You’re richer than you think?

Do you find yourself thinking and spending in ways that mimic the banks and credit cards marketing jingles? Are you amongst the Walmart shoppers that spend like they’re rich while the rich are busy shopping like they’re poor? Figuring out what position in society your financial picture takes very little time but lots of common sense.. Unfortunately the majority of society suffers from a lack of the latter.

Buy high & Sell low = Get rich for idiots

My wife and I love Real Estate, the problem is we love making money even more. We make some of our smartest money through buying low (and intelligently) and selling high and I am not talking about Real Estate. Shouldn’t these two go hand in hand though? After all we have always been told that Real Estate always goes up and as such the money invested into Real Estate will always go up (grow) as well.

I strongly believe that there is a great degree of truth backed by the undeniable evidence that for the most part this has held true for many many years – despite the temporary declines incurred during the late 80’s and early 90’s where losses were regained within approximately 5 years. Simply put Real Estate has proved itself as a relatively safe and consistent investment tool for over 30 years. Our parents who purchased at the beginning of our lives have and still continue to sell with modest returns on their investments, in turn the next generations of buyers have bought on top of historical gains in hopes of riding the same road to appreciable positive return that their parents are now partially retiring on.

Over the past 10 or so years Real Estate has ingrained itself into Canadians culture and financial lives in a way that rivals that of Hockey, Beer or Maple Syrup! Real Estate is marketed to Canadians and in particular first time buyers as the ONE & ONLY way to wealth and fortune and compounding this phenomenon is the Joneses effect that plays itself out subliminally 24/7 in the minds of the financially uneducated. Real Estate is no longer marketed as a home, it is marketed as an investment tool and for the majority of those in society with simple minds – the simple math to prove this point makes marketing and selling Real Estate easier than flipping burgers.33

Why WASTE rent when you can BUY and eventually see the return on your mortgage payments?? Why PAY someone else to live in their home when you could otherwise PAY YOURSELF to live in the same home? With interest rates today at historical lows and 5 year variables @ 2.99% easier to obtain than a low interest line of credit, the mindless and financially illiterate have been running like flocks of sheep to BUY on the premises of being savvy investors and selling for profit in a few years down the road. This works – as long as Real Estate continues to appreciate at the pace that is has in the past 10 years and mortgage rates remain at their historical lows.

The problem however is they won’t! – it really takes 10-15 mins worth of easy research to understand exactly where Real Estate lies today. Real Estate today is at record highs, prices and price growth is in territory now that has lead to devastating collapses in Ireland, Great Britain, United States, Japan, Poland and Spain to name a few – each and every one of these countries (amongst others) have experienced exactly what Canadians are experiencing now – record high prices, unsustainable growth, uncertain economic environments spurring ultra low interest rate policies etc. Each of the listed countries experienced deflation in Real Estate values between 20%-65%.dd

The fall out of their crashes have been devastating to the finances of those who bought in at the highs, many will never recover financially and the compounding effects of Real Estate crashes and the greater economy (jobs, savings, investments, retirements etc) have only made life worse. Each and every one of the listed countries had varying factors behind the run up in their prices to the point of collapse, however the big picture remains the same – any asset valued above its historical level has an exponential risk associated with it.

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Back to Canada – our Real Estate is now priced far beyond every single healthy metric of historical and economic averages. Are people still realizing appreciable profit and gains off of Real Estate, the answer is yes but at a rapidly diminishing rate. Will people be realizing profit and gains off of Real Estate bought today in 5 years? The answer is a definite no. In fact, anybody buying in today’s environment will not likely see any gains or appreciable profit adjusted or unadjusted for inflation in 10-15 years.

Allow me to demonstrate quickly how buying today (even under the assumption that housing will appreciate by at least 1% every year for the next 5 years) will still end up costing you MORE money than if you had just decided to invest in the TSX.

Here are the details:

4 bdrm / 3 bath house listed today with a beautiful view of Okanagan Lake list for $429000. Purchase the house with a 5 year fixed @ 2.99%

Rent the exact same comparable house on the exact same road with the exact same view for $2000 per month.

Alternatively, invest what you would otherwise pay between a 5% minimum down payment and closing costs in the exact same TSX portfolio that I hold with average 5 year returns of 8.3% without adding another dime for 5 years.

End result punched out on the calculator on my phone – Renting is cheaper by $28,241 ($471 / month)

And for the 99% percent of you that call bullshit and don’t trust the my math see below.

This is simply a black and white example that does not take into account any of the extremely high risk that are the prices of Canadian Real Estate today.

If house prices were to DECLINE by 1% per year than this would be the result: Renting is cheaper by $69,004 ($1150 / month)

So back to my wife and I – we love Real Estate, our family is invested in multiple properties throughout the Okanagan, but we also love making money more and nobody ever made a dime through buying high and selling low.

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