5 Rules To Keep Your House From Being A Bad Investment

  1. If the housing market has a positive outlook you can consider a home less than 2.5x your gross annual household income if you make a 20% down payment.  If you can make a down payment of at least 30% you could consider a home that costs up to 4x your gross annual household income.
  2. Consider an open mortgage even through the % is higher, you can pay it off whenever you can. Interest is an exponential function not linear so spending only 10% of your wage on keeping your family alive and putting the other 90% of your wage into your open mortgage will have you owing your home as fast as possible (meaning house costs your the least). Conventional banking will only dictate you pay $3K/month and spending and saving the rest. Because of the exponential fx of interest this makes no sense since few investments now can guarantee you a  better return, and spending the money just makes everything harder than it has to be.  That means no vacation for the first year or two (no big deal, your own life is so good you don’t need to escape from it you will be exponentially better off than had you followed the bank’s amortization schedule, and you can ball out all your want.
  3. Choose a home with the largest area of low-e windows facing the south (at least two-thirds).  Use retractable awnings to control heat into your south facing windows.  Use hi-tech window film on the east and west windows to block out summer sun and retain warmth in the winter. Do not install film on the south windows since efficiency gains in the summer would be less than the solar heat blocked in the cold months when the sun is in the low southern sky. North-facing windows never need film except for privacy reasons.
  4. Choose a home with dark coloured stone/tile/natural wood floors and build a dark stone/gypsum wall in the south-facing room.  These materials add to the thermal mass of your home, keeping your home warmer in the winter and make it more efficient to cool in the summer.  If there is considerable mass in the wall, lighter more reflective floors will distribute heat to the wall.  The rest of the home should be painted light with zero VOC paint to maximize light.
  5. Buy residential real estate for improving your life first, rental income second, and capital appreciation third.

Example Buying a $500K house when your household monthly disposable net income is $13,500. 

  1. Put 20% ($100K) down and avoid CMHC.
  2. Put 90% – $12K/month in the mortgage (including prop. tax) and the remaining  10% ($1,500 per month) is for groceries + car + insurance + utilities (note utilities are less because of the houses South facing windows).
  3. You own the house in less than 4 years (usually much less since scalable businesses don’t yield linear gains).
  4. After the the house is owned outright, interest cost is out of the picture, in 10 years the same $12K being dollar cost averaged into a low-cost index fund (7%) example you are looking at least $2 million + the paid off house. On the conservative extreme if you used  2.5% GICs from Canadian Tire for example, then he would still have $1.6 million + the paid off house.

Extra tips

  • Choose a fixer-upper that is as new as possible 1970+ with no more than $30,000 required in fixing up costs.
  • Look for houses that have been for sale over 60 days and try to pay 10% below the assessed value.  Offer to pay in cash since there is a better chance of closing.
  • A stone patio adds significant thermal mass and buffers outside temperatures around the home. Stone pavers make a thermal mass battery from which the house derives heat during the fall and early winter and melts snow early and allows microclimate gardening in planter beds.
  • Use rocks in your landscaping and install water features, ponds or swimming pools in places where they will create a desirable microclimate (keeping your yard cooler in the summer and warmer in the colder months).
  • Two-story homes are more efficient than the comparable square feet of a bungalow.  A raised bungalow is even more inefficient (concrete has poor R value).
  • Avoid leveraged real estate investments unless you are doing it right: if you can flip it for 50% increase on your purchase price after putting 25-33% down  and doubling or tripling your investment in fixing it up.  (Buy a distressed property for $500K with $125K down and an open mortgage. Spend $125K fixing the place up and sell for $750K.  Alternatively spend <$50K and sell for $600K.
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