2020 Investment Decisions

No doubt, at this time of year, many of us will be reviewing annual investment returns from savings, stocks, bonds, TFSAs, RRSPs, RESPs etc. Few of us, as part of this process, will sit down and calculate the actual rate of return on our investments in real estate. As we know, Canadian real estate has long been one of the soundest investment decisions one could make, with all too many Canadians finding out that come retirement nothing else came close to matching it.

‘We should have bought two or three more properties’, is all too common a comment of people in their 50s, 60s, 70s and beyond. But for our purposes in this article, let’s not look at investment properties; rather let’s try to measure the return on investment in your single owner-occupied property – your home.

We all have to live somewhere, and paying somebody else’s mortgage seemed like a bad idea, so you scraped together the down payment and bought a home, and the cost per month between renting and owning seemed worthwhile for the stability. Stability becomes a more important topic as we form new families.

In the examples below we use conservative estimations to illustrate the benefits and we show the impact of over a seven-year period, the minimum suggested average amount of time often suggested for ownership of a property.

Multiply and adjust the figures below accordingly in order to reach your personal figures. All examples use a 2.79% fixed interest rate and the maximum amortisations allowable. Percent gains are presented inclusive of mortgage pay-down under the assumption that an equal amount of money would have been spent on rent instead.

Example – The 5% down buyer

Year One

$100,000.00 purchase price
5% down payment
$3,420.00 (3.6% CMHC premium)
$98,420.00 opening mortgage balance
Total investment – $5,000.00
$2,000.00 gain in value (average 2%)
$2,767.69 mortgage principal reduction
Net value
– $102,000 property value
– $95,652 mortgage balance ($3,420.00 CMHC premium included)
$6,348 net equity
~26% annual gain on the initial investment factoring in the CMHC expense and mortgage paydown
Admittedly this is a paper gain; to convert this gain to cash would involve related expenses to dispose of the property that would almost certainly put the owner into a net loss position. However, few homeowners are looking to sell their property after just one year.

So let’s fast forward seven years, a more typical timeline, before making a move to the next property.

Year Seven

$100,000.00 purchase price
5% down payment
$3,420.00 (3.6% CMHC premium)
$98,420.00 opening mortgage balance
Total investment – $5,000.00
$14,868 gain in value (average 2% compounding)
$21,424 mortgage principal reduction (assuming renewal at same rate)
Net value
– $114,868 property value
– $78,576 mortgage balance ($3,420.00 CMHC premium included)
$36,292 net equity
~ 103% annual gain on the initial investment factoring in the CMHC expense and mortgage paydown
~725% total gain (over 7 years) on the initial investment
These numbers are approximations and contain generalisations. The purpose of this exercise is not to argue that real estate is superior to any other form of investment. In fact, under 4% of Canadians will purchase an investment property. The purpose is to demonstrate that the homes in which we live are an excellent investment over the long term, far better than most of us realize until many years later.

Working out a formula for the annual appreciation that you are comfortable with is a conversation worth having with the input of multiple sources, your realtor, mortgage broker, accountant and certified financial planner being the top four among them.

There is value well past what most people realise in owning their homes. One of the keys is the leveraged nature of the investment. Five percent down to get your foot in the door presents a wonderful opportunity for many. The fact is, we are far more comfortable with a leveraged investment in our homes than we are in any part of the stock market because there is no risk during the term of a mortgage of receiving the dreaded ‘margin call’.

Real estate, in particular, Canadian real estate, is largely boring. As it should be.

When taking stock of your financial results for 2019, don’t forget to factor in the increase in the value of your home, as well as the paydown of your mortgage. You may be pleasantly surprised.