This is the full text version of my keynote speech to the Toronto Investor Forum presented on March 5th, 2016 at The International Centre in Mississauga.
Money or Happiness? Pick one.
I admit it’s a bit of a trick question. After all, money won’t buy you happiness and happiness won’t make you money. But as investors it’s important to think about why we invest. Is it all about that number on the bottom line? Or is that number only a tool to get us the things we think will make us happy: travel, art, cars, food, nice wine, good schools for our kids... or time to do what we want, to read, to teach, to give, to spend time with family.
My name is Irene, and about ten years ago I had over half a million dollars in personal debt. Today, I spend my time sharing my path to success and helping people make smart investment decisions completely free of charge.
Now, there are lots of people here who will tell you how to make money, lots of smart people who can give you detailed and complex advice on how to grow your net worth and bottom line, and that’s great. But the truth, the unpopular truth perhaps, is that making money is the easy part. There are a million ways to do it, some better than others, and some better for some people.
So over the next twenty minutes I want to focus less on how to make money and more on how to be happy. Now before I scare everyone off - that’s not to say this is a talk full of high-minded aphorisms or abstract metaphors - my hope is that by 11:15, you’ll walk away with a guide to condos, money, life and everything.
So here we go.
Ten years ago, I was five hundred thousand dollars in debt.
Five hundred thousand. It’s a big number. When you’re in it - 500,000 feels the same as 10 million. Your entire life becomes about your debt.
$500,000 is just over 25 times the national average consumer debt.
Paying $2,000 a month it would have taken my just over 44 years to pay it off.
It’s almost 80,000 Netflix subscriptions, or one subscription that lasts for 6,000 years.
So how did I get myself nearly half a million dollars in debt? I got it trying to be rich, trying to make money.
I grew up working at my parent’s furniture store. They weren’t your typical asian parents -they didn’t push me to be a doctor or a lawyer - but they did always tell me to invest in myself. To them the greatest thing you could be was an entrepreneur. And, I took my parents’ advice to heart. I desperately wanted to run my own business.
After I graduated university in 2002, I thought the internet would totally kill brick and mortar retail. So, in deciding what type of business woman I wanted to be, I searched for something I thought the internet couldn’t replace.
And what I came up with was: Human touch. The internet was never going to be able to give you a hug, a handshake, or a massage.
So my business partner, my sister and I decided to open a spa. We knew nothing about running a business, or spas in general, so we were very studious. We spent tons of time online researching: textiles, decor, music to play, nail polish colours, the importance of scent… literally everything but the success rate of spas.
80% fail within the first two years.
I also had no idea how to run a business. Things like overhead, ROI, cost per person, etc… were foreign to me. I didn’t have a clue what to look for and strive for in my own spa.
And it’s so funny - I was so sure I was going to be successful. I had planned out this fabulous life for myself, I would be running a business that would eventually run itself, live in a gorgeous downtown loft, eat in posh restaurants, and live happily ever after. I would be happy, I thought, when I was rich. I bought a condo. I was ready for life to begin.
For five years, it was hell. I worked 12-16 hour days. I did nails, facials, paid my employees, rent, taxes, and made exactly nothing.
By the end of our first five years in business(?) I had about $200,000 on a credit card
a line of credit of $460,000 and outstanding payables to linen stores, etc. of $40,000
And I was making absolutely nothing. Those were my formative years. But instead of living this fabulous life I had so poorly laid out for myself, I was just running myself into the ground.
I got through the day by drinking. A lot. I would take shots first thing in the morning so I didn’t have to go through my day sober. I was ignoring calls from creditors, debtors. I owed everybody money, and I couldn’t face them.
So we sold the spa and broke up. We made back about $200,000 from the sale of the business.
It was rock bottom. I couldn’t afford my condo anymore. And to make matters worse, the penalty for breaking my mortgage was just around $45,000. Forty-five thousand dollars. So my only option was to rent out the condo, move back to the suburbs and return to my teenage job working at my parent’s furniture store. I was completely and utterly humiliated. But as it turned out, I had accidentally stumbled upon a success:
After five years of running my own business I had dug myself into $500,000 worth of debt. After 5 years of basically doing nothing with my condo I had made $160,000. Enough to pay off a good chunk of the debt and give me a new lease on life. No more drinking to get through the day. No more pretending to love what I was doing. I didn’t have to keep up appearances anymore. And I only owed a fraction of what I might have.
I learned three important lessons that year:
Lesson Number 1: It’s Better to Work Smart than Hard:
Turns out that this is really what my parents had meant when they wanted me to become and entrepreneur. It didn’t really have anything to do with owning my own business - what they really wanted me to do was to build something that would work for me. The best entrepreneurs do this naturally, they build a business, they hire the right people to run it, they sell the business, rinse and repeat. But it’s that concept that makes entrepreneurship so appealing - the idea of passive income. I realized that I had accidentally been running two business: the spa in which I worked incredibly hard, but not particularly smart, and renting my condo, for which I did almost no work, and saw a huge reward. With the condo, I hadn’t actually worked smart, I had been lucky but it made very clear to me that hard work doesn’t equal success.
Lesson Number 2: Don’t Dream
At least, don’t just dream.
Following your dreams can be like navigating without a map to a place that’s nowhere in particular. It’s unsustainable.
Chasing the spa business was one of those dreams - without a road map, there was no getting there. Once I finally admitted that it was a disaster, I was able to see the opportunity that the condo had been all along.
When you’re focused too far in front of you, you can’t see the shiny thing out of the corner of your eye.
So my advice is this: Get started - and edit as you go along. Doggedly pursue short-term goals. Be micro-ambitious. Eventually, with an open mind, you’ll wind up where you’re supposed to be.
Lesson Number 3: Run with it!
Investing, making money, life in general is all about jumping on opportunity. That shiny thing I saw out of the corner of my eye was that no one, at the time, was selling condominiums as an investment.
Realtors all seemed to be selling the trappings - the floorplan, the size, the view, the countertops, the location. But nobody treated real estate like stocks or bonds. And there’s huge value in that - over the past 15 years the average condo in the GTA has steadily outperformed the Toronto Stock Exchange. I realized I could take my own failures, my own mistakes and teach people about what I did wrong - and what I eventually got right.
Ten years and lots and learning later, I’ve honed my investing strategy and replicated that first accidental success - not just for myself, but for the individuals and families I coach.
Now an older, more experienced, and hopefully wiser Irene can share with you this: 5 reasons investing in pre-construction rental condominiums is great for your bottom line and your life. Not all of these reasons are groundbreaking, in fact many of them might seem like common sense. But that’s what makes this investing strategy such an appealing one: it’s simple
1. You’re investing with someone else’s money.
When you buy a home, you’re buying an asset, slowly. You commit to paying a 20% down payment, and pay the other 80% over the course of a thirty year mortgage. This makes real estate different from any other type of investment because while you only invest in 20% of the total asset, you make money off 100% of it.
If you invested sixty thousand dollars in stocks, for example, and in a year they appreciated by 5% - which is by no means guaranteed in today’s market - you would have made three thousand dollars. If you invested that same sixty thousand in real estate, and it appreciated by the same 5%, you would have made $15,000. Why? Because that sixty thousand was really just 20% of the total asset, you’ve earned appreciation on the full $300,000 property. You’re earning appreciation on five times your initial investment.
But that leverage isn’t all. The biggest difference between buying a rental property and other types of investments is that somebody desperately wants to use it, and pay you for it, until you sell it. So your tenant ends up buying the property for you. So not only is your asset appreciating at five times your initial investment, but your equity in the property increases at no cost to you.
On top of all of this, if you already own a home, you can borrow that sixty thousand against the equity in your home. Meaning you’re investing with none of your own money, the bank pays for the downpayment, your tenant pays for the rest and you earn appreciation, plus growing equity on a $300,000 asset you haven’t paid for. And because it’s a business you can write off the interest on that initial money you borrowed against your taxes.
That’s working smarter.
2. It’s relatively low-risk
You’ve probably heard that over 50% of the people who reside in Toronto rent their accommodations. It’s expensive to get into the market - and people will need housing regardless of fluctuations in the real estate market itself. So buying-to-rent is actually bubble-proof, in the right location. Your monthly income will be consistent and predictable, even if prices change dramatically. You’d just keep renting.
They say you should never trust someone who says trust me, and in real estate saying “bubble-proof” is sort of like saying trust me. So let me qualify: condo investing is not without risk, but if you’re smart about it, it’s less risky and less affected by market fluctuations. We recently did a little case study which you can read on my website, where we looked at what an average condo bought using this investment strategy would look like if we ran it through the same market conditions as the 1989 Toronto housing collapse. You’ll be surprised at how they did.
3. They’re Inexpensive
You have to spend money to make money. That’s true, but what they don’t tell you is that you don’t have to spend a lot of money to make a lot of money.
One thing many first-time investors worry about it that they’re putting away money into a project that they won’t see returns on for years - a worry that often leads them to buy resale. While it’s true that there are no immediate returns on an unbuilt condominium project, resale properties have huge fees that are avoided with pre-construction.
Closing fees, inspection fees, land transfer fees, and bidding wars aren’t incurred with a pre-construction property. Even your realtor fees are paid for by property developers, not you.
These expenses increase the carrying cost of the rental property, and so you’d have to rent at a higher price. If your rental is priced higher than your neighbour’s, you can incur monthly losses from an unoccupied unit, and increase the time it takes to make back your initial investment. So getting in one the ground floor - even if you’re buying the penthouse - really does count.
One thing that I pride myself on, is I always try to buy a unit or a couple of units in the same building as my clients. We invest as a team, we negotiate as a team. This is something you simply can’t do with re-sale or with freehold real estate. I’m able to cap or eliminate out of pocket costs for my investors by negotiating in bulk.
For example, most investors don’t consider the impact of development charges on their investment. A quick definition: development charges are paid by land developers to the municipal government to fund all of the infrastructure that the municipality has to provide to support the building - roads, transit, water, fire and police facilities, even libraries and parks. With resale, these fees are already built into the price of the property. For pre-construction, this is often a huge out-of-pocket expense investors have to pay to the builder before taking ownership. In some cases, it can be upwards of $10,000.
After years of investing in Toronto real estate I’ve funded a lot of infrastructure - and they still won’t name a library after me. But development charges can actually be a huge opportunity for pre-construction investors. Since I’m usually negotiating on behalf of thirty to forty units in a condo project, we have the negotiating power to cap or often times eliminate development charges for those units. This has two huge benefits: first, as soon as the building closes we get that value for free. It’s built into the unit - if the other investors had to pay the development charges and we didn’t, then we’re up $10,000.
$10,000 might not seem like a lot of money… to some of you. But with pre-construction, knocking $10,000 off of a development charge is the same as getting a $50,000 discount on the unit price. Because with pre-construction, we only pay our down payment out-of-pocket. Which is only 20% of the unit’s cost - the rest is paid by a tenant. No development charge, 5x the purchasing power. You can’t do that with re-sale.
4. You Don’t Even Need to Save the Full Down Payment
On top of pre-construction being inexpensive and low-risk, you don’t even need to save the full down payment immediately. Pre-construction projects have structured deposit schedules that spread your down payment over the course of construction. Usually this is in installments of 5% with the final 5% paid at occupancy. This varies by developer and project, and I can negotiate a customized schedule if we need to. The goal is to make purchasing an investment as easy and hands-free as possible. This requires less up-front cash and gives you more time and flexibility in saving for your unit.
5. It’s a hands-off business plan.
Have you decided? Money or Happiness?
My answer is c) none of the above. My answer is time. It’s such a cliche, I know, time is money. But it’s surprising how often we forget that one of the greatest things money can buy us is time. To me, an investment strategy that’s stressful, that takes a lot of time, just isn’t worth it. It might, might, make you money but it won’t make you happy.
Instead, pre-construction condo investing takes very little time and money and earns you passive income - with a little help.
The only hard part, really, is picking the right project. This is where I come in. My job as an investment coach is to help people choose the right projects, in the right neighbourhoods, with the right builders, and then get the best deal possible. I do all the research, look over all the contracts, negotiate with the builder. There’s absolutely no cost to the investor. But even if you don’t invest with me pre-construction can be a simple, smart, and time-saving investment.
As an investment coach, I definitely can’t - and definitely won’t - say that every pre-construction condo is a good investment. Every property and every purchaser is different, and we have to leverage your savings and strategize for the best possible property. Pre-construction condos offer an excellent opportunity to grow your equity with a smaller investment, but strategically customizing a purchase to your situation is the only guaranteed best solution.
Ten years later? Let’s just say I’m no longer $500,000 in debt. I’d like to think I’ve found happiness, because I get to help amazing people, like all of you, make smart investments, and nothing makes me happier.