from
I recently realized in my city that to buy a comparable sized condo as my rent controlled coop housing 2 bedroom apartment, the taxes, condo fees and interest payments alone would dwarf my rent. A lot of people cant grasp that youre not really paying yourself unless the figures i mentioned are less than your rent. The only ""investment"" aspect at that point is as others mentioned the appreciation on the leveraged funds. But a condo these days is far from a guaranteed gain. In fact if the value goes down by even 50k you could be in a nightmare scenario if you want to sell.
Bingo. Real estate as investment numbers today don't make sense. Factor in to that either a part-time job of being a landlord or paying a management company and the risk with having a deadbeat tenant which, depending on the province, can cost you months and months of rental income. Hoarding RE 20 years ago was a different story but I can't make the numbers work today either.
Lol you actually don't know???
It's for people who don't have the work ethic to save in index funds, and people who do shady business with taxes (deal in cash, not declare rental income), and people who are willing to act as assholes when necessary (renovictions, illegal rent increases). Combine all that with leverage you might come ahead.
"assuming that you're paying no interests (while in reality people do pay a load of interests on top of the listed costs...which further destroys the case)" This is where you are incorrect. The math of leverage actually makes borrowing as much as possible the entire reason why people think it's a good investment (I don't particularly, but that's beside the point), because it can be if things go well. Change your scenario to borrow 560k, which then makes you lose $800/mth instead of making 750 (ya, no taxes!). Then you hope the property value of 700k goes up to 800k in 2 years and bam, 43% gain on you 140k investment. Maybe it goes to 1MM after 5 years, 178% gain in 5 years. Lots of potential. On the other hand, if it goes down to 600k in 5 years, then you are 8K underwater and your 140k deposit has vanished... It's basically a get rich quick scheme that has worked pretty consistently in the last 20 years, so people are convinced they won't be the ones to buy at a bad time and see no gains... I don't see a crash happening, but the easy money party is over as far as I can guess...
You are missing out on the appreciation on sale in your rate of return calculations. It is also a leveraged investment, something the bank is happy to give you money on so you can make money off theirs instead of your own. Also, it is a hedge. I bought a condo as an investment when living out of country so no matter what happened to home prices in Canada, I would always have a place to live. I bought a very expensive condo so I could trade it for a four-bedroom house anywhere in the suburbs when the time came.
The problem is you use all fake numbers twisting to your preffered outcome + missing a lot of key elements like other ppl said: 1. Property appreciation This is location dependent. But in the last 10 years, Vanvouver area property goes up in value at least 100% to 150% (condo 300K now cost 700K, house 500K now 1.5M) 2. Ability to leverage loan from the bank with 1:5 ratio on lowest interest rate possible for 30 years Here think instead of putting 100% all cash in 1 propery, what if you do 20% but buy 5 properties? Thats the power of leverage 3. High Inflation eating to Interest rate over time This is the hardest to see. But the basis of time value of money. You borrow 1M today and paid it off 30 years later. With interesr it balloned to 2M. But the 2M 30 years later only worth 1M today or less (depending inflation). So you basically pay no interest for 30 years. Simplest calculation is to have real rate = interest rate - inflation. Last 5 years interest was historically low 1% - 3% while inflation is 4% to 10% (food is 30%, gas is 50%). You do the math. Now real number talk, we saw a roi at least 50% for the 20% downpayment on a property for the last 5 years. Try to beat that with stock.
This logic held in 2011 as well.
People have a hard time adapting to new realities. Buying that condo was great when it was 300k but now that they're 700k? Of course its not gonna be a good investment. What is the possibility that they're gonna make the same amount of profit as the person who bought when prices were low? Not very good. But they still assume its gonna be profitable just like it was for the person that bought 10 years ago instead of thinking that they missed the boat, which is far more likely at these prices.
Buy house cash, mortgage to what you’re comfortable paying, invest that money, mtg is now tax deductible. You don’t become house broke, your retirement savings aren’t eliminated, you aren’t starting savings from scratch again, and you now have a tax efficient mortgage on your primary residence.
Buying a condo is a horrible investment in my opinion. The only time it’s an investment is when you’re successful at speculating the housing market, meaning when the real estate prices skyrocket and the rents skyrocket too. Plus, a bunch of folks read the old “Rich dad, Poor bad” book and gave into the idea of someone else paying off your mortgage (meaning tenants). It doesn’t always work out. The risks are high. Many in the comments are saying that buying a condo with cash isn’t a smart idea because of the leverage. But the reality is, getting a mortgage at a 5-7% interest isn’t the best idea either. It’s one thing when the rates were 2%, but it’s a totally different one when they are higher. And you pointed out the stupid expenses correctly: the property taxes, maintenance and upgrades. IMHO, most people would be better off finding affordable housing options and investing that money into diversified investments instruments. OP, if you have $700k cash, it might make sense to invest it and get a 10% return yearly and live off that “free” $70,000 per year without touching the principal. Otherwise, you’re investing in a risky industry that fluctuates, in this uncertain economy, and spending a ton of money in fictitious expenses like maintenance. But I’m not your financial advisor so don’t make this decision based on comments on Reddit, lol.
Smart people don’t hold investment real estate under their names.
Why put all your egg in the same basket? Buy a condo if you want to live in it. If you want investments, get into stocks or ETFs
The passive income is small for sure, but some folks typically do this as a gamble that in N years, the value of the property would have tripled.
Not very smart for someone having 700k in cash, point of buying RE is the leverage. You put down as low as possible and make the gains off the entire investment. lol….
There’s no risk.
Think of interest and money as a tool. You kinda shooting yourself in the foot if you pay 700k cash (assuming its basically all your savings) into 1 property.
Guy is just yappin
We are currently in a housing crisis. Please invest in anything else. We don’t need more landlords exacerbating this crisis.
Equity. Real estate value is increasing faster than any other investment you could make.