Pierre-Yves McSween: investing where it counts

A well-known economic columnist in Quebec, Chartered Professional Accountant Pierre-Yves McSween has his vision of the real estate world, he who owns two plexes to diversify his investments. CORPIQ met with him on the sidelines of the conference he presented at the IMMO 2018 event, during which he led the participants to question their needs and their relationship with money.

During your radio show, you regularly talk about the stock market and often real estate. What place does real estate occupy in your investment strategy?

Real estate fascinates me. I have two plexes and I intend to buy a third one. I invested early in the stock market but late in real estate. I contributed to RRSPs while I was attending university while still having student debt. I was not yet an accountant and in my mind, avoiding paying taxes was my priority. Investing in RRSPs when you're 20 is a little silly because the deduction is not very big. I remember at one point, after university, my net assets were $13,000 in RRSPs and $10,000 in debt on a line of credit. Then the Pierre-Yves McSween on the job market quickly became a consultant. Overnight, my salary increased by 40%. There I said to myself: I’ll invest the difference. That year, I saved $30,000- $40,000 and it was my base fund to buy a duplex with my wife.

You understand the importance of investing early, but how do you get there at a time when you have very few resources?

I compare it to a job. Often people wait to have the skills for a job before applying, whereas it's the other way around. You have to learn about the job for which you want the skills. It's a bit the same principle in real estate. The investment you make very young is the principle of compound interest. Time is lucrative. When you do not give yourself the chance to have the time for it, you do not make money.

It's very difficult for a young person to say, "my first $10, $20, $30, $40,000, that I'm going to make as a surplus to my standard of living, I'm going to invest at risk while my neighbour is going to Bali. I'm going to be 39 years old and I do not remember seeing this much peer pressure to travel to then put up heavenly pictures of our travels on the Internet.

The stock market and real estate each have their own risks and benefits. Do you have a preference?

I like both. I turned to real estate because I had concentrated too much on the stock market. I prefer a 50-50 balance, but it's a question of personal choice. Real estate alone is a concentration of risk.

When interest rates are very low or fall, it makes the stock market less interesting and real estate more interesting. There’s a correlation. When real estate becomes less profitable, people go to the stock market. On the other hand, what is interesting about the current situation is that interest rates are low. This is the reason why I find that there is value in being a property owner. This is the best investment at the moment, while the stock market is rather volatile. In fact, real estate is too. It's funny, it's the wrong time for the stock market, which is about to undergo a correction, and in real estate that is capping with interest rates are on the rise. I don’t know where to put my money, so I put it in the stock market and real estate. If not in one or the other, where do I put it? I have even invested in a real estate investment fund to be on the stock market and real estate simultaneously. It's a way to benefit from the real estate yield without having concentrated risk.

What are your ambitions in real estate?

There are real estate investors who want big buildings. I prefer several small buildings. I make less money than those who have bigger buildings, but if one of my smaller buildings is not doing well, my risk is weighted. I'll give you an example: if you have three triplexes and you need cash, you sell one. I could be wrong and lose $30,000, but at least I am not being out on the streets. If you have a major problem with your 10-unit building, you’re done. For a small family like mine, who does not have a family fortune behind it, it's hard to take so many risks. For me, diversification becomes interesting.

Since 2000, the value of plexes has tripled. Should we rejoice or worry?

I will tell you three things about this. First, homeowners must have the intellectual honesty to recognize that the value of their property has risen due to falling interest rates. No one is that brilliant, we took advantage of the economic situation. Second, renovations are extremely expensive if you follow the rules. Third, the real estate reinvestment deficit is important.

Are buildings worth the traded prices?

There is no good time to invest in real estate, there is a good price, however. In Montreal, in the central neighbourhoods, what is 100 years old has been demolished or renovated. We also have buildings from the 50s with the original plumbing. More recent buildings are rarer. My first building’s foundation needed steel piles and the second does also. I took it into account in the purchase price. In many places, you have $50- $75,000 net to invest to make your building stable.

There are fewer opportunities, but there is no bad time to invest. The thing to avoid is paying the wrong price compared to the market. My duplex did not cost me much, because there was work to do in it. The owners were not ready to invest the money and time. I paid $150,000 less than neighbouring duplexes. I'm able to get into this work, I'm not afraid to do on. I saw it as a very long-term investment.

There are also many condos being built. What do you think?

A homeowner needs to live somewhere, without necessarily being a landlord. Instead of buying a condo, I buy the entire building. When you buy a plex, you buy 100% of the land. It’s mine. I am master of my domain, even if a tenant lives on the second floor. It's better than having a condo where I own 1/16 of the land. A condo is fun at first, but in 5, 10, 15, 20 years, we will see a lot of condo management problems with reinvestments, divestitures and reserve funds not high enough. Also, we build cheaply. In the end, getting along with 32 co-owners who cannot afford to invest means that we do not do the work we want. If you buy a condo and you want to change your windows, everyone has to change their windows. I want to have control over my life.

People forget about condo fees and municipal taxes in their calculations. You hear that being a tenant is throwing money out the window. Do the math: it will cost you $1500-1600 a month to be a co-owner with a down payment and a risk. At $700-800 as a renter, it may be less beautiful, but for half the price you have peace. That has value. I do not own, but I don’t have the stress either. A plumber who costs you $500-1000 for the day is the equivalent of a month's rent.

In the market, what part do emotions play vs rational calculations?

The problem is the plexes occupied by the owner. Beyond a 5-plex, you are a real estate investor. As long as you are within the realm of being a live-in-the-building landlord, you are right on the emotional side of things. [...] Tenants in the nicest apartments are afraid to be evicted because they know that the owner who buys the plex will come to live in the best unit. Emotions take hold. There is no logical calculation with small buildings because they are occupied by the owners. Those who have no emotion are those who want to rent 100% of their building.

Even real estate brokers tell me what to look for is emotion, children, daycare, school. In short, convince the parent that he is investing in a quality of life. It has value.

There is a reality in Quebec, a rent control that forces homeowners to subsidize housing, in a way. What is your point of view?

You concentrate the risk in the hands of the owner, but you do not give him a return, except on capital gain, that itself is proportional to the rent. I understand that we do not want to put housing in the hands of speculators, as it happens in other countries or even in certain places in Canada, where it becomes unlivable. You want to protect people's right to live somewhere. The problem is that there is no balance.

Install a new hot water tank for $800 and see what increase you are allowed to get... You will never be able to pay for your water heater. Never! You, therefore, find yourself to subsidize the replacement of the tank. I put $80,000 of renovations in one of my units. The Régie du logement is giving me a recovery over such a long time that I will be dead before seeing the end of it. And I have to finance that money.

The problem is that we have two kinds of owners at the extremes. The one who inherited a paid building, who can afford not to increase rents, and the other, the owner who bought in 2017. Both live exactly the same reality of regulation, but cannot allow themselves to have the same problems. Whoever has just bought cannot have issues of non-payment of rent. The one who has inherited, he can even afford to have no income, and it does not change his life.

To those who have just bought, the tenant says: "it's your problem if you paid too much", knowing that the Régie does not allow them to increase rents. He isn’t wrong, but there is an overbid. [...] Real estate is the only investment where you are 100% owner, but without having control. [...] The availability of land means that we cannot increase rent too much, otherwise tenants will go build or buy.

Despite low rents and vacant housing, social housing is being built at close to $200,000 per unit. What do you think?

It's shocking to see government-funded housing co-op towers. It's more beautiful than the condo projects next door. It is not as well maintained as when people are owners. So it costs a lot of money for society to have social housing. Instead of subsidizing housing, I think that we should rather subsidize the tenant. You are a low-income renter who pays $800 a month, but can only afford $500? So let’s give a $300 benefit paid directly to the owner. Otherwise, homeowners do not want tenants on welfare in their building because they are afraid of not being paid. As there is no financial guarantee, we do not encourage the owner to take tenants who have limited means.

What does not count when you own?

We must talk about the mental load in the life of the owner, the stress of managing his papers, paying bills, renovating. All this financial stress goes unpaid. Time is not accounted for either. I have had a building for almost eight years and the time I spend to maintain it, cut the grass, repair small things, the tenant calling me because he broke something: for all that, I'm not paid for my time. So when I am told that I am making some percentage gain on the value, yes, but that time I might have put elsewhere.

I know someone who earns $30,000. For this person, having a triplex will change their life. It allows them to earn a retirement they could not afford.

For me, I tell myself that it is a protection against inflation in the long term and I think also of my two children. That's the benefit I see, but there is also the mental burden and stress. I do not want to own 100 doors, I am a small owner and I see my investment as a diversification factor.

By Hans Brouillette, Director of public affairs, CORPIQ

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