A new report issued last week by condo research firm Urbanation Inc. shed light on a problem that has plagued real estate investors for years – the vast majority of rental property owners are bleeding cash flow.

According to the report (G&M subs), which looked specifically at new condo investors in Toronto, more than 80% who took out a mortgage to buy newly completed condos this year were cash flow negative and losing an average of $605 a month.

Perhaps these investors had no intention to close on the pre-construction condo and instead would look for an assignment sale. But with pre-construction condos being priced nearly $100,000 higher than existing condos on the resale market (and there are a lot of them), new investors are understandably taking a pass.

That leaves buyers on the hook to close the deal and take on the expenses of owning a rental property, which will cost them hundreds of dollars a month more than what they can get in rental income.

Therein lies the dilemma for real estate investors. A cash flow negative condo was tolerable when the rental property appreciated in value by 10-20% per year. Stick it out long enough, sell, and make a tidy profit.

But now we’re in a situation where housing prices are sky high and the cost of ownership is sky high, leaving investors in a bind.

This is not uncommon.

I’ve met with countless real estate investors (or wannabe real estate investors) from across the country over the years of running my financial planning practice. Most lived (or owned property) in big markets like Toronto and Vancouver, but there are plenty of investment property owners in Calgary and Edmonton, and in smaller markets like Lethbridge and Regina.

Most didn’t really have a plan. They either bought a new house and kept their old condo as a rental. Or they heard success stories from other property owners (their parents) about how real estate is a great investment and so they decided to buy a property to rent out.

Here’s a reality check. If you own property in an expensive market and have a mortgage you’re going to be cash flow negative when factoring in all expenses. Even if you manage to break even or turn a small monthly profit, you’ll need to set aside a reserve fund for future maintenance, vacancies, etc.

There is no guarantee of price appreciation. Even in more reasonably priced markets, like Edmonton, investors who bought 15 years ago have seen their properties depreciate in value (yes, you read that right).

Related: My house was a lousy investment (or was it?)

With those factors in mind, what is the end game? Hope you can sell for a profit down the road? Ride out 20-25 years of negative cash flow until the mortgage is paid off?

One young couple owned a rental property (a condo they previously lived in) that had appreciated in value by $300,000. The property cost them $300 per month more than they received in rental income. 

Meanwhile, the couple was struggling to save meaningfully for retirement, and had an upcoming parental leave to fund.

The solution was staring them right in the face. Sell the rental and use the ~$250,000 in after-tax profit to boost their retirement savings and set-up an emergency fund to cover their parental leave.

Another couple, closer to retirement, owned a rental property outright. Did they plan to own the house indefinitely? Not sure, they said.

Delving deeper, they didn’t love being landlords and managing tenants. The property was aging, and they figured it would need a new driveway and a new roof at some point soon.

We came up with a plan to sell the property the year after they retired, but two years before they planned to apply for Old Age Security. That way they could get rid of the property, use the proceeds to shore up their retirement savings (and take that bucket list trip), and take the capital gain at a time when they had no other income. They even had some remaining RRSP room to use up and reduce the tax hit.

All of this to say, think carefully about buying a rental property today. No doubt there are successful real estate investors out there. But this is not your parents’ real estate market. Most investors are bleeding cash flow, and there’s no guarantee that prices rise like they have in the past decade or so.

This Week’s Recap:

We’re back from a wonderful three-week trip to Europe, highlighted by an incredible Taylor Swift concert in Zurich, a glorious five-night stay in Varenna (Lake Como), and a new favourite destination in the Lauterbrunnen valley in Switzerland. We will definitely be back for a longer stay in the future.

I did not take any foreign currency with me this time, just as an experiment to see if it was possible to get by with just a credit card. I brought my Wealthsimple Cash debit MasterCard with me just in case I needed to take out cash (and not pay any foreign currency conversion fees or withdrawal fees), but I didn’t use it.

Even shopping at a hand-made market in Bellagio, the sellers all took credit card or in one case took payment via PayPal. All good!

I used the Scotia Passport Visa Infinite for all of my transactions. I like the Scotia cards because they also don’t charge foreign currency conversion fees, but also because I received an email immediately after every single transaction with the amount charged in Canadian dollars.

This was helpful for me because I like to stay on top of our budget during our travels. 

Even public transit in Switzerland and Italy could all be booked online or via mobile app (including the bus in Varenna). I appreciated this, because I hate having to fumble for exact change on the bus.

So, it is possible to visit London (pound sterling), Paris (Euro), Zurich (Swiss Franc), Lauterbrunnen (Swiss Franc), Lake Como (Euro), and Venice (Euro) without bringing any local currency with you.

Finally, while we didn’t use our American Express Platinum cards for any transactions on this trip, they still came in handy for airport lounge access in Calgary, Venice, and Montreal. Your Amex Platinum card gives you and a guest free access to 1,400 airport lounges in over 500 airports around the world. 

My wife and I each have our own Amex Platinum cards, so that gets all four of us into the lounges. If you figure it costs $50 per person, per visit, then we got $600 worth of value out of our Platinum cards this trip.

Weekend Reading:

At the Humble Dollar blog, David Gartland explains why real estate investing is not his thing.

Our house has become a retirement nest egg. But if we cash out, will our kids ever own property in Toronto?

For mortgage seekers, a good broker is paramount. Rob McLister explains how to find one.

Rebalancing your portfolio can reliably reduce risk, but it doesn’t necessarily improve returns.

Here’s why you shouldn’t give up on international investing:

“The owner of foreign stocks has not only faced devaluation versus the US, but currency devaluation. So, the underlying investment is now a lot less expensive than say a US counterpart. And you’re able to buy those investments using undervalued currencies. So, looking forward, you have a double positive: underpriced stocks using underpriced currencies.”

One is not enough. Why you should diversify beyond an S&P 500 fund.

Private credit is promoted to retail investors for its high yields and stable returns, but as you can probably guess, Ben Felix is skeptical:

A Wealth of Common Sense blogger Ben Carlson explains why a balanced portfolio always comes with regrets.

Here’s Ben Carlson again on how much money you need for retirement.

A taxpayer was penalized for a TFSA over-contribution after relying on My Account information.

Finally, Gen Y Money shares a long overdue break-up story – goodbye Telus, hello Public Mobile.

Have a great a great weekend, everyone!

Global stocks continue soaring to new all-time highs, with US large cap growth stocks (aka Big Tech) leading the way. Even the TSX is getting in on the action, finally surpassing its March 2022 high earlier this year.

Big returns are all around us, and it’s only natural for investors to feel a bit of FOMO about what could have been if they only picked THAT index fund, or THAT sector, or THAT high flying tech stock.

Every week I hear from readers and clients who are unhappy with their current portfolio and want to switch to something with better returns. 

This makes sense at first glance. We want to invest in things that have done well recently, or in things that have a long track record of doing well.

Chalk it up to the old days of stock picking or mutual fund selection, where you’d screen for the best performers of the past 1-5 years (maybe the last 10+ years if you’re really doing your due diligence) to find the best investments.

But this is classic performance chasing. Picking your investments based on past performance is likely to lead to poor future returns versus just buying a sensible and diversified portfolio of index funds.

If we start with the premise that investing has largely been solved with low cost index funds, and that investing complexity has largely been solved with asset allocation funds, then the only real decisions to make is to decide your risk appropriate asset mix (100/0, 80/20, 60/40, 40/60, etc.) and then flip a coin between those fund providers (Vanguard, iShares, BMO, etc.).

Unfortunately, buying a single asset allocation ETF doesn’t seem sophisticated enough for many investors. Why buy global stocks (VEQT), when Vanguard’s S&P 500 tracker (VFV) is flying higher?

It’s hard to argue with that. The S&P 500 has been absolutely crushing it lately with average annual returns of 15.29% over the past 10 years. But go back far enough through history and the average annual return is in the 8% to 10% range (depending on your start and end date).

So while the average DIY investor sees 15% annual returns over the past decade and wants a piece of the action, more astute investors see a big red flag called mean reversion. 

If longer-term annual returns average 8-10%, and the most recent decade saw returns of 15+%, a reversion to the mean would imply that future expected returns must be lower. Indeed, Vanguard Capital Markets Model forecasts show US large cap stocks averaging 3.2% to 5.2% per year for the next decade.

Compare that to global equities (ex-US), which are expected to return between 6.8% and 8.8.% over the next decade.

Obviously these are just models and forecasts based on current stock prices and expected growth – nobody can predict the future.

The point is you can’t expect to achieve the highest rate of return every single year, and you can’t expect to switch your investment strategy every year to chase those higher returns and not end up disappointed with the results.

Otherwise where does it end?

VEQT gives you 13,500+ global stocks. That diversification reduces the dispersion of outcomes, but the trade-off is “lower highs”.

VFV holds the largest 500 stocks in the US. It’s reasonably diversified, given the size of the US market and its global influence, and has excellent past returns. But US stock prices are incredibly high relative to historical valuations, and significant mean reversion is possible. The US did suffer through a “lost decade” in the 2000s, after all.

Why not take it even further. The NASDAQ has trounced the S&P 500 since inception 25 years ago. QQQ, which holds the 100 largest tech stocks, has a cumulative outperformance of 369.51% over the S&P 500 during that span.

Or, instead of holding 100 tech stocks, just pick the best one. NVIDIA’s stock has risen by more than 75% per year over the past 10 years.

But if it’s the highest returns you’re after, why not just go all-in on bitcoin? Over the last 12 years, it has had an annual growth rate of more than 100%.

The problem is that we can’t go back in time and invest in these ETFs, stocks, or coins. It’s their future returns that matter. And higher prices mean lower expected returns.

For my retirement portfolio, I’m looking to avoid lost decades and extreme volatility. That means fighting the FOMO and resisting the urge to chase shiny objects. By definition, something is always going to perform better than a globally diversified portfolio. That’s a feature, not a bug.

This Week’s Recap:

We’re a little more than halfway through an incredible vacation, with stops in London, Paris, Zurich, and Lauterbrunnen (where it is absolutely pouring rain as I write this). 

We’re sad to only get to spend two nights in the Lauterbrunnen valley, but happy we found such a beautiful area and we’re already plotting our next visit to Switzerland. 

Off to Italy tomorrow for some much needed relaxation and warmer temperatures.

Weekend Reading:

Can we normalize a phased retirement? Why Morningstar’s Christine Benz is not ready for retirement, but she’s not waiting.

Single, no pension? MoneySense’s Jason Heath explains how to plan for retirement in Canada.

Why investors should expect the worst in the short run:

“Investors in equities win over the long-term by being optimistic, but that alone is not enough. We also need to be sufficiently realistic to understand that the long-term will include some torrid periods that will present the most exacting behavioural tests. If we don’t plan for those short-term challenges, we are unlikely to reach our long-run goals.”

With another US presidential election looming, how will the stock market react? Andrew Hallam shares how to build wealth, no matter who’s sleeping in the Oval Office.

Jonathan Clements’ financial life is suddenly looking much different as a 61-year-old with perhaps as little as a year to live.

She retired and now regrets her frugal retirement. Here’s why:

“I wish I’d taken some big trips when I first retired and had more energy,” Agnes said. “Now even short outings take it out of me. I’m trying, but it’s not the same.”

Uh-oh. Toronto is awash in new condo listings – 6,350 of them to be exact.

Early retirees, here’s how to get at least 39% more CPP.

Finally, PWL Capital portfolio manager Mark Magrath shares two risks of taking too many risks with your TFSA (G&M subs)

Have a great weekend, everyone!

Welcome to another net worth update. I’ve been tracking and reporting my net worth twice a year for the past decade or so. It’s a good way to check on our financial progress and keep us on track with our goals.

We’re at the stage of our journey where forces outside of our control can have a major impact on our net worth. Our overall portfolio surpassed the $1M mark earlier this year, and that means a 10% increase or decrease on our investment returns moves the needle by $100,000.

Let’s be honest, outside of setting up an appropriate asset mix and choosing your investment vehicle(s), your returns are largely out of your control and can vary widely in the short-term.

So, while we try to keep the net worth needle moving forward, I’m careful not to take too much credit for an increase in portfolio value that has more to do with market returns rather than our own contributions.

Speaking of returns, well they have been excellent so far this year. Global stocks, represented by Vanguard’s All Equity ETF (VEQT), are up about 14.3% YTD. As you know, that’s where the bulk of our money is invested.

As for contributions, we’ve started filling up our TFSAs again and have each contributed $17,000 so far (on our way to a goal of contributing $28,000 each by year-end).

We’ve dumped $36,000 into our corporate investing account this year, and plan to contribute about $66,000 by year-end if all goes well. We’re able to do this thanks to consistently strong business income that continues to grow year-over-year (#blessed).

Critics of advice-only planning say people don’t want to pay upfront for advice.

My advice-only peers all tell me I’m not charging enough.

Meanwhile we’ll hit $500k in revenue this year with just $25k of expenses.

It’s possible to make good money and charge a fair price.

— Boomer and Echo (@BoomerandEcho) May 2, 2024

We also re-organized the kids’ RESP account to follow Justin Bender’s RESP strategy for family RESP accounts. The gist of it is that our oldest daughter has her portion of education savings invested in VEQT + VSB, while our youngest daughter has her portion invested in XEQT + XSB.

We now contribute to the RESP annually in January and do our rebalancing then to get to our target asset mix (more conservative as they get closer to post-secondary age).

Finally, we renewed our 1-year mortgage term at the end of April – opting for a 3-year fixed rate term this time around. We also switched lenders from TD to Pine Mortgage. So far, so good.

Now, let’s look at the numbers.

Net worth update: 2024 mid-year review

Total Assets – $2,146,728

• Chequing account – $12,000
• Corporate cash – $50,000
• Corporate investment account – $386,706
• RRSPs – $344,493
• LIRA – $228,678
• TFSAs – $34,499
• RESP – $114,352
• Principal residence – $976,000

Total Liabilities – $491,116

• Mortgage – $491,116

Net worth – $1,655,612

Now let’s answer a few questions about the way I calculate our net worth:

Credit Cards, Banking, and Investments

We funnel all of our purchases onto a few different rewards credit cards to earn points on our everyday spending.

Our go-to card is the American Express Cobalt Card, which we use for groceries, dining, and gas. We also look for the best credit card sign-up bonuses and time our large annual spending (car and house insurance) around these offers. One I’m using currently is the American Express Aeroplan Reserve Card.

Our joint chequing account and the kids’ RESPs are held at TD. My wife has her own chequing and savings accounts at Tangerine. 

Our RRSPs, TFSAs, and my LIRA are held at the zero-commission trading platform Wealthsimple Trade. Our corporate investment account is held at Questrade.

You know all of this from my post about how I invest my own money.

RRSP / LIRA / RESP

The right way to calculate net worth is to use the same formula consistently over time to help track and achieve your financial goals.

My preferred method is to list the current value of my RRSP, LIRA, and RESP plans rather than discounting their future value to account for taxes and distributions.

I consider a net worth statement to be a snapshot of your current financial picture, so when it comes time to draw from my RRSP/LIRA and distribute the RESP to my kids, my net worth will decrease accordingly.

Principal Residence

We bought our home last year for $976,000, so that’s the price I’m using for our net worth calculation. I typically adjust the purchase price by inflation each year but I’ll likely keep listing it at the purchase price for a few years.

Astute readers will notice that the price of our previous home went from $459,000 to $555,000 from 2021 to 2022. That ended up being the sale price, so you can see that I was pretty conservative with the house value over the years.

Final Thoughts

We’re enjoying a more “normal” year with our finances after a tumultuous couple of years building our new house. Inflation is cooling off, interest rates are starting to fall, and maybe we’ll get that so-called soft-landing after all.

We also have a good plan to fill up our TFSAs over the next five years or so. 

Recent changes to the capital gains inclusion rate will affect our corporate investing account, but it’s still advantageous to shelter excess money inside our corporation and invest for the future. 

We’re taking a flexible approach that will see us having money in lots of different buckets for retirement (RRSP, LIRA, TFSA, corporation). That will help smooth out taxes as we navigate our way to and through retirement.

Finally, we’re looking forward to continue travelling this year as we visit London, Paris, Zurich (Taylor Swift!), Lauterbrunnen, Lake Como, and Venice on what is sure to be an epic trip in July. 

We’re also heading back to our happy place this fall with an eight-day stay in Edinburgh in October.

How’s your 2024 shaping up?