Historical article note: This article was originally published on 2019-04-18. 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.
Real estate investment by ordinary people in China is called "speculative property investment." People who invest in real estate are often led by the media to be associated with Wenzhou property speculators, coal bosses, or uncles with official positions. Owning multiple properties in China is not easy, not because people don't want to invest in real estate or because house prices are too high, but because there is a strong collective envy of wealth in society. The government also follows public opinion by implementing purchase restrictions, sales restrictions, and loan limits to crack down on property investment. Even back in the era when people’s purchasing power was restricted with food coupons and meat coupons, there was a black market to bypass these restrictions. When material wealth became abundant and there were no more coupons, the black market naturally disappeared. If China had no shortage of houses, there would be no need for purchase limits, and the market would naturally use money to identify who really needs to buy a house; if there is a shortage of houses, developers need to be treated well to increase supply. The methods for bypassing real estate restrictions introduced on the “Reservoir Forum” are laughable; using divorce to bypass purchase limits is the most basic trick. The imagination and wisdom of our nation, which prides itself on its most noble bloodline, are fully unleashed in the pursuit of real estate wealth. In Canada, families of average intelligence and income can freely invest in real estate without having to engage in extensive strategizing against the government and banks. The Canadian government even provides tax benefits to real estate investors; rental income is only taxed on the net income after deducting loan interest, property taxes, and other expenses. Most Chinese people who fail miserably in real estate investment in Canada are usually those with overly ambitious ideas, while those of average intelligence generally do fine. In Canada, investing in real estate allows one to be simple and straightforward; those who overthink or rush too much often end up failing.
01 First avoid those investments that are most likely to fail
A certain Chinese construction company is seeking bankruptcy protection; a real estate project planned by a certain Chinese developer has become stalled... In Toronto, such news appears every year. From publicly available information, the biggest failures in real estate investment by Chinese people all occur in real estate development. Wang Shi's first book, "Roads and Dreams," was published in 2006, and his view on building houses overseas is: unless cooperating with local developers, Vanke would not build houses abroad. Feng Lun's book, "Fierce Years," was published in 2017, and it introduces three models of real estate development in the United States, citing and praising the development model of The Related Companies, where developers only contribute 5% of the funds but receive 45% of the profits; in other words, local business-savvy craftsmen (developers) act as producers and directors and end up receiving nearly half of the profits. Even these two godfather-level tycoons are cautious in overseas real estate development, yet some people insist on testing fate—then losing their vests becomes easy to understand. When discussing the current real estate development model in the U.S., Feng Lun humbly and vividly remarked: "We (China) are like five-year-old children now, seeing older brothers and sisters holding hands and wanting to know what 'grown-up matters' come after holding hands." In China, having developed real estate, borrowing money to buy land, then mortgaging the land to a bank to borrow funds for construction, and repaying the loan after selling the property, people think they can 'copy' and 'paste' this in Canada. But the hand-holding of these five-year-olds and the hand-holding of adults is fundamentally different. Many Chinese developers spend a large amount of cash just to buy land; lacking development experience, local banks simply won't issue construction loans. Furthermore, the most profitable part of real estate development is changing the original land use, for instance from agricultural land to residential land, yet Chinese developers are all novices, making it difficult to gain approval from local councils and neighbors. Development is not something that just throwing money at it can accomplish; real estate development is a skilled craft that requires first earning the trust of local government and the community, and even after paying the 'tuition,' outsiders may still fail to master it. Some things just can't be done before the right age. This money in development—if you don't earn it, fine, but if you pretend you can and can't, it can be fatal.
Investment in residential housing is like an elementary school course; investing in commercial properties or multiple residential units is like a middle school course. It's more prudent to first do well in residential property investment before attempting commercial real estate investment. In Canada, each person can apply for mortgages on up to 10 residential investment properties, and a married couple can have up to 20. Even without attending the middle school-level real estate investment courses, just graduating from the 'elementary' level is enough for a lifetime of wealth. Unfortunately, some people come to Canada and immediately take the 'middle school' exams, and it's normal to fail. Many buy cemeteries, ice cream shops, vacation homes, farms, wineries, hotels, gas stations, motels, and not only fail to gain profit but also end up deeply trapped. Commercial real estate investors with weak foundations are similar to Chinese who rush into real estate development: they rely solely on inertia from their success in China and can't rely on luck in Canada. Copying is easy, but where you paste it is crucial; if you paste it in the wrong place, you will suffer. Most Chinese only began to understand real estate around 1998, and even the earliest participants have only about 21 years of experience, while Canadian real estate has a 150-year history. Many practices from China seem too naive when applied in Canada. Don't blame the commission-taking 'professionals' for deceiving you; they often lack experience themselves and can't discern what is good or bad. Living in Canada a little longer is the only way to find truly genuine professionals. In addition, I recommend a book to everyone: 'Rich Dad’s Guide to Real Estate Investing' from the Rich Dad series, which details experiences and lessons from North American real estate investment, legal foundations, and tax policies, with particularly detailed information on commercial real estate investment. It is best not to invest in Canadian commercial real estate without reading this book at least twice. For Chinese people in mainland China, this book is useless because the property, transaction, and tax systems are completely different; the Chinese edition of this book is only suitable for Chinese in Canada and the United States.
Those who fall into the two big pitfalls mentioned above are usually newly arrived investment immigrants. Real estate is a huge pool of wealth; losing tens of millions in it might not even make a ripple. If you don't seek trouble, you won't get into trouble.
Step 1 in Real Estate Investment: Applying for a Mortgage
China has a real estate hero, known among people in the circles as 'Oshen.' He is like Ren Zhiqiang, consistently speaking the truth year after year and long at odds with the empty forces. His slogan is 'Science has not yet been popularized, and truth still needs to be defended.' Oshen's wealth creation view is 'building an asset portfolio centered on mortgages,' based on the fundamental ideas of Austrian economics and the fact of China's excessive money issuance. The basic idea of Austrian economics is market determinism—only individuals can make behavioral decisions. Suppressing demand or restricting supply only pushes housing prices up. Every macro-control effort actually drives up housing prices, so Oshen despises all government actions to regulate housing prices, and history has proven him right. The situation of China's monetary over-issuance has been hidden layer by layer. Just looking at the inflation data from the National Bureau of Statistics is deceiving. The greatest beneficiaries of inflation are debtors, and the worst off are creditors, so borrowing champion Wang Jianlin became the richest man. Over the past 17 years, Oshen has desperately taken on housing debt, with cash flow repeatedly at risk of breaking, and now the asset portfolio centered on mortgages is worth 1 billion RMB. Borrow money, put the house under your own name, and wait for the flood of money to grow the assets under your name; in fact, you only need to overcome the difficulty of obtaining a mortgage. Oshen's experience is that in real estate investment, 80% of the time is spent finding loans, and 20% of the time on finding houses and handling transactions. My practice and observations are the same: the process of real estate investment is the process of finding loans. There is only one reason—the principle of leverage: the fulcrum is the down payment, which you provide; the lever arm is the bank's loan; the force comes from income. The first step in investing in real estate in Canada is the same as in China: finding loans.
Step 2 of Real Estate Investment in Canada: Prepare to Refinance the Mortgage
Last week's article, 'Where Investment Begins,' discussed a point: an asset must be able to convert into capital to enjoy the greatest benefits of the capitalist system. If you take out a loan to buy investment property A, then A is just an asset that can generate investment returns and maintain leverage usage. After holding A for a period, the mortgage balance gradually decreases. If you refinance property A, withdraw cash, and use it as a down payment for investment property B, A then functions as capital. Of course, B can also obtain a mortgage, using the funds withdrawn from refinancing A as the down payment, and when buying B, it is even possible to achieve zero down payment. This kind of investment is the most efficient. In Canada, this investment method is achievable. Why is it said that the second step in Canadian real estate investment is preparing to refinance the mortgage? The reason is that when buying A, you should already prepare for refinancing. If the price of property A is too high and the loan amount is too large, it will be difficult to refinance later, and the opportunity to turn A from an asset into capital will be small. Therefore, when choosing an investment property, it is recommended to buy low- to mid-priced properties in areas with active transactions. After buying property A, if it is illegally rented to multiple families or used for Airbnb or other short-term rentals, the bank may refuse refinancing because the property does not meet its requirements. In this case, A only retains the asset function and loses its capital function, making such an approach not worthwhile. From the first day of taking out a mortgage for an investment property, one should prepare for future refinancing, ready to convert the existing asset into capital. Therefore, the second step in Canadian real estate investment is preparing to refinance.
Step 3 of Real Estate Investment in Canada: Strive to Reduce Your Primary Home Mortgage
The factor that most affects the strategy of investing in multiple properties is the mortgage loan on a primary residence. Mortgages for primary residences, car loans, student loans, credit cards, and personal lines of credit all fall under consumer loans, collectively known as 'bad debt.' Among all bad debts, the loan for a primary residence is the largest single item, which is why several books in the 'Rich Dad' series explain why a house is not an asset, because a primary residence is a consumer expenditure that takes away from household income, whereas investment properties are assets that generate income for the family. Each month, for every 100 yuan of bad debt, borrowing capacity decreases by 25,000 yuan. Conversely, for every 100 yuan of income, borrowing capacity increases by only 6,000 yuan per month. From the perspective of borrowing capacity, there is an inequality between debt and income. Reducing bad debt is more effective at improving borrowing capacity than increasing income. The ideal situation is to have no loans on a primary residence, with all mortgages on investment properties. Doing so not only prepares one for early retirement but is also the best arrangement from a tax perspective. Accelerating the elimination of primary residence debt also requires leveraging mortgages on investment properties to achieve it.
05 Real estate investment cannot be without continuous income
In the past, in 'A Detailed Explanation of the Pros and Cons of Leverage,' when explaining the principle of leverage, we said that the down payment is the fulcrum, income is the force, and a mortgage loan is the lever arm. All three elements are indispensable; otherwise, real estate cannot be leveraged. Whether applying for a loan to purchase a property or applying to mortgage an existing property, income support is required. Some people are reluctant to pay income tax, which directly affects their income and borrowing capacity. Whether the saved taxes are worth it will only be known at retirement. From a life cycle perspective, everyone's income peak lasts only about 10 to 15 years. This is also the golden period for real estate investment. Too early doesn’t work, and too late means missing out. Delaying gratification and, during the period of highest and most stable income, making the greatest effort to put as much property as possible in your name is much wiser than tirelessly working without end.
From ancient times to the present, one of the ways humans have accumulated wealth is by laying bricks for security. Real estate, as a repository of assets, has been tested for thousands of years and rarely collapses, making it a true wealth preserver. Remember the story of the Three Little Pigs? It is still a bedtime story for three-year-old children today. Not laying bricks for security, even children know, is not a serious matter.