# What is the point of buying real estate when a GIC yields more?

Despite the fact that interest rates have risen over the past year and the housing market flatlining in Toronto and other Canadian cities, for whatever reason， people are still selling houses at ridiculous prices (from listings I see online in my area).

For example, a family acquaintance sold a condo for \$535 000 with the closing date being December 19 (10 days ago as of this post). The only problem, however, is that said condo has a monthly fee of \$680 and property tax of \$2500/year. On this market, it can be rented out for no more than \$1 900/month. If you do the math,

`(1900 x 12 - 2500 - 680 x 12) / 535 000 x 100% = 2.26%`.

There are many, many condos like this, and the math is even more brutal when it comes to semi-detached houses and single family homes, sometimes going down to below 2%. On the other hand, a 1 year GIC has a yield of 3% these days and if only you can break the \$535 000 cash into 6 deposits such that if every single bank goes bankrupt, CDIC would still reimburse you for the principal and interest.

So, going back to this point: why should anyone buy a house to live in if they are renting right now, given that you can put hundreds of thousands into a GIC and use the interest to pay your rent?

• What is the \$680 fee for? Seems like either the rent is way too low or the price was way too high. – D Stanley Dec 29 '18 at 17:19
• @D Stanley \$680 “condo fee”, that includes water and gas (but a lot of places include gas, and the value of including water should not exceed \$40/month, so let's say \$640/month), it will help this equation a bit, but not much. – user2213307 Dec 29 '18 at 17:24
• Because owning your own home is not, and should not be, primarily a financial decision. As a parallel, why do people buy new cars when a) they lose 25% or more of their value the minute they're driven off the lot; and b) good used cars can be had for a fraction of the price of new? – jamesqf Dec 30 '18 at 4:31

## 2 Answers

You don’t usually buy real estate in cash. In Canada, you only pay in 20% of the property value. So you get a 5x leverage on a very safe investment. Rental properties in Toronto don’t provide any significant income, but they have proved to provide significant capital gain. With conservative calculations, in a 5-7 year time span, you can double your money. You can also use your rental property as a tax shelter.

A very good reason to buy any property as an investment, with a mortgage, is as a hedge against inflation. When not using cash, the value of the money you use today will almost certainly be more than the value of that which you make payments with in the future, thanks to inflation (hence less cost to you). All currencies tend to inflate under the current global climate for fractional lending. Here in the US, we even use inflation as an indicator of positive economic growth because it means there is more credit in the market (which presumably means more activity).

If you are looking to park a large amount of cash for the short term, shop for the most attractive interest bearing deposit you can find. If long term, I suggest you leverage the same future value principle by looking to invest in mutual funds. A large cash deposit is a good way to start earning dividends and if you use this as a retirement account, constant regular contributions cost less as time goes on but continue to help grow the shares held which follow market valuation and return more in the future in terms of volume of dollars earned **when properly managed.

The important take away is to evaluate the "future value" of the money put into an investment of any kind, so the term is as important as the rate, and generally the longer the term the better your position. If you buy property, there is one added advantage over investments in that you can transfer risk by insuring the property against loss. You can't typically do that with cash deposits on stocks, bonds or mutual funds.