Historical article note: This article was originally published on 2018-01-22. 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.
——Postscript to the lecture "Experience Sharing on Multiple Investment Housing Loans"
On January 20, 2018, at the invitation of Dapeng Real Estate Company, I shared my experience with 200 real estate agents and real estate investors. Now through the public account, I will sort out the key points of the lecture in text.
First of all, Tony Ma, President of Dapeng Real Estate Company, gave a 30-minute market analysis and real estate investment experience sharing to the audience. There were so many exciting scenes that I will not repeat them one by one. The four viewpoints that convince me the most: Real estate investment is a T+5 transaction, and the 5 refers to 5 years, not 5 months; the performance of a real estate agent is not what award you won this year, but whether you invested in a property this year; real estate investment will never lose money, comma, it depends on when you sell; the money everyone loses in real estate investment must be less than the money lost in the stock market or starting a business.
My manager Ida also came to the scene to help out and briefly introduced BMO Bank’s strategy and the impact of B20 on the market, as well as our next steps: a new policy of locking interest rates for 130 days is about to be launched.
My sharing begins near the end of life. How much social security income can a 70-year-old man get in Canada? Will the government protect housing for the elderly? The results of the backward calculation are chilling to the bone: a decent old age life can only rely on your own current investment results, not the government. A decent retirement life requires a home with paid off loans and financial assets of 2 million.
It is not easy for 90% of people to achieve such a "grand" life goal. There is a shortcut, which is investment. There is no distinction between good and bad investment products, whether stocks or real estate, it doesn’t matter what assets you hold, what matters is how you hold them. Real estate investment is about running your own business for the purpose of arbitrage, rather than selling your time to make money. Real estate has financial attributes and a collateral function. Therefore, banks can be used as counterparties for arbitrage during the period of holding real estate. The method is refinance. This method avoids the transaction friction costs caused by selling real estate. From this we draw a conclusion that the income from real estate investment does not come from rental income. Tenants are employees and god-like teammates. Investment properties should not be used as airbnb or homestay. These are physical labor and do not belong to real estate investment. If you need money, go to a bank to refinance. The bank is open every day.
When will the days of carrying high housing debt end? Answer: When you retire, you will be 65 years old. Before the age of 65, do not sell investment properties. If you need money, go to a bank to refinance. After retirement, there is no income and I can no longer refinance before selling my house. During the holding period, refinance should be done every 5 to 6 years. First, add back leverage to improve capital turnover efficiency and leverage utility. Second, use the money to invest in financial assets, because the latter has a compound interest effect. Without further ado, here’s an example: I bought a condominium for 350,000 yuan in 2011, with a down payment of 70,000 yuan. In 2017, I refinanced with 140,000 yuan in cash, and the loan balance rose to 390,000 yuan. The borrowing amount for this house was higher than the original purchase price, so I left the market risk to the bank. There is no need to worry about excessive debt. As long as the bank can approve it, it means the risk is controllable. Calculating the increase, the income in 6 years is 140,000, the principal is 70,000, the income is 200%, and the annual investment return is 33%. There is no house sale, no transaction costs, no capital gains tax, and the bank’s refinance cost is only 800 yuan. Compared with stocks, Buffett's investment return to shareholders is 18% per year. Is real estate investment even better than Buffett? Wrong, Buffett invests in financial assets, which has a compound interest effect. According to the rule of 72, 72 divided by 18 equals 4. That is, if you invest 70,000 in Buffett in 2011, he will earn you 140,000 in only 4 years. This is what I have concluded. To refinance, take out cash and learn to invest in financial assets as early as possible. Surprises come from the unknown, and shocks come from ignorance. Don’t be afraid of financial assets. Learn slowly and you will definitely gain something. According to the rule of 72, if you invest 140,000 in financial products in 2017, don’t be greedy. The annual return rate is 7.2%. Then the principal will double in 10 years. By 2037, the 140,000 will become 560,000 in 20 years. That is to say, use leverage to buy real estate, refinance and withdraw cash to invest in financial products, achieve 2 million in financial assets when you retire, add a loan-free home, and happily carry high debt all the way to a beautiful retirement life.
To achieve the above goals, you must first distinguish between good and bad debts, otherwise you will not be able to get a loan. At the same time, make an effort to pay your taxes. I'm not kidding, the prerequisite for getting a loan is income. The federal government has made such strict changes to mortgage policies, forcing borrowers to pay more taxes. Think about it, the source of taxation for the federal government is income tax, and the source of taxation for local governments is consumption tax and asset tax. People who do not pay income tax in Canada are borrowing a lot of money to buy a house. What will the federal government do? Banks that lent large amounts of money to non-residents and new immigrants who did not pay taxes in the past few years are now having a hard time. It is indeed unfair to lend money from people who pay taxes to people who do not pay taxes. Loans are getting harder and harder, and interest rates are getting higher and higher. Only those who can afford it are the winners in life. The appraisal is complete.