Hi friends, hope you are doing great.

My friend told me to ask ChatGPT: “now that you can remember everything I’ve ever typed here, point out my top five blind spots”.

Here are the headline responses:

Can’t argue much there!

Give it a try - see what it says about you.

This leads me to another issue I have lately - and you guessed it, it’s with AI.

I’m a quiet thinker sort of person, questioning this and that, and so on.

The only problem is, what used to take a day, or a week, or a month, to answer one question, now takes seconds.

They say knowledge is power. I tend to agree.

But the incredible speed at which a question is provided a response (instantly), that is then half heartedly read to a limited and fleeting understanding, I would argue, is not knowledge.

Asking hundreds of questions a day is really nothing more than a major distraction. By the time tomorrow comes along, I’ll be on a new train of questions, and have forgotten the threads from yesterday, even if they were deserving of further pursuit.

This sort of AI OCD or ADD whatever you want to call it is bogging me down. And I don’t like it.

Therefore, I am going to try and be more intentional with the use of AI, and whether asking it “why the sky is blue” is really worth it.

—

Business for today:

Real estate is a terrible investment - or is it?

Let’s set the stage:

Someone has a case of the (real estate) mondays!

The first thing that came to mind when reading this was: this guy probably bought property without running the numbers and instead hype-purchased real estate and got burned.

Yes, there are elements that ring true:

But where a 150 word tweet can make RE investing sound like the plague, more context is needed.

For sure, owning real estate comes with its pros and cons.

But like any investment, the answer is simple: it depends on the numbers.

In a perfect world, a property will generate rent, ideally covering:

Rent should cover all of that, with some left over, for the owners of course!

The best commercial properties, in our opinion, are triple net (NNN), which means the tenant pays the operating costs (property tax, common area maintenace, etc). These are common lease structures in Industrial, Retail, and Office.

Rental is solid, but these can be slightly riskier, since the Landlord only collects the top line rent, and then pays expenses out of pocket, which leaves an exposure to cost inflation. Ideally, the Landlord will set and grow rents high enough to cover expenses, but things can go wrong if market forces drive up insurance or property taxes faster than rents can be increased. For these reasons, multifamily rental properties in rent-controlled geographies are often even more challenging.

At the end of the day the question is this: is the free cash flow increasing sustainably? Because all else equal, higher income = higher value. If not, there is a problem.

The high level metrics that are mission critical for ANY property:

This is how successful investors own real estate, crunching the numbers… rather than the gambler strategy of “I just bought this so I hope it goes up!”

—

You’ll notice I didn’t go deep on the primary residence angle here, that was on purpose.

Because to me, a home you live in is somewhere in between an investment asset and a lifestyle asset. Investment from the perspective of inflation protection, leverage, forced saving, equity build up and prinicipal residence tax exemptions. Lifestyle in the sense of security, control, and community.

For many years, inflation and falling interest rates validated the argument that home ownership was a fantastic ‘investment’.

But the last few years is reminding everyone that real estate doesn’t always go up - Canada’s housing market is down 18% since 2022, the largest decline among the world’s developed nations.

I’ve also seen anecdotal reports from my friend Steve Saretsky of west side Vancouver homes purchased in 2014 for 4-5 million are today selling for the exact same price - that’s called a round trip.

Like any real estate decision, it comes back to the same rule as always: run the numbers.

Gross Rent Multiple (price / gross rent) is a good metric to start with. Above 25 it’s more favourable to rent, below 20 is a buyers market, financially speaking.

For anyone interested in the rent vs buy debate and learning about the GRM - I ran a previous series on this and provided a spreadsheet model for those interested in crunching the numbers.

Check them out here if interested.

“Whether you think you can or think you can't, you're right."

—Henry Ford

How do you view home ownership? Investment asset? Lifestlye asset? Or a combination?

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