Historical article note: This article was originally published on 2019-10-03. 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.

A 'routine' refers to the summary of previous successful experiences, which later people can follow to save the cost of trial and error, like a 'recipe.' In recent years, this word has been diminished to mean 'trap.' Real estate investment has also been reduced to 'speculating in property,' so no one is willing to summarize the routines of real estate investment. In fact, there are many people who aspire to invest in real estate and want to know the successful experiences; there should also be quite a few people who want to invest in real estate as if following a recipe to cook. Otherwise, my personal public account would not have thousands of subscribed readers.

Investors who uphold the banner of real estate investment and summarize their real estate investment experience should be a niche in China. The most famous is the Reservoir Forum, where moderator Oshen has written two books introducing many types of cuisine and cooking methods, which friends in China can use as a reference. There are also not many people discussing real estate investment in Canada. On anonymous forums, those who curse speculators and those who curse basement keyboard warriors form two streams of mutual insults, and the discussion on real estate investment lacks constructive value. What is valuable—successful experience—is hard to find, and even if found, most people cannot follow it. However, the lessons from failures are universal. For example, making one mistake A will make you permanently excluded from real estate investment, and yet 90% of people repeatedly make this mistake A. It is not easy to summarize a real estate investment strategy, but summarizing a handbook of failure is still useful as a reference.

My experience over the past 10 years can be summarized as: the strategy of real estate investment is to implement a planned mortgage strategy, fully utilize bank policies, and purchase multiple properties.

01 A fatal mistake that early on ruins the idea of investing in real estate

The most effective way to keep yourself away from real estate investment is to do everything you can to make your mortgage for your own house reach the maximum limit that your income can afford. For example, under the current loan policies and interest rates, the maximum single loan amount is five times the household's annual income. If the income is 100,000 and the mortgage for your own house exceeds 500,000, you cannot take out a loan to buy an investment property, nor can you mortgage any other existing properties further.

After Li Xiao's family landed in Canada, they immediately invested in property and bought Property A. At that time, the market price was only 300,000, and they borrowed 80%, with a loan amount of 240,000. With the family’s joint effort, they paid off the loan over 15 years and even saved 220,000. The price of Property A had also risen to 800,000. Li Xiao's family planned to move to a new home, targeting a property priced at 1,000,000, with a family income of 160,000. They then purchased Property B, making a down payment of 200,000 and borrowing 800,000. After happily moving into Property B, they realized that Property A had no mortgage. When they turned Property A into a rental, because there was no interest expense to deduct from the gross rental income, the net rental income was very high, which increased their family income tax rate. At this point, Li Xiao's family discovered that all banks had rejected their application for an additional mortgage on Property A, citing the same reason: their borrowing capacity was only 800,000, and they had already borrowed 800,000 for their primary residence, so Property A, as an investment property, could not be used for an additional mortgage. Li Xiao's family is now in a situation where they “can’t move,” which is what we commonly refer to as a "mortgage vegetative state."

Faced with this dilemma, Xiao Li's family has the following options: 01. Start saving money to pay off their own home from now on, without trying to make any changes—fall and stay where they fall; 02. Move, return to live in A, rent out B, and then refinance house A; 03. Sell A, get 800,000 from the sale, use 600,000 to accelerate repayment of B's loan, reducing B's loan to 200,000, and use the remaining 200,000 as a down payment to buy investment properties C and D, each worth 500,000. Guess what the approximate probability ranges are in real life for Xiao Li's family choosing among these three options? What I have observed is: the probability of choosing 01 is 95% to 98%; choosing 02 is 0%; choosing 03 is 2% to 5%.

Families who choose Option 01 mainly do so due to path dependence: they use the method of paying off House B's loan with House A's loan, without needing to think, because everyone else does it too... They are typical families who are strategically lazy but tactically diligent; blessings and prayers go to such families. Families who choose Option 02 mainly do so because of loss aversion and unwillingness to admit mistakes: the mortgage was unplanned and led to this situation, so if they move back into House A, wouldn't it be both a waste of resources and a source of ridicule from friends? Although they made a serious mistake, they can't back down; moving back to House A has costs, and they are expenditures outside of necessary expenses in other mental accounts, which they cannot tolerate. Families who choose Option 03, although rare, do exist. Such families are unlikely to have arrived at this choice through self-awareness; if they could have thought this far, they wouldn't have made the initial mistake only to correct it later. Families who choose Option 03 likely have good mentors and friends around them who proposed this solution.

Having a winning hand but playing it badly is because of not taking the mortgage seriously. The masters of real estate investment are simply masters of mortgage strategy, nothing else.

02 Real Estate Investment Standard Actions

To avoid the mistakes made by Xiao Li's family, the correct approach, and also the standard practice in real estate investment, is to keep personal housing debt to a minimum. In previous articles, we mentioned the concept of 'bad debt.' For those unfamiliar with this concept, please start by reviewing the article from January 2018 on the public account. A primary residence is the biggest bad debt, because a primary residence is the largest consumer good. The correct approach for Xiao Li's family is: before purchasing B, take out an additional mortgage on A, use as much money as possible, and put it all towards the down payment of house B, ensuring that the loan on house B is lower than the loan on house A—that is, to minimize personal housing debt.

Many people have doubts. If you have pressed A first, can you still apply for a loan when buying B? The answer is definitely yes. Because when applying for B, the bank treats A as a rental property and uses the rental income to offset A's debt. Although this means that the loan for B cannot reach five times the annual income, it also means that you don't need to borrow that much. What Xiao Li's family needs to do is find someone who can plan for them and accurately calculate how much loan can be obtained for A and B respectively. From this example, it can also be seen that there is no need to wait until the loan for property A is fully repaid before switching to a self-occupied house.

If you want to change to a primary residence in the future and buy C, what should you do? By the same logic, before buying C, see if you can add a mortgage to A. If you can, then add a mortgage to A first. If not, at least add a mortgage to B, and then purchase C. In this way, after buying C, you will have investment properties A and B under your name, and C will be your primary residence, with the mortgage amount for the primary residence kept as low as possible.

When C is used as a primary residence, and the loan balance is only 2.5 times the household's annual income, A and B can be remortgaged again to withdraw funds to purchase D as an investment property.

In summary, the standard procedure for real estate investment is: to keep the mortgage on your own home at a minimum, you need to mortgage all existing properties before buying a primary residence. Investing in multiple properties involves a process of mortgaging, moving, then mortgaging again, and moving again. Once the mortgage balance on your own home is less than 2.5 times your annual income, you can directly purchase rental properties.

03 Optional Actions in Real Estate Investment

People with strong observational skills will quickly realize after immigrating to Canada that creating wealth there is very difficult. The GDP grows by about 1.6% per year, the country’s incremental wealth is very limited, and it is concentrated in high-tech and resource industries. Small-scale entrepreneurial ventures usually result in total loss. The proper approach is to take a share of existing wealth, and 76% of existing wealth is in real estate. Therefore, investing in second-hand housing has become a wise choice. Admitting mistakes and correcting them is smart, but it is much harder to correct mistakes in investment direction. Here, we provide several unconventional methods used by intelligent investors with strong decisiveness.

Xiao Jia, when he first came to Canada, took advantage of the new immigrant policy and bought a big house as soon as he arrived, with a mortgage balance of 1.3 million. He found a professional job with an annual salary of 90,000, but because his personal housing debt was too high, he couldn't invest in real estate. After realizing this, he resolutely rented out his own house and fully utilized section 45(2) of the tax law to handle property appreciation issues. Method: postpone personal gratification and turn bad debt into good debt.

Xiao Yi, a real estate agent, in 2018 refinanced all his investment properties to cash out 600,000 yuan to prepare for the downturn in the real estate market. Although he paid a few thousand yuan in penalties because the original loans had not yet matured, it was worth it to obtain 600,000 yuan in cash reserves. Because he is self-employed, when applying for a loan in 2018, the bank used the average income of 2017 and 2016, which were his two highest-earning years as a real estate agent, giving him very strong borrowing capacity. Strategy: borrow money when your borrowing capacity is at its peak, not when you need to borrow.

Xiaobing, who had always been unable to borrow more for property investment due to high mortgage debt on his own home, used a private loan to pay off 300,000 yuan of his home mortgage. After releasing his borrowing capacity, he added mortgages on three investment properties and withdrew 700,000 yuan in cash, which not only paid off the private loan but also prepared 400,000 yuan for the next investment down payment. Method: Forcefully pay off the home mortgage, add mortgages on investment properties, use a 'surgical' approach to quickly repay the home loan—short-term pain for long-term gain—and from then on, say goodbye to loan difficulties.

Xiao Ding has a high income but no down payment. His father has no income but has a large RRSP. Using the bank's high-net-worth client program, they get a second mortgage on their primary residence, withdraw cash for Xiao Ding to use as a down payment on an investment property, and set up a gentleman's agreement that after four years, Xiao Ding will take out a second mortgage on the investment property and use the funds to repay his father's investment. Fighting corruption as close brothers, investing as father and son. Method: Two generations, money from those who have it, income from those who earn it, investing in partnership form, and teaching financial knowledge by example.

Xiao Wu, after selling his owner-occupied home, received 700,000 yuan from the sale. He did not immediately buy another home to live in, but first rented a place and used 400,000 yuan as a down payment to buy two investment properties. Only after renting them out did he purchase a new owner-occupied home. Strategy: The best time to buy investment properties is when you get rid of your owner-occupied debt. Once the rental properties generate rental income, it can offset the debt of the investment properties, so it has little impact on borrowing ability when buying an owner-occupied home.

The aforementioned methods are not common and are considered unconventional practices in real estate investment; only investors who are very familiar with bank mortgage policies and have strong confidence in real estate investment would occasionally use them.

4 Real Estate Investment Strategies That Cut Off Their Own Lifeline

There are three levels of cooperation: a community of shared interests, a community of shared undertakings, and a community of shared destiny. In real estate investment, the cooperation between investors and real estate agents, lawyers, accountants, and renovation workers is a cooperation of shared interests; the cooperation with banks and tenants is a relationship of shared undertakings; only the cooperation between spouses can be considered a community of shared destiny. Many people cannot distinguish between these three levels of relationships: asking real estate agents for investment advice; doing things that banks do not allow; thinking of ways to raise rent or evict tenants. Real estate agents help you find properties and complete transactions according to your requirements, but they do not necessarily have real estate investment experience. The bank is your biggest partner: you pay 20% as a down payment, the bank lends 80%, the bank holds the majority, receiving only interest without dividends. Where else can you find such a major shareholder? Yet some people are never satisfied, illegally subletting or modifying the property after handover, engaging in activities that damage the bank's collateral. When refinancing, the bank needs to conduct an on-site property assessment, and properties with illegal modifications or illegal rentals are absolutely refused for refinancing. The relationship between landlord and tenant is also that of business partners; paying rent on time and maintaining the property makes tenants good tenants and quality partners. Let go of the dream of getting rich from rent alone; no one becomes very wealthy solely from rent. People who buy stocks know they should buy growth stocks rather than just dividend stocks. Why can't real estate investors understand this concept and keep making things difficult for their business partners?

Investment properties—buy, hold, refinance, continue holding, and use the cash from refinancing to buy more investment properties—is truly the proper path for real estate investment in Canada. Rooming houses are the source of all criminal cases, fires, and other tragedies, which is why banks absolutely do not provide loans for rooming houses, nor do they allow refinancing for them. Many Chinese insist on cutting off their own lifelines by illegally modifying and subletting properties, severing their relationship with the bank, turning assets with capital extraction potential into rigid assets, and scheming to scrape pennies from tenants in walls. If you regard 'buying houses to collect rent' as real estate investment, even an elderly lady can do it. Yet many Chinese in Canada, who not only have high assets but also high qualifications, focus only on painstakingly collecting rent without knowing how to cooperate with banks, refinance existing investment properties, and then buy a new investment property with zero down payment. In news reports of various tragedies in rooming houses, Chinese landlords often appear; renting a room for a few hundred dollars inevitably attracts certain types of tenants. The public does not see this as helping the poor, but rather views such landlords as unscrupulous. Rooming houses are not only unacceptable to banks, but are also morally, rationally, and legally indefensible. To risk enormous property assets just for the minuscule profit of rent is genuinely difficult to understand.

Other 'investment' activities that self-disrupt regular channels include: buying rundown houses to demolish and rebuild for resale, buying rundown houses to refurbish for resale, and short-term rentals in a guesthouse style. These all transform capital-intensive investments into labor-intensive ones, forcibly raising house prices or rents with restless hands. Speculating in real estate, like speculating in stocks, is market arbitrage, and no investment market offers stable and risk-free arbitrage opportunities. Even if such opportunities appear, they are very short-lived. Speculating in real estate with a fast-in, fast-out approach is highly risky, and like arbitrageurs in other markets, occasional successful speculators can be defeated by the last failed trade and then leave the market for good.

Summary: Real estate investment, here specifically referring to urban real estate investment, is not simply buying a house to rent it out as a landlord, but a process of executing a planned mortgage strategy. Only when one converts to a mortgage strategy executor can one become a qualified real estate investor. Urban real estate investment, as the moderator of the Reservoir Forum said, is about building an asset portfolio centered around mortgages.