Over the years, I’ve said plenty about overvalued real estate in Canada, especially in Toronto and Vancouver.

In a post some said was my finest ever (thanks, three readers!), I wrote a whole bunch of words about how Canadian real estate is way, way, way overvalued. That was in 2013, which is almost long enough ago that even if I end up being right, I was early enough my prediction shouldn’t really count.

I also told people how to short real estate using options, or how to indirectly short the market by buying related companies. I also wrote about how I tried to short the market and how it didn’t exactly work that well.

So instead I just hang out on the sidelines, rubbing my hands together in anticipated glee, just waiting to laugh at you suckers who bought at the top of the market. I take breaks to twirl my evil moustache and laugh menacingly.

I sometimes wish for a perfect real life example of how dangerous investing in Toronto real estate is. I think I found it. Take it away, Toronto Life magazine.

The seller had lived in the (2 bedroom on an impressively leafy lot) house for 40 years. A neighbour approached him in early summer about buying the place and renting it back to him, but the deal fell through. The seller’s interest was piqued, though: he saw an opportunity to make money without moving. He found an agent willing to market the house as an investment property.

I have never met this seller, but I immediately like him a full 162% more than most of my relatives.

The buyer, who is a real estate agent, was completely on board with the seller’s plan. She agreed to rent it back to him for a minimum of 5 years, for $2,500 a month. The seller will pay for his own maintenance and utilities.

Of course it’s a real estate agent. Those people are the best at putting all their eggs in one basket. Okay, how much did he get for the place?

The house was shown about half a dozen times, but the agent investor moved the fastest. The seller accepted her offer, for $77,000 under asking.

By the numbers:

  • $912,000
  • $3673.78 in taxes (2016)
  • 880 square feet
  • 35 days on MLS
  • 2 bedrooms
  • 1 bathroom

Let’s take a minute to just soak in the fact a house with 880 square feet of living space costs close to a decent middle class retirement. I just paid less than $200,000 for pretty much the same thing. I’m not saying you should leave Toronto and never come back, but…

Oh wait. I did say that.

Now onto the good stuff. How much money is the buyer making off this thing?

Some assumptions:

  • Total cost of $925,965 thanks to Toronto’s land transfer tax
  • Mortgage of $729,600
  • Down payment of $196,395
  • Mortgage rate of 2.59%, five-year fixed, 25-year amortization
  • Mortgage payment of $3,306.28
  • Mortgage interest of ~$1,500 per month
  • Maintenance of zero, property management of zero
  • Taxes stay at $3,673
  • House insurance of $3,000
  • Rent of $30,000

First, let’s look at our nice Realtor’s return based on the entire investment, including having to pay the land transfer tax.

Income: $30,000
Expenses (including mortgage payments): $46,345.00
Cash flow: (16,345.00)
Cap rate: LOL%

Now we’ll just look at mortgage interest instead of a whole mortgage payment. This goes down over time, of course, but we’ll assume $1,500 for the first couple of years.

Income: $30,000
Expenses: $24,673
Cash flow: $5,327
Cap rate: 0.57%

And finally, a return on capital.

Income: $30,000
Expenses: $24,673
Cash flow: $5,327
Down payment: $196,395
Return on capital: 2.7%

Just yesterday I did a post on Oaken Financial GICs which pay a 2.75% interest rate. You could make more money just doing that than taking on all the risk and added work of trying to manage a rental.

So there you have it. All you need to do to match the return offered by a GIC is leverage your money five times over and buy a house in Toronto’s crazy-overvalued real estate market. Please don’t. Seriously, I’m begging you. This won’t end well.

Tell everyone, yo!