The Canadian Investor - Saving For A Down Payment In An Expensive Real Estate Market - Part 2

Episode Date: November 7, 2024

This is the Part 2 of Saving For A Down Payment In An Expensive Real Estate Market. You can listen to Part 1 with the links below: Part 1 - Apple Podcast Part 1- Spotify  Part 1 - Web Player In this episode Simon is joined by Dan Foch from the Canadian Real Estate Investor Podcast. We dive into strategies for building a down payment to purchase property. We explore scenarios that highlight the impact of different savings and investment strategies. For those falling short, we discuss ways to increase your savings, such as increasing income or cutting costs. Additionally, we break down more complex strategies, from traditional balanced portfolios to higher risk asset allocations involving Stocks, bonds, gold and Bitcoin highlighting the risks and potential benefits of each strategy.   Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. Welcome back to the Canadian Investor Podcast. I'm here with Dan, not Dan Kent, Dan Foch from the Canadian Real Estate Investor Podcast. We're doing our second part on investing to build a down payment for a property to purchase, whether it's a home or an investment

property. So we talked about the type of registered vehicles that you can have access to in the part one of the episode that is on the Canadian Real Estate Investor Podcast. So if you haven't listened to that episode, stop right now, go listen to it. It will be in the show notes, the link, and then come back and listen to Dan provide his infinite knowledge on real estate. Yeah. Yeah. I'd really appreciate the less exciting Dan here, but yeah, would really appreciate if anybody who's interested would take a listen to our first half of the episode and tune into some of the other episodes on the Canadian real estate investor stream. You might find them interesting. We talk a lot about mortgage

rules, a lot about mortgage rates and kind of debt markets and macro, especially because, I mean, international capital flows have a really big role in Canadian real estate because of foreign investment. And so, yeah, we take a little bit of an interesting spin on it. Yeah. Unless you find this small town in Canada that no one knows, then maybe it doesn't have as much of an impact. But we finished the last one with the taxable accounts or margin accounts, so basically the non-registered account. Now we're going to look at the different strategies that you can use to build a down payment to purchase a property. It'll depend on a variety of factors. So the three main

ones, at least in my opinion, are how much money can you save towards a down payment each year? How large of a down payment will you realistically required? And obviously, you know, this it's hard to say, right, because the market does move. And of course, as we've seen recently, government regulation and requirements can move pretty quickly as well. Do you need, for example, to get $15,000 for a down payment or do you need $100,000 or even more $100,000? So that'll make a big difference on what you'll do in terms of investment in those accounts while you build a down payment. And when would you like to purchase the home? So in other words, in those accounts while you build a down payment? And when would you like to purchase the home? So in other words, how much time do you have to make the money grow? So those are three factors that will have a big impact on the different type of strategies to use.

Why? Because I think it's pretty simple. Say you're likely to qualify on an income basis for purchasing a home, but you just don't have the down payment yet. While the homes you're looking at will likely require a down payment of $100,000 or more, and you're looking to purchase home in 10 years. So let's say that's your situation here. Well, first of all, it's going to vary depending how much money you can save, especially if you're starting from zero, from not much of a base. Say you only have $250 a month, $3,000 a year towards a down payment. Well, if you put your money in a savings account, I think you know, Dan, that you'll probably fall way short of your $100,000 goal. It's pretty tough to beat inflation in today's market. I mean,

even with the inflation coming down, I still think that the cumulative inflation of price increases on the cost of living that the average person, it's so hard to save enough when you're not making substantial returns. Your money has to be working for you in order for you to beat the cost of living and the market and inflation right now, I think. Yeah, exactly. And in this situation, I said, so after 10 years, let's just say you're getting 4% on your cash, right? Which is no guarantee. It could be less. It could be more as we've seen recently. While in 10 years, you'll get

roughly 37,000 in your savings account that pays 4%. So you're clearly falling way short of that 100,000. If you do this, then you'll have to, essentially, you'll have to choose between two outcomes. Nothing changes and you fall short. Or two, you're able to increase your savings per month during the time period and get some kind of windfall. You know, bank of mom and dad, inheritance, whatever it is. You know, if you're going to just use a savings account, these would be the two options. But of course, the last one that you could decide to do, and I know you have other ideas for that, but you could also decide to move from the GTA, for example, to a location if you're, you know, you don't require to be physically in the office, you can

work remotely to a location that is much less expansive than the GTA, for example. Yeah. I think we had a handful of different kind of ideas on how to deal with it. If somebody really wants exposure to real estate, either they own a house or, I mean, we talk to, I mean, Nick, my co-host on the Canadian Real Estate Investor Podcast, he doesn't own his primary residence and he owns more real estate than most people that I know. And so you can still get exposure to the real estate asset without it being your house. the cost of borrowing, down payment, et cetera. You can rent a condo for lower than the total cost of ownership if you were to buy it today, which is pretty wild. And so he can stay close to the action and have the same quality of life while keeping his capital free to invest elsewhere. And so he does what he calls long distance investing. So that's one way to get exposure

to real estate. And there's a couple of other strategies, which I'll talk about towards the end of the episode. But things like I mean, the government just made it easier to do what you hear called house hacking, they basically made it so that they're going to allow Canadians to actually put units in their in their houses and get better debt, more favorable debt programs to do that. And so that's kind of a blended strategy where you get the investment and the house all in one, right? Just got to lever up. Apparently, according to CMHC. Yeah, exactly. And I thought you were going to refer to Nick as the Batman, but I guess that's an old joke. Yeah. It's a couple of years old, but I guess

the second scenario, right? So I'm just going to, I'm giving these two scenarios just to show the different kind of situations people could be in. So same situation, you want to save up $100,000 over the next 10 years. You're starting from zero, but you can contribute $700 a month or $8,400 a year. Well, if you have that 4% interest in your savings account, you actually end the period with $103,000. So obviously, you know, there could be home inflation, you could require a higher down payment. It's a long time period. I do understand it. But, you know, if you're in the second situation, you definitely have a more realistic chance of achieving your goal without

taking that much risk. Essentially, you know, the biggest risk you're taking here is that inflation really picks up and you're not keeping up with inflation. So that is something to consider. But, you know, there are other things to look into. So what are their options if you're likely to fall way short of your required down payment? Well, the first one and the one that will likely make the biggest difference, and I did an episode recently, got a lot of traction, is, you know, just make more money and increase your savings rate. So I know it's easier said than done, especially in this kind of climate. You know, it's not as easy to ask for

raises or look for second jobs or, you know, gig work. But that is something you could look into. It could also be that, you know, maybe you were single and now you have a partner and you're simply able to save more on two incomes. Right. Things like that can happen. Second is cut your expenses. We talked about eating crab dinner. Well, you know, reduce your life expectancy and eat cheap food. That that would be another option. That's like, that's the way I play golf. It's like, you know, you want to get a better score. You just have to play fewer holes.

Yeah, exactly. That's it. So maybe it means getting a roommate. I mean, obviously you guys talk about house hacking for a period of time so that your expenses are reduced and you're able to put more towards your down payment. You can definitely, you know, get creative trying to come by. Maybe you get a little bit from the first one and the second one here. Consider a property that's less expensive in your current city. You know, maybe you look for a fixer upper. Maybe you look at condos. Maybe you look at an area that's less expensive or the classic up and coming area.

Sometimes they just end up staying up and coming for a very long time. But, you know, that's something you can look at. Consider moving cities, like I mentioned earlier, to a city that's more affordable. I could also being, you know, a bit less central, moving more in the suburbs where the prices are more affordable. where the prices are more affordable. Hope that real estate prices fall sufficiently enough that you'll be enough to have a down payment or hope for new government measures that may help you purchase a property.

And I put the last two because at the end of the day, hope is not really a strategy. But I think unfortunately it's a reflection of our high home prices and how unaffordable they are right now that um i think a lot of people feel like yeah that's their main strategy is just hope right now yeah i think or or the opposite of hope which i guess is just like you know be super negative and hope that them are not hope but uh you know like talk about the market as if it's this like deep demon that has wronged you and that you want it to crash and burn, which seems to be like kind of one of those other things.

I think a lot of cynicism is bred out of that, like that disenfranchised feeling that people feel when they're excluded from the housing market. No, I think you're absolutely right because they're sold this dream, right? And now they're getting in their top, supposedly top earning years. You know, they're out of school and, you know, they're hearing stories about their parents buying their first home in their mid to late 20s. And realistically, it's not going to happen for them for probably either ever or not until they're 30, 40 or even older. Yeah, I know. It's a tough situation for a lot of people to be dealing with. And again, like if you really, really do believe in property ownership as like, you know, it's a must for whatever reason, you can have both. Like we've talked about, and I'll get into it a little

bit more when we talk about the real estate focused strategies on how to build a down payment. Like how can you use real estate as a wealth building tool without owning your house to save a down payment? Because honestly, that's what I've done. Nick could pretty easily sell a couple of his investment properties or even refi a couple of his investment properties, realize that equity, and then go buy a house. He chooses not to, but I would say the returns are still substantial enough that you can use it as an investment to build the down payment. Most people just don't think about it that way. They think, oh, I have to buy the house and then I have to get on the rocket ship. And then once I've been on the rocket ship for five years, I can take some equity out of the rocket

ship, which is my primary residence and go buy an investment property. Who's to say you can't do it the other way around? No, exactly. And that rocket ship analogy is pretty good. You can ask people who bought a house in Florida in 2007, 2008, how that kind of mindset has worked out for them. Or Vegas, I think, was hit pretty hard in the U.S. Yeah, you can even ask somebody who bought Florida real estate in 2011, maybe, because I think they're not doing too well right now either. A lot of waterlogged rocket ships in that market for sure. Exactly. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free,

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surprised as I was that BMO, the Canadian bank, is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. So, you know, the reason why we're doing this here is because a lot of the time you'll see like kind of common advice i see um is just you know just put your money in a savings account or gic while you save for a down payment but i think let's be real here for a lot of people it's just and that's the reason i talked about these two scenarios just because this will just not cut it you know they're they're not going to be able to build a down payment especially if they want to live in one of those large cities. So having a different strategy with the FHSA, TFSA, RSP, that you're able to take a bit more risk, but at least you're giving yourself additional risk by doing this. So by taking additional risk, you increase the chances of losing money. And for each scenario, I'm actually giving a bullish,

neutral scenario, a bearish, and a couple of them I'll give extremely bearish because I want to show the different potential outcomes that could happen. And some of them, yes, you achieve the desired down payment, but in the bearish or extremely bearish, you actually lose like half of your money. So I think that's important to remember. Even if your time horizon is 10 years, it's not a very long time when it comes to investing. So some assets that I will talk about will do very well during very long periods of time, but could struggle even when you're looking at timeframes such as like 10 years. And especially if it's less, be careful of taking too much risk, especially if you have money in a registered account.

For example, if you YOLO, so you only live once type of investment, a super risky stock, let's say a single stock. And I've heard of this before, in your TFSA and you lose all your money and you've maxed out your contribution, well, that contribution room is just gone forever. If owning a home is not realistic, consider renting like you just mentioned and investing the money that you are able to save in a more balanced portfolio, have a longer term outlook. At the end of the day, from a financial perspective, I can give you a lot of different arguments that it makes the most sense to rent, especially now as you're kind of starting to see and rents will ebbs and flow depending on offer and demand,

obviously. But I think you can make cases where it's sometimes a lot more advantageous to rent and invest the money as well. Before I give the examples, anything you want to add, Dan? No, I think that, and I'm going to dive into this a little bit in my section, but a big piece of this is understanding that most people haven't done the math on, it would surprise the average person how little anyone has done the math on anything related to their real estate purchase, honestly. But if you haven't done a real cost-benefit analysis on renting versus buying, which I think if you're going to dive into that a little bit, but especially if you want to be near center ice in a top five Canadian city, nine times out of 10, you're in a condo. Realistically, you're not really renting a house, right? Cause you want to be walkable to work. You know, your, your house is almost like a pseudo hotel room for you. And so you, you know, you're getting a one or two bedroom condo and you, you know, you're the city is your, your, the rest of your house, your oyster. Yes. Yeah. And, and so, and that's, and for, for young people who want to

be, you know, spending more of their time and energy on work than their household, it makes sense. The thing is, condos, from just where they stand right now in the market, Toronto and Vancouver, I'll present a very clear example of how to run that cost-benefit analysis. But even if you owned the same condo that you would be renting for $2,500 a month, you actually would not be getting ahead. Even if you had no ROI on the down payment. So there's no opportunity cost on the down payment. So people really need to, and actually I would encourage people to just type into chat GPT. Like I'm looking at either buying a condo at this price or renting the condo at this price. Here's what the interest rate is.

Here's what the condo fees are. Here's what the taxes are. And give me a cost benefit on that. And it will give you a pretty good analysis. Yeah. So in the scenarios, I've actually, so I decided what kind of assets to look at. And then I did the similar kind of thing. I asked Chad GPT, I'm like, give me kind of the four outcomes.

I did the similar kind of thing. I asked Chad GPT, I'm like, give me kind of the four outcomes. And I thought, you know, that, you know, the returns for the bullish and not neutral and bearish outcomes were pretty reasonable. So I think that's and they'll do the calculation for you. It'll be much easier. But it's amazing how many people kind of forget that they have to pay condo fees if they pay, they live in a condo, pay property taxes, maintenance on a house, like all these things add up that you would not have to pay if you're renting. Now for the examples here, now let's go back to the first scenario. I was saying you're saving 250 bucks a month towards a down payment. Your goal is to purchase a home in the next 10 years and you think you'll need 100k for a down payment. Well, the first thing I would do here is try to see if you can save a bit more per month, whether it's through additional income or

reducing your expenses. So let's just say instead of $250,000, let's say you're able to scrape in an extra $50 a month so you can do $300,000. So if you invest in a savings account and getting 4%, that would give you $44,000 at the end of 10 years. Now, if you're able to bump that up to $400 a month, you would have $59,000, still well short of your $100,000 goal. I just wanted to highlight this because remember these numbers, because some of the outcomes that we will get on the portfolios are actually much lower than this. So you have to realize that you are taking additional risk. And depending on what the markets do, you know, you could end up with a lot less money than if you put it in a,

you know, savings account and 4% or treasury bills that are very short term, one to three months, whether it's Canadian or US. And of course, you, this is more static for the amount that you're adding. But of course, you could be doing, you you know for the first three years two hundred dollars a month then you get a salary increase you can do four hundred a month the next three years and then six hundred dollar a month the last four years in that 10 year period well you also end up with 59 000 because the increases in money you can save doesn't have a lot of time to compound so make sure you keep that in mind because the sooner you can save and increase your savings rate, the higher the impact will be because of the investment compounding over time. The example here that I have for the first portfolio is a more traditional

balanced portfolio. So, you know, stuff you'll commonly see, not quite the 60-40, so 60% stocks, 40% bonds, but something pretty similar. So here I decided to do 50% stocks in an S&P 500 ETF index fund, 40% in cash yielding 4%, but cash could be, you know, short-term treasury bills, you know, could be US treasury bills, something like that. Doesn't have to be in a savings account, and 10% in TLT, which is the 20 plus year US treasury ETF. I'm not a big fan personally of long dated bonds right now, given the debt situation, but nonetheless, I wanted to run the numbers. So the first bullish scenario here or the bullish scenario. So the assumptions here are the S&P 500 would get you 12% annual returns, cash, of course, 4% and TLT 6%. So the end value you get is $55,000 at the end of 10 years. And if you do $400 a month, it's $73,000. So you end up clearly in front then if you would just be doing, you know, putting in cash

yielding 4%. Now the neutral scenario, the S&P 500 is 8% annual return and TLT 3%. I won't say the cash because it's always 4%. The end value is 49,000 if you do $300 a month and $65,000 if you do $400 a month. The bearish scenario, now you're looking at 3% annual returns for the S&P 500 and all the returns are annual and 0% for the TLT. You're looking at the end value of $42,000 for $300 a month and 56 for $400 a month. So at this point, you know, you're starting to get into, you know, lower than if you had money just in cash. So I think it's important to remember there's different outcomes. There's infinite numbers of outcome that could happen, you know, almost with a, when you're looking at a return. So keep that in mind. And the extreme bearish scenario here is negative 2% annual return for the S&P 500 and negative 2% for TLT. You end up with $36,000 for the $300 a month

and $49,000 if you do $400 a month. So I wanted to mention this, and this is a more kind of balanced traditional portfolio. And you can already see that not all outcomes are good and even the best outcome you actually fall short of your 100k goal any comments on this one Dan I know you're it's not your forte but still yeah I mean uh it's definitely not my forte I I'm not like you know I always found it you know we talked about it with the registered accounts and stuff like that but it it took me, I mean, investing for me, it was very much just a, it was a painful edu or expensive education on, um, just using indexes that I just couldn't, I wasn't good at, at, um, at investing in anything other than that. Right. So I could

never beat the market, but yeah, I think like your, your outcomes and like the easiest way to, to control some of those outcome scenarios is again just like re reweighting your basket to be a little bit more risk uh or take a little bit less risk i guess right um and just i think people need to assess okay what which you know like the kycs that you do when you fill out like a uh quest trade or like whenever you're on one of those websites it's so good to just like actually people need to actually think about this stuff you know what i mean it's like oh am i like what would happen like because they're literally like oh like assume that you you know your your stocks

just draw down like 50 what would you do buy more it's like well would you actually like you know because most people are hitting the sell button as soon as they see the red yeah and it's easier said than done right one till you actually live it. And that's always something I remind to people. It's like, okay, just keep that in mind. And of course, you could decide to choose individual stocks. I tried to keep it as simple as possible because ETFs are pretty easy to access. But now I'll go into kind of slightly riskier portfolio.

I'm going to add some Bitcoin in there for the last two portfolio. This one I consider risky and the last one very risky. So keep that in mind because there is the potential for losses is greater. So this one is 60% stocks in the S&P 500, 20% in cash yielding 4% again, 10% in gold, 10% in Bitcoin. Now for gold and Bitcoin, you can very easily use ETF. I believe BMO has a gold ETF, ZGLD if I remember correctly. Bitcoin, I would always recommend the US listed ETFs because they're much lower in fees, but you will have to convert

Canadian dollars to US dollars. Now the bullish scenario here is for the S&P 500, you get 10% annual returns. And I've noticed here that Chad GPT gave me slightly different bullish scenarios, but that's okay. It's just to illustrate it. Gold ETF, 6%, Bitcoin, 20%. So the end value is $60,000 and $80,000 if you do $400 a month, $60,000 if you do $300 a month. Now the neutral scenario here is 6% annual return, gold 3%, Bitcoin 7%. The end value is $48,000 for $300 a month and $63,000 if you do $400 a month. So the neutral scenario still gets you slightly more than if you just did cash. Now, the bearish scenario, the assumption here, negative 2%, the S&P 500, gold ETF, 1%, Bitcoin, negative 15%. The end value is $34,000 for $300 a month and $45,000 for $400 a month. So you're starting to see here that, yes, when you start getting into the bearish

scenarios, the outcomes are not great. But again, if you're looking at the bullish scenario, you're getting closer to your goals. So it really has to be a question you have to ask yourself, because at the end of the day, you know, people can recommend putting all the money in a savings account or GICs. If your situation is such that you cannot save more money than that, and for whatever reason you have to stay in the current location, the other options are not open to you, you can't really cut your costs for a month. Well, if home ownership is that important for you, I'm not saying it's the best financial decision, but if it's that important to you, then at the end of the day, you will have to take more risks. That's the simple thing if you

want to have a shot at attaining that. Now, the last one is higher risk. So it's 80% in the QQQ ETF. So this is the power share. It follows the NASDAQ. 20% in Bitcoin. This will be very volatile. follows the Nasdaq, 20% in Bitcoin. This will be very volatile. And so just keep that in mind. The bullish scenario, the QQQ is 12% annual return, Bitcoin 20%. The end value is $74,000 if you do $300 a month and 99K, let's just say 100 for the fun of it, if you're doing $400 a month. So you essentially can achieve your goal if you're doing $400 a month. So you essentially can achieve your goal if you're doing $400 a month. The neutral scenario is 7% annual returns for QQQ, 7% Bitcoin. So if you do $300 a month, you end up with $52,000 and $400 a month, $69,000. The bearish scenario is QQQ negative returns of 3%, Bitcoin negative returns of 15%. The end value is $28,000

for $300 a month and $38,000 for $400 a month. So now you're looking at pretty significant losses compared to if you had it in cash. And the extremely bearish scenario, QQQ is negative 6%, scenario QQQ is negative six percent Bitcoin negative thirty percent and the end value is twenty three thousand if you do three hundred dollars a month and thirty one thousand if you do four hundred dollars a month so you're literally looking at fifty percent loss pretty close to it in the extremely bearish scenario and you know obviously you'll have to also weigh the probability of each scenario happening. You know, it could get worse than the extremely bearish scenario as well. So keep that in mind.

And I want to make it very clear for people. This is not investment advice. I know I said it before, but I want to show people that, yes, having, you know, a really bad outcome when you're taking more risk is definitely possible. But again, the reality is, is that housing is not very affordable in Canada. And for some, taking more risk will likely be the only way that they can achieve home ownership. I do have some key takeaways there. Anything you wanted to add before I say that and then we move on to your section? No, I just think it is one of those challenges. And I think one of the ways that we see people being able to create or like to kind of reduce that risk while still getting outsized

returns is almost like getting an investment that has a little bit of a job element to it, right? Like real estate can very much be a gold in the handcuffs a little bit. Like it can become a very lucrative job. You'll get people who are flipping properties or they're doing Airbnbs or something like that. And there's some work required with that. And so the work you put in can kind of reduce the risk while still getting those higher returns, but it ends up being a side hustle. And I think a lot of people forget that part. So you got to consider the hours that you're putting into it. Even if you're managing your own portfolio, you got to consider the hours you're putting into it as well. Yeah, no, exactly. That's it. And, you know, I kept it quite simple. These are kind of

portfolios that I wouldn't say set it and forget it, but they shouldn't require too much management. Clearly, you can own individual companies. There's other types of assets you can own. You can, you know, put in some REITs in there. I know you'll be talking about that as well. But, you know, there's just some, you know, just for inspiration, I would say, for people. And clearly, you know, have to do your own due diligence. If you're not even comfortable with that, maybe consider working with a professional investment, you know, advisor. That could be it. Although sometimes their fees will probably be really high if you're just looking at small investments like this. So keep that in mind.

Now, the key takeaway is increasing your monthly income contribution will have a large impact on the outcome. We actually did a recent episode that had like a lot of traction on how you can make small regular contribution that can make like a big difference. So just being able to increase, I mean, you saw it with the numbers, right? Even in the less risky

portfolio, the more balanced one, the difference that just an extra $100 a month can do, you know, in the neutral scenario, even right, even when you're not looking at amazing returns, that extra $100 a month can make a pretty big difference. So keep that in mind instead of just thinking, okay, I'll try to achieve 25, 30% annual returns. That's not realistic. The chances that you achieve that are extremely low. And when it comes to any kind of returns, whether it's this, even real estate, right, Dan, you have to think in probabilities and the most probable outcome. So when you purchase a property, you know, you have to think of the different outcomes and what

probability you place. I don't like my brain thinks like that, but a lot of people oftentimes either, you know, they tend to disregard any risk. So and they just think about the positive outcome. But I want to reinforce that higher risk means that, yes, you have higher chance of getting closer to your goal. But you also have a higher chance to take significant losses, the more aggressive you get. So keep that in mind. These would be average returns in these types of scenarios. But the reality is the market, you know, goes up and down. So, you know, these annual returns will not be the same. So I can take, you know, the go

back to the more balanced portfolio where it said the bullish outcome is 12% annual return. And then for the S&P 500 and 6% for the bonds. Well, it's very possible that a year you can get 15% and returns for the S&P 500 and the next year you get negative 15. So you have to keep in mind like it goes up and down. And depending on the timing of when you'll you'll need the money, you know, it may get a little tricky and you may not get like the best outcome, which brings me to my fourth takeaway here. It is the closer you get to your goal or needing the money, the more you should start thinking about de-risking your portfolio and putting more into cash or cash equivalents. I mentioned a lot, short-term treasury bills, one to three months. There's ETFs. The ones I use, it's UBIL for US

dollars. It's listed in Canada. So it's TFSA and registered account friendly or CBIL again for same thing, but for Canadian treasury bills. And again, it doesn't have to be an all or nothing. That's why I wanted to show some of the different approaches. You could keep 80% in cash yielding for percent and just have 20% into an S&P 500 index fund, for example. So you like I think a lot of time you see that with investors as they get kind of into an all or nothing, you know, approach, whether it's, you know, gold bugs. They just put everything in gold or, you know, people think market's going to crash. I'm going to put everything in gold or you know people think market's gonna crash i'm gonna put everything in cash hundred percent you know just being able to have a balanced approach i think it's really important and just kind of forget the all or nothing thing if it's 90 in cash and 10

in the s&p 500 because you want a little boost on those returns just to you know that's the little nudge that you think you need to achieve the down payment, then, you know, maybe that's something you can consider as well. Yeah, 100%. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you

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Should I jump over to if somebody wants to get exposure to real estate while saving for their real estate? Yeah, yeah. Let's go for it. You have quite a bit, so I will have to zoom through that. Yeah, I can zoom through it for sure. So, I got a lot of ground to cover here. So, basically, I learned pretty early that I was very good at losing money when it came to stocks and stuff like that. And I would imagine most of your listeners won't be in that category because they listen to you. But I was good at investing in real

estate. I just seemed to do a decent job at that. And I think a lot of Canadians feel that way, especially if their goal outcome here for them is to save for a down payment. They're probably in some way, shape or form bullish on real estate, right? So the easiest way for people to get access to real estate while saving for real estate, I guess there's a list. There's a handful of different ways you can do it. I'll give you a summary of the list and we'll go from there. So house hacking, flipping properties, rent to own or co-ownership, REITs, which you mentioned, short-term rental and short-term rental arbitrage. None of these are recommendations, by the way. I'm just kind of giving you all the info because some of them I don't like at all. The BRRRR strategy, partnership with other investors. So like crowdfunding, exempt markets, et cetera, and private lending as well. And so I'll start off with the house

hacking. House hacking would be, again, this is going to be a challenge if you don't have a substantial down payment saved up, but maybe if you're in hybrid work or in a decentralized workplace, or you work from home and you could go live in another city that has cheaper housing, you know, like the St. John's of the world, or, you know, the Prairies. If you could buy a house, you can purchase a multi-unit property, like a duplex or a triplex, and you live in one unit and rent out the other. That would be house hacking, right? So you kind of get both worlds. The challenge with this one is that it requires a down payment. So if you're using it to save for your down payment, it might be a bit difficult. It would lower your personal housing costs while allowing you to build equity and you're getting some of that rental income while capitalizing on

the leverage that you get from real estate. The next one would be flipping properties. I consider this a job. Some people consider this an investment strategy. I consider this like a side hustle or a job. It's very time intensive, but basically you buy an undervalued property, you renovate it, you sell it at a higher price and you profit from the sale, buy low, pump some money in, sell high. You really need to understand the market. You need to know about renovations. If you're like a skilled trades person or somebody who can do the work and you can find the deals for cheap or you have an investor, you can buy super distressed properties that no banks would lend on. And you just ask the owner to give you a VTB mortgage or something. Yeah, you can do well doing this, but in most other cases, it's pretty tough. It's very

high risk. And again, it's a job. The next one is buying in a rent to own arrangement. And actually Nick and I just did an episode on this. We recorded it. It's in the hopper, kind of one of those evergreen episodes that'll come out whenever, but rent to owns tough. It's hard to win with that strategy because you're basically overpaying your rent, which rent's already pretty inflated in this scenario to the owner of the property and kind of gradually saving a down payment through them. So you're just getting a savings vehicle on top of rent. It's tough to win with that one. From my perspective, I think most people can actually outperform the return that you get that's embedded within the rent to own agreement so i usually would say stay away from that one but co-ownership like there's a lot of new fintech startups let's call them

lotley key arboro and fraction would be some names of ones that i would say people could google but basically you with these they they um will match will match your down payment or even give you uh like 75 percent of of your down payment so if you only have you know two and a half percent to put down they'll actually match you and you they benefit in the upside but you make all the payments and all of that i thought you had to give your sell your soul away to be able to that too yeah there's some kidneys involved and stuff like that no yeah i don't i don't really like some of them i actually like i talked to some of these groups and i like them but they do get a bad rap like i know some other people in the industry have criticized them quite a bit i think that they're

look like i think that the the problem is is the canadian cultural obsession we have with housing. That's like home ownership by any means necessary. All they did from my perspective was provide the any means necessary, but the people who have an issue with it don't acknowledge that the problem isn't the any means necessary. It's the cultural obsession from my perspective. The next would be REITs, which I feel like you've talked a lot about on the show, but if you want exposure to real estate and you don't have a down payment, you can invest in REITs. I feel like most Canadian REITs are trading below NAV right now. They're a pretty cheap way to actually buy real estate based on their asset value. So if you get real estate and you get the value in underwriting, most of those I would

actually advise people to look at. That's kind of one of my favorite ones on the list, to be honest. And it also encourages you to underwrite and think about real estate more from an institutional perspective, which can really benefit you later when you're getting into buying your primary or investing in real estate otherwise. Most people think about real estate too much as a speculative asset rather than the proper- Cashflow generating one. Yeah. Yeah. Or like an institutional, like you say, a cashflow. The next one would be short-term rental properties, very similar to flipping from my perspective. You'll see a lot of people doing Airbnb arbitrage, they call it, where they'll go rent a place on a long-term rental and then they'll sublet it to Airbnbs. That's a job really like as a side hustle,

the same way as, as flipping. You can make a lot of money, but it is like, it's, it's a lucrative job. Let's call it a burst strategy. Very similar to like house hacking. You could buy a property and then you put, put some money into it. It's kind of a blend between let's call it flipping and maybe house hacking. You rehab it, you rent it out, some money into it. It's kind of a blend between let's call it flipping and maybe house hacking. You rehab it, you rent it out, refinance and repeat. It's pretty hard to actually do this in Canada, to be honest. The spreads on the value you can create from renovation doesn't actually allow people to scale. I guess you'd have to be able to do most of the rentals yourself for it to start making sense.

Yeah. yourself for it to start making sense. Yeah. Yeah. And so like when, when the feds came out with this policy about giving people those 90% mortgages to refi out, if they've added units to their house, I came up with this thing called the first time home burr, which was like, which honestly, like it's, that's kind of what they're encouraging people to do. So that might actually be a good strategy for people where it's like, Hey, buy, you know, whatever a house with an insured mortgage. And then over time, like over the course of your first mortgage term, add a unit to it and then refi out and use the rental income. This is what I did for my first two properties, right? I bought a house. I lived in one of the units. I rented out another unit and I lived at the unit I was

living in. I was turning it into a apartment as I lived there. I was in university for the first one and my second one, I was young. So I didn't like, I could live with that, that kind of way of living. But that, so that worked well for me. Living in renovations. It's not, uh, yeah, no, not for everyone. Just know what you're getting into. I've done it once and it's, uh, especially if you have kids or something like, yeah, I wouldn't do it today with kids.

Yeah. But, uh uh well actually i say that but i'm about to actually renovate my house but but uh it's just one one room in the house so we'll and and it's not me doing it it's a contractor so okay i thought it was uh i thought it was your spouse doing it but i guess yeah maybe next time she'll do the demo work actually she'll do okay the uh the next piece uh would be partnership with other investors so like this would be like your gplp structure so general partner limited partner crowdfunding would be another good example so like canadian platforms i think addy is like the only one that

comes to mind um that has like but these groups um they work in like the exempt markets they call them so like crowdfunding uses a canadian crowdfunding exemption but then there's also like prospectus exemptions and then there's you know like larger ones where you can actually do it through your like rrsp and stuff like that like graybrook actually graybrook somebody we have a guest on the show a lot and these are lower uh entry costs they allow you to use registered funds in a lot of cases not in the crowdfunding one but I think in like some of your EMD, like exempt market dealer, OM exemption stuff. But your capital is out of your hands. And honestly, the ones where you're going to get good returns, they're typically long like lockout periods, let's call them. So you end up like with your capital stuck for like five to seven years,

which could kind of be prohibitive if you're planning to use that capital at an undefined point when you find a house that you want to buy. The last one I'll do here is private lending. Basically, you're lending your money out and typically secured against real estate. So that's kind of how it's a real estate strategy. But basically, you get through a broker or a lawyer or through the grapevine, you hear of somebody who needs 25 grand and you give them the 25 grand and you say i want i'm gonna i'm gonna register a charge on your house and i'm gonna charge you 12 per year 12 plus 2 or something like that that's kind of how private lending works um it's obviously backed by the house so you need to under be able to underwrite the value of the property to make sure that you're

in a safe uh loan to position. The last thing I would add, I think before we wrap up here is basically just like, I think people should really consider renting in the desired area that they want to be in while they're saving for a down payment. Whether it's, you know, especially like if you're in a city and you want to be close to the core, like if you live in urban life and you're living in a condo it's i mean like we'll just i'll use a scenario here the you can rent a condo in toronto or vancouver for probably 2500 bucks a month ottawa and montreal and uh and calgary pretty similar the condo that same condo would cost you probably 600 grand to buy. Assuming you'd be using a 4.5% interest rate today and 25 year AM, 20% down, so 120K. We're going to calculate an opportunity cost on that capital as well.

Condo fees would be about 500 bucks, although they're starting to creep up, honestly, just inflationary with maintenance right now. Property taxes, 2,000 a year. That would probably be at a Toronto and Vancouver, which have the lowest property taxes in the country. I was going to say that sounds pretty low, but- It sounds low, but yeah, Toronto and Vancouver is like, yeah, like four grand would be like a nice house in Toronto, right? The appreciation, I just assumed 3% per year, which is average

historical growth. And I assumed a 5%, so basically a GIC on investments, or I guess GICs are lower now, but a GIC two years ago on your investments. So your monthly cost of buying would be your mortgage amounts, $480,000. So your mortgage payment on a 25-year AM, 4.5 interest rate is 26, 2,600 bucks a month. 20 is just shy of 2,700 bucks a month. Again, add on those condo fees, 500 bucks,

add on property taxes, which is $170 a month ish. Total cost to own is about 3,400 a month. The, so your annual cost of buying is about 40 grand. The annual cost of renting would be about 30,000, 2,500 times 12. The opportunity costs on that down payment, if you rented the $120,000 down payment could be invested. So if, and this is

where it kind of can be a deciding factor. If you make a 5% return, that would yield 6% per year. Most people probably who are listening to your advice can make more than 5%, I would say. So, you know, you could double that potentially. I mean, S&P, historic S&P is over 10%, right? So- I think it's a good, like it's a conservative estimate. I think it's for illiteracy. Yeah, illustration purposes, I think that's good. Yeah. And so you would also account for principal pay down. So your mortgage payments also account for, let's say $600 per month. Because again, the amortization schedule means at the beginning of your mortgage, you pay a lot more interest and a lot less principal because you owe more money. So this is why real estate really benefits from being owned longer.

The longer you own it, the faster you pay it down, which is a lot of people don't know that. And with a 3% appreciation rate, you'd go up 18K per year in appreciation, which is pretty cool when you account for the leverage. That's a pretty sweet return, honestly, in the grand scheme of things. So renting, net cost of renting, basically $30,000 rent cost, less that six grand that you could earn on the down payment is 24K a year. Buying the total cost of owning was 40K plus the equity. So you'd pay down 7,200 in principal per year. And the appreciation, which is really the difference maker in this example, is 18 grand. So your net cost of buying

is actually lower at 14,000 in this example. But as soon as you start to move those levers of, oh, I can make 10% or, oh, the property is going down year over year, which it is for condos right now in those two markets where this example would exist. Now, all of a sudden you've got a market where it makes more sense to rent. Also accounting for the fact that rent control exists, your rent, like, you know, if you lock in a property at today's rents and you're not, you're not fearful of that inflation hurting you over time. And so again, this is where I would like know how much money you can conservatively make or you're capable of making hopefully over the last couple of years and run that discount rate scenario, run that cost benefit analysis. If you

can make 10% and the real estate market isn't giving you the 18% capital appreciation, then it probably makes more sense for you to rent than buy. If you can't make more than that, then it might make more sense for you to buy than rent. And this is again, why most people like real estate. They're not good investors. That's why I like it. You know what I mean? The average Canadian probably can't beat that return. Yeah. Yeah. And I mean, I think at the end of the day, right, some people may end up thinking that it's best to still buy because, you know, there are some kind of emotional aspects to it, even if it's less economical. Let's say, you know, after the calculation, you're like, you know what? Renting is actually cheaper when all of this is calculated and factored in.

calculated and factored in. I think, you know, we've been so programmed about home ownership that I think a lot of people will just end up disregarding that and just the emotional desire to own a home, right? So I think from a financial perspective, I totally agree in practice. I've heard so many people, so many realtors, unfortunately, that are drinking their own Kool-Aid, I would say, that don't fully understand that, that think, you know, the advantages of owning a home that are non-monetary, they'll still qualify those for whatever reason as monetary. I've seen that happen before. So I've seen it on flyers. Yeah, for sure. I think a lot of people, there's a lot of components that people don't really understand about real estate. Like the condo fees, like that maintenance expense that I mentioned is pretty fixed. But like when you start getting into detached ownership, especially what most young Canadians and first-time buyers are reserved to owning, you have a lot of deferred maintenance. Like in a lot of cases, we're buying old houses that we have to do, like fix up and mow lawns and make repairs and whatever,

right? And so a lot of people don't consider those costs, like go get a home inspection. And then all of the things that the home inspector says, like, oh, you're gonna have to redo the roof in 10 years. It's like, did you put that into your financial model that you have to spend 10K in 10 years to redo the roof in this house? No, probably not, right? Well, maybe you should do that. Yeah. For homes, right, 1% to 2% typically of the home's value will go towards maintenance.

Yeah. And again, it's the same thing as returns, right? It will likely not be 1% to 2% every year, but one year maybe 5%, the next one flat. So just keep that in mind yeah 100 okay so well dan uh thank you for coming on the episode i know we're running a little bit long and i think you're uh going to be on daddy duty soon so i don't want to keep you any longer than that than you have to i'm on this show but i think it was great doing this episode i'm sure we'll we'll do it again at some point

in the future. Again, I'll just remind people, if you just listened to this episode, go into the show notes, you'll be able to see a link to the first part of this episode where we go over the different type of accounts, and then you'll be able to make a bit more sense of it with, you know, different kind of investment strategy. But Dan, it was great to have you on. Please check out the Canadian Real Estate Investor Podcast. Dan and Nick do, sorry, Dan and the Batman do a fantastic job. They, yeah, they, the episodes are always great. I sometimes miss one, but I try not to. I always find that I learned something about real estate that I didn't know. So thanks for listening and we'll see you next week. The Canadian Investor Podcast should not be construed as investment or financial

advice. The host and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.