Calgary real estate prospects

[pheoxs]

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I've always struggled with the landlord economics, maybe the accounting and/or Math 30 brotherhood can help me out. Say I'm single unit landlord that is cash flow neutral to borderline cash flow negative on any given year. What keeps me convinced that even in this state, it is still worthwhile to proceed because there is mortgage principal being paid down along with a commensurate (slight) increase in home prices (apart from the past few years) so the delta keeps widening. The other thing I've noticed my accountants do is amortize the building (not land) component of the total value as an expense. So on the B/S the NAV increases (we hope) but the income statement and CF are both negative for the year. So what gives? Is there an advantage to incurring these mostly paper annual losses? If the property value keeps being expensed downward, then will I have to pay more of a capital gain when it's time to sell?

Gotta look at it as your return on your principal investment.

Let's say you put 100k down on a 500k house /w 400k mortgage @2.99% for 5 years. Assuming you're revenue neutral to simplify the math then your gains/losses come down to A) principal payments and B) change in house value.

A mortgage calculator shows you'd have paid 58k onto your principal after 5 years. So 100k invested you received a 58k gain. That's roughly equivalent to investing in the stock market and getting 9% return each year. Granted a house has some risk (tenants, maintenances) but there is also the second aspect of the house's value itself. If your house goes up 50k over 5 years then you've doubled your money. But obviously if it drops 50k over 5 years then you lose your gains too. Goes both ways.

But long term houses (detached, not the shit condo market) continues to gradually go up even factoring in some oil crashes along the way. So it's relatively safe bet if you look 10 or 20 years out that you'll be up both on principal payments but also house value itself going up.

[Buster]

basically it's a no brainer

[killramos]

brb my portfolio just called, something about feces all over the master bedroom floor.

[riander5]

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Gotta look at it as your return on your principal investment.

Let's say you put 100k down on a 500k house /w 400k mortgage @2.99% for 5 years. Assuming you're revenue neutral to simplify the math then your gains/losses come down to A) principal payments and B) change in house value.

A mortgage calculator shows you'd have paid 58k onto your principal after 5 years. So 100k invested you received a 58k gain. That's roughly equivalent to investing in the stock market and getting 9% return each year. Granted a house has some risk (tenants, maintenances) but there is also the second aspect of the house's value itself. If your house goes up 50k over 5 years then you've doubled your money. But obviously if it drops 50k over 5 years then you lose your gains too. Goes both ways.

But long term houses (detached, not the shit condo market) continues to gradually go up even factoring in some oil crashes along the way. So it's relatively safe bet if you look 10 or 20 years out that you'll be up both on principal payments but also house value itself going up.

Or in simpler terms, if you cashflow slightly negative, you are turning a small monthly investment into 10x that. Ask my how I know. I will invest $100k of money out of my own pocket over 25 years, to have paid off properties worth roughly $800k. Could I invest that small amount somewhere else? Sure, but I'm already doing that with other money.

Im forced to diversify into RE because I'm an idiot and bought condos. On the bright side, ill invest 5% of my post tax income or so for a big return over time. Only issue is the headaches that come with it but for a ~ million dollar pay cheque at the end should be worth it.

Unless interest rates go full 1980's on me. Then me and the rest of Canadians with mortgages are declaring bankruptcy

[88CRX]

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Only issue is the headaches that come with it but for a ~ million dollar pay cheque at the end should be worth it.

Its worth it for some people some of the time.... then you read about tenants turning furnace off in -30c weather to save money LOL.

I did it for a while (also condo ownership related) but after all the time required between tenants and dealing with a condo board I was glad to dump my rental, take my equity (and small profit) never to return again.

[Buster]

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Its worth it for some people some of the time.... then you read about tenants turning furnace off in -30c weather to save money LOL.

I did it for a while (also condo ownership related) but after all the time required between tenants and dealing with a condo board I was glad to dump my rental, take my equity (and small profit) never to return again.

That's not how RE investment works. It's passive income.

[killramos]

Sounds like RE investments are kindof like boats.

The two happiest days for a boat owner, they day you buy it and the day you finally sell it.

[Buster]

I'm thinking that rental properties are the Costco Gas line of investments.

It's a good gauge of how much people value their time.

[ercchry]

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I'm thinking that rental properties are the Costco Gas line of investments.

It's a good gauge of how much people value their time.

It’s a young man’s game for sure… but what else is a young man’s game? It’s the lowest barrier to entry out there, all it takes is a full time job and a couple bucks and you’re now leveraged like a big boi. Grind at it in your 20s, then you might just be able to get a seat at the real table.

Not many people can just hope right into being an eligible investor without a few years under them earning big, even franchises have rather high barriers, not a whole lot out there for the “every man”

[kJUMP]

Ok, forget the economics, I get that. In terms of the accounting, for a simplified one unit example, is there any benefit (or what is the purpose) in a paper loss each year? When you factor in interest, maintenance, insurance and property amortization as a few examples of related expenses, all that combined is not at all offset by the annual rental revenue. On a separate note, if amortization serves to decrease the value of the property (not the land) each year, then does that in any way factor into your initial purchase price when it's time to sell, or is this just an accounting trick?

[Strider]

Of course you calculate your return on $100k, since 5x leverage doesn't matter and RE can't lose (all the downtown condo bag HODLers on here notwithstanding).

[Buster]

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It’s a young man’s game for sure… but what else is a young man’s game? It’s the lowest barrier to entry out there, all it takes is a full time job and a couple bucks and you’re now leveraged like a big boi. Grind at it in your 20s, then you might just be able to get a seat at the real table.

Not many people can just hope right into being an eligible investor without a few years under them earning big, even franchises have rather high barriers, not a whole lot out there for the “every man”

People make two mistakes with this line of thinking:

1. They don't realize that the low barrier of entry also means demand is high.
2. People treat it like a cheat code, rather than understanding the risks

[killramos]

Rosebud

F U N D

[ercchry]

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People make two mistakes with this line of thinking:

1. They don't realize that the low barrier of entry also means demand is high.
2. People treat it like a cheat code, rather than understanding the risks

3. Previous results is not an indicator of future performance

I’m not advocating for slumlord status levels of RE exposure… but it’s can be used as a great accelerator of wealth at a young age, no one is extending you credit without a track record, except for mortgages

[Cagare]

It's by far the easiest way to become a leveraged investor at a young age. It was also a good vehicle for my immigrant family to build wealth in the 80's and 90's, although most of them have gotten away from rental properties because of the tremendous amount of personal effort involved and the types of people that so often had to deal with. You can't get away with half as much as they used to as landlords during those times now, the pendulum has swung very far in favour of the tenant in recent years.

I find it fascinating that so many people are willing to leverage to invest in rental houses but so few leverage to invest in equities and view that as "risky".

[Buster]

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3. Previous results is not an indicator of future performance

I’m not advocating for slumlord status levels of RE exposure… but it’s can be used as a great accelerator of wealth at a young age, no one is extending you credit without a track record, except for mortgages

Why is it hard for people to get Credit at a young age?

[vengie]

I know very few people who have made money as a RE investor in Calgary.

I know even more who have lost significant money thinking they were the next big real estate tycoon.

[ercchry]

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Why is it hard for people to get Credit at a young age?

You damn well know the answer haha… but it’s still better than giving them a robinhood margin account with advanced options trading enabled

[suntan]

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You damn well know the answer haha… but it’s still better than giving them a robinhood margin account with advanced options trading enabled

So they can't get credit, but I guess a mortgage on a second property isn't credit?

[Buster]

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It's by far the easiest way to become a leveraged investor at a young age. It was also a good vehicle for my immigrant family to build wealth in the 80's and 90's, although most of them have gotten away from rental properties because of the tremendous amount of personal effort involved and the types of people that so often had to deal with. You can't get away with half as much as they used to as landlords during those times now, the pendulum has swung very far in favour of the tenant in recent years.

I find it fascinating that so many people are willing to leverage to invest in rental houses but so few leverage to invest in equities and view that as "risky".

This is easy to answer. There are large institutional incentives to create a culture around home ownership and RE investment. The same reasons why RE is an unattractive investment are the same reasons that there is so much marketing pressure put towards making it an aspirational asset class. There are a lot of intermediaries that make a shit ton of money - banks, real estate agents, lawyers, inspection companies, renovation companies, property management, etc. You as the home-owner supply the risk, and the labor. Awesome!

Who makes money off of ETFs and other equities? A much smaller industrial complex, with much lower margins.

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You damn well know the answer haha… but it’s still better than giving them a robinhood margin account with advanced options trading enabled

Is it though?