Historical article note: This article was originally published on 2019-05-02. 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.
Since the discussion about how to invest in multiple properties in Canada started in 2016, many friends have not only contacted me via WeChat but also visited my office in person to understand the principles and procedures of investing in multiple properties. Many people are interested in real estate investment, but very few truly master the rules. Even investors who are capable and take action often encounter difficulties in getting additional loans after buying 2 or 3 properties. Among the friends who come for consultation, many have already become 'mortgage vegetative individuals,' with moving being the only option and no effective way to remedy the situation. How can one continuously maintain borrowing capacity and buy several more investment properties? In addition to watching my 2.5-hour video on YouTube, you should also 'bookmark' this article as an error-prevention manual and review it regularly. The video link: https://www.youtube.com/watch?feature=youtu.be&v=jrKyvtCoSnE&from=groupmessage&isappinstalled=0&app=desktop. This video has already received 6K views.
01 Why Invest in Multiple Real Estate Properties
First of all, Canada is a typical developed country. Labor laws have already started to protect workers, and capitalists, entrepreneurs, and business owners have slowed down their pace. Everything is much slower than in developing countries. The GDP growth of developed countries is very slow, far lower than that of China. People who immigrate to developed countries will find a sense of helplessness from not being able to exert force, because the wealth stock in developed countries is very large, but the increment is small, and there are few opportunities to create wealth. Developed countries have passed the stage of wealth creation. The wealth increment in society is limited, but the wealth stock is huge. For new immigrants to surpass the wealth of existing residents, the best way is to use leverage and take a portion from the existing wealth pool. If new immigrants work from nine to five like the old residents, the wealth gap will only grow larger.
Secondly, interest rates are the compass for asset allocation. In a situation of low interest rates accompanied by inflation, borrowing is advantageous; in a situation of high interest rates with deflation, investing in fixed-income bonds is advantageous. The world has been in a low-interest-rate environment for 10 years. The Federal Reserve originally intended to restore interest rates to normal to encourage savings, but over the past decade, government and private borrowing has been so large that raising rates too quickly might not have deleveraged, but rather could have broken the leverage. My personal view on interest rates is that central banks have relatively strong and easy control over short-term overnight rates, but controlling long-term bond yields is very difficult, especially after implementing QE, since raising rates afterward becomes particularly challenging. For example, Japan was the first to use QE and has been trying to raise rates for 18 years, but every attempt has failed. If low interest rates persist over the next 3-5 years, then borrowing will be the way to accumulate wealth. As Oushen said, 'building an asset portfolio centered on mortgage loans,' the historical condition is a low-interest-rate environment. Just imagine, if interest rates were 10%, would you still take out a loan to buy a house? And if the rates are 3-4%, why not take a mortgage to buy a house?
Third, a self-occupied home is a consumer good and does not generate rental income, so it cannot be classified as an asset. Moreover, a mortgaged self-occupied home is considered the largest 'bad debt.' Only investment properties that can generate rental income can be considered assets. Of course, the more assets, the better. Real estate, as an asset, has the function of collateral; every brick can be converted into capital for the next investment. The more investment properties you buy, the more assets you have, the more capital you can extract, and the more capital you have, the more assets you can acquire. Assets are tools to balance income throughout our lifetime: when income is high, store it in the asset warehouse; when older and weaker with lower income, withdraw cash from assets to enjoy retirement. If in your prime, with income far exceeding expenses, turning income into secure investments is an important way to accumulate assets and capital.
In addition to the three main reasons mentioned above, there are also: Toronto's population will continue to grow, and it is believed that later new immigrants will have stronger purchasing power, leading to a steady increase in housing prices; the supply of new homes in Toronto is slow, and the vacancy rate is extremely low, indicating strong demand for real estate and secure rental income; Canada's financial system is conservative, which safeguards the healthy and stable development of the real estate market; family investments are mainly guided by conservatism, and one should not easily try unfamiliar asset repositories. Real estate, having been tested over millennia, is a safe asset repository...
02 Life is short, what should one do if there’s no time to save for multiple house down payments?
In the Rich Dad series book 'Real Estate Investment Guide,' Chapter 16 features Rich Dad's advisor, real estate investment and financing expert Wayne Palmer, sharing his investment experience. His experience was the first time I saw someone write in a book that the most, most, most important factor in real estate investment—time—is treated as a key factor for investing. Wayne Palmer's real estate investment formula is as follows: Wealth = Transactions × Opportunities × (Intelligence + Capital) ÷ Time Spent. If completing a transaction and creating wealth takes too long, it might not be worth it and could even lead to losses. Most economists, when studying and explaining economic behavior, also do not consider the factor of time spent. What's most baffling is that in all standard economics textbooks, there isn’t a single one that analyzes the time return on investment or production. Every problem, especially economic problems, has a constraining factor, which is time. For personal investment, achieving financial freedom at 55 years old versus 85 years old—the latter's freedom is basically meaningless. In the book 'Little Women under Zhengyang Gate,' there is a scene about barter trade with Russia, where perishable fruits were chosen as products, and due to transportation delays, the fruits all rotted in the cart, almost resulting in a total loss for that business deal. The importance of time can never be overemphasized. I saw an article title once in my social circle roughly saying that wealth accumulation is a matter of three generations. I didn't open it because I thought this was an irresponsible view of one's own life and something that puts one's descendants at a disadvantage. Wealth accumulation must be completed within one generation; otherwise, it is meaningless. Everyone comes into this world in extreme poverty, naked, and leaves in a similar state, but during the process, it cannot be that way. If one relies on the second or third generation, then what is the meaning of this life? In the third volume, chapter eight of Zhang Wuchang’s 'Economic Explanation,' titled 'Transaction Speed and the Futures Market,' there is a slight discussion on transaction time and the issue of time spent, but it is not explored in depth. I think this is the difference between economists and investors or entrepreneurs. A person risking their own money cannot ignore the time spent on transactions; the limitations and scarcity of time have a fatal impact on investment and trading. However, for economists, this issue is not important.
Investing in multiple properties, saving for the down payment by yourself, over a lifetime you’ll only own about three properties, no more. Therefore, if you are to buy more than three investment properties in your lifetime, the key factor is: purchase investment properties during the 5–10 years when your income is most stable and highest, and keep leveraging existing investment properties; try to keep the mortgage balance on your primary residence as low as possible—ideally, the mortgage balance on your primary residence should be less than three times your annual income, and it’s best to pay off the primary residence mortgage; plan the timing of buying investment properties carefully, keeping around a one-year interval between purchases of two investment properties; control the mortgage amount for each investment property, with a single loan amount below four times the household’s annual income; unless you plan to change your primary residence, do not leverage your primary residence mortgage; never damage the capital value of the properties yourself, do not rent illegally, and do not illegally renovate; avoid buying properties that most banks won’t provide loans for; try not to claim depreciation/CCA on investment properties. The ideal of investing in multiple properties is very appealing, but the reality is tough. During the 5–10 years of accumulating properties, you need to postpone other desires, be willing to pay more taxes, make every effort, focus all attention, quickly build real estate wealth, and form an 'asset package centered on mortgages.' Unless interest rates rise significantly, do not easily sell any investment property.
The experiences summarized above are easy to understand for friends who have already read the previous 65 articles of the "" public account. I recommend everyone to "subscribe" to my public account and read past articles.
03 Lessons from Multiple Property Investments That Were Abandoned Midway
Lesson one, the most serious lesson, is continuously taking out home equity from your primary residence to use as down payments for investment properties, until one day, the mortgage balance on your primary home becomes so high that you can no longer qualify for an investment property loan. This is one of the main reasons many people who originally had the conditions to invest in multiple properties end up giving up halfway. This situation is what I previously referred to as the 'mortgage vegetative state' phenomenon. Once this symptom appears, you either move to live in the house with the smallest mortgage or return to the status of a new immigrant, gradually accelerating the repayment of your primary residence loan over time—there are no shortcuts. Remember, do not increase the balance and monthly payment of your primary mortgage unless you are planning to move to a new primary residence.
Lesson Two: For investment properties, a single loan amount exceeding five times annual income makes it impossible to refinance the investment property for many years. This situation arises when the borrower falsely claims that a property intended for investment is for self-occupation, resulting in a single investment property loan exceeding five times the household's annual income. When this happens, the investment property cannot be refinanced for many years, stripping the property of its capital attributes and turning it into a 'rigid asset,' significantly increasing the time required for multi-property investment plans and reducing capital liquidity. Remember, when choosing investment properties, try to select ones in densely populated areas with active transactions but low unit prices, for example, second-hand CONDOs in Toronto. The single loan amount should never exceed five times the household's annual income, and it's best to keep it around four times. Such properties are the easiest to refinance, allowing you to extract capital from the bricks in 2-3 years. A friend bought a condo worth $730,000 in Toronto in May 2017. In 2019, its refinancing appraisal value was $940,000, with a household annual income of just over $190,000 and a very low outstanding mortgage on the primary residence. In this case, after refinancing, he was able to buy another investment property immediately with zero down payment. Let's review the wealth accumulation formula: Wealth = Transactions x Opportunities x (Intelligence + Capital) ÷ Time spent. The more capital, the better, and the shorter the transaction time, the better.
Lesson Three: Self-destructing assets. For real estate investment in residential housing, in order to continuously leverage it, it must meet the bank's requirements for property. If, after buying a residential property, someone makes illegal modifications or illegally subleases it, the bank can no longer offer additional loans, and the property then becomes a "rigid asset." Many people are very interested in the fact that the capitalist system can create enormous wealth; there are countless books, from Marx to modern economists, discussing the power of capital. In the books I’ve read, the one that explains most clearly how capitalism can create wealth is "The Secrets of Capital" written by a Peruvian scholar. He looks at why capitalist countries are wealthy from outside the capitalist system and observes that the residents of capitalist countries, precisely because they live within the system, fail to recognize its true nature. For example, the author found that in Mexico and Peru, completing a property transaction can take nearly two years; in many developing countries, much real estate lacks full property rights. For instance, in China, many universities build houses for professors to live in; professors pay 1 million yuan for the right to use them. Because the professors do not own the property rights, they cannot use these houses as collateral for additional loans, and the 1 million yuan becomes sunk into the asset. All such properties with limited rights are "rigid assets." The proportion of rigid assets in non-capitalist countries is staggering; they cannot be converted into capital or means of production, and the transaction process is not only legally unprotected but also time-consuming and cumbersome. For those of us living in capitalist countries, the capital attribute of self-destructing assets is extremely foolish and short-sighted.
Lesson Four: Owner-occupied housing, relying on rent to support the mortgage, is hard to get out of. Many people treat renting out basements as a type of real estate investment, but if it’s an owner-occupied house being rented out, it only indicates one thing: the house was bought too expensive, and the owner cannot afford it, so they need to rely on rent to support it. For owner-occupied homes, it’s enough that it’s livable; we don’t live to show off to others, and there’s no need to become a slave to the house. Debt from owner-occupied homes is the biggest obstacle to real estate investment, and those relying on renting to support the mortgage may spend their whole lives holding onto the house without escape. In high-quality communities, very few homeowners rent out basements. Some semi-detached house communities have serious renting issues, with cars parked all over the streets, and these community environments are artificially damaged by the homeowners, leading to slow property value growth. If you have already chosen such a community, it is recommended to move out as soon as possible. Spending a lifetime holding onto a single house while the community environment is being degraded is the slowest way to accumulate property for retirement through housing. It is advised to get rid of this treadmill-like approach of running hard but staying in the same place as quickly as possible.
Lesson five: Every bank has its own mortgage policy. For investment properties purchased, mortgage loans can only be obtained from a very few banks, which limits the implementation of multi-property investment plans. The current multi-property investment loan policy is: a borrower can have a maximum of 11 properties under their name, with no more than 10 being investment properties, and no more than 5 loans at a single bank. Loans exceeding this limit are considered commercial loans, not residential mortgage loans. Each bank also has requirements for the properties; for example, four banks do not provide loans for investment properties under 500 square feet, while only one bank does. Therefore, investors buying investment properties under 500 square feet can only get a loan from this one bank, meaning they will not exceed five properties anyway.
Lesson six: reluctant to pay taxes. I've mentioned this many times before, but I'll repeat it here: self-employed individuals can decide for themselves how much income their company gives to them personally. Mortgage loans depend on personal income, not company income. If a self-employed person pays themselves too little, it will hinder plans for multiple property investments. Each bank evaluates rental income differently; five banks, five different calculations. Some banks use the net income of investment properties to offset debts, so claiming depreciation/CCA on investment properties can reduce borrowing capacity. During the period of leveraging, be willing to pay taxes, and think about tax savings only after accumulating properties.
For readers who do not own property or own fewer than three properties, this article is relatively difficult. It is recommended to 'bookmark' it and read it repeatedly. Topics on investing in multiple properties are very popular, but there are very few practitioners. In the Golden Horseshoe area, the total number of people owning multiple properties is only 120,000, accounting for about 1.8% of the total population. But who provides all these rental properties? The answer is obvious: investors who understand the techniques of multiple property investments hold more than one property and are already far ahead of those who have not yet started. Rome wasn't built in a day. You are welcome to subscribe to the official account and read the previous 65 articles to understand the logic and techniques of investing in multiple properties.