By Lindsay Smith/Real Estate Columnist
I remember buying a coffee for a very successful real estate broker when I first started my career. I learned one of the greatest lessons in investing from that coffee meeting. It was around 1989 and the market was heated with multiple bids and for a first time, people “flipping homes.” (Flipping means buying a property with the sole purpose of quickly reselling it for profit.)
The man’s name was Guy Leblanc and he was a legend. I want you to picture this…. A balding man, in a white suit, white shoes and driving a white Cadillac with gold trim. Get the picture? Guy was a likeable person with a bit of a giggle and a knack at flipping property. At this point, (pre-MLS online) the real estate community would meet at the Red Barn on Wayne Court in Oshawa and each realtor would have an opportunity to talk about the new properties they had introduced to the market weekly. Guy was always on stage sometimes with 10 properties he was selling. As I got to know him, most of the homes he sold were ones he owned. Let’s get to the lesson.
I asked Guy how many homes he had owned since he started to invest in real estate. His response floored me. “Over 1,000,” he replied. We chatted about him buying homes, doing quick renovations and then reselling them as quickly as he could. I then asked him if he remembered the first five homes he had ever owned. Not only did he remember, he knew the streets they were located on in Bowmanville, sharing that he purchased the homes about 25 years prior. I made a comment/question that I have never forgotten. I asked, “If you still owned those five properties they would be paid off by now. I am curious, would you be wealthier now owning five outright and never buying another property than having flipped over a thousand?” “Absolutely,” he laughed. He shared with me that the true value in real estate is holding it long term, not flipping it.
Long term investing has several different levers of building wealth happening at the same time. The longer you hold an investment, the smaller the mortgage becomes over time. A $500,000 mortgage will pay down over $80,000 in principal over five years. (At 2% 25 yr am) The other impact on your investment happens when the values increase, so does your equity. Even if the increase in property values is 2 per cent per year, after five years a $600,000 property would be worth somewhere around $660,000. The value increase and mortgage paydown is around $140,000. Sweet! Once you decide to sell the property, the gains will be viewed as capital gains. This means the tax rate would be lower than some personal income tax brackets.
What would happen if Guy was still around flipping homes? CRA would view his activity as a business and would tax the profits made as income. There are some definite advantages to holding rather than flipping.
With holding long term, an investor can calculate to the penny how much equity has built up as the mortgage is paid down, however an unknown is what will happen to the values over the next few years. This is a “buy and keep your fingers crossed” part of the investment strategy. In the past three decades I have seen the values steadily increase with only two declines. Real estate has proven to be a very safe investment.
The other variable are tenants and rent. In a perfect world an investor buys a property, finds a tenant and the tenant pays their rent on time every month. Oh, and the rent carries the expenses of the property along with a small overage to offset any emergencies. In many cases, this happens, however sometimes things go sideways with rent not being paid in a timely manner or damage being done to the property. My experience has shown that by doing proper due diligence when screening tenants, the issues are reduced. Most investors want quality tenants and most tenants just want a safe, clean, and stable home.
If you are an investor, or thinking of becoming one, I think that Guy Leblanc, who passed away years ago would still offer the same advice over a cup of coffee. Buy and hold, the true value to the investor is long term growth. The other benefit is that the investor is offering a rental unit in an area that is starved for more rental stock. Done properly, everyone wins. Investors have a solid investment and tenants have a clean roof over their heads.