Have you ever felt like you wish you had a better financial education? Do you know people in your life who could benefit from hearing no nonsense, useful Canadian centered (we mean centred!!) financial advice? Past guest and recent author, Doug Allan, joins Adam and Matt to bring this podcast back to the basics when it comes to financial literacy (and real estate) in Canada. How should real estate fit into long-term financial planning? What do you need to know about taxes, mortgages, good debt, bad debt, risk and reward? And how can you make simple moves that set you up for a fruitful – and early – retirement? This book is for everyone looking to sort out their finances, from sixteen to sixty five. Grab your notebook!
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Tell us about yourself.
I graduated from McGill in 2008 with a Bachelor of Commerce and went into a chartered accountancy program. About five years ago, I moved into commercial real estate and have worked on development and investment projects mostly down in Seattle as Vice President, Finance & Operations at Burrard. It’s fair to say the last 10-15 years of my career have been all finance, all the time.
Why go from accounting to real estate?
In my last few years as an accountant, I started volunteering on the board at Polygon Art Gallery. They were looking for a treasurer to lead the real estate development finance of their new facility, so that was my first foray into commercial real estate. Christian Chan, who is the principal at Burrard, joined the board a few years after I did and we got to know each other quite well. He then asked if I wanted to come and work with him at Burrard on a project in Seattle. It was an opportunity to pursue a new project so I took it.
Your book “A Fighting Chance: The High School Finance Education Everyone Deserves” provides financial literacy for young Canadians. Can you tell us more about it?
I have picked up a lot of knowledge in the financial industry over the last 15 years but I wish I had learned all of those things when I was 17 or 18. Why not learn them when you’re young so you can get fired up about finances and put yourself in a better position to succeed? The idea is to build a foundation while people are young with the knowledge I wish I had gotten in high school. It’s approachable, and not too dry – I hope! I didn’t learn any of these things in high school. There’s a huge gap in our education.
I wanted the book to be a foundational level of finance. The first foundational piece is about time. Time is your most valuable ally when it comes to money. The second piece is about opportunity cost. Every decision has an alternative scenario. Lastly, I look at risk. What could go wrong with your money? What’s the risk of going nothing? From there, we jump into the specifics of how you want your life to look. What will that cost and what does that mean for your investment strategy now?
Should every 17 year old Canadian aspire to own a home?
Not necessarily. Everyone’s situation is different. Younger people are much more nomadic these days. Buying a house has transaction costs; it will cost 5-6% of the value just to get in or out of it. So if you’re not going to be there for a few years, it might not be worth it.
Let’s assume you put down 20% for a $500,000 condo, so $100,000. You could have put that into an ETF and earn 6-7% annually; that’s your opportunity cost. You then have to pay transaction costs of transfer tax, legal fees, etc. Every year you have property taxes, HOA/strata fees, maintenance, repairs, insurance, etc. Some of your costs are principal reduction and building equity but if that house doesn’t increase in value, you may not be earning money. So you have to think if this is a good investment.
We’ve been fortunate in Vancouver that prices have been going up for many years – and that’s why real estate is so attractive to people. Real estate is attractive because you can leverage your money; you only have to pay $100,000 for a $500,000 asset.
But when you look at whether you should rent or own, it’s about longevity. How long will you be in the house? How much do you believe in the market? What’s your lifestyle? Some people prefer the flexibility of renting while others take pride in being owners. The key is to have the tools to make the right decision for you.
Can you break down the financial considerations of owning a home?
Every home is different. With today’s mortgage rate of 2%, you’re paying down your mortgage a lot faster from year one. Broad strokes, you need 1-2% appreciation to be increasing your equity after all of the costs of home ownership are factored in. And that’s why the housing market is so out of control right now. It’s almost a sure thing in most people’s minds that their house will go up more than 1-2%. But you also have to factor in the transaction costs of buying and selling.
How does inflation play into these considerations?
Inflation is hard for a lot of people to get their head around. People can expect 2-3% inflation per year but over the coming years, it’s anyone’s guess. We can expect it to be higher. People flock towards hard assets, like gold and real estate, in times of high inflation. Real estate is a good place to be because prices go up and real estate is a leveraged asset. I’m transitioning more of my assets out of equity and into real estate because the stock market makes me nervous. Real estate cash flows and feels safer to me.
What makes a good real estate investment? How do you approach real estate investing?
There are so many ways to invest in real estate. Personally, I’m 35 so I want to create a portfolio that is paid off and cash flowing by the time I retire. I’m a buy and hold guy. I like new properties and properties that cash flow where the rent covers all of the costs.
Real estate is an asset you invest in. There are three major categories of real estate gains: cash flow, principal reduction and appreciation. Most of the gains are not from cash flow. Real estate is a pretty incredible wealth building tool.
I’m a father of two little kids so I’m looking for relatively passive properties. I like markets that are on the outskirts of up and coming markets – so something like Langford outside of Victoria. They cash flow now and I can sit back and relax while I wait for the appreciation over time.
Is there a percentage of a portfolio that you think should be dedicated to real estate?
Asset allocation is a very personal decision to make. You have to figure out your risk tolerance and what allows you to sleep at night. I’m pretty bullish on real estate in BC. I think BC will always be a great place to live, so I’m comfortable putting 30-50% of my networth into real estate. But that might be too much for some people.
How does tax inform your strategy? What do young people need to know about taxes?
For a principal residence, Canada has an exemption so you pay zero taxes on the capital gains. But that doesn’t exist across the world. So that’s very attractive to Canadians. The government also incentivizes building and other investments in real estate. There are tax advantages to investing in real estate but they can get complex.
Let’s say you have a $500,000 investment property. Some of the value is allocated to the land and some is allocated to the building itself. The land doesn’t depreciate but the building does. Let’s say $400,000 is allocated to the building and $100,000 is allocated to the land. That $400,000 depreciates over time, which gives you a tax deduction each year. You may have to recapture that depreciation when you sell. But if your strategy is to buy and hold forever, the depreciation can be powerful. The taxes you save can be invested. It’s an attractive opportunity but it depends on your strategy.
What other ways can you invest in real estate?
There are a lot of ways. Traditionally, you can buy a real estate investment trust (REIT). A REIT trades like a stock. I’m not a big REIT fan because, like stocks, they can be volatile.
Another way to invest is simply buying property with title ownership. But you need to have quite a bit of money to invest in a single property. Another way is through syndicated private equity deals where a large number of investors all put in money to buy a larger building and everyone shares in the appreciation. But that’s limited to accredited investors who qualify with higher incomes and net worths.
Over the past few years, a lot of young entrepreneurs have recognized how lucrative yet restrictive those commercial deals are. So they’ve created platforms that open up commercial investment opportunities for everyday investors for as little as $1. They’re very cool platforms. The key is strong due diligence.
How would you approach debt as a 17 year old today?
That’s a very important question as making the wrong decision about debt when you’re young can have detrimental impacts on your ability to grow wealth. There’s only a few times when taking on debt makes sense. The first would be investing. If you can buy a piece of real estate using other people’s money and your real estate is cash flowing, that’s good debt. Funding an education is another type of debt that could make sense. Not every student loan makes sense; you have to ask yourself, will this degree earn you an income that makes this debt worthwhile? Finally, buying a home is always a good use of money, especially in Vancouver. Paying a mortgage monthly is a good way to force people to save. Not everyone has the willpower to take excess money and invest it.
Suffice to say, credit card debt, consumer debt and car debt are bad. Make sure you’re using your debt to acquire an asset – something that increases your income or your equity.
Find out more: https://afightingchancefinance.com/