Real estate investment

Mailey Rogers blog

December 2, 2016

Last week, we hosted a real estate investment information event at the Kay Meek Studio Theatre. We had a very strong turnout of clients and interested investors who contributed to a lively discussion with our presenters. The question and answer format was very successful, and encouraged engaging conversation throughout the event. Thanks to all who joined us!

For those who weren’t able to attend, we are pleased to share some of the key points of the discussion, led by myself and Jeffrey Olin, President and CEO of Vision Capital.

One main takeaway emphasized was that owning your own home is a lifestyle choice and shouldn’t inherently be regarded as the best investment decision.  Careful consideration of the costs of home ownership should be weighed against how your lifestyle could improve through downsizing or choosing to rent. There are always options!

Mr. Olin spoke about investing in real estate through financial securities. One of the advantages he pointed out was that when investing in real estate through financial securities, it is possible to buy at a discount (something you can’t do when physically purchasing real estate, or short-selling overvalued real estate). Real estate securities also allow an investor to more easily diversify geographically and by property type (multi-family apartment, office, retail, retirement/assistant living, etc.). Additionally, when you invest in real estate securities, you can buy and sell quickly with little cost. Alternatively, direct property investing can be quite illiquid and have significant costs associated with buying and selling (realtor’s fees, property transfer tax, etc.). Jeffrey Olin had some excellent points, and his performance as the Portfolio Manager of a successful securities fund is impressive, and warrants further consideration as a way to invest in the real estate sector.

In my portion of the presentation, I discussed home ownership and its relationship to your net worth. Homeownership is often viewed as “the Canadian dream” and can represent more than 50% of one’s total net worth. From a financial return perspective, one must look at more than just the appreciation of the asset (your home). Uniquely, a home is an asset with a negative dividend. In addition to the mortgage interest expense, a homeowner has several expenses that a renter does not. Alex Avery, author of The Wealthy Renter, suggests we should add maintenance costs (pegged at 2% to 5% of the home’s value), property tax (pegged at between 0.5% and 1.5% of the home’s value) and building insurance (versus contents insurance for a renter).

The Wealthy Renter also suggests that we all calculate the “implicit rent” we pay to live in the home we own – even if it is mortgage-free. When adding the opportunity cost (the potential return that the home’s value could generate in alternative investments) to the maintenance costs, property taxes and additional insurance costs, it is the norm to find one is paying an “implicit rent” of 7% to 8% of the home’s value! Try calculating this for your own situation.

Owning a mortgaged home is a forced savings strategy. It can be argued, however, that renting and investing the difference between the rent and the cost of home ownership could bring greater financial wealth with much fewer headaches. This is something we should discuss – every situation is different, but we can find out what’s best for your family.

In closing, we would like to share this great article from the National Post featuring our speaker, Jeffrey Olin. Thanks again to Jeffrey for taking the time to make this interesting and very valuable presentation to our clients.