The Canadian Investor - Should you Invest in Stocks or Real Estate ? Part 1

Episode Date: April 29, 2024

In this special episode, Dan Foch from the Canadian Real Estate Investor Podcast joins Simon to give the pros and cons between investing in the stock markets and investing in real estate. You can access part 2 of the episode on the Canadian Real Estate Investor Podcast by using the links below. 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 Listen to Part 2 of the episode: Apple Podcast Spotify Web player 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. Hey, everyone. In today's episode, I'm joined by the one and only Dan Fauche, who co-hosts the Canadian Real Estate Investor Podcast. We had a great conversation to show the pros and cons of investing in the stock market, but also actual real estate. You're about to listen to the first part of the episode. The second part will be released on April 30th on the Canadian Real Estate Investor feed.

If you're not already following the Canadian Real Estate Investor Podcast, which by the way, you really should because it is a fantastic show, you can find the link in today's show notes. And now, on to the show. 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, but not Dan Kent. So Dan Foch, special episode here. We'll be talking about investing in the stock market versus investing in actual real estate. Pretty excited. We've been wanting to do that for a while. Dan, how's it going?

I'm good. Yeah, it's finally answering the age-old question of whether or not stocks or real estate are a better investment. I know it's definitely a heated topic in Canada because we're pretty obsessed with real estate, which I think is what led you guys to do a spinoff of your show into the real estate asset class as sort of the first for to do a spinoff of your show into the real estate asset class as sort of the first foray into a, into a spinoff show. But, uh, and, and I think we had initially thought it would be more of a debate, but I don't know. Uh, I don't know. I think we'll agree on most things. I know for sure. I think you're right. I always say it this way, like you have to be a really bad investor to not be able to beat the returns of real estate. But most people are bad investors.

And so that's what makes real estate such a good investment, right? Yeah. And it's performed. Real estate has performed pretty well. And I think we've almost been conditioned as Canadians to own real estate as the way to go. And, you know, you know, a friend of a friend or family member that is like a multimillionaire because they started buying real estate in the

1990s when there was, you know, a correction with home prices. And then they've done really well ever since. So I think you hear those stories quite a bit. I mean, I know people, obviously, you and Nick own quite a few properties, but I know people in my personal life that have done quite well over the years. And I think people tend to focus on that, thinking that real estate is always the best investment. I mean, I think you can do quite well, but there's definitely some drawbacks, but also some, I think there's some pros of owning real estate compared to investing in the stock market. And I'm saying investing in the stock market because I'm going to be talking about different asset classes that you can have access when you invest in the stock market. So that's why I'll use that term a bit more. Yeah, for sure. Love it.

Okay, well, let's just get started here. So in terms of the historical return, so I'm going to have to lean on you a little bit here for real estate. I know we were texting, but essentially, if you looked at the past 25 years, I did a little graphic here. And for our Join TCI listeners, you'll be able to see what it looks like. I know most people are probably familiar listening to the podcast. So last 25 years, you're looking at 523% returns for the TSX-60. So these are typically the 60 largest companies listed on the TSX and very close behind 512% total returns for the S&P 500. And total returns does include dividend payments during that period of time.

And you're looking at roughly 7.7, 7.8% that time period of annual returns, which is very solid. Obviously, no guarantee it will continue in the future. But do you want to kind of compare that with what real estate has returned over that time period? Yeah. So when you try and analyze real estate in the same way, it would be tough to really arrive at a similar metric. But if you're to annualize that, and I think if you look at the S&P alone, it's like a 10% annualized return over the last 10 to 20 years. And if you're to say real estate prices or house prices grew, you could argue that they've grown at an average of about 5.11% on a compound annual growth rate basis. But the challenge is that that doesn't necessarily

capture, like it would almost be more akin to thinking about a dividend stock that also has capital appreciation because that compound annual growth rate doesn't really account for yield, cashflow, and principal pay down that you would get from owning a rental property and having tenants amortize your mortgage. And so, you know, on a purely speculative basis, I would say that stocks outperform real estate in their ability to go up in value. But when you think about the yield piece, you know, your real estate assets, typically if you're buying a rental property in the last decade, it would need to have a cap rate of typically over 6% to make sense other than sort of that period during COVID when rates were 2% or whatever.

But, you know, so if you're a cap rate, that's basically your net operating income to your price. So I guess like almost like a price to income ratio. Yeah. And that... Net operating income is just a profitability metric, very similar to net income, but it's just widely used for real estate. Yeah. And so that would say like your return, this is before debt service, so it doesn't account

for your capital costs either, but your return from that asset would be 6%, let's say. And then you take your debt service out. So a portion of that return goes to debt service, a portion of that goes to interest, which is a complete sunk cost. And we're going to get into some of those after. But so it ends up kind of the best metric you can end up using to look at it would be like an internal rate of return or IRR, which is basically what is the asset return if your NPV, your net present value is equal to zero. And usually like a typical investment property,

like a duplex in like a secondary market that you would rent out and it would be cashflow positive would be like an IRR of about 15 to 20%. So I'm not sure how those two charts annualize out, but that's kind of the way I would look at it. So it comes with a lot more risk and costs though, from my perspective. Yeah. And the returns I mentioned, too, I think I probably did a disservice to stocks because the starting period was October 6, 1999. That's as far back as I could go for the data from FinChat.io. And for those who are well versed in the stock market, you'll know that that was almost at the peak of the tech stock bubble in the 1990s. So in early 2020, the bubble was essentially burst. So clearly, if I picked a date more like, you know,

2001, I think it would have looked a little better. But nonetheless, I think that's some good context that you provided there. In terms of I think you did reference it a little bit indirectly, I think probably one of the biggest pluses for stocks or investing in the stock market, whether you invest in stock bonds, real estate investment trusts, or, you know, could even be any Bitcoin ETF, whatever it is, there's a low barrier to entry. So you can invest in the stock market with just a few dollars. I actually did last year, a little project where I wanted to prove to people that if you only have $50 a month, you can still get something pretty significant in terms of

return over long periods of time. So I actually invested in $52 a month because my broker does not allow fractional shares. And I put that into the index fund. So it's a global index fund, ticker VEQT. Pretty low fees, I think around 20 basis points. So 0.2% fees annually. And the goal was really just to show that, that you don't need to have thousands of dollars to invest in the stock market. And at the end of the year, I invested just shy of $630. And it was worth $668. So that gave me about 6% returns for the year. And if you invest $50 a month and get that 6% return over 25 years, which is, I think,

pretty reasonable, relatively conservative, especially compared to the last 5 to 10 years, you'd end up with $34,000 actually a bit over that time period. So it just shows that in the stock market, you can definitely, it's more accessible to a wider range of people. And I know you're big on housing affordability, and I know we're talking about real estate a bit more broadly here, but that's been one of the hot issues right is it's just very difficult for people to save enough money to put a down payment on you know a home that they would live in and i guess even more so if they want to put a down payment on a rental property because then you're going from five percent to twenty percent i think minimum if you're it's an income property that is not

owner occupied yeah typically like even twenty percent% would be pretty low for the down payment. A lot of lenders are expecting and with those new OSFI rules, I expect that that's only going to get worse. So OSFI just capped the total debt universe that you can have with a Sked A bank to 4.5 times income. So basically, a lot of investors are going to end up going B-side, which means that your rates are going to be higher, which means that your cash flow will be impacted. But also, you're typically seeing the B-side wanting 25%, 30% down on a lot of these. They are assets and they do want a little bit more collateral safety to lend against an investment property. The only other piece that I'll mention in regards to that, you mentioned it sort of in the context

of being a barrier to entry. We pride ourselves on being like a coast to coast real estate investment show because I think a lot of people, most of our listeners are from the GTA, I think 60% of our audience or something. So it's easy to kind of end up with that geographic bias where you're like, oh, I know I'm familiar with these markets, so I want to own a property there. But the reality is you could buy a cash flowing single family house in Saskatchewan or Winnipeg or many places in the East Coast for under $100,000. And at 20% down, it's a $20,000, you know, commitment, assuming just purely the down payment. So the barrier ends still more than $50 a month. Yeah, no, exactly. You can't dollar cost average into it. It's certainly more than 50 bucks a

month. But you know, I mean, where we're investing is like, when you start getting into those more meaningful amounts, that's where real estate is good at. And what we're going to talk about it next is kind of that access to leverage. 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 have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email,

every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questtrade.com. Calling all DIY do-it-yourself investors, Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency

because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning, Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the

YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. I'll let you finish the couple of things that you had to mention on the closing costs and stuff. And then there is one thing I want to point out to people in regards to going high loan to value.

Yeah, yeah. And that's a really good point. I know you've been pretty vocal on that. I think you have your periodical PSA that, you know, if you put 5% down, you literally have negative equity in the home. And the 5% down, obviously, it's for CMHC insured mortgages that you'd only be able to do that. So if you don't have, that's the bare minimum. And there are some additional costs. So for example, say you want to buy a property that's half a million dollars, which is pretty, you know, it's definitely under the average for the national average. It's probably

on the high side for certain communities across Canada. On the low side, obviously, if you're Toronto, even in Ottawa, that's probably on the lower end of prices for Ottawa but I took that to be relatively conservative and try to catch all a little bit so you'll need like a $25,000 down payment if it's more than $500,000 then it would actually be any tranche that is above $500,000 it's 10% minimum right right? Yeah, exactly. So like up to a million, it ends up being 12 to 12 and a half to 15% usually. Yeah. Okay. Yeah, that's it. So I just want to make sure I know this stuff pretty well, but I'm not an expert like you are on that. So you need a $25,000 payment there. And for Ontario, you'll need to pay at least $6,000, $475 in land transfer tax. And this, of course,

will vary from province to province. You'll need to pay $19,000 in CMHC insurance, which most people just tack onto the mortgage. And let's say you'll pay, I think it's reasonable to pay about $2,000 in lawyer fees, title insurance, stuff like that, and just other fees for closing. So, you know, when you calculate all that in, and again, let's assume that most people don't pay the CMHC insurance up front and they just add it to the mortgage, just means that you'll have to come up with $33,375 as a bare minimum to buy the property. And even more, like we mentioned, if you buy an income property that is an owner occupied. So if you're buying an income property, you'll have to come up

with at least pretty much $110,000 for a half million dollar property. That's factor in the 20% down payment. So it is, and again, obviously with the caveat that depending where you're located across Canada or the different markets you may be looking to invest in, that will vary. But for a lot of people, even if, you know, with your $100,000 example, I mean, it's still a decent chunk of money for a lot of people, especially as, you know, costs of living are rising and people have less and less disposable income. At some point, I mean, you got to find some ways to make money to be able to afford that down payment. Yeah, for sure. I think this is really where stocks stand out to me is the barrier to entry is obviously a lot lower. And there's really, there hasn't, in the US, it's a little bit different because they have crowdfunding from

the JOBS Act. But crowdfunding in Canada is, you don't get access to as good of deals because our laws are different. So I'm not sure if you're familiar with this, but crowdfunding a U S they can crowdfund any real estate deal, but in Canada they're capped at $2 million per issuer. So that's the size of the raise. So it doesn't really give you access to really good deals. And then, um, I think it's 5,000 or 10,000 per subscriber per year, depending on the type of deal. And so you end up, it ends up basically just being a investor relations nightmare. And so it doesn't select for the best deals really. So we don't really have a good way to invest incrementally in real estate in Canada. So I guess to go back to your example, the one thing that I always insist that people

think of is how land transfer taxes have sunk costs. So basically, like when you're buying this house for $500,000, using the example that you did at, you know, 6,500 bucks, you're paying $506,000 for this house now, right? Because so it gets added. I would just add that to the price hypothetically in your head. In BC, it could be up to like $8,000 on a property of that value. And so let's say you paid $508,000 now for this property. This is where I really want people to, because a lot of people think about their home as an investment, which is fine. I think the home is more of a savings vehicle. I think real estate is really good at forcing Canadians to save money by creating a debt obligation. But when people buy

owner-occupied, they're typically using mortgage insurance because they're buying higher loan to value. So they will typically buy with 80, 85, 90, even 90%, sorry, 95% mortgage. And I'm just going to run the math on that. So this comes from the CMHC website. So at 65% your CMHC premium is only 60 basis points. At 75%, it's 1.7%. At 80, it's 2.4%. At 85, it's 2.8%. At 90, it's 3.1%. And at 95% loan to value mortgage is 4% CMHC premium. So that's an insurance premium that gets paid one time and gets added to your mortgage. And that's a default insurance. So if you stop paying your mortgage, the bank takes less risk. That's why they're willing to give better rates. Like the cheapest interest rates in Canada are the highest risk

borrowers, but it's the lowest risk because they're insured by CMHC, by us, the taxpayer through Canada Mortgage Bonds. So if you do the math... Doesn't that make you feel good? No, it makes me sick. And I don't know if you guys have talked about the CMB stuff, but I mean... We haven't, but we've talked about it, you and I, quite a bit. Yeah. I mean, it scares me that... We chat on it maybe briefly here. So, because before I get into this little thing about the actual risk and equity position that these borrowers are in, I mean, the government basically increased CMB issuance by 50%. So, they added 20 billion. Yeah. And CMBs are Canada Mortgage Bonds, just for those not familiar with the term.

Yeah. And so, what they're doing is they're actually, they're issuing Government of Canada Bonds to get cheaper debt. So, let's say government of Canada bond is that like, what is the yield for? Let's just say it's 4% mid threes. On the five year. Yeah. That's probably right. Yeah. Yeah. So they'll issue that bond and they'll pay less interest on it. And then they'll use that money that they just raised from selling those bonds to buy Canada mortgage bonds. The idea being like a bit of a spread capture or revenue generator. But well, that's sort of how I think bankers positioned it to them as a good idea. But what this really effectively does is it adds a ton of liquidity

into the market and it's almost like a bit of a yield curve control. So they're introducing a buyer who's not an arm's length buyer, right? A buyer who has a vested interest in keeping the rates down to the market because they're buying their own bonds that they insure now to functionally reduce rates. So it allows these CMHC rates to stay low. Just for historical context, the only time... I know Braden rags on me for being too bearish, but the only time that things like this, that sovereigns tend to get involved with mortgage bond purchases, the only time that really takes place is usually on the forefront of a bit of a debt crisis. So I would

just mention that. They're very, very similar to the Fannie and Freddie setup in 07, 08. So do you have anything to add on that before I go back? No, well, just to clarify yield curve control. So like kind of the yield curve control in the truest sense is you have like the Bank of Japan has been famous for doing this. So essentially they'll establish an interest rate for longer duration bonds. duration bonds. Usually that's what they'll establish and the central bank will intervene and buy essentially whatever they need to buy in terms of government bonds to make sure that the interest rate is at their target rate. So it's manipulating rates to make sure that they don't go above a certain amount. Essentially the way I like to see it, it's basically quantitative easing on

steroids, because quantitative easing usually they will obviously impact there'll be a buyer of long duration government bonds, they can buy other assets, but we'll stick to those right now. But they won't be, they won't necessarily have a target in mind, they'll typically intervene if there's not been enough demand from the private markets for that debt. Whereas yield current control, they basically have no set amount that they need to buy. They just have a target interest rate and they will buy until that interest rate reaches that number. Yeah. Well said. Yeah. So do you think then that the objective here would be to kind of stimulate the housing market a little bit

or at least add a little bit of liquidity there in the absence of it? I mean... Yeah, I think that's probably the end game for sure. I mean, I think they're trying whatever they can. I think they probably realized that there was probably some... I'm assuming banks were probably a bit more reluctant to potentially issue mortgages. And that's a way for them to get those mortgages off of the books of the banks and make sure that the banks have more money to be able to loan to individuals and businesses. Yeah. Or individual or investors. Yeah. Yeah. And I think a lot of people don't know that CMHC also functions as a lender for multifamily properties,

or not a lender, sorry, an insurer. So they have a multifamily product called MLI Select, which MLI just stands for mortgage loan insurance. And they actually insure the same way that they would insure borrowers in the owner-occupied market. They will insure builders or investors who own multifamily rental properties. And so I think the objective of the government is for all of that capital probably to go towards purpose-built rental construction. But the reality is it's the same capital pool and the banks are going to lend to what makes the most sense and is the easiest to deliver to them. And that's certainly going to be the marginalized first-time homebuyers who are fired up to finally get in the market after everything. CMHC premium. So you don't have to be a mathematician to see that that kind of cancels out and you have only 1% equity left before realtor fees and closing costs. And that's also before considering the sunk cost of land transfer tax that I mentioned. So functionally, when you take

possession of the house, you're actually in a negative equity position. Because I would say, I'll add the realtor fees and stuff after, but at a 90% loan to value, 10% down, you're actually in a negative equity position. Because I would say, I'll add the realtor fees and stuff after. But at a 90% loan to value, 10% down, you're adding 3.1% CMHC premium to the price. So you have about 6.9% before realtor fees, closing costs, and that sunk cost of land transfer tax on the way in. So if you say 5% to the realtor, two grand for the lawyer, you're still in a negative equity position at 90% loan to value. At. At 85% loan-to-value, that's kind of where you start getting into positive equity position. So 15% down, 2.8% CMHC premium, you have 12.2% equity before realtor fees and closing costs, which is about, again, 5%, two grand. And so only at that 85% loan-to-value do you start getting into a positive

equity position as an owner-occupied buyer. That's just something that I want people to be aware of when we kind of transition this discussion into leverage. Because while leverage gives you the ability to supercharge your investment by reducing the amount of money that you have to put in, it also supercharges the risk, right? High risk, high return seems to be the trade-off. Yeah, and especially when you have almost no equity or zero equity or negative equity, I think a lot of people say, well, as long as house prices keep going up, I'm fine. I would add to that, as long as you also keep your job and your income sources, you're fine. If one of those two variables happen or if both happen at the same time, we've seen in the last year, year and a half, a lot of people, I mean, you

don't have to look very far, just go on House Sigma, you can go if it was any kind of, you know, relatively large city, at least in Ontario, you'll be able to see people that actually bought homes and sold them at a loss because, you know, you can assume whatever you want what happened, but I would say either they had a variable rate that they weren't able to keep up with. Or there was a loss of income and they weren't able to keep up with it. And then they had to literally take a big loss. And most likely got their whole investment wiped out. Especially if you're taking a 20% to hit.

And then some, right? Yeah, exactly. 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 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 have questions

along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing

up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends. And there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might

know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, Blossom the app store, and I'll see you there. Anything else you want to add or the fun topic of leverage? Yeah, I think it's a good segue into leverage for sure. Yeah. So leverage, I mean, like you mentioned, you alluded to, it can be a great thing or a terrible thing. It definitely amplifies your gain and amplifies your losses. And sometimes I feel like depending on who you talk, people tend to focus on the gains being amplified and there's not much discussion on the losses being amplified. I would say even more so if we looked at pre-February 2022, March 2022, it was basically you're stupid to not use leverage because you're

just going to get rich. Is that a good way to summarize it? Well, yeah. I mean, I think it was basically your real cost of capital. So adjusted for inflation was so offside that you're functionally borrowing money at negative rates. And so you could buy a TV and it would hypothetically go up in value because of inflation. So yeah, it was financially irresponsible to not lever up at that point in time. Yeah. I mean, I guess, yeah, I probably, maybe I'm just too conservative, but for me, it definitely, I saw a lot of warning signs and I'm not just saying this for, yeah, I'm not just saying this for real estate here. This was also true

for stocks because you can buy stocks and a lot of financial products that you'll find in your broker on leverage as well. So I'll just give an example because sometimes I find people don't fully understand how leverage works. So say you buy a home for a million and you put $200,000 down. We'll just keep it really simple. We'll just forget about the fees here. You have a $800,000 mortgage because it's a million minus a $200 down. The home goes up 20% in value. It's not worth $1.2 million. And you've now doubled your initial investment since you have $400,000 worth of equity, which is double what you put as your down payment.

So who would not like that, right? That's like the perfect outcome right there. But then the other way around, you bought the same home for a million, you put $200,000 down. And I, unfortunately, a lot of people who bought in late 2021, early 2022 are probably in a situation like this, maybe not as much now because i think prices have picked up a little bit depending on the area but you have still the same hundred thousand dollar mortgage on the property but now the home goes down 20 percent of value is now worth 800 000 your equity is completely wiped out and that investment you made is now worth zero, which is probably not a bad outcome for some people compared to what I've seen at the very least. For sure. I mean, I think, you know,

you now imagine those same numbers if you put a smaller amount down, right? Like if you only put, if we use the 500K example, if you only put 5% down and it's gone down 20% in value, now all of a sudden you actually can't even sell the property because you would have to fork out all of that negative equity to the bank to exit. Like you still have to pay off the remaining debt that you owe them. And so that's probably the more extreme situation that you're describing. So, I mean, I think that when I think about real estate, the primary advantage of it is access to leverage.

And it's not just access to leverage because I know you're going to discuss like people can trade on margin. And there's a couple of examples that I have where, you know, stocks also carry embedded leverage within them. You know, REITs, as an example, are taking on their cap at 65% leverage, I think, based on their legal structure. But like junior miners are, you know, 10x or whatever, right? So you can access leverage in the stock market, but I think it's the structure of the debt.

It's also the 25-year amortization and that you're not on this callable credit product. But the fact that you're on a credit product that has a fixed five-year term, it's very a favorable debt term. So it's basically giving you access to probably the most favorable credit in the market. So it's not just purely the leverage, it's also the type of leverage and the nature of it that I think makes real estate compelling when you think purely about leverage. Right. Yeah, exactly. I think people automatically associate real estate with leverage, but definitely you're right. You can definitely access leverage if you want to buy stocks. And I think that's why it's important to talk about it, because there is this conception that, you know conception that you can just buy stock with money,

especially if people are getting started in investing. But there's different ways that you can invest on leverage. I mean, one that was popular, not so much anymore because it's, I think, not very advantageous to do so, but the Smith maneuver where you could essentially use your HELOC, your home equity line of credit, borrow off of that, and then invest the money into stocks. And then you're able to, I think, deduct the interest income off of it, something like that. Is that good? Yeah, basically because it's, yeah, so any of the income that you're earning from the stocks or whatever you use that, with the investment income, so stocks, dividends, real estate, whatever, you can deduct the interest costs as a cost of doing business against the income from whatever you use those funds for. with this strategy and it used to do well for them and now it's a bit more of a struggle because the heloc is typically what prime plus couple percentage points so you're looking probably

at seven eight percent right now if not more yeah i think it's funny like an easy way to think about this is a lot of people use helocs to lend out money as private lenders as well that's like the great canadian carry trade right like it really is um, and so that's not scary at all. Yeah, I know. And, and while you think about how many did that and then how many also did it to buy, to purchase pre-construction condos, right? Like when you really think about the examine where a lot of these funds from HELOCs were going, it, it starts to make you lose sleep at night a little bit. But, you know, I think that that's a good example because if you use a HELOC and you're at, you know, you're at prime plus one to two, right? Maybe prime plus, prime plus a little, some spread three, four,

whatever it is, you know, you started at TD's prime was what at the bottom 3%. So you're paying like, you know, three to 5% and lending out money to somebody at 10%, 12%. And then all of a sudden in just one year, like you could have lent money out in 2020, or sorry, 2021, at the end of 2021. And by the end of, by the time that mortgage came up for renewal, because typically when you lend a private mortgage out, it's on a one-year term, you had no incentive to renew because your capital cost has now gone from 5% to 8%, right? Helox are basically in the 8s now, mid-7s to 8s. And so it's also taken a lot of that rescue liquidity, that private debt out of the market as well. Yeah, yeah, exactly. And if we come back to the stock markets, obviously, the same kind of pros and cons happen with leverage. So obviously, it can supercharge

your returns, but it can also really magnify your losses. You can also buy on margin. There's going to be different requirements. I think depending on the broker, it may be 30 to 50 percent requirement. But that's just people can still do that. You'll be able to do that in a margin account. So it's not just specific to real estate, but that's something I've stayed away from just because it's you have to come up with the money somehow when you're buying a stock and it goes down in value. buying a stock and it goes down in value, either they'll use the collateral that you have against it and the existing stocks that you have, or they'll ask you to put money. If not, you'll have to liquidate some stock, which if it's gone down in value, it's oftentimes not the best time to be selling stocks. It's definitely something that can be pretty dangerous in my opinion. And I mean, Warren Buffett says that all

the time. And in terms of stats, I've seen, I don't know the exact numbers, but the Ontario Securities Commission did with Ligier Marketing research a couple of years ago. And I think they said at the time there was about 20% of retail investors that were using some form of leverage, whether it was getting a loan, whether it was using HELOC, whether it was using margin. So I think at the time, obviously, there was a lot of hype in the market. So it may be closer to, you know, 10% now, it's hard to say, but maybe a 10 to 20% range that people are using leverage. So it is definitely possible. But again, I think it's important to for people to understand the pros and cons. Unfortunately, I think with the current for people to understand the pros and cons.

Unfortunately, I think with the current environment, a lot of people may result to getting leverage because they want to become rich. And one of, I don't know if you were aware of that, but I know you know NVIDIA stock. And there's actually like a recently created NVIDIA 3X levered ETF that people people can buy which is obviously not risky at all um and i'm being sarcastic here yeah yeah i thought this was the uh the lever up and yolo show i must be on the wrong podcast yeah yeah pretty much it is funny i'm gonna mention this when we talk later about the the sort of fourth section which is um which is liquidity but you know you mentioned like not selling at a loss and me like i'm i'm a buy uh what is it buy high sell low guy the opposite of what you're supposed to do right like that's most people in stocks that's why i don't do well in stocks so and uh like i can usually i can usually do you and i have talked about a couple of these

trades like insurance policies or like you know know, trades against major macro moves. But usually if I'm trying to buy an actual stock, like actually invest in a company, I'm usually going to find a way to get into the red and then I'm going to sell at a loss. And real estate, when we talk about the liquidity portion, almost prevents you about that a little bit or prevents you against that a little bit because it forces you to diamond hand stuff because it's not as easy to sell. So I thought that was kind of funny, like the switching costs alone, while they're a burden, they can also be a bit of a blessing. Yeah, I think that's 100% true. Yeah, definitely. Depending, I think it has a lot to do with

temperament, obviously. And just the fact that you can see, you know, when the markets are open, you can literally take your phone and refresh the stock every single second. And you can see, you know, when the markets are open, you can literally take your phone and refresh the stock every single second and you can see the price go up and down. Whereas real estate, I mean, you can have a ballpark idea of probably what, you know, the real estate you own is worth, but you don't have a minute by minute, you know, realtor.com or whatever site where like, oh, here's the real-time value of your real estate. That's not happening. You can look at comps and have a general idea, but you won't know until you sell it. Well, and I think that leverage plays an interesting role in this respect where it also, like I was talking about how the nature of leverage, it does give you access to really

good leverage from a rate perspective and a loan value perspective. But the other piece is, you know, you're on a monthly payment schedule. So in order to really catastrophically blow up a real estate investment, it actually takes a long time because, you know, a lot of people, and we're seeing this in the current market, you know, mortgage delinquencies are just starting to rise, even though they probably should have been rising two, three years ago, because people only have to pay their mortgage on a monthly basis. And so a lot of people can scrape together some money or, you know, go borrow from a friend or whatever it is to make a payment. And then it takes them, they're able to kind of white knuckle it and hold on. And the other piece is that typically, if you're breaking a mortgage, if you bought on a fixed

mortgage, you have a cost to get out of that mortgage. You usually have to pay a prepayment penalty or a mortgage discharge penalty. Even on variable rate mortgages, which are technically open, there's still a small fee to exit. And so that adds into the switching costs of selling your real estate asset, which makes it less compelling to sell. And not only that, and also you'd have to like, you know, stock, you put it on the market hypothetically through your broker for in, and it's gone. And by the time you click the button,

right. And a real estate asset, you know, even in a hot market, it's still, you got to declutter, you got to move a bunch of stuff around, clean it, maybe paint it, do some repairs, So you got to declutter, you got to move a bunch of stuff around, clean it, maybe paint it, do some repairs, put it on, you know, and all of a sudden a month's gone by and then it has to sit on the market for a week or two weeks or a month. And so you really have to be committed to be exiting a real estate asset and you have to be committed to failing to pay for it too, to blow up the position because you have to not be scrambling to just make that one extra mortgage payment. Right. Yeah. And and I'd be remiss if I didn't say that. According to the Financial Consumer Agency of Canada, selling your home when you're actually underwater is probably not the best idea. That's that. Did you see that video? They added it to the website yeah yeah i know that i saw they added so just for some context dan made a video on this canadian

government of canada agency and basically they were like you know talking about what if you're having trouble making your mortgage payments all the things you can do. Well, one of the most obvious things, and I went through that myself about five years ago for a home I used to own, where not that I couldn't make the mortgage payments, but I was at the point where I was like, you know what, this is too much trouble. I've, you know, put some money in. I will never, like, I may get it back at some point, but I think the best option for me right now is just to selling this property, get rid of it, and then use the money to invest somewhere else. That's what I did. But it was interesting to see that. Apparently, that's not what people should do when oftentimes it's probably the best option because if you're really struggling to make your mortgage payment, you probably can't

afford the home. Right. Yeah. And I would say that's on a personal basis, like on your primary residence, but also on an investment property. If you're purely thinking of an investment property from a business perspective, and this is one of the differences between real estate and stocks, I think, is that you can actively manage the asset. And so, if your investment property is really underwater, you have options. Selling is usually the option that ends up being the least friction to get out of a bad position. But if you have a single family house, as an example, and because of the mortgage product you chose, it's now cash flow negative, $500 a month, you could also spend more money and

put a basement apartment in it as an example. And now you're adding to the value of the property, but you're also adding to your exposure. You're increasing your position, but you're also increasing the yield of the property and increasing the value of the property. You could also add a detached accessory dwelling unit like garden suites, which are incredibly popular right now. They're in a lot of cases fully financeable for good borrow borrowers, let's call that because that's an important distinction. The person I just described who needs this to make their asset work might not be able to get the credit, but you could add a garden suite and add $1,500 to $2,000 worth of rent to the property. These aren't options that you have where you can actually inject more money. I mean,

I guess you could average down if your investment is bad in stocks, that would kind of be the best comparison, but you can't like, unless you're Warren Buffett, go to the shareholders meeting and tell the person how to run their company better. Right? So that's the active management pieces. It's a blessing and a curse because you have to actively manage it as well. You have to go collect the rent checks, you know, do the maintenance, et cetera, which we're going to talk about a little bit further, but, but you, you, you have, so you have the luxury of being able to improve the investment, but you also have the burden of being able to improve the investment, right? Yeah, exactly. And I think before we move on

to our next section, because we weren't sure if we were going to do this in two separate episodes or not, but given that we're probably a third to close to half of the way through and already more than 40 minutes in, I think we'll do this in a two-part episode then. Does that make sense? It works for me, yeah. Okay, sounds good. So you'll be hearing this episode

on the Canadian Investor Podcast and we'll have the second part of investing in the stock market versus real estate on the Canadian Real Estate Investor Podcast. Perfect. We haven't figured out the release schedule just yet, but we'll make sure that you're aware once you listen to that. We'll probably put a little intro just to give people a context and where to find the first episode if they come across the second one first and vice versa. So we'll see you on the other side. We'll call it a day

for the first part of the episode and we'll see you on the next side for the second part. The Canadian Investor Podcast should not be construed as investment or financial advice. The hosts 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.