Real estate, still a good investment?
I say it right away, I copied the title of this article. In fact, I want to write a counter-article to this one published in La Presse . A less knowledgeable reader will emerge from this previous reading by saying to himself that real estate is not profitable. Go read it if you haven’t yet before reading the rest of my article.
In this article from La Presse, the couple earns $ 175,000 a year. They live in a house worth $ 675,000. In 2016, they acquired two triplexes. Their family budget has been in deficit by $ 1,500 per month for a long time.
Obviously, we do not have all the details or all the figures in the article. But what tires me about the proposed solutions is that the “experts” recommend that they sell their triplexes to settle other debts, completely (in my humble opinion) bypassing their biggest financial problems.
Get advice from a financial advisor …
Questions about triplex mortgages
First of all, something is wrong with the mortgage debts of the two triplexes. Paid $ 370,000 per building in 2016, the mortgage balances are $ 350,000 per building, two years after purchase. Either they have already refinanced their buildings since the purchase to get out of the equity, or they have been 100% financed, which is very unlikely with conventional financing. Even considering the current values of $ 425,000, the loan-to-value ratio is 83%. So we seem to be in the presence of creative investors for financing. Normally, when you buy, it cannot exceed 80% when you are not a homeowner. So I am not surprised to see that the buildings do not have surplus cash.
Is real estate still performing well? I believe that here we are in a case where the buyers either miscalculated their operating expenses and / or their debt ratios on these two buildings are too high. Were the buildings purchased at the right price? Looks good, because they paid $ 370,000 and now it’s worth $ 425,000. That’s a great capital gain in just two years.
Basically, a duplex or a triplex is rarely very profitable. Cash surpluses are very often tiny, unless you put in a huge down payment up front, which doesn’t appear to be the case in this article.
Huge expense is ignored in the equation
Their biggest expense in my opinion: their family home. Valued at $ 675,000 with a mortgage of $ 367,000. I dare to imagine the municipal and school tax accounts. Probably around $ 6,000 a year, or more. It all depends on the city of course. Not to mention the monthly mortgage, insurance, maintenance.
Owning a house to live in is not an investment. It is a pure expense. For a salary of $ 175,000 per year for two, personally, I wonder if it is not to live beyond one’s means to have such an expensive residence, considering that they have three teenagers in school. private.
Bad Advice from a Financial Planner
The article literally says:”The more time you spend doing the renovations yourself, the more money you’ll end up making. But if you have to hire someone every time a tenant trashes the property or there is a water leak, you will lose money, ”recalls the financial planner.
First, it is so bad advice, followed by a myth that is being propagated by the counselor. I would like to remind him that it is forbidden for a landlord to do renovation work himself in a rental building. Unless he is the owner of the said building (for 4-plexes and less), which is not the case for our two speakers here.
Second, ” whenever a tenant trashes the home”. I’m making a big assumption here, but I think we’re dealing with a financial advisor who doesn’t own a rental property or who has watched too much Proprio as a hostage . It’s VERY rare for a tenant to live. SACCAGE a home. Small wear and tear here and there, yes. But ransack a home, then I ask myself the question if this advisor does not have an advantage in investors investing in funds that she sells and avoids the “real estate at all costs. There are of course a few rare exceptions where properties are heavily damaged by occupants. His phrase is still exaggerated to the bone to scare.
Third, I will always advise investors to take in experts to do their repairs and renovations. It’s true that at first in real estate, we all tend to do that, then with experience, we realize that it is a mistake. To each his job. Change a toilet yourself? It won’t even cost the plumber $ 150 in time to do it right, tax deductible on top of that. My list of examples could be long.
Extreme solution, but paying off in the long run
My recommendation, without knowing all the details of their lives: Put the main residence up for sale, to either decrease the value of the new residence, reduce tax and maintenance expenses. Or even better, to go and live in one of the two triplexes. Not an easy decision with three teenagers at home. Impossible? So not. Even if it would only be for 3 or 4 years, before moving back to a house that is more reasonable in terms of value.
The lady says it: she wants to find a solution for her retirement. This is the solution for a few years, abandoning the expensive home for a proprio-occupant plex. Their monthly expenses would drop drastically. A little “discomfort” of 3 to 5 years in a plex, for long term financial security, all families should do this rather than starting directly with the purchase of a home. Is it possible to bring the whole small family into one of the accommodations and / or to modify a home so that it becomes possible?
Selling one of the triplexes now, is that really the best solution? Perhaps. As long as there isn’t a huge penalty for breaking the mortgage. Remember to count the taxes on the capital gain.
For a secure retirement, I would do the opposite of what the advisor recommends. I would probably keep the triplexes and look to cut expenses elsewhere. And there, it’s very personal, but selling triplexes to focus on RRSPs and TFSAs … when they’re already having trouble making ends meet, I wouldn’t be.
Said a guy (me) who wound up his RRSPs in 2018 to focus on real estate. The article advisor would not like me at all! (Don’t worry about me on the fiscal side, I have planned my affairs).
I find that the title and the content of the article referred to at the top of the page suggest that real estate is not profitable. I don’t believe this family’s problems are caused by real estate, but by their other life choices.