Money Goes Up, It’s Good; Money Goes Down, It’s Bad” – Insights on Real Estate and Psychology

My friend, Cam Levitt, a Toronto-based real estate agent, is one of the few people I've met who approaches real estate with a pragmatic perspective. Recently, he commented:

“Most people who “invested” in real estate did so because they thought they understood it, when in reality, it had essentially become a speculative and leveraged momentum trade—if money goes up, it’s good; if it goes down, it’s bad.”

I laughed because his observations about human behavior and confidence in 'investing' are universal—this could apply to stocks, bonds, crypto, real estate, or gold.

This article aims to provide clarity for clients and partners who frequently ask about general real estate trends and how best to manage their current and future investments. For full transparency, my family owns rental properties and views real estate as a viable component of a comprehensive wealth strategy.

However, I don't champion any asset class universally; each comes with its own set of risks and benefits. The goal here is to equip you with enough information to have a more productive financial conversation around real estate.

Understanding the Cap Rate?

One essential metric for real estate investors is the Cap Rate or capitalization rate. This measures how much you earn annually (net income) after all expenses, divided by the asset's purchase price.

For example, if you buy a condo for $500,000 and generate $50,000 in net rental income after property taxes, maintenance fees, and other annual expenses, your cap rate is 10%. A higher cap rate may indicate more risk (e.g., short-term rentals like Airbnb), while a lower cap rate might suggest stability (e.g., long-term rentals).

Cam provided an actual current a cap rate calculation on a currently listed 750 sq ft condo unit in Toronto:

In practice, Toronto’s residential real estate has seen cap rates as low as 1-2% for years. In a zero-interest-rate environment, earning 2% plus price appreciation might have seemed appealing. However, with rising interest rates and declining prices, does this strategy still make sense? In isolation, the answer is no.

Financial assets like government and corporate bonds currently offer better returns with lower risk and, in some cases, better tax benefits.

This analysis was also done on unleveraged basis - meaning that it was assumed investors did not borrow to make this investment. Investors that have even modest leverage against these investments are now losing money due to higher interest costs and been selling.

Dealing with Trapped Equity and Losses?

Whether in real estate or other assets, investors must realize gains or losses and reinvest capital where it can generate better returns. Real estate investors facing low cap rates and negative cash flow—especially with mortgage-financed properties—should ask themselves critical questions:

• Why am I holding this property? Is it for price appreciation or the hope of improving net cash flow? Are my assumptions realistic?
• Can my equity be better invested elsewhere for a superior return with greater certainty?
• What are my net returns after considering taxes?
• How does my net worth evolve over time, considering my real estate holdings versus other assets like liquid investments, insurance, pensions, private businesses, and active income?

Investors with negative equity (where selling would not cover the mortgage) need thorough advice and analysis. The tendency to hold onto such investments due to the ‘sunk cost fallacy’ can be harmful.

In real estate, selling isn’t as simple as offloading liquid stocks—there are costs, time delays, and sometimes a lack of buyers. It’s crucial to be realistic about the viability of holding onto or freeing up mortgage capacity to reinvest in more profitable ventures.

The Pros and Cons of Owning Real Estate

One of my clients, a highly successful US real estate investor, once advised me before I bought my first property: “If you like the vacation location and can manage if the property never rents out while covering all the costs, you’ll be satisfied.” He was right.?

My family purchased a rental property in Charleston, South Carolina. The investment thesis was that migration to southern states due to lower taxes, affordable housing, and better weather would drive demand. The property’s value has appreciated, and it continues to generate positive cash flow. Our success was partly due to timing and having a great property manager and supportive neighbours. Without these factors, we might have sold it long ago. While the property provides personal and family benefits, I recognize that we were lucky.

Our clients share varied experiences, such as issues with tenants or unexpected maintenance. For example, one client had copper piping stolen, and another dealt with a problematic tenant exploiting legal loopholes. Challenges like these highlight that real estate isn't as passive as many assume. Stocks don’t call you at 2 a.m. about a leak in the ceiling. Real estate investment, while rewarding for some, requires active involvement.

An Agent’s Perspective on Real Estate Investing

I asked Cam how he advises clients on whether a real estate investment might be viable. He replied,

“In the current environment, there are almost no metrics which justify purchasing a secondary property as an investment. If someone wants to put more capital to work into real estate right now it only makes sense toward your principal home for the tax efficiency, either by upsizing or improving the house.? But our jobs are different, I’m not a true fiduciary like a Portfolio Manager/Wealth Manager. ??My job is to advise on market conditions, facilitate transactions, and mitigate risks during the process. If I inform a client that a house is overpriced or the roof needs replacing soon and they still want to proceed, then I’ve done my job.”

Considering Toronto’s bull market since 1989, which only recently saw losses, I asked Cam about investor psychology. His response was insightful:

“People forgot about risk; they assumed prices would keep rising. No matter what you told them, they wanted to go charging ahead anyway”.

About Michael Yhip Wealth Partners

We are an award winning Canadian based wealth management team specializing in working with business owners, entrepreneurs and individuals who have created, or are in the process of creating, significant value.

The individuals and families we work with are looking for the highest level of service, experience and knowledge to help them establish and execute full wealth management plans that include financial planning; tax efficiency and minimization strategies; investment management; insurance; estate planning; and banking. Our focus is business owners that are creating significant value through the growth in their business and we focus on helping create meaningful value above and beyond simply the investments we manage.

On occasion we geek out and write technical articles that maybe only a handful of people find interesting.

You can find out more at www.michaelyhip.com