So what’s the total return for a Vancouver house?

Total return is a way of objectively comparing returns on different assets. The concept is simple – you buy an asset for $X, use all income when received to buy more at the current market price, sell it all for $Y, and your total return is Y/X. Annualized % is (Y/X)^(1/n)-1 where n is the number of years.

For example, you buy a 5 year compounding GIC at 3%, after 5 years it’s worth 1.03^5 = 1.16. Total return is 1.16 or 3% annualized (note not 16%/5).

When you have an asset with varying yield or price it gets more complicated. For stocks people like S&P calculate the total return for us. But for houses you have to do it yourself. What I decided to do is calculate the total return for a benchmark Vancouver house from 1985Q4 to 2010Q4, a 25 year period which saw the biggest price increase ever in Vancouver (or in most other places for that matter). Reinvestment of income is conceptually a bit of a problem as you can’t buy a “slice” of a house but that’s the way I’ll compute it because total return always does it that way.

My assumptions:
– quarterly prices as per UBC/Sauder. start 1985Q4: 160,100; end 2010Q4: 772,600
– starting rent $1500/month
– starting taxes $1800/year
– starting maintenance/insurance $1800/year
– rent, taxes, maint/insurance rise with CPI which increased by 86% over the period

And at the end you have 2.29 “houses” which you sell for a total of $1,769,254. Total return is 11.04 over 25 years which is 10.1% annually.

And what did the TSX 60 return over the same period? 9.5% annually.

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people observer
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people observer

you need to incorporate leverage into your calculation – housing is generally leveraged, people generally do not invest on margin

people observer
Guest
people observer

leveraged total return v unleveraged total return – it matters when you discuss investing in assets.

jesse
Member

It may be hard to grasp but financing reduces total return. Crazy talk.

Anonymous
Guest
Anonymous

@patriotz: Then calculate net return. Total return seems to the issue among a great number of people when discussing RE. They tend to forget all other input costs to achieve that return.

Troll
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Troll

Good post.

Anonymous
Guest
Anonymous

As a straight comparison just on returns, those numbers are valid. But add financing costs, property taxes, and maintenance and it likely becomes a different story.

Leverage is only valid if you buy and sell quickly, effectively having the bank pay for your costs. Over the 25yr period from 1986 you would likely have your mortgage paid off (unless you re-leveraged to purchase other properties)

Thus it is likely if we treated it as a house, 20% down, financed over 25years that after all the taxes and maintenance costs that you probable ended up with closer to 4% annualized return and the banks thank you for your prompt payments.

jesse
Member
Kenney: Provincial Nominee Program beefed up Provinces and territories are on track this year to welcome a record number of immigrants selected under their own nominee programs. In a speech to the Vancouver Board of Trade, Jason Kenney, Minister of Citizenship, Immigration and Multiculturalism, discussed the rapid growth in provincial nominee programs in recent years. “Our government recognizes the importance of nominee programs in spreading out the benefits of immigration around the country,” said Minister Kenney. “That is why we plan to admit about 40,000 immigrants in the provincial nominee category in 2011, five times more than the 8,000 welcomed in 2005. The previous high was 36,428 provincial nominees in 2010.” Important because, as it turns out at least to date that BC tends to draw from a highly diverse pool of immigrant sources to the provincial nominee program, unlike… Read more »
people observer
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people observer

you also need to factor in taxable investments – those cap gains on real estate were tax-free. In contrast, the interest income are taxed heavily, as are the cap gains and dividends (albeit there is a div tax credit). There is an option to tax defer it through RSPs, but no TFSA

Firkin
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Firkin

@patriotz: I don't understand how total return doesn't take transaction costs into account. It doesn't make sense to compare the return on something it costs $5 to buy or sell to something it costs $15,000 to buy or sell.

Crash
Guest
Crash

Off topic sorry, but…

From last Friday's flips to watch:

MLS#: V893467

Assessed: $780,000

Sold: Mar 2010 $805,000

Listed: Jul 2011 $1,340,000 (after some renos. maybe $40-50K worth)

Now has a 'Sold' sign. Sold to a Greater Fool!?

I'll try to find what it sold for.

keeperofthederp
Guest
jesse
Member

Investopedia explains Total Return

Total return accounts for two categories of return: income and capital appreciation. Income includes interest paid by fixed-income investments, distributions or dividends. Capital appreciation represents the change in the market price of an asset

How you finance the deal is a separate question.

If, taking a completely random example, you can convince someone to lend you money at a low real interest rate without any equity share if prices go up, that sounds like a decent way of raising funds, at least compared to VC or even angels. Even better: getting parents, other family members, and the government to just give you money, or at least loan it to you with no fungible indemnification.

There are many creative ways of financing real estate investment beyond cash, mortgages and parental handouts.

4SlicesofCheese
Guest
4SlicesofCheese

http://www.ctvbc.ctv.ca/servlet/an/local/CTVNews/

Why would he be a flight risk. Canada would never send him back. Hell I would stay in Canada and enjoy my underground business without worrying about being prosecuted.

real_professional
Member

Odlum Brown July 2011 – Report "Pizza Guy Recommends Selling"

Available in the newly created VCI Library

http://vancouvercondo.info/forum/topic/vci-librar

keeperofthederp
Guest

can anyone tell me what the previous sales history was on

MLS V896107

thx

Anonymous
Guest
Anonymous
While I agree that the total return is the same the actual difference is different due to leverage. The guy who bought the house for $160,100 in 1982 probably put down 25% = $40,025. If you invested the $40,000 in the TSX 60 in 1982 you would have $386,700 (if my math is correct) while the house owner has a house worth $772,600. I don't want to debate about "home owning costs" vs. "renting costs". My argument is below. Note: I am a bear. I just find that the amount that house prices are increasing by is greater than the amount most people can save & invest. For example if a person saves $20,000 per year for 5 years you would have $150,000 (assuming $100,000 principle and $50,000 investment gains/income). Meanwhile the house price has increased by $500,000 in that… Read more »
Anonymous
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Anonymous

Ever heard of ham weather? http://www.hamweather.com/

rain, rain, rain and more rain 🙁

vanpire
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vanpire

@Anonymous:

In 2001 I almost bought a brand new house in Clayton village, Cloverdale (Surrey) for $199,000 +tax (1300sqft + 650sqft unfinished basement)

I can buy the same house today after 10 years for $450,000 (asking) with a finished basement and mature landscaping after many upgrades, improvements and renovations. After 10 years the owners did alright, I guess, but nobody became a millionaire in this case. Not by a long stretch after what they paid in fees, interest, taxes and improvement costs.

Outskirts of GV are different for sure. Some Port Coquitlam homes are selling for the same or less this year than what they were bought for 3-4 years ago.

No joke.

bubba
Guest
bubba
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YLTN @ Work
Guest
YLTN @ Work

@Anonymous: If you want to compare it equally, take that $40K downpayment and invest it on the TSX 60, now invest another $120K on margin – it's the same thing, borrowing to buy a house or borrowing to buy an investment.

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