Historical article note: This article was originally published on 2019-05-30. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
Over the past nine years, due to work, I have met many real estate investors, which has taught me a lot of experience and also shown me many lessons. Houses, in different people's eyes, have different values and characteristics. In the eyes of a successful real estate investor, a house is actually just collateral, without any emotional attachment. As collateral, it only needs to be recognized by the bank; if it can also be continuously leveraged to provide capital for other investments, like an ATM, then that’s perfect. Investors who see houses as collateral are usually more successful and more relaxed. Those who overthink, on the other hand, are burdened by the house.
Feng Lun's definition of real estate is: man-made, valuable, fixed space. After humans began walking upright, the heart shifted upwards, and the legs touched the ground instead of four limbs, which was conducive to long-distance running rather than sprinting. Therefore, when sweating, it became necessary to dissipate heat immediately, and human hair and fur began to degenerate. Without long hair and thick skin for protection, humans became very sensitive to scrapes and scratches, so they began to live in caves. Tigers and lions, with thick fur, cannot dissipate heat as easily, can only sprint, but don't need to live in caves, and so gradually diverged from humans. As the population grew, caves became insufficient, and humans began developing real estate. Places with more job opportunities, concentrated schools, and clustered entertainment and shopping facilities attract too many people wishing to live there, so houses had to be built upwards, after all, land is limited but the sky is infinite. From a human nature perspective, "houses are for living, not speculation" is impossible, because "man-made, valuable, fixed space" is ultimately limited and scarce. Competition among people is for one thing: the competition for living space, which obviously includes man-made fixed space. Everyone who buys a house is doing so for investment, because renting is also possible. Those who claim that buying a house is a necessity are not just buying to live in it; rather, it's because their mother-in-law considers it a necessity. One of the laws of economics is the principle of substitution. The alternative to buying a house is renting, so those who buy houses are all real estate investors. A 2018 Canadian survey of first-time homebuyers found that 80% of respondents believed a house was a good long-term investment; I believe the remaining 20% were not telling the truth. Since they are all real estate investors, who does it best and most easily, and who struggles painfully? Let's take a look at the profile of a typical real estate investor.
01 A relaxed and happy god-level real estate investor
These are a batch of real estate investors most favored by banks, clients who can buy one more property just by filling out two application forms: the first application form is to apply for an additional mortgage on their existing investment property, and the second application form is to apply for a loan for the next property, of course, with the down payment taken from the additional mortgage on the previous property. How did these seemingly magical real estate investors cultivate their skills?
First of all, in the eyes of the bank, a house is simply collateral. Whether it is a detached house, a semi-detached house, a townhouse, or an apartment building, as long as it meets the qualification for collateral, it can serve as acceptable collateral for issuing a mortgage. Some clients call to ask if a detached house next to a certain university, with 11 bedrooms, can qualify for a loan. This is a student dormitory, and the bank will not provide a mortgage. Some clients ask whether they can refinance and transfer the mortgage of their semi-detached owner-occupied house to another bank; the house is in North York and the basement is rented out. The answer is still NO. Semi-detached houses in North York are all in single-family zoning areas. If the house is occupied by two families, the bank does not accept such collateral. The aforementioned actions that damage the nature of the collateral are like cutting off one’s own feet. Banks play the most important role in the real estate market. If one ignores the bank’s requirements, tries to be clever, forces the house to increase rental income, illegally changes its use, or violates zoning regulations, the house will lose its eligibility as collateral. Not only will refinancing become impossible, but selling the house will also be difficult, thereby reducing its value. Top-level real estate investors place the bank's preferences and aversions first, maintain a certain respect for both the property and the bank, avoid any time-consuming and laborious actions that would undermine the collateral, and treat the bank as an important partner, cooperating with the bank for mutual benefit.
Secondly, investors who have a firm attachment to holding onto properties in the city where they invest will be the ones who laugh last. I once asked a client who owned 10 investment apartments how they managed it. The client’s answer was quite surprising: At the end of 2008, the Toronto real estate market froze, everyone said housing prices would drop by half, and transaction volumes plummeted. At that time, the client already owned five investment properties, and everyone advised them to sell quickly, but they didn’t; from 2011 to 2016, the apartment buildings only increased by 20% over seven years, yet they patiently bought without selling, finally reaping the catch-up gains from 2016 to 2019. Investing in a city is like buying its stock; confidence is more important than gold. If they had sold in 2008 and bought back in 2010, sold in 2016 and bought back in 2018, apart from paying taxes to the government, how much would they actually have earned? Avoiding unnecessary buying and selling, delaying taxes as much as possible, and holding long-term investment products with intrinsic value yields far greater returns than short-term trading driven by lack of foresight and confidence. What you invest in is not important; the key is how you hold after identifying intrinsic value. Buffett and Munger meticulously maintain the compounding machine long-term, making it impossible for other investors to catch up. Real estate investors must carefully maintain the leverage machine long-term; as long as you buy early and hold for the long term, later investors have no chance to surpass you.
Finally, investors need to maintain a high income over the long term. Banks only recognize income, not individuals. For long-time clients who lose their jobs and then apply for a loan, the answer is, sorry, no loan. This kind of 'favoring the rich over the poor' by banks is a positive and correct form of discrimination—if you can't repay, don't expect to get a loan. To extend the pleasurable journey of buying an investment property, taking out additional loans for more investment properties, and buying even more investment properties, the necessary condition is to maintain a high income. Or, conversely, in the 10-15 years when your income is highest and your work is most stable, you should quickly build up a real estate investment portfolio—and if this period coincides with low interest rates, that's perfect. The biggest advantage of investing in Canadian real estate is that banks are conservative. The reason the U.S. real estate market took a severe hit was that during low-interest periods, mortgage approval standards were relaxed, letting in a large number of property buyers without the ability to repay. Canadian banks have never made this mistake; you either have a high income or significant net assets, otherwise, don’t even think about borrowing. They confidently discriminate against those with weak risk-bearing capacity. Top-tier real estate investors are the clients banks most welcome because their income level gives banks the confidence to lend.
02 To investors striving to own multiple investment properties
No one is born knowing how to invest in real estate; taking a few detours is perfectly normal. There’s no harm without comparison—many investors only start reading my articles after hitting a bottleneck themselves and realizing that “others” have become top-tier real estate investors. Many high-income families pay hefty taxes but cannot access reasonable social resources or compensation, turning to banks to hide wealth in property, secure stability brick by brick, and save assets for retirement. However, after buying two or three properties, banks start saying 'no.' In the past, few in our Chinese community studied this topic, even though many faced the same issue: the problem of being a 'mortgage zombie.' Fortunately, WeChat Moments and various groups provided places to discuss this issue, so many realized they were not alone, and that the problem was not incurable. In the past two years, those who firmly believed that the Toronto real estate market would continue to thrive have made significant efforts: some used unconventional methods with family support to swiftly reduce their primary residence mortgage balance, then immediately took out extra loans on investment properties to repay funds borrowed from family; others gave up on oversized primary residence mortgages and sought other housing. Regardless of the method, breaking free from the burden of an oversized primary residence mortgage is not easy. But friends who successfully did so are truly excited: they not only opened the door to investing in multiple properties but also learned to use financial leverage, manage family debt, and grasp the essence of private property economics—real estate capital operation. The practical knowledge gained is the most valuable legacy to pass on to the next generation and a precious set of basic survival skills in a capitalist country, learned through the hard work of the first-generation immigrants. In this process, I feel genuine joy in being able to help more fellow countrymen understand and eventually become multiple-property investors.
03 Real Estate Investors Driving in Opposite Directions
Recently, I attended an event where I talked about using financial leverage for real estate investment, and another senior participant discussed the topic of active appreciation of properties. I asked myself a question: what is passive appreciation of real estate? Since active appreciation involves personally improving the property to make it appreciate faster than the surrounding houses, which belongs to active real estate investment, then doing nothing and just watching the property value go up is passive appreciation. When banks assess the market value of residential properties, they use the comparison method, which involves comparing the target property with similar properties recently sold in its neighborhood to determine the current market price of the target property. The properties used for comparison are called comparables. For instance, if the target property has one more bedroom than Comparable 1, the target property value increases by 60,000; if Comparable 2 has a ravine backyard but the target property doesn’t, the target property value decreases by 40,000... If real estate investors don’t understand how banks assess property prices, replacing all the carpets in a house with top-grade flooring is considered a futile upgrade from the bank's evaluation perspective because it’s not included in the bank’s appraisal criteria. At most, it makes the property more appealing to potential buyers. The first type of contrary real estate investors blindly make capital investments—spending money, effort, and time—without actually increasing the property value. In fact, it’s very simple: as long as we follow the laws, actively maintain community safety, keep the community orderly, and report any illegal subletting to 311, we are helping. The prices of your neighbors’ houses determine the price of your house, which is why in North America, it is often very difficult for a new development to gain the approval of neighbors. For example, would you agree to a refugee shelter being built next to your neighborhood? "Don’t in my backyard" is the foundation of North American community culture—"don’t do things in my backyard"—because no one wants their property values to drop.
Those who think that raising rent can increase property prices are completely mistaken. Commercial properties can increase property value by raising rent, but illegally modifying residential property structures or illegally renting to multiple families damages the property's status as a legitimate mortgage asset and harms the community. As a result, the original mortgage cannot be increased, and illegally modified properties are very difficult to sell.
Some investors are relatively headstrong; even though they have 2 or 3 pre-sale properties pending settlement, they insist on giving up a stable salaried job to do self-employed work, which requires two years of tax return income to apply for a loan, rather than just a payslip and employer letter.
Some investors hear that real estate in a certain place has cash flow and go to invest. Have you considered exchange rate risk? Have you considered the tax rates of different countries? Canada has no inheritance tax; if you are going to invest in real estate in a country with inheritance tax, buy more life insurance, otherwise the beneficiaries might not even be able to pay the taxes.
04 Investors who have not yet developed an investment mindset
Buying a self-owned home to live in for a lifetime, planning to sell it when you can no longer manage it and then move to a smaller house, using the property for retirement—families like this should make up 90%. Perhaps they don’t realize that buying a self-owned home is actually a form of investment. In Canada, there is the reverse mortgage; after reaching a certain age, one can mortgage their home to a financial company and receive a certain monthly mortgage income. After death, the property is handled by the financial company, and the remaining funds from the sale are given to the will's beneficiaries. After the introduction of commercial housing in China, many middle-class families shifted their investment focus from the stock market to real estate. In the A-share market, only the losers and the market manipulators are left. The government suppresses real estate investment through purchase restrictions and loan limits, while investors use tactics like fake divorces to actually buy property to negotiate with the government. All of this demonstrates the awakening of real estate investment awareness among middle-class and above families. Real estate, as valuable fixed man-made space, has maintained its scarcity with population growth, and this feature happens to match the characteristics of an investment: usable, mortgageable, value-preserving, capable of beating inflation, and most importantly, everyone is familiar with real estate, whereas not everyone is familiar with the stock market. Buying a house itself is an awakening of investment awareness. Compared to renting, it already frees people from the instinct of having to find somewhere to live just to avoid damage. Renting is pure consumption, buying a house is both consumption and investment, it’s just that buyers themselves haven’t realized it yet. For most people, the first step in real estate investment is when they replace their self-owned home: they don’t sell the original house and rent it out, thus beginning the journey of owning multiple investment properties.