Historical article note: This article was originally published on 2019-08-01. 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.
"You reap what you sow; the more you work, the more you gain; diligence is a virtue…" We earnestly study and work hard, following the correct path shown by our predecessors, yet wealth seems as difficult to increase as if it had Earth's gravity. For salaried workers, no one has ever achieved a wealthy life solely through labor, let alone left substantial assets for the next generation. The main reason wealth cannot be accumulated is that humans are consuming beings; as long as we live, there is consumption. If what we earn only covers our consumption, we cannot accumulate wealth. In contrast, families that have accumulated wealth do so at a pace that breaks free from the Earth's gravity of income barely exceeding consumption. Achieving a leap in family wealth is possible, but it certainly does not come from working overtime to sell your time, nor from gambling on the lottery. To achieve a leap in wealth, one must first find the income source where their irreplaceability is highest, second, understand the wealth accumulation mechanisms and laws of their country, and finally, find a mentor who can guide them in taking action and become an active agent of action.
01 Income depends on irreplaceability in the division of labor
Adam Smith pointed out in "The Wealth of Nations" that division of labor and the market are the fundamental conditions for creating national wealth. Division of labor requires people to find the sub-occupation in which they are relatively most irreplaceable, improve efficiency and output, and then achieve wealth maximization through market exchange. After China implemented a market economy following the reform and opening-up, productivity was unleashed, and people's material living standards rapidly improved. The results of bidding farewell to a planned economy and embracing a market economy made workers around the world clearly see that material scarcity is not a distribution problem, but a production problem; it is an economic system issue. The last few countries that did not believe in a market economy, after reforming their ways, ultimately proved Adam Smith's views in "The Wealth of Nations" to be correct. Austrian economist Hayek pointed out as early as 1944 that a centralized planned economy system is "The Road to Serfdom"; in 1978, at the age of 80, he once again stated that officials sitting in offices trying to accurately calculate what everyone needs and then produce accordingly belongs to "The Fatal Conceit." Hayek was undoubtedly the prophet of planned economy's fate. For families, to increase income, they must enhance their irreplaceability in the division of labor—there is no other way. Once the whole world understands this principle, why are some families able to defy gravity, break free from the constraint where income and consumption are roughly equal, and create several times the wealth of their peers? Under the laws of their own country, whoever discovers the secret of capital can achieve a leap in family wealth.
02 The Secret of Capital
A friend recommended the book "The Secret of Capital" to me; the author is a Peruvian economist named Hernando de Soto. This was the most shocking economics book I read in 2019. The book systematically summarizes insights I had experienced but had not yet elevated to a theoretical level. The author is a field experimental economist who, by collecting data from developing countries, uncovered the mystery of capital: in countries where a legal system that establishes private property as inviolable is not in place and the transaction costs of property rights are too high, even if people are very hardworking and strive to imitate Western lifestyles, as long as they cannot extract capital from assets, reinvest capital to buy assets, and then extract capital from these assets... then the laborers in these countries find it very difficult to achieve a leap in family wealth. They run on a treadmill where income offsets consumption, yet their wealth remains stagnant.
"'Private property is sacred and inviolable' is an important factor for many people when considering whether to emigrate. Serious property rights must have legal protection, as well as thorough verification and registration; otherwise, property cannot be traded among strangers. The currently popular drama 'The Longest Day in Chang'an' is an anti-terrorist palace intrigue series. An important discussion on the wealth of the Tang dynasty appears in Episode 15, in the debate between Jing'an Si Officer Xu Bin and Deputy Li Bi. Li Bi scolded Xu Bin for still having the leisure to start a business at home—experimenting with making paper from bamboo—while facing a major anti-terrorist threat. Xu Bin shouted, 'Paper-making is also the future of the Tang,' startling his boss Li Bi. Xu Bin passionately argued: the Tang is developing too fast, and there is not enough paper; grassroots officials do not have enough paper to record citizens' births and deaths in detail, nor the details of land transfers and property transactions. If this continues, it will be unclear who owns how much property, so how can the government collect taxes? Li Bi's ambition was simply to maintain peace in Chang'an, support the crown prince's ascent, implement light taxes and levies, and bring prosperity to the Tang. Xu Bin’s remark highlights the sacred status of private property in national wealth and power, as well as the importance of complete records. Paper made from bamboo is beautiful, inexpensive, and, most importantly, produced in large quantities, sufficient for the government to thoroughly record population changes and the details of property rights and transactions. China’s commercial banks only began real-name accounts in 1994; before then, one could even open an account in the name of a family dog, making financial assets difficult to verify. It is said that China is considering real-name registration for real estate. These advances in property rights are commendable, but for those of us who only live one life, waiting too long leaves emigration as the only option. South Korean President Kim Young-sam took five years to implement real-name real estate registration in South Korea, a country with 45 million people. During this reform process, 2,000 public officials were arrested, and two former presidents were brought to trial. We sincerely hope that China’s real-name real estate registration can be implemented smoothly.
In the United States and Canada, a real estate transaction can be completed within a few days. Behind this is a well-established property law and regulated transaction process, developed gradually over more than a hundred years. In 1849, California had over 800 property jurisdiction districts, each with its own recording system and management rules. Over the course of a century, the U.S. federal government issued more than 35 priority laws to incorporate all unofficial property regulations across the country into a unified ownership system, thereby establishing a healthy, efficient, and comprehensive ownership market.
In developing countries, without the establishment of a unified property rights market, how difficult is it to complete a property rights matter? Take a look at Soto's field research results: In the capital of Peru, to register a small business, you need someone to run the procedures for 6 hours a day, and it takes 289 days to complete the registration, with a registration cost of 1,231 USD; to obtain a piece of land in Peru to build a self-occupied house, having someone handle the procedures takes 6 years and 11 months, dealing with 52 departments, completing 207 administrative approvals, and finally obtaining a legal property certificate, requiring a total of 728 procedures; in the Philippines, to build a house and obtain legal procedures, it requires completing 168 steps involving 53 national and private sectors, taking 13-25 years. There are many more data in Soto's book, which I will not cite here. In short, when the legal pathway is impractical, people start building illegally and chaotically, and since illegal buildings cannot enter the property rights legal system, the right to transfer and the right to mortgage cannot be exercised at all. These assets have become 'dead assets' that cannot be transformed into capital. How much capital is frozen in assets? In the Philippines, 57% of urban residents and 67% of rural residents' housing are frozen assets, unable to extract capital for other investments; in Peru, 53% of urban residents and 81% of rural residents live in illegal buildings.
Developing countries are also eating McDonald's fries, drinking Coca-Cola, have large shopping malls selling branded clothing, and elites are playing golf. But this shallow lifestyle imitation is not the essence of capitalism at all. Malthus's population alarmist theory once predicted that human reproduction grows geometrically while resources grow arithmetically, and that humans would inevitably starve. Fortunately, capitalism discovered the secret of plundering capital: buying assets, extracting capital from assets, then buying more assets and extracting more capital, allowing capital to grow geometrically. This not only preserved people's basic subsistence but also greatly improved material living standards. Although we often complain about the suffering caused by the expansion and contraction cycles of capital, the victory of capital is a victory for all humanity; it ensures that humanity can survive.
03 What is visible is assets, what is invisible is capital
The water in a reservoir is H2O. If it is used to generate electricity, it is transformed into electrical energy. We can see and touch water, but we cannot see or touch electrical energy; we can see food, but we cannot see the energy that is converted after eating the food. Assets and capital have a similar relationship: what can be seen are assets, what cannot be seen is capital. A house is built on a piece of land, with windows and doors, a kitchen and bathroom, a garage and garden. The entire process of mortgaging the house to borrow funds for reinvestment does not change any physical state or property of the house; it only changes the ownership at a legal level: a mortgage right is added on top of ownership. It is precisely this invisible activity of extracting capital from assets that can achieve a wealth leap for a family. By saving for a down payment, taking out a mortgage, and purchasing real estate—because the mortgage must be repaid on time—the balance naturally decreases. In first-tier metropolitan cities, housing prices keep rising. After 2 to 3 years, one can add another mortgage, extract cash for a down payment, apply for another loan, and buy another property. This is the investment method I have personally practiced. I did not expect that Soto had long discovered the principles and benefits behind it.
The book 'The Secrets of Capital' perfectly explains the 'endowment effect,' that is, the effect brought about by ownership that is described by formal law and is inviolable. These six endowment effects are: 1. Determining the economic potential of assets: If a house is only used for living, the asset of the house only has physical natural attributes. With a formal legal description, it not only has natural attributes but also legal attributes, such as being mortgageable, pledgeable, and transferable. The economic potential brought by these additional legal attributes is exactly what we want to explore. If explored well, one house can yield the equivalent potential of ten; 2. Integrating dispersed information into a system: Only assets included in a unified ownership description can be refined into capital. The concentration and standardization of dispersed information and records reflect the value of ownership; 3. Establishing responsibility and a credit system: Formal ownership itself implies responsibility. If you are a homeowner, you must pay property taxes and repay mortgage loans on time; 4. Making assets exchangeable; 5. Building your own relationship network through asset ownership; 6. Only standardized and formal ownership can ensure smooth transactions.
China has implemented a market economy and has made significant progress in productivity by leveraging latecomer advantages. The idea of equalizing wealth still hinders the derivation of capital. Purchase and loan restrictions are meant to prevent those who have become wealthy first from using capital advantages to continue expanding the wealth gap, artificially suppressing the regeneration of capital.
04 Action π Portrait
A house: what can be seen is the physical property of the house, while what cannot be seen with the naked eye is the legal attribute of ownership. Do not assume that people in capitalist countries all understand this point. Those born in capitalist countries take the existing property rights system for granted and, on the contrary, turn a blind eye to the potential of property, remaining ignorant and unaware. Soto, who discovered the 'secret of capital,' was a Peruvian economist, a complete outsider to capitalism, yet because of the distance there was beauty in his discovery, revealing this advantage of capitalism. In the Golden Horseshoe region of Ontario, Canada, there is a total population of 7.4 million, of whom only 120,000 own multiple properties. Fewer than 2% know the secret of capital and understand that real estate investment can achieve leaps in family wealth. I believe that these 120,000 people likely own more than one investment property. Once they discover this secret of capital, they will be unable to stop, repeatedly putting it into practice.
The goddess of luck only favors those who take action; luck is only related to action and has no connection with idle fantasies. My previous 75 articles on my official account have already explained a relatively systematic and complete approach to real estate investment: pay off your primary residence as quickly as possible, continually use additional mortgages for investment properties, have tenants help repay the mortgage, recognizing that rental income plays a supporting role and is not the main goal of real estate investment, hold property when interest rates are low, and hold it for as long as possible, avoiding frequent trading, which reduces current net rental income, and make full use of property rights for capital-intensive investments. In Canada, people with moderate income or high net worth can take full advantage of bank leverage to invest in real estate. I can honestly tell everyone that very few people are actually action π. Readers who take action benefit greatly; since 2018, at least four families have used unconventional methods to rapidly repay their primary residence mortgage, first paying off their own home loans and then using additional mortgages on investment properties, successfully achieving the historic transformation of bad debt into good debt, breaking free from the burden of high primary residence mortgage and boldly starting multiple-property real estate investment. A very few highly capable readers have rented out their homes with large mortgages and rented apartments for themselves, successfully getting rid of their own home loans. There are many people capable of rapidly repaying their primary residence, but very few actually take action. My profile for action π is as follows: they understand the previous 75 articles on my official account, have strong psychological motivation to break away from the original wealth accumulation mode, achieve the leap in wealth, explore ways for the next generation to survive and thrive in a capitalist country, dare to take responsibility for their own actions, and firmly believe that Toronto will be more crowded tomorrow. The series of lectures to be held in 2019 will only be valuable to action π and are not suitable for those looking everywhere for quick-rich schemes or for people who only attend free lectures. Please send me a private message on WeChat: 'I am action π', and I will send you the lecture notice in mid-August.
05 Don't Treat Real Estate Investment as Physical Labor
Some people take 'not wanting to clean the toilet' as a reason for not daring to invest in real estate. There are also people who particularly enjoy cleaning the toilet, and they get unhappy if they are not allowed to, even wanting to appeal. People who buy houses for short-term rentals belong to the latter type.
Canada has complete property laws and a smooth transaction system, but the currently booming Airbnb has not yet been incorporated into this mature system. The city of Markham has explicitly rejected short-term rentals. Toronto has also rejected them, but toilet-scrubbing enthusiasts are appealing to defend their right to scrub. For a short-term rental property, I don't know how to declare rental income or how banks handle such income when applying for additional mortgages. Property rights in real estate are clearly well protected by law, and the processes for renting and selling transactions are quite standardized. Banks' views on offsetting rental income against debt have become relatively stable. However, the legal status of short-term rental activities and income has not yet been established, and they have not been fully integrated into the legitimate system. Naturally, banks still assess an applicant's debt repayment ability according to the old rules for additional mortgages, and short-term renters are unlikely to provide the rental income documents that banks require. Investments within the legal system rely on intellectual work and are capital-intensive; investments outside the legal system involve investing in dead assets and rely on physical effort. Most importantly, transforming assets within the legal system into assets outside it is effectively destroying all potential for extracting capital from the asset. The biggest yield from such real estate investment is just that rent. Seventy-six percent of Canada's wealth is in real estate. By scrubbing toilets, what do you really gain in the real estate market—gold or something else?
Not following the rules, taking shortcuts, being crafty, and walking the fine line are our favorites; it's probably a tradition that's thousands of years old, and people can't change it even after migrating. Laozi made this traditional virtue very clear in the Dao De Jing: 'The great way is level, yet the people prefer the shortcuts.' People always feel that the straight path is too slow, and there is gold on the shortcut. The most impatient ones go to Thailand or invest in real estate in Cyprus, and it is said that the Belt and Road will eventually expand there.
Chinese people in Canada, whether middle-income or high-net-worth, can proudly walk down the main avenue and borrow money from the bank to achieve wealth upgrades. Relying on physical strength or labor can never achieve wealth leaps. The secret to family wealth leaps lies in the family's ability to operate capital. Read and try to practice this article, and you will find: the organs above the neck are for making money, while the organs below the neck are for scrubbing toilets.
Living in Canada, a capitalist country, I hope that readers can have a clear understanding of the nature of capital. There is a gap between knowledge and action, and this gap is called choice. When people make choices, they are not facing the right way or the wrong way, but the right way or the easy way. Sticking to the old path is the easiest. The first step to becoming an Action π is to share this article with the friends and clients you care about the most. Together, we can learn and work hard on private property economics and family wealth leap, and loudly declare our wishes: I want to achieve a wealth leap, I want to be an Action π. Shout out your dreams, and you will surely find like-minded partners.