Recently Kevin O’Leary, “Mr. Wonderful” of Dragon’s Den fame, did an interview on BNN where he pronounced “You’d be an Idiot to buy a house!” You can check it out by clicking here.
I agree with some of his comments, especially his criticism of the condos, which I agree don’t make for good real estate investments. You can learn why here.
Kevin, and the media in general, have a very flawed view of real estate as an investment asset class. The main issue is that when they talk about real estate returns they are almost exclusively talking about end user home buyers.
The media oddly confuses people by considering peoples homes where they live as investments. This is wrong! At best, if your home, where you live, is mortgage free it is mainly an inflation adjusted asset NOT an investment!
As a true real estate investor I can tell you that most of Kevin’s comments and indeed media’s analysis of the real estate market as an investment class are irrelevant and flawed in many, many ways. Here are but a few of the reasons why:
The media keeps on touting that, “your house is likely one of the biggest investments you will ever make!” This is pure hogwash fed to the masses! The reality is that the only way to make any return on one’s home is solely by an overall expectation of house price needing to continue going up for you to make any money on your own home. In reality this is called speculation, it’s risky and is definitely not something I would consider as “investing”!
Psst! I will let you in on a little secret. As true real estate investors we do not really care one way or the other which way the market is going!
If this sounds crazy to you, then let me explain.
As true real estate investors in single family homes we do not typically live in the homes we buy. We instead rent the homes we buy to tenants. So it is actually great news to us when media pundits likely Kevin O’Leary, and the rest of the media for that matter, are saying “Don’t buy! Rent instead!” This means more people will be looking to rent instead of buying a home. That’s right! More tenants demanding to rent one of my “true” real estate investment properties!
Experienced real estate investors also know that no investment, regardless of whether it is real estate or stocks, consistently go up in a straight line. House prices are no different. Remember the subprime fiasco in the US when home prices fell by more than 50% in some areas during the “Great Recession” or the Canadian market crash in the late 1980’s?
Here’s another secret that true real estate investors already know. A housing correction or even a crash will happen again. To us it is a foregone conclusion. We know this because real estate markets, just like the overall economy go through boom, bust and stagnant periods.
Unlike stocks however, since real estate is an inflation adjusted asset, over the long term real estate prices will most definitely go up. We know this because they have been doing so for hundreds of years! Sure they may correct from time to time, but they will ultimately almost always go higher. Unfortunately, with individual stocks this is not always the case.
For true real estate investors, this is great news as well. As home prices get high, even into bubble territory, people get priced out of the market, yet they still need a place to live, right? Wonderful news yet again! I will be happy to rent them one of my lovely properties!
True real estate investors do not view their own homes to be an investment. Yes you heard that right!
In reality, our homes, that is, where we live, are not income producing assets. In fact, for most people their home is a liability (mortgage) that you have an obligation of personally paying off over time. Worse yet, even after they pay off the mortgage, their homes continue being a liability since home owners remain on the hook for paying their home property taxes, insurance, utilities, repairs and other maintenance out of pocket indefinitely.
So here’s the truth. Since I invest exclusively in cash flow positive properties, I am not the one who pays my monthly mortgage payments, taxes, utilities, etc. It is my tenants who pay for all of these costs and they will most likely keep on paying these costs indefinitely!
The awesome part is that after my tenants pay for all these costs monthly, I get cold hard cash in my pocket (positive cash flow) because the rent they pay me is more than the how much it costs me to carry and run the property.
Better still, ultimately my tenants will end up paying off my mortgage entirely and my cash flow will only continue to increase over time. In some cases, by as much as 700%+, with each property ultimately bringing in $14,000-20,000+ each and every single year, and quite possibly FOREVER without ever having to bite into my capital (that is I never have to sell the properties)! If you ever wanted to know the true definition of “cash cow”, well here it is! This is what I call true investments!
To recap, as an investor I depend mainly on monthly cash flow and mortgage pay down, which today typically make up about 10-15%+ of my overall annual returns collectively BEFORE I EVEN BEGIN TO CONSIDER ANY APPRECIATION. Most importantly, I get these returns regardless of whether the market goes up or down.
Do my investment properties appreciate in value over time? Absolutely! However, to me this component of my overall return is a nice to have as it may or may not happen consistently, year after year, and is difficult to forecast.
And here’s the thing, I really don’t care what my home values will be when my homes ultimately get paid off. Are they almost sure to be much higher than they are today? Absolutely, and that’s nice but not really what interests me. Instead it is the consistent, dependable income that my homes are expected to generate, quite possibly FOREVER, that matters to me most.
Put another way, if for example my goal is to earn a $150,000 yearly in investment income from my properties when I retire, does it really matter what my real estate portfolio of assets is worth on the open market at any given point in time? Does it matter whether we are in a house correction or boom period of escalating home prices? Not really. I only care that I consistently keep on getting my $150,000 investment income this year and every year thereafter. Period!
What Kevin O’Leary is likely saying is that today it is appreciation in value, rather than the positive cash flow and mortgage pay down pillars indicated above, that most home buyers are looking at when considering whether to rent or buy and I wholeheartedly agree with him that this is a big no, no!
It is also one of the main reasons I do not invest directly in the GTA since appreciation is the only way to make money there since cash flowing properties simply are next to near impossible to find any longer in the area with only 20% down!
More importantly I invest in real estate to maximize my returns and I have found better areas to invest in where returns are even better than properties in Toronto, but still benefit from the Toronto boom.
I highly advise millennials, and everyone in North America for that matter, who are looking at getting in to the real estate market to first separate where you want to live from where you want to invest. Live where you want to live, but invest where you can get maximum returns and lower risk associated with your investments.
BONUS: That 5% down payment for a $1M Toronto home plus the associated CMHC financing fees for low downpayment mortgages would typically equate to the same amount, dollar wise, enough for a 20% downpayment for practically the same home in a similar area of one of my targeted areas to invest thereby enabling investors to avoid CMHC or other mortgage insurer fees. Right off the bat, you would come ahead as a real estate investor.
BONUS X 2: The appreciation rates in my target areas are just as good if not better than their much more expensive Toronto counter parts. So as investments today they usually perform better and are therefore superior to similar investment properties located in Toronto.
For example, if someone wishes to live in Toronto, then I would recommend they rent a place where they want to live in Toronto, since the costs to rent are most likely to be less than the costs of carrying the property if you were to buy it, especially if they are only putting 5% down. Instead buy investment real estate in areas where you can maximize your returns (positive cash flow, etc). This way you get into the real estate market without getting yourself “house poor” and live where you really want to live.
You get the best of both worlds and can then truly look forward to living your very own Cloud9Life! 🙂
Until next time…
Felix Vortsman, real estate investor