Revenue LOSS – Is Toronto too Dependent on Real Estate?

Published on 16th August 2018

You and I both know that Toronto real estate is a hot topic these days and oftentimes, a very sensitive matter as well. For these reasons, this is probably why you are following these blog posts closely. The most common topics that are brought up include: prices, sales, the amount of construction and locals being priced out of the market. As great as those topics are to write about, there has already been a lot of press in the news about it since they’re all essentially “eyeball magnet” topics. So today, I want to shed some light on some important issues that haven’t really been addressed a whole lot yet – the loss of revenue for the City of Toronto.

The Villain – As a world-class city, there are many improvements that need to be continually made as we grow and need more and more revenue to support these developments. Every mayor wants to improve our City, however, the issue always seems to be where will that money come from. Who has the guts to be the villain and increase taxes in order to further improve our City?

The David Miller Factor – Back in 2008, David Miller implemented the Municipal Land Transfer Tax (MLTT) in addition to the Ontario Land Transfer Tax. It essentially doubles the land transfer tax if you buy a property within the City of Toronto. For a $500,000 property (i.e., an average entry-level condo), the land transfer tax is $6,475 for Ontario and $6,475 for Toronto, for a grand total in land transfer tax fees of $12,950.

Pot of Gold – To date, the MLTT has unexpectedly produced over $9 billion dollars in revenue as a result of the growing real estate market. In 2017, it accounted for 9% of the City’s total annual revenue. Have a look at the disproportionate growth of the MLTT relative to the other sources of revenue between 2011 and 2018.

Source: NationalObserver

For reference, 47% of the City’s revenue comes from property taxes despite having the lowest property tax rate in the Ontario (the latter of which is shown in the chart below).

Unexpected Cash – The MLTT tax has basically become a cash cow for the City. This has allowed Mayor John Tory to freeze all increases on the property tax rate during his tenure. In the last few years, Toronto’s budget has had an unexpected increase of tax revenue from MLTT as follows:

2015 – Unexpected $75 million
2016 – Unexpected $101 million
2017 – Unexpected $182 million

This all sounds great for the City, but with the decline in sales volume, this poses a huge issue for Toronto’s budget. The following is word-for-word excerpt from Toronto’s 2018 Principles of the Long-Term, Financial Plan:

“Revenue from the Municipal Land Transfer Tax has been the dominant force in maintaining stable revenues in spite of low property taxes. When the Municipal Land Transfer Tax was introduced in 2008, it was expected to be a small portion of total revenues. As has been well documented and flagged, it has grown considerably with the real estate market, bringing the City considerable and unforeseen revenue increases along with revenue risk. It is important to take appropriate steps to mitigate the cyclical risk of this tax. Municipal Land Transfer Tax revenues do not need to decline to pose a significant problem. If the tax does not continue to grow, Council may have to make difficult decisions to close the structural budget gap each year.”

The scary thing is if the tax revenue flat-lines, it could prove to be an issue for Toronto.

By the Numbers – Although the real estate market is healthy in various pockets of the GTA, the damage has already been done. Have a look at the chart below for MLTT that has been collected in the first 7 months of 2018 relative to 2017.

Keep in mind that the first 4 months of 2017 were all record-setting years. However, don’t forget that the balance of 2017 was super weak. At this point in time, the City already has a $244 million dollar (30%) deficit relative to last year. The 2018 Fall market is going to have to perform incredibly well in order to cover this deficit and maintain the revenue levels being generated in the years prior.

Development Charges, Explained – It is for all of the reasons above why I believe the development charges were doubled back in February 2018 (Pre-Construction Condo Prices Are Primed to Increase!). The doubling of development charges will yield the City approximately $300 million dollars in tax revenue. However, the issue with that is since development companies are for-profit, they will not be absorbing this tax. It will ultimately be passed onto you and I as the end-consumers and citizens – all of this has effectively driven up real estate prices for us.

The Wrap – At the end of the day, the City of Toronto is a business as well – it needs to have enough revenue coming in to support the dollars it spends. Money must come in one way or another. Unless the real estate market explodes in the Fall of 2018, Toronto is going to need to find a way to fill the financial gap created by the potential loss of the MLTT revenue in 2018. Personally, I don’t think something drastic will be coming because a municipal election is happening in October and nobody is going to run on a platform of increasing taxes. However, I wouldn’t be surprised if we see some changes in the future!

Analysis Paralysis – How to NOT Get Trapped!

Published on 9th August 2018

Have you ever wondered why there are just SO many Realtors in this city? The answer is actually quite simple because the requirements and steps to obtain the license is fairly easy. You don’t need a university education to be a Realtor. You complete 5 multiple choice exams over the course of 18 months. If you’ve successfully passed the exams, then you can carry on with trading real estate. From my own experience, what they teach you with the real estate courses is really not the most useful in helping you become a successful Realtor.

It is for the reasons above why I always find it interesting to talk to people who transitioned into real estate from what they originally studied in school (i.e., engineering, accounting, etc.). A lot of these skills from other professions are transferable to a career in real estate, and many do use their skills to their advantage in order to excel.

For me, I actually studied science in school (because every immigrant parent wants their kid to be a doctor when they grow up!). Ultimately, this means that I was trained to always look for empirical evidence.

Real Estate Riches – What I have seen (and continue to see) after helping manage the portfolios of very wealthy clients is that real estate is a huge contributor to their overall net worth. I’m sure you have heard that a majority of the millionaires in the world come from owning real estate.

In the Driver’s Seat – The simple fact is that with real estate, you can use a down payment of 5% to buy an income producing asset that is 20 times its value, combined with the fact that you have full control over the asset itself. If that last sentence makes sense to you, then you’ll understand why real estate is such a great wealth creation vehicle.

Learning to Drive – Obviously, in order for real estate to be a great wealth creation vehicle, you need to know how to drive first. It is here where the rubber often meets the road, and this is where I see a lot of people getting stuck. Action needs to be taken instead of over analyzed a million times.

Decisions, Decisions – There are so many different investment strategies out there for real estate that ranges from, buy and hold, short-term rental, flipping, buy-fix-refi-rent, pre-construction, rent-to-own, vacation rentals, multi-residential, commercial, development, and many more. As a result, many first time investors get stuck with trying to learn and understand each and every single strategy; they will analyze each strategy to the nth degree before they make their first investment. The empirical evidence that I have seen over and over again is simple – buy a property that pays for itself and you’re golden! You will have many options moving forward once you actually own that asset.

Rubberneck Rule – I recall when I first learned how to correctly invest in real estate – I kept coming back to one rule. This rule is the 1% rule. It is a basic rule that I was told to always apply to every investment property. That is, to have each month’s rent be at least 1% of the total purchase price.

At the time, it seemed like a great rule that many leading experts had recommended to follow because it meant that you could, in theory, pay off the property in approximately 8 years. Looking back though, having that rule in my mind actually worked to my disadvantage because it got me completely stuck for a while (kind of like driving by and rubbernecking when there’s an accident on the road).

Applying the Rule to Reality – If you think about it, the average investment condo is a little over $500,000. If I applied the 1% rule to the average condo investment, I would need $5,000 per month in rent to make that rule work. Even with the massive rental incomes in short-term rentals, the $5,000 per month expectation is hard to achieve every month on a consistent basis. From that perspective alone, all of the condos purchased in the last decade would have been a terrible investment. However, there are tons of real estate millionaires in Toronto that have made their fortunes with condos and who have NOT followed this 1% rule.

So Then That Begs the Questions: How effective is having an inflexible rule for investing in real estate? How much analysis do you really need to have in order to determine if a property is a good investment?

Ultimately, you will have to answer those questions for yourself. For me, even though I could analyze a property to death, I have trained myself to be flexible enough – as long as I can make the property pay for itself, then the rest really doesn’t matter as much. Taking action in the NOW is first and foremost. Without taking action, there will be no results nor a bottom line.

The Wrap – In summary, if you want to be successful in real estate or just about anything else for that matter, you must overcome any fears and doubts that you may have. Remember that taking action will get you results. So the next time that you experience analysis paralysis, just remember this:

“Thinking will not overcome fear, but action will” – W. Clement Stone

Should I Sell My Property?!

Published on 2nd August 2018

To sell or not to sell… that is the question. You could imagine one asking such a question with a face similar to the emoji on the bottom.

Recently, I’ve been asked by a few of my clients regarding whether they should sell their property right now. Unless it’s for personal reasons, my answer has always been no. So at the request of one of my clients, I’ll go deeper into this topic in this week’s Insight Article so that I can shed some light on why selling doesn’t make any sense.

If you’re reading this and would like me to do a deep dive on this controversial topic with you, please send me an email at

One for One – When pondering the dilemma of “to sell or not to sell”, I would actually challenge your question with another question:

“Is your property generating positive monthly cash flow?”

The above question applies to both selling an existing property and a pre-construction assignment. Before I tell you my thoughts, allow me briefly explain what an assignment is and the purpose of it.

Where’s the Assignment Clause? An assignment is essentially the process in which one person sells the benefits and obligations of a contract to someone else. In the case of a pre-construction contract, the new buyer (the “assignee”) gets to close on the condo unit which you (the “assignor”) purchased much earlier from the developer. Technically, the purpose of an assignment is for a “just in case of an emergency” situation and you should treat it as such.

I know many may disagree with me on this and some investors even actively treat the assignment clause as a mandatory necessity when purchasing a pre-construction condo because they know they will want to sell it before closing.

Think Twice – Allow me to explain why I don’t recommend selling any piece of real estate right now, and that includes both existing and assignment properties.

In my honest opinion, you will make the most money when you buy and hold a property, especially with the way the Toronto real estate market is trending. The longer you hold onto a property, the better off you will be. The combination of cash flow, mortgage paydown and a very conservative appreciation will generally yield you over 25% return on your money (i.e., your mortgage down payment). This is significantly better than any mutual fund!

I have many clients who ask me to sell their properties, and as much as that will help benefit my business, I often talk them out of the sale of their property because I don’t want them to lose an income producing asset. Income producing assets are super important to your wealth generation because in our current world, it’ll only be more difficult to own anything from this point forward as a result of inflation, interest rates, and a whole lot of other reasons that I won’t get into here.

Let me give you two scenarios:

Option #1 – Selling Now

Let’s say you have purchased a pre-construction condo a few years ago for $400,000. It’s now worth $500,000. In your mind, you would think, “AMAZING – If I sell this property now, I can make a quick $100,000 on my deposit from a few years ago!” Wicked return on investment right!?!

While that is correct, let me break down the numbers some more for you.

Your $100,000 profit would be eaten up by a 5% realtor fee, which is $25,000 + HST. Then, your profits will also be taxed at 50% for capital gains tax at your marginal tax rate (assuming this unit was not for personal occupancy). For a person making an annual income of $100,000, the marginal tax rate is 21.75% or in other words, another $10,875 would be gone from your profits. After that, you still need to account for the builder assignment and legal fees of approximately $6,000 combined.

With all of the factors above, your profits have been reduced down to almost half of what you originally expected – to an actual profit of approximately $54,875. The calculation below provides an illustration of this example:

Option #2 – Not Selling

This is the option that I would highly recommend. You close on the property, rent it out and make a healthy monthly cash flow each month. This is why the earlier question, “Is your property generating positive monthly cash flow?”, is so important. Assuming that your property appreciated by $100,000, you could opt to refinance your property immediately after you close on it. Doing this refinance would allow you to possibly pull out approximately $80,000 TAX-FREE to pick up another property!

So What’s the Catch? That $80,000 refinance will add another $350 per month to your monthly mortgage payments. However, as long as your rental income supports this additional monthly mortgage expense (i.e., the added expense does not put you in a net negative cash flow position), then you’re golden!

…and Here’s the Real Kicker – YOU STILL OWN THAT INCOME-PRODUCING ASSET! #winning all around!

So over the course of 5 years, which scenario above is going to make you more money? Selling now for a profit of $55,000 and try to double that with another property, or knowingly having TWO fully rented out properties that are still both continuing to appreciate in value?

YOU are Top Priority – It is for the reasons above why I will always try to talk my clients out of doing any selling unless you absolutely have to due to personal circumstances. When I advise my clients against giving me their business to sell their home, I always get great feedback for being completely honest and transparent. Watching out for the best interests of my clients is always top priority for us here at PPTO. We always want you to make the most out of your hard earned dollars!

The Wrap – So hopefully this helps you understand why I would always push for not selling your existing and pre-construction properties. If you have the ability to own real estate in Toronto, why give up an in-demand asset that will ultimately keep increasing in value over time? It’ll only get more and more difficult to own real estate in Toronto in the years to come, so hold on to those assets!

4 Record Setting Trends you wont believe

Published on 26th July 2018

Generally, summertime usually means a slower real estate market. Families head out to cottages, vacations are taken, and people are just generally busy enjoying the many activities happening in and around Toronto during the summer months. However, despite this supposed “summertime slowdown”, there have been some shocking statistics coming out from the downtown core in the past 4 weeks.

Believe It Or Not – Every morning, I monitor the MLS for new and sold properties in certain areas for my clients, and I often stumble across some that have me thinking, “Seriously… that happened?!”. Recently, there have been 4 such cases that really caught my attention, and I wanted to share it with you to give you an idea of some trends we may be seeing.

Keep in mind that although these properties are outliers right now, there is a very good chance that the market is trending in that direction. I remember vividly when we had pre-constructions condos that were just breaking the $1,000 per square foot mark last September 2017 (10 months ago). At that time, many of my clients had expressed concerns that we broke the 4-digit mark; in other words, they thought that had to be the peak (that’s a rather odd way to determine the peak, if I may add). However, 5 months later, in January 2018 (7 months ago), $1,000 per square foot was considered cheap as many projects were pushing $1,100 per square foot product in that short time span. Presently, another 7 months later, and we’re pushing the $1,300 per square foot mark in the downtown core.

Outrageous New Norms – I’m not saying we’re going to see this kind of appreciation moving forward, but the point that I’m trying to make is that sometimes the record setters become the norm much quicker than you may think. Remember 5 years ago when you could buy a downtown condo for $650 per square foot? Long gone are those days!

In the past 4 weeks, the properties below really caught my eye on where the market could be heading. I absolutely have to share this with you!

Example #1: Bachelor Unit Sells for Over Half A Million Dollars
Address: 80 John St #1502
Sold Price: $500,800
Sold Date: July 21, 2018

Closer Look: I have never seen a bachelor unit sell for over $500,000 before. Granted, this is a shallow, well laid out bachelor unit – but nonetheless, it is still a bachelor unit. There are no doors to the bedroom. Also, this unit was sold in a bidding war and OVER asking! This says a lot about the demand for entry-level properties. I wouldn’t even classify entry-level properties based on the type of unit nowadays, but rather based on the price (i.e., an entry-level property is what an average person can afford).

Note: This unit has 1 locker, no parking, and above-average maintenance fees.

Example #2: Bachelor Unit Sells for Almost $1,300 Per Square Foot
Address: 290 Adelaide St W #2903
Sold Price: $415,000
Sold Date: July 9th, 2018

Closer Look: Recently, new build condos were starting in the $1,300 per square foot range and many people thought it was crazy. Well, just recently a bachelor unit at Bond Condo sold for $1,269 per square foot – that’s a new resale record for sure (excluding luxury penthouse units)! Here is the interesting thing though that many people who only read the headline would miss. If you purchased this condo at a record-setting price per square foot, then your monthly carrying cost (mortgage, taxes, maintenance) of owning the property is actually lower than if you were to rent this property to live in. True story! So despite its price tag, this property is actually cash flow positive!

Note: This unit has 1 Locker, no parking, and super low maintenance fee & taxes.

Example #3: Bachelor Unit Leased for Over $2,000 Per Month
Address: 88 Blue Jays Way #2611
Sold Price: $2,050 per month
Sold Date: June 27, 2018

Closer Look: Remember how I was talking about the lack of rental supply and a potential bloodbath that is happening? Well, this landlord clearly took advantage of that. A bachelor unit being leased for $2,050 is definitely a record. Just take a moment and think about that for a second – there is a bachelor unit that is worth over $2,000 per month to rent in downtown Toronto… that’s insane! The rent of $2,050 per month is a higher monthly payment than if you were to buy and own the previous bachelor unit at Bondo Condo (which is literally a 1 minute walk down the street). The new tenant even paid above asking price just to get the unit. The demand is just incredible. On a per square foot basis, the rent is $4.75. We’re getting close to $5 per square foot. Can you believe this?!

Note: This unit has no locker, no parking, the hydro is extra, and it has never been lived in before.

Example #4: 1 Bedroom Unit Breaks $3,000 Per Month
Address: 5 St. Joseph St #1008
Sold Price: $3,000 per month
Sold Date: July 16, 2018

Closer Look: One year ago, it was crazy to think that 1-bedroom units were going to break the $2,000 per month rental mark. Well, this 1-bedroom unit just broke the $3,000 per month rental mark. Granted, this is a nice corner unit, but the fact that this unit was leased out in 2 days for $3,000/month tells me that there is a huge demand for 1-bedroom units with parking (as I have been warning my clients). I’ve experienced this with a few of my clients in the last few months as well. This property is leased at $4.21 per square foot.

Note: This unit has no locker, 1 parking spot, and hydro is extra.

The Wrap – The 4 examples highlighted above set new records in their respective areas, but you shouldn’t take this as where the market is right now. However, do note that because there have been cases like this caused by the lack of supply, I wouldn’t be surprised to see these cases being the norm in the coming months. Everyone thought a condo couldn’t exceed $1,000 per square foot just a few years ago when people were buying properties for $650 per square foot. Well, we’re past that $1,000 per square foot mark in the downtown core now. Unfortunately, this is the new norm. Will $1,300 per square foot soon be the new norm? Only time will tell. Hang tight everyone!

Here We Go Again… Rental Rate Hikes!

Published on 19th July 2018

It has been less than two months since I wrote an insight article on how to capitalize on the upcoming rental bloodbath. Now, here we are in the middle of July and the bloodbath is real.

Oftentimes, it is hard for some people to understand and grasp how fast the market is actually moving (even when you are actively trading in it). So when good, reputable sources come out with just pure stats on how the market is doing (without any further bias), I always review it to do some due diligence. Plus, of course, I will always share my thoughts with you afterwards :).

The Numbers are In – A few days ago, Urbanation released the annual rental numbers comparing the current rental market to last year and to no surprise for me, the current rental rates are at an all-time high – an 11.2% increase from last year, or in other words, the current average rental rate in the GTA is now $2,302/month! For your reference, the average rental increase after considering inflation is expected to be approximately 3-4%.

Up, Up and Away! Below is a chart depicting the escalating cost of rent year-over-year, and you can see that in 2018, we had the biggest jump to date. You can blame some of that jump on rent control and the stress test, but there are also other factors that have caused this spike as well.

Scarce Market – The supply issue is real, but nobody is addressing it. With no one moving out of their rental property due to rent control, Toronto is experiencing historic lows for the turnover rate on rentals right now. We’re currently at an average of 15 days on the market with rental units.Good luck to everyone out there trying to find a rental unit right now!

Rental bidding wars are back! Below is a quick snapshot of what it currently takes to rent a particular type of unit in the GTA. Some of these numbers may come as a surprise to some people, but this is as real as it gets. Some of these numbers are even at least 20% higher when you are in the downtown area!

High Cost of Living – Lastly, below is a snapshot of each municipality and their rental rates. You can see that to be in the city (not even just the downtown core), the average rent in Toronto is over $2,500 per month or in other words, that’s $30,000 going towards rent per year.

The average pre-tax income in Toronto is approximately $45,000. If annual rental costs are $30,000, that’s two thirds of your pre-tax income going towards living costs!

More Bloodbath?! So even though we find ourselves in the middle of July’s rental bloodbath, there is actually even more potential rental rate increases coming our way between now and September. When October rolls along and we get the numbers, we’ll see where the rental market ended after the summer, and quite frankly, it would not surprise me if we reach new historical highs for rental rates yet again.

The Wrap – So what does that mean for investors? New peaks in rental rates translate to higher average selling prices. For an investor, it’s a winning situation. For the renters, we’re seeing an unfortunate series of events here. This is the vicious cycle in Toronto that we are living through right now. Condo prices and rents are going to keep going higher and higher until someone actually addresses this underlying supply issue.

Why You Should NOT Sell Your Pre-Construction Unit on Assignment

Published on 12th July 2018

If you have been buying pre-construction condos or simply just looking around, then you might recall seeing incentives like “$0 assignment fee” or a “reduced assignment fee”. You might be wondering why that is important and if you should be looking for that in your next purchase. Recently, I’ve been asked a few times about selling a pre-construction condo via assignment. As a fellow investor, I wanted to share my thoughts and strategy so that you are able to maximize your real estate investing efforts instead of making make a costly mistake.

What is an Assignment and its Purpose? An assignment is essentially the process in which one person sells the rights and obligations of a contract to someone else.

In the case of a pre-construction condo, when you assign a contract to someone else, they will get the benefit of closing the specific unit stated in the contract upon its completion, in addition to fulfilling the other contract obligations. A similar process takes places when you are transferring a leased car to someone else.

So then the question becomes: why do some people always look for an assignment clause on pre-construction purchases?

The Assignment Flipper – If you are a pre-construction assignment flipper, then yes, you could potentially make money on the assignment sale. The downside though is that you are essentially throwing away the long-term benefits of owning real estate. Allow me to explain why I don’t always recommend assignment flipping.

Finder’s Keepers – In my honest opinion, you will make the most money when you buy and hold a property, especially the way that the Toronto and Golden Horseshoe markets are shaping out. The longer you hold onto a property, the better off you will be for many reasons other than just appreciation. You also get the benefits of:

1) Cash Flow
2) Mortgage Pay Down
3) An Income Producing Asset

Many of my clients ask me to sell their properties, but as much as that will benefit my own business, I often talk them out of it because of the above benefits that you get with owning and holding onto real estate.

An Example – Let me give you an example (approximate numbers based on one of my clients). Let’s say that you purchased a pre-construction condo a few years ago for $400,000. It’s now worth $500,000 and you plan to assign the deal. From your perspective, you may think “Awesome! If I sell this property, I can make a quick $100,000 on my deposit from a few years ago!” That sounds like some wickedly good return on investment, right!?!

While that is correct, let me break down the numbers some more for you.

Your 100,000 profit would be eaten up by the 5% realtor fee, which is $25,000 + HST. Then, your profits will also be taxed at 50% for capital gains at your marginal tax rate. For a person who has an annual income of $100,000, that’s 21.75% or in other words, another $10,875 gone from your profits from the assignment deal. You will also need to pay the builder assignment and legal fee of approximately $6,000.

On the other hand, if you don’t do the assignment and just close on the property, you can rent it out and make a healthy cash flow each month. Subsequently, you could also choose to refinance your property immediately after closing (since there would already be some appreciation in the unit). This means that you could be possibly pulling out about $80,000 tax-free (from the refinance) to pick up another property.

What’s the Catch? The refinance would add another $350 per month to your monthly mortgage payments. However, as long as your monthly rental income on the additional property supports the added $350 per month mortgage payment, then you’re golden!

Here’s the kicker though – YOU STILL OWN THAT PROPERTY!

It is for the above reason why I will always try to talk you out of doing an assignment, unless you absolutely have to as a result of personal circumstances.

The longer you hold onto real estate, the more benefits you will have. So why not leverage the appreciation that you gain during the construction phase of a pre-construction unit in order to buy more properties? It’s a very simple formula.

Generational Wealth = Buy + Hold + Re-finance + Repeat

The Wrap – I hope this helps you understand why I’ll always push for you to not flip your pre-construction properties. You have the opportunity to close on an amazing asset in Toronto, why give it up that easily. It’ll only get more and more difficult to own real estate in Toronto in the years to come, so hold onto those hard assets! Here at PPTO, we can help you acquire even MORE properties so that your portfolio just keeps growing and outpacing the market instead of the other way around!

Mortgage WARS and What This Means for YOU!

Published on 5th July 2018

Move aside Trump trade wars! We have mortgage wars between the banks to deal with right now. If you haven’t heard the news yet, HSBC and BMO have officially just dropped their mortgage rates, which will ultimately force other competing banks to follow suit.

Three weeks ago, I wrote an Insight Article called, “The Market is Crazy – What Should I Do?! Fixed or Variable Mortgage?“. That article answered a yearning question of whether you should go fixed or variable with your mortgage rate.

Knowledge is Power – Another interest rate announcement will take place next week on July 11th, 2018. But whether the interest rate increases or not, we technically already have a discounted rate from these bank promotions. As investors, being in the know is half the battle! So being able to understand what is going on with the mortgage rates is critical to being a savvy investor.

Controlling the Rates – I’ve spoken to many mortgage brokers on this matter and I get the feeling that many of them believe that the major financial institutions are like the biggest money cartels. In a way, the major banks essentially monopolize the industry as they control the interest rates and dictate the cost of borrowing. That said, there is nothing we can really do about that if we need to borrow money in order to fund our investments.

Driving the Bottom Line – It’s a highly competitive industry because when one of the major financial institutions reduces their lending rate for mortgages, it will drive the other lenders to reduce their rates as well. A good comparison for this would be when Telus, the telecom giant, introduced a 10-gigabyte phone plan for $60 to drive higher profits; the other telecom giants soon followed in their footsteps. Similarly, in the lending world right now, BMO dropped their mortgage rates for the exact same reason – to drive profits!

OFSI Driving Down the Profits – The OFSI stress test requires that all borrowers be assessed for their purchasing power at the posted interest rate. This means that it doesn’t matter what rate the individual banks offer; the rate of measure for the stress test is always the one that is posted.

So even though there are customers who would want a mortgage to purchase a property, many of these customers are no longer qualified to get the mortgage as a result of the stress test. In turn, these unqualified customers are no longer taking out mortgages at the major banks – they’ve been priced out. All of this leads to major losses for the big banks.

Mortgage Wars! Mortgages are the bread and butter of the major financial institutions because it is a significant driving force for profits. If the amount of mortgages decrease, banks will report lower earnings. Since mortgages make up a large part of the banks’ portfolios, large swings in mortgages will drastically impact their bottom line.

Ladies and gentlemen, this is exactly why the banks will go into a mortgage war with one another. When you can’t control the rate that the customer is being stress-tested at, you can only entice them to get a mortgage with a specific lender that has a much a lower rate than the rest.

On Sale Now – Currently, BMO has a promotion on fixed rate mortgages at 3.19% relative to the 3.75% rate (on average) that other banks are offering. In addition, BMO is now offering their variable rate mortgages at 2.35% compared to 2.65% (on average) at other major banks – that’s a whole 0.3% less!

This mortgage war indicates that banks are struggling to increase the number of mortgages in their portfolio, having to deal with the new OFSI rule changes themselves as well. They are attempting to take matters into their own hands to combat the stress test.

Interest Rate Hike – Then What?? So what if there is another interest rate hike when the Bank of Canada makes their announcement next week? There is actually no need to panic if you think about what the banks are offering right now. Interest rate hikes, if any, will go up in 0.25% increments (historically speaking). If you compare this with the BMO promotion on variable rate mortgages that are 0.3% less than the average rate, there is essentially nothing to worry about. We already have a great deal on rates! Any interest rate hike would just essentially nullify the promotional rates. The only condition here, as it’s been since January 1st, 2017, you just need to be able to qualify for the mortgage after the stress test.

The Wrap – If the interest rate hike risks have been holding you back from purchasing your next property, now is the time to take action. Take advantage of these discounted interest rates while they last! We have the burden of the stress test now, but every small win in our favour counts!

Wealth Building – BAD Debt Vs. GOOD Debt

Published on 28th June 2018

Back to the Beginning – You may not know this, but I was actually not born in Canada. I immigrated here with my parents when I was very young so I had a Canadian upbringing (not sure what that really means, but definitely lots of hockey though).

My parents, on the other hand, had a difficult time getting a job in Canada when we landed as they were not fluent in English. My dad owned a refrigerator strip manufacturing business in China, which he sold to immigrate to Canada, and my mom was a seamstress. Without being fluent in English though, they were forced to work at a Chinese restaurant, similar to most other non-English speaking Chinese immigrants.

Traditional Teaching – As a result of my environment at home as a child, this led to the constant teachings of go to school, get good grades, and get a good job.

What that translated into was pay attention in class, study hard, and get a white-collar job with pension and benefits.

This belief was entrenched in me for over 20 years.

I knew why it made sense, mathematically and financially. If I increase my skills and worth to an employer with school, my value per hour to my company will increase. Hence my income will increase. The goal was to increase my skill level to $50/hr so that I could make six figures. Then after all of that, I can have a comfortable life.

That was the dream.

Unfortunately, The World Has Changed – That dream doesn’t exist for me anymore (and generally speaking, that dream is fading for many young people in Toronto as well). Rather, it was a dream that my parents sold me.

Even with a six-figure income, which is double the average income, one can barely afford a 1-bedroom condo downtown these days; let alone being able to pay off any school debt while saving up for a down payment.

The AHA! Moment – Through a series of unfortunate events at the time (but fortunate looking back now), I realized that what my parents had taught me, despite all of their good intentions, was actually going to make me poor. One of the lessons that turned my financial life around was the concept taught in Robert Kiyosaki’s popular book, “Rich Dad Poor Dad”. That lesson was the difference between good debt and bad debt. I wish I didn’t have to learn this the hard way.

This is very important and it took me forever to understand because I was raised to squirrel money away and pay off my debts as quick as possible to avoid paying extra interest. The following summarizes the simple difference between good debt versus bad debt.

Good Debt – Payments are covered by someone else.
Bad Debt – Payments are covered by you.

It sounds simple in theory, but hard in execution.

Let me give you an example.

Bad debt is using your line of credit from your house (HELOC) to pay for kitchen renovations for your own personal home. Who pays for this? You do! Yes, I know what you may be thinking – there is “resale” value and you can re-cooperate the cost of renovations in the end, but ultimately it is you who are paying for these costs until the house is sold (which may be a long time down the road). This is an example of the poor use of debt.

On the other hand, good debt is using that same line of credit from your house (HELOC) to acquire a rental property that pays for itself. Who pays for this newly acquired house? Your tenant will perpetually pay for all of your expenses, including interest on your HELOC if done correctly. This is an example of a great use of debt.

Money That Works For YOU – What I learned was that in order to be wealthy, it’s not just about chasing after that six-figure job, but rather it was about being smart with my money so that I could let my money work for me instead of having to work for money.

Doing a kitchen renovation with your HELOC would mean that you are working for money to pay off that borrowed money. Instead, if you invest your borrowed money in a rental property, your money would be working for YOU via consistent rental income and mortgage paydown.

The Wrap – This lesson has changed how I view money for the rest of my life. It has also shaped how I build wealth for the rest of my life. I hope this Insight Article strikes the same aha! moment for you as it did for me when I learned the difference between bad debt versus good debt. Give us a call to see what good debt in real estate can do for you!

Until Next Time, Happy Real Estate-ing,
(416) 436 9436

Real Estate CRASH – What Will Happen To My Mortgage?!

Published on 21st June 2018

Last week, I wrote about what happens to rental rates when the market crashes. As a quick recap: As long as your investment property pays for itself, you are protected in a crash, whether it is worth $1,000,000 or $1. This is why real estate investing is much easier than buying your own personal property – you are not paying for the mortgage on your investment property (that is, if the investment is properly put together).

Although I am bullish on the real estate market (because I can see the economic trends and fundamentals of the GTA), I always prepare for the worst case scenario and as investors, you should as well. Capitalize on the upside but always cap the downside.

In this week’s Insight Article, we will continue along the same path as last week as I further discuss the “what if” situation for mortgages.

Real Estate Fuel – First off, everyone must understand that real estate is fuelled by credit.

In layman’s terms, “fuelled by credit” means that access to borrowed money is the main driver of real estate. Remember that most of the time, the bank funds the balance of your purchase after your down payment. So if access to credit is difficult, then the real estate market will slow down. On the other hand, if credit is readily accessible, then the real estate market will speed up.

The Credit Killer – At the start of this year, the access to credit for real estate slowed down through the implementation of the stress test.

Pre-Stress Test – Prior to 2018, you could purchase a property that is valued at approximately 7-8 times your gross income.

Post-Stress Test – Starting from January 1st, 2018, that dropped to only 5 times your gross income.

That is exactly why everybody effectively lost about 20% of their purchasing power through these traditional lending avenues. Have a look at the chart below for the difference.

When the River Stops Flowing – When there is a financial market crash, access to credit usually comes to a complete stop. Cash is normally king, but it becomes even more critical in these situations. Let’s use the 2008 financial crisis in the US as an example. Leading up to 2008 in the US, if you had a pulse, you could get a mortgage.

However, when poop hit the fan, credit froze, real estate prices plummeted and the most important factor was this: the mortgages were worth more than the price of real estate. This means that people had a mortgage for approximately $400,000 but their properties were worth only $300,000.

That’s Crazy, Right?! So what people did was drop their keys and stopped paying for their mortgage, and thereby purposely going into default. It sounds scary, right? Will this happen to us in Toronto if the market crashes?

I doubt it.

Allow me to explain.

There are two main reasons why I doubt we will spiral like our counterparts in the US if the market crashes in Toronto:

  1. The Office of the Superintendent of Financial Institutions (OFSI) regulates the lending industry like a total control freak. The difficulty of getting a mortgage has been increasing since 2008 to protect our housing market from becoming like the US.
  2. Recourse Loans – This may be a new term unless you are in the financial world, but there are basically two types of loans: a recourse and non-recourse loan. The definitions are below.


  • Recourse Loan – this is what we have in Ontario, and it allows the lender to garnish wages and take your assets to pay off your debt.
  • Non-recourse Loan – this is what the US has, and it DOES NOT give the lender the right to take assets to pay off your debt.

So Why Is This Important? After the financial crisis, people in the US packed their bags and walked away from their mortgages. People in Ontario simply cannot walk away from their mortgage if a similar crash were to happen here. For that reason alone, that is why if you are buying an investment property, the investment MUST pay for itself. You cannot walk away from your debt here in Ontario.

The same applies for a personal home – make sure you have the means to pay for the property as you cannot walk away from the mortgage on your personal home either.

Protected by OFSI – There are so many safety mechanisms built into our lending policies that the next time you are applying for a mortgage and are jumping through hoops, do take a look at it from a different perspective. OFSI has implemented these lending policies to ensure that mortgages issued by lenders are safe and we do not have the same type of financial meltdown as the US.

The Wrap – With the recent credit freeze (i.e., stress test), if you are still able to purchase a property whether for investment or personal, I would recommend you do so sooner rather than later because it will only get harder down the road as they make access to credit even more difficult later on. Keep leveraging the credit while you still can and have that money work for you!

Real Estate CRASH – What Will Happen To My Rental Property?!

Published on 14th June 2018

 As a seasoned real estate investor or an investor-to-be, I’m sure you have come across your fair share of “Real Estate Millionaire Weekend Boot Camp” classes. I know I have. A handful of US-based classes are the first hits that you will find in Google searches. They make promises on how to become a multi-millionaire real estate investor over the weekend by using other people’s money (OPM) to buy properties with 0% down.

Well, let me save you the $10,000 class fee by saying that it’s a COMPLETE waste of time, money and focus. It’s simply a very steep fee for not enough return on investment. I would highly suggest to pass on it.

The Simple Secret – Let me tell you the single most important piece of information that they may never tell you at these real estate boot camps: The secret is to buy a property that pays for itself (i.e., where rental income covers all of the expenses).

That, ladies and gents, is the bread and butter of real estate investing. Simple, right?

There are a multitude of different methods and strategies for real estate investing that range in complexity and difficulty. But to this day, buy and hold is still the single most reliable way of investing and is the method which I recommend the most, especially if you are just starting out.

Remember This – Generational wealth is created by TIME IN the market, and NOT TIMING the market.

Nobody can predict what will happen to prices, and as much as I can gather data and am entrenched with the day-to-day trading of real estate, still, anything can happen (i.e., 15% foreign buyer tax).

If anybody tells you to buy real estate because it’s simply “a good investment” and it “always goes up“, you should probably turn around and run the other way, as far as you can.

What does make real estate as a great investment vehicle is that you have 100% control over the asset and it pays you in 3 different ways. You can read more about that in this insight article: Real Estate Investing 101. The first principle is cash flow (a.k.a., the rental income covers all of the expenses). Allow me to elaborate on why this is important when evaluating your next investment property.

Recalling the Financial Crisis – Back in Q3 of 2008 when the poop hit the fan with the financial crisis, We all know what happened to the price of real state in the US. Chart A below shows this exact nose dive of real estate property prices.

Chart A – USA Prices (Source: The Economist)

What do you think happened to rental vacancies when everybody decided to not pay their mortgages?

Three months after the crash (i.e., the start of 2009) when the US government bailed out Wall Street, people started to default on their mortgages. As per Chart B below, the resulting impact on the rental market was a turning point for vacancy rates – it started to plummet to historical lows. This was the time when people no longer paid their mortgages, and instead sought a rental property to put a roof over their heads instead.

Chart B – USA Vacancy Rates (Source: FRED Economics)

Note that the lower the vacancy rate, the better as this means that there are less empty rental properties just sitting around. What do you think happened to rents when these vacancy rates kept dropping?

Chart C below shows the rental rates during this same time period. Rental rates definitely didn’t drop like the prices in the buy/sell market; in fact, they stayed fairly consistent!

Chart C – USA Rental Rates (Source: DepotofNumbers)

Caveat – Now, similar to the real estate boot camps, the above info is US-driven data and is not necessarily applicable to us in Toronto. However, it does give us a good indicator on how the market reacts and behaves, should Toronto ever experience a crash as significant as the US crash in 2008.

What You MUST Understand – It doesn’t matter what happens to the price of your property as long as you buy a property that pays for itself. Even after a crash, the vacancy rates will decrease, rents will increase and your property will be filled. Over time, and because you have undertaken a buy and hold strategy, property prices will rebound.

Even if your property is worth $1, as long as your tenant covers all of your expenses, you will survive the crash because you are not paying for anything out of pocket.

There will be ups and downs in the real estate prices – I can almost guarantee you that. But as long as you buy a property that pays for itself, you’re well on your way to creating generational wealth.

The Wrap – This is why it is of utmost importance to work with an investment-oriented realtor such as myself, Zhen, and not any just any realtor. Not all investment properties are created equal and frankly, some are just terrible. If you want to learn more about how and where to find the BEST investment properties, PPTO will guide you in the right direction and help you make your real estate goals and dreams come to life!