Principal Residence or Investment Property: Which should you buy first?

Andrew la Fleur: When you’re buying your first property, should you buy your own home or condo to live in, your principle residence, or should you buy an investment property first? Coming up on today’s welcome.

Speaker 2: Welcome to the True Condos podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew la Fleur: Welcome back to the show and thanks for listening in. Once again, Andrew le Fleur here and happy to be with you today. Today we want to talk about putting first things first as it were. When you’re buying a property, your first property, should your first property be an investment property or should your first property be your principle residence, your home, your condo that you’re going to live in yourself?

Well, I believe that your first property in the vast majority of cases, almost all the time, should be your principle residence. You should be wanting to get into your principle residence and owning your principle residence, owning your own home or condo as soon as possible. And then after you’ve done that, you can start to look at building your real estate portfolio with investment properties. This podcast came about, this week, I was talking to somebody this week and they were a big time real estate investor. And I knew they. They purchased many properties for investment for the years and they’ve got quite a portfolio going on, buying several properties pretty much every year. And I was shocked to find out that this person did not own their own home. They were actually a renter themselves. So they owned all these investment properties but they were renting themselves.

And it really got me thinking as I give this sort of advice to lots of people and people ask me, “I have some money. This is my situation. What should I do?” Like I said, almost all the time, the answer to this question is, “You should buy your own principle residence first before you’re moving into investment properties.” And there’s a few reasons for that. And before I get into those reasons, I should also add that I think, my personal philosophy for most people is that you should buy, when you’re buying that first home, when you’re buying a second home, third home, as you’re buying your own principle residence, my general philosophy is you should be the biggest, the most expensive, not necessarily the size of the biggest but the biggest in a dollar sense. You should spend the most possible. You should buy the biggest house possible. You should spend the most amount of money possible, house or condo of course. And that you should not follow the advice of not maxing yourself out, of not stretching yourself too thin. If you’re approved for a million, you should spend 700,000, that kind of thing.

No, I’m a firm believer that if you’re approved for a million, you should spend a million or even a million and one. You should spend as much as you can. And the reason for that is that I really believe that stretching yourself in that sense is a good thing. This works for me. It doesn’t necessarily work for everyone but this is my philosophy and I wanted to share it with you and help you understand my thinking. Maybe it resonates with you and it’s helping for you to think this way. If it’s not, then that’s okay, too, but as somebody like myself, I consider myself a fairly, I have a fairly high risk tolerance when it comes to real estate investing. And I believe that stretching yourself is good. I believe that in a general sense, putting big things ahead of you in life and in finances is a good thing, setting big goals is a good thing, that it stretches you and forces your mind and forces your mind to think in new ways and forces your creativity to come up with new solutions when you’re faced with big challenges. And buying a house that is the most you can afford and stretch yourself financially is one of those ways that you can do that. And as you do that, it forces you to grow, it forces you to think differently.

If you’re an entrepreneur, if you have business, it forces you in a practical sense to make more money and to grow your business and to increase your financial future. And if you are a real estate investor whether you know it or not, you are an entrepreneur. Every single real estate investment that you make is a small business in itself. It is a cashflow producing business. There’s income. There’s expenses. There’s capital expenses. And you’ve got a customer. There’s money coming in. There’s money going out. You’ve got debts to fulfill. You’ve got taxes to pay. You are a business. You are an entrepreneur if you own real estate. Whether you are a high risk or low risk, you are still an entrepreneur. And again this stretching sort of exercise to me is a very good thing and it helps me to grow and to move forward in life and in finances and business. And so for that reason, I do believe in stretching yourself financially when it comes to this.

But also, just look historically, factually speaking. If you look historically at real estate prices over the long run, they continue to up five, six percent a year over the last 50 years is what we have seen and what we’ll likely continue to see in the next 50 years. And if that trend continues, you will be very thankful when you reach the later stages of your life when you are in the retirement years or approaching the final years or decade of life and you made decisions to stretch yourself 20, 30, 40, 50 years earlier to buy as of a house as you can afford. If you spend an extra hundred thousand dollars today and you push yourself to figure out how to make those numbers work and you get that extra 100,000 dollars today, that extra 100,000 dollars on top of what you were going to spend on that principle residents 30, 40, 50 years from now when you are 75, 80 years old and you are reaching that stage where you’re going to be selling that asset.

Or if you’re thinking beyond that, if you’re thinking in the event of your death and your estate and being able to pass things down to the next generation and to leave that wealth for them, that little incremental decision that you made decades before to spend that extra 100,000 can translate into many hundreds of thousands of dollars of extra money in your estate or in your retirement network as you downsize, as you move into different retirement homes. Or if you’re going from a house to a condo for example or if you want to travel the world with that money. Whatever it is you want to do when you’re reaching those later stages in life, these small decisions that we make today in our 20s and 30s and 40s have big, huge impacts on the kind of life that you’re gonna lead, the kind of legacy that you’re gonna leave and obviously the bottom line network that you’re gonna have when you are in those later stages of life. So for that reason, for those reasons, I do believe in stretching yourself. I do believe in going to the max or even potentially beyond it in some cases.

Again, this is advice for me. This is a philosophy for me, not necessarily something that everyone will embrace and everyone will understand. I get that. Not everyone is as tolerant as risk as I am and as many of us real estate investors are. But hopefully that sort of thinking is helpful to you.

So jumping now into the reasons again why you want to own your principle residence first. The number one reason of course, as you can probably guess, is because your principle residence in Canada, at least for now, is one of the only, last remaining tax exempt investment vehicles that exist. So your principle residence in Canada, you do not pay any taxes on that when you sell it, no matter how much money you make on it when you sell it, you don’t pay any taxes. So this to me, another hidden thing here, is that the value of this feature of owning your own principle residence is only going to increase in time. The reason for that I believe is that tax rates will continue to increase over time, that taxes will not go down, that taxes will go up, that the government will continue to close any tax loopholes or whatever you want to call them that might exist. We’re going to be taxed more and more and more and more over the years and again, over the decades. You got to think longterm here.

Today versus 20, 30 years from now, I’d be willing to bet a lot of money that tax rates are going to be higher 30 years from now than they are today, that the cost of running our society and all the services that we enjoy in the great country of Canada, the socialist country of Canada that we are in, these costs are going to continue to increase. Government size will continue to increase. And somebody’s got to pay for that and it’s you and I. It’s the taxpayer. We’re going to be paying more taxes I believe in the future. So therefore, if you’re tax free, this could change. But assuming it doesn’t, if you’re buying an asset today that’s tax free. And you don’t have to pay taxes when you sell that and in the future, then the value of that feature is only going to become better and better as tax rates inevitably and taxes inevitably increase in the future, that becomes more and more valuable as other TFSAs and other little things here and there that we do have to avoid taxes will slowly be eliminated over time, that becomes more valuable.

So that’s the number one and obviously the most obvious thing is obviously you want to get your money into a tax free asset. That’s going to grow your wealthy exponentially. That’s gonna allow you to move up into bigger and bigger properties as your principle residence, more and more expensive properties over time, because when you do move, you’re not taking that tax hit as you would when you sell an investment property for example. You had some profit on your investment condo and you wanted to sell it and buy two other condos with it, you’re going to have to pay taxes first before you can take that money to the next investment opportunity.

Other points. Refinancing possibilities. Obviously if you own your own home and you’re paying it down, you’re building the equity. It allows you to pull some of that equity out to invest in other areas. We’ve talked about this on many different episodes. Refinancing and the advantages of that. You can do that also with investment properties, too, but let’s start with your principle residence. Another reason to do it first is it’s very helpful I find just to learn real estate, learn how real estate works, learn how the real estate transaction works to buy your first property and to get your hands dirty so to speak. And once you go through that and you actually, the keys are in your hand and the mortgage is hanging over your head and you have to pay that every month, it becomes much more real and much more tangible once you’ve actually going through the process yourself. And it’s a very different experience when you actually own your own home and it makes you a much better investor, a much better landlord when you’ve gone through that.

Another reason is again more of a philosophical standpoint that’s person to be, but maybe it resonates with you as well, is I do believe in taking care of yourself and your family first, making sure that you and your family have a great home to come home to every day, something that you can be proud of, something that you own, something that is yours, and something that makes you feel good about yourself and about your life and about your finances and what you’ve build for yourself to that point every time that you walk through the doors. It’s possible but much more difficult to get that same sense and same feeling if you’re in a rental property or if you’re in somebody’s else’s property. So I do believe that and just from a mental health perspective and from a familial health perspective, it’s very, I believe very wise and good to have a home that is beautiful to you that is safe and welcoming and warm and just amazing place to come to, again, as you walk through that door every day.

And you can really only get that sense, I believe, if you own it yourself and if it’s yourself and if you bought it and if you earned it and you worked hard to get it, whether it’s a 50,000 dollar shack in the woods or a five million dollar mansion in Rosedale, if you bought it, if you earned it, its yourself, that feeling that you get and that sense of pride that you get is something that is a very amazing part of life and we’ve only got one life to live so I do believe in making it a good one and just having good things and taking care of yourself is very, very important.

Another reason for buying your principle residence first, renting is very expensive, we talk about this a lot. Renting in the city is very, very expensive unless you are living a very minimalistic, simple life. If you are a single person perhaps, renting is very, very expensive, even if you are a single person it’s expensive, unless you’re doing some shared accommodation or something like that. But renting is very expensive and so again very simple concept of better to put your money into owning the home instead of renting your home, even if you are buying investment properties. Buy that principle residence first.

And finally, that principle residence you buy can become a rental property. It might even become your first rental property. So once you buy that property and you own it, hold onto it, don’t sell it. Keep it as long as possible. Turn it into a rental property after you live in it for some time and move onto your next home. Do that as much as you can where finances will allow you to do so, especially if you own detached housing or any kind of low rise housing, in particular, in the 416, in the city of Toronto in particular. But really if you own low rise housing anywhere in the GTA, it’s just becoming more and more of a rare jewel and as more and more people come into our city and fewer and fewer homes are being built, it’s just an asset that you never want to let go of.

So there’s some reasons why I believe you should always own your own place first. Some of the exceptions I should just add as a footnote to this episode, some of the exceptions to this rule might be the following. As I said, as I hinted it, if you can live a very simple life, then this may not be the right philosophy for you. If you’re okay with living in sort of a simple, very simple rental accommodation scenario where you are living far beneath your means and you are happy and you are content and your home is a great place that you love to come to, then my philosophy may not be for you. You might want to stick, you should be okay in stitching with that sort of a life if that works for you. Again, for example, if you are a single, young working professional and maybe you have a roommate and your rental cost is 1,000 dollars a month or something, then obviously it’s going to be extremely expensive for you to move into any kind of an ownership situation. If you’re very happy in living that sort of a situation and life and that works for you, then continue to do that and invest your money into investment properties.

For the vast majority of people though, I think my advice is gonna work because most people will not fall into that category. And finally the other exception would be if you’re living at home, if you’re living at home with your parents. If you’re a young person and I have a lot of clients like this who are living at home with their parents and they’re investing in condos all over the place but they haven’t bought their principle residence first. For that sort of a client, obviously my philosophy doesn’t really make sense. You should continue, if you’re happy and if you’re able to live at home, not pay any rent at all and that works for you. Again, maybe you’re single, maybe you’re not married yet, you don’t have kids or whatever the situation might be. If you’re able to live at home for free, keep doing that. Don’t take my advice and go out and buy your principle residence if you’re happy and content and it’s a good situation for you to live at home with your parents, keep doing that.

Because that is obviously a massive way that you can save money if you’re living at home and not paying rent, that is huge and that will allow you to make some great investments that will set you up for the future when you do eventually move out, when you do eventually buy your principle residence, and you’ve made some investment property decisions, you can still take advantage of the tax free status of getting your principle residence and everything. So that would be some advice there for somebody who is listening who is saying, “Well, I live at home and things are working and I’m not paying rent, should I be rushing to move out and buy a condo or a house?”

No, you don’t need to rush it. But again, for the vast majority of people I think my advice and my tips and my reasons for that will apply as we talked about in this episode. Okay. There you have it. That is it for today’s episode. I hope you found this useful and if you did, please go ahead and send this to somebody that you know, somebody that could benefit from this, maybe somebody’s who is in that situation where they’re debating, “Should I buy a principle residence? Should I buy an investment property?” Share this with them and let me know what you think as always. You can email me andrew@truecondos.com. You can call me anytime. 416-371-2333. Until next time, have a great week.

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