Toronto's economy and real estate: How much does one affect the other?

[cornflakes]

"So, I know that I'm not doing a smart thing by running around everywhere (facebook, youtube, forums, etc) telling people I have 100k to invest, but I just want to get as much information as I can to learn about investment options, and what might be best for me. I'm not thinking about my retirements savings right now. I'm actually more about how I can make this 100k work hard for me from now on. How can I be smarter with my money and make sure that it's going to work hard for me and earn money for me while I sleep..."

Cornflakes, I think you should make an appointment with a good financial planner. You need to set some financial goals — it doesn't matter what they are, just so long as they are real goals — and build a plan to help you reach them. I may be wrong — and please correct if I am — but from your posts I don't get the sense your familiar with important concepts like asset mix, risk tolerance, opportunity cost etc. You're right in that $100K isn't the kind of money to set you up for life, but it sure is a lot to lose.

Yes, that would be a wise thing for me to seek a financial planner. Do you know if consultation on the first visit is free or do they expect me to pay some fee (paid consultation?). Sometimes I'm not sure when I'm expecting too much free info from someone and maybe they are normally supposed to get paid for the time I take up?

Yes, I'm not familiar with those terms, but it may just be the words, and maybe I do know what the underlying meaning of that jargon is. Asset mix sounds like the advice people generally give which is to 'diversify' and make sure not to put all my eggs in one basket. Risk tolerance to me sounds either like how much money am I willing to risk (if say that money is lost, would I still be ok) or it means how much risk or what's the threshold of the amount of risk I'm willing to take on my investments. Opportunity cost is being aware of what I might have given up if I invested in something else (I kinda looked that one up right now, but I already thought about it, just didn't know it was called opportunity cost). Actually, that's what I'm trying to do right now. I'm trying to gather the info, put something tangible down on paper so that I can directly compare what the ROI might be. Of course, we can never really know the future, but at least by comparing how the yield would have been if I invested say last year and seeing what everything one year later yielded (stocks, bonds, real estate, etc).

Just by reading many of your posts, I get exposed to some much needed information and 'vocabulary' of the things I'm looking into. I need to familiarize myself with the jargon or vocabulary of these sort of things.

 

[NorthYorkEd]

Yes, that would be a wise thing for me to seek a financial planner. Do you know if consultation on the first visit is free or do they expect me to pay some fee (paid consultation?). Sometimes I'm not sure when I'm expecting too much free info from someone and maybe they are normally supposed to get paid for the time I take up?

There are typically two types of financial advisors:

1) Commission-based advisors, who make money from back-end management fees and by selling you products that they earn commissions on. These types are usually found in the banks, firms, investment companies like Edward Jones, Fidelity, etc. You could pay 2% and up per asset for these types of services, and they usually build in "punishment fees" (i.e. Deferred Sales Charge) if you sell or withdraw any locked-in assets early.

2) Fee-based advisors, who charge you a percentage of your assets (usually in the area of 1%). This is the preferred type as the fees are much lower and they are usually not beholden to certain products and don't try to sell you things in order to earn commissions. Many are independent, but some work in-house for larger firms. Fee-based are preferred, but you usually need at least $500K in assets to get in the door.

My advice #1: avoid the banks and investment firms and use a site like Tangerine.ca or Wealthsimple to get your $100K working immediately in a portfolio of financial assets balanced to your risk requirements and comfort level. This is the next best thing to do-it-yourself investing, and will allow you to watch and learn the mechanisms of the system without being (potentially) fleeced by advisors more interested in their own gains and commissions. You will get broad exposure to the market (through bonds and equities indexing) without being tied to individual stocks.

Neither of those sites will charge you anything to ask a few questions. Nor should most reputable advisors.

My advice #2: eliminate any current debt, and avoid new debt like the plague. This alone, is one of the best things you can do for future financial health. The lenders want you to borrow and leverage yourself to the gills. Save and invest. Save and pay cash for the things you want. Save.

My advice #3: IMO, investing in a condo right now carries a fair amount of risk. There is a lot of cash going in up front, there are many factors that could drain additional cash (like unexpected repairs, bad tenants, special assessments, etc) and it could be a long time before actual profits are seen. This type of investing or speculating is best when you are already well-established financially and are looking to expand.

Hope this helps.

 

[Cooper]

Yes, I'm not familiar with those terms, but it may just be the words, and maybe I do know what the underlying meaning of that jargon is.... .

Sounds like you're getting (or already have) a grasp on important basics, Cornflakes. Keep at it! I learned about this stuff during my tenure as business journo and wrote regularly about personal finance. I'm no expert, but one of the biggest lessons I took away from those years is the importance of knowing *why* you are investing. A person's goals may be short term (saving for a downpayment, making a major purchase, taking a year off work etc.) or long-term (retirement, leaving legacies etc.). Or they may be a mix of both. Everyone is different, but it's hard to build a plan until you know what you want. Once you know that, a *good* planner can introduce you to investment strategies to get you there.

One last thought: a goal does have to be some big dream. It can be as simple as "I'd like to invest my money so its earning a reasonable return while I figure out what my goal is."

 

[cornflakes]

Thanks again. Those were all very helpful responses and information about financial advisors and goal-setting.
All this investment thinking is very new and fresh to me, so I know it will take many repetitious Q-A's. Sometimes being told the same thing over again is a good thing because a pattern starts to emerge and one can get a better idea of
the overall scope of things.

I was listening to a couple more speeches from Warren Buffet and some other sources and the same sort of things I've heard before kept recurring. When I ask myself, "what do I want?" or "what is/are my goal(s)?", one of the things that I'm 100% certain of is that I want to do something I'm passionate about. I want to involve my time, money, and my energy into something that I love in the first place. It's horrible feeling to wake up in the morning not loving whatever it is you do, even you get paid well for it. It sounds like if I invest in a pre-sale condo right now, I might not see any actual capital gains until 10 years later or so. I'm not really sure if I can endure that. I want to both invest, while at the same time pocket some money every month so that I can live a little and enjoy life. As Buffet said, it's like we're trying to save up all the sex until we're 65. I don't want to be that person. I feel in many ways, my life has been exactly that. I'm not really living the life that I really want. I don't want to make my goal sound something like this: "work hard, save money now and do this for 30+ years until im 65 and then I can enjoy life a little." I definitely don't want to pass life up, just because I want to have security when I'm 65. There's not even a guarantee that I'll make it to 65. So, I've been trying to think of taking immediate action and make it a massive action plan. I'm not saying it's realistic for me to become a wealthy person overnight, but it has happened, and many have achieved it somehow (meaning within 10 years or less, they've become millionaires or close to it).

Am I starting to sound like someone who needs to start a small business or partner into a growing startup? I think that's what I'm looking for. Maybe what I need to find more information on is about how to get into startups, or small businesses? I have plenty of ideas always roaming around my mind, and I often wish that I had people I could bounce these ideas back and forth with, without giving away possibly some great idea someone else will take run with it. I don't know how to patent inventions or ideas even. But do you think it's possible that if I have some great idea, that with the right people, the right tools, and access to turn it into an actual business model/plan to make it come to fruition, that I can make this happen?

Is the usual process for something like this to actually sell the idea or partnership with someone? I don't think most companies or startups ever start with just one person who did it all on his/her own. It seems like you have to network and partnership with other people or businesses to get something up and running. It reminds me of the Leaders vs Managers lesson. Leaders are people who give vision and direction to the company. They answer the "whys". Managers are people who take care of the "hows", and the logistics of how to run everything and to make it run smoothly. So if I'm a leader or founder of something, do I need to find myself a manager?

 

[Cooper]

For the sake of argument, here's another way you could look at it, Cornflakes: suppose you invested your entire nest egg today in a portfolio that returned 5% a year. In 30 years time (assuming you have that kind of time horizon), your portfolio would be worth about $430,000 (before taxes). That's a nice chunk of future change. But it's also relevant today. If you started from zero, you'd need to invest about $6,500 a year over the same time period to get roughly the same amount money. So, investing today means you don't have to save as much each year to reach long-term goals, which frees up money in your current cash flow. Of course, you'll still want to continue saving as you'll probably want more than $400K when you hit retirement age. I'm just thinking this one of having money today and money in the future. (Of course, I wouldn't jump into a plan like this without consulting an adviser.) As for starting a business.... you're a braver person than me.

 

[bennessb]

I want to both invest, while at the same time pocket some money every month so that I can live a little and enjoy life. As Buffet said, it's like we're trying to save up all the sex until we're 65. I don't want to be that person. I feel in many ways, my life has been exactly that. I'm not really living the life that I really want. I don't want to make my goal sound something like this: "work hard, save money now and do this for 30+ years until im 65 and then I can enjoy life a little." I definitely don't want to pass life up, just because I want to have security when I'm 65. There's not even a guarantee that I'll make it to 65. So, I've been trying to think of taking immediate action and make it a massive action plan. I'm not saying it's realistic for me to become a wealthy person overnight, but it has happened, and many have achieved it somehow (meaning within 10 years or less, they've become millionaires or close to it).

It sounds like you're describing Financial Independence, @cornflakes, and there are lots of places you can read about that (it's a good term to google if you want to find other people who have asked, and maybe even answered, these same questions). Maybe get started with Canadian Investing with Mr. Frugal Toque? It's probably simpler than a lot of what you've been reading, but it might help fill in some gaps about goal setting.

 

[Mislav]

Yes I agree Mislav. I mentioned a bit earlier in my posts that my situation is sort of favorable right now in that I already have a place to live in (that my job provides for me free), so that's why investing in a condo seems like a great idea for me because I don't need to find another place to live or rent. It's as if though I'm going to live/own 2 places yet, I don't have to pay for either one of them (meaning monthly rent/mortgage). So that's why I was thinking as long as I have free housing, I think I should take advantage of this time in my life and start investing in another place. That way, is it correct for me to say that it's basically like I'm making 2 incomes (my current job and then the rent coming from my condo investment)? Even if there is little to no surplus from the rent, as long as they are paying off my mortgage for me, that's basically money I'm getting in the long-run anyways right? So for example, if I'm earning 3,000/month from my job and my renters are paying me 1,700/month for my condo unit, then it's like I'm earning 4,700/month right? (obviously I know that im putting most of that 1700 back into maintenance, mortgage, and taxes, but even still, the mortgage is being paid off for me).

Also, someone told me recently that the CRA changed the rules and you cannot just flip a condo anymore like you used to. So now, you MUST own/rent out the condo for at least 1 year before you can flip it for profit. Is that correct? So now, I can't just invest in a pre-sale condo for say 300k today, then in 5 years when it's done construction, flip it for 340k and pocket the 40k (minus whatever fees there are to pay)? It's not that easy anymore?

I would say you're in an awesome position that you don't have to pay for a place. I would enjoy the ride and save unless the price of a certain real estate object is right. I'm more of a dividend as opposed to a capital gain investor so I would look to generate income as opposed to "flip" the condo and make a quick buck. Btw who are you working for? My job pays for my car/gas even for personal use but not for my apartment.

 

[howl]

To get back to the original question, I think the relationship between the economy and real estate is there, but it is not a direct relationship. Assuming a fluid population - the growth or decline in population of a city is largely dependent on how many jobs it can support compared to other cities. If jobs are not available in the city you currently live in, but they are available in another city then you will be tempted to migrate. If there are no jobs in either city then people will remain in place.

In general housing prices are linked to demand - when people move into a city housing prices go up and when they move out prices fall. Therefore as long as Toronto is keeping pace in terms of jobs with other cities housing prices should remain stable. If the economy drops evenly across the whole country it shouldn't have a big effect on real estate prices, but if the economy falters in one region and not another then housing prices will go up or down accordingly.

The other factor is speculative investment, and is what usually leads to the major bubbles crashing. The key to this is the long term economic health of the city in relation to the rest of the country and the rest of the world. If people continue to see Toronto as a place that will do better than average for jobs they will continue to invest in Toronto real estate. As soon as some other part of the country or the world starts to look rosier then investment money will flow to there, causing a possible crash in Toronto.

So how the Toronto real estate market will do if there is a crash in the American economy depends on how many jobs we can retain compared to other cities. It's not a case of absolute numbers (e.g. the GDP falls so real estate prices fall), but the comparative health of the economy (e.g. how is Toronto doing in comparison to other places). A crash in the American economy could potentially drive real estate prices up in Toronto if we can retain more jobs than they do.

 

[cornflakes]

Thanks for that response Howl. I appreciate how you made it clear and simple for me to understand.
In general, my opinion of Toronto and the surrounding area seems to be very positive in terms of growth (jobs and
investments). Feel free to correct my assumptions or add in anything I'm forgetting here. I think that Toronto's global reputation
as being one of the most multicultural/cosmopolitan cities attracts investors from all over the world, ie. Chinese, Indian for example due to the high Chinese and Indian presence in Toronto. This goes for many other countries as well. To me, it seems that
the population growth is very steady and constant, as Toronto seems to be a hot destination spot for still many immigrants both high and low skilled. Based on even something like skycraperspage website, it seems to indicate that Toronto has among the most buildings (and continues to do so with new projects and developments) in the world. So, it sounds like Toronto is going to remain a very good place for investors, businesses, jobs, etc. Would you say this is a fair assessment or am I missing some glaring holes that might bring trouble to Toronto in the near future, relative to other cities in Canada or the world even?