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Life by Design is a podcast that shares the experiences and tools to help couples align their wealth goals and reclaim their time, enabling them to experience freedom, abundance, and a life by design.
Jessilyn Persson (00:04)
In today's episode, we're flipping the script on a popular belief. The notion that paying off your mortgage is inherently better. And we're going to talk about two actual investments in our life that illustrate the difference. This episode was inspired by a notion that we keep seeing over and over again with our clients and friends. The idea of having no mortgage. Most of us were raised with the belief that you should pay off your mortgage as fast as possible. Well, we've learned differently.
and the two scenarios that we're going to detail will show the difference, which will allow you to make a more informed decision on your mortgage. So the first one we want to talk about is your personal residential mortgage.
Brian Persson (00:46)
And yeah, not just everybody else out there, but us as well. We were ⁓ told by our parents that paying off your mortgage is kind of your number one priority in your financial life. But we're going to show a little bit about why that's not entirely true. And we did go down that path when we first started ⁓ with our property. We tried very, very hard to pay it off until we discovered a different way.
Jessilyn Persson (01:11)
Yeah, we were, and I think we've shared this on multiple podcasts, we were, think, too much shy of being mortgage free before we actually decided to, instead of pay it off, we refinanced, pulled it out and bought property.
Brian Persson (01:28)
Yes. Yeah. So we want to work through some actual numbers in this podcast. So just so you can really see the financial difference that it creates by using the finances and the leverage that you have available for you in your personal residence versus actually just paying that off and then not using that leverage for any type of investment.
So as we just mentioned, we were very, close to paying off our personal mortgage and our mortgage had started at about 350K, but when we refinanced it, we were able to buy up to $2 million worth of property. So we now had $2 million worth of mortgages instead on those investment properties. But the portfolio is now cash flowing at $2,800 a month.
which was ⁓ almost or is now almost double our original mortgage payment. So we're actually paying our original mortgage and we are cash flowing and putting money in our pocket because we actually borrowed from our personal residence.
Jessilyn Persson (02:39)
Right and I mean it gives us cash flow as well as we have you know The interest that we have against our residential property because we borrowed against it is right off. Yeah, right So there it's not like our expenses enough necessarily went up because we have a bigger mortgage because those costs are being covered by our tenants
Brian Persson (03:01)
Yeah, the costs are being covered by our tenants, yeah. And then the added benefit is that seven years down the road after we refinanced our property, so this is seven years down the road today, and now we are able to buy apartment buildings from the original portfolio that we bought when we refinanced our personal residence. And now that $2 million in property has turned into $4.5 million in property.
So the contrast there is that now today we could have had $500,000 and actually specifically $570,000 in equity, or we could have refinanced as we did seven years ago and have $4.5 million in value of our properties. Plus the portfolio is now cash flowing with the apartment buildings at $6,000 a month. So if we had
If we had paid off our personal residence, we would have been saving about $1,000 a month, as in not spending it. Instead now, we are earning $6,000 a month with the exact same amount of equity.
Jessilyn Persson (04:16)
Yeah, that's a whole mind shift, I think. I mean, to think like, ah, everyone I know their safety net is I'm going to be mortgage free. So, you know, if something happens to my job or my husband's job or the family income, I don't have a mortgage. I can still live in my home. if you flip that switch and went the route we went, it's like, oh, if I don't have a job or don't have family income, I'm still making $6,000 a month off my investment properties.
to help pay down my mortgage, but also supplement other bills that still come whether you have a job or not.
Brian Persson (04:53)
Yeah, and not only that, our real estate portfolio has some leverage still in it. So if we had a really disastrous situation where we still had like the $6,000 a month wasn't enough to lean on, we have some stuff to lean on, like some credit to lean on inside of our real estate portfolio. So not only are we not just saving $1,000 a month if we had paid off our personal residence, but
We have that 6,000 plus we have the ability to leverage if, you know, there is a disaster in our life of some sort.
Jessilyn Persson (05:31)
Yeah, and the good news is this is a rinse and repeat story. So like as we grow these portfolios, we can refinance as the price goes up, pull that money out and buy more apartment buildings and just keep building our cash flow. And to a point where I mean, working outside of of course, our real estate portfolio would be optional.
Brian Persson (05:54)
Yeah. And you know, the first round took us seven years, but the planned second round for refinancing and buying, buying like upping our game again is about five years. I think it's going to happen in less probably about four, but then, you know, the next round after that will be two years. And all of sudden you're, you're on this, hockey stick of a, of a climb and your $1,000 in saving is now turning into just this.
huge multiplier on your income.
Jessilyn Persson (06:27)
Yeah. And upping our game isn't just adding another apartment. It's continually into double our portfolio. So as you mentioned, we went from two, we're now at 4.5. And then I know you say four years, but I think it's going to be more like two to double this to nine. But in four years, we'll get to our goal, which was closer to 20.
Brian Persson (06:49)
Yeah, yeah, exactly. then ⁓ far, far out into the future, like after that four years, at that point, your real estate portfolio has enough that you can leverage from to actually pay yourself an income. So you end up not only using your real estate portfolio to pay you, but you're actually borrowing from your real estate portfolio to live. And guess what? That's tax free.
So you're saving money on the tax and instead of having to pay tax on the cashflow of your real estate, the win-wins just start to stack into the future.
Jessilyn Persson (07:26)
Right, right. Okay, so what does this look like? So if we want to share with our audience comparing you got your investment property, a mortgage versus a mortgage free, let's talk about what that looks like from cost. Like what's it going to take from an investment perspective? ⁓ ROI, so return on my investment and where the gaps are that someone who's looking at being mortgage free, because that's how they're raised,
Where are the gaps they're missing in this whole concept?
Brian Persson (08:00)
in terms of the personal residence or are we talking about investment residence?
Jessilyn Persson (08:05)
talking the investment property now here. you're going to compare a mortgage versus a mortgage free up.
Brian Persson (08:09)
Yeah. So, and so this, this contrast comes from the idea of a lot of what our clients are thinking and they w they want to get into real estate. And specifically these clients are a little bit further down the road. They've already, they're, relatively successful financially and they're looking at getting into real estate, but in their head, they still have that mortgage free sort of notion that they grew up with.
So they look at these real estate properties and they want to pay them off instantly because they are far enough ahead that they actually have the money to pay off these properties. And I kept getting this question over and over again and inherently, instinctively, I knew that like paying off your mortgage was not the best return on of your investment.
But I got it asked one too many times and a couple of months ago, I said, you know what? That's it. I got to, I got to draw this out and actually like show why these numbers actually matter and why it is not the best investment to pay off your real estate investment property entirely. Right. Yeah. So, some things that people forget about are things like the mortgage pay down and the CRA in Canada that
the Canadian Revenue Agency, i.e. the taxman, these things start to add up when it comes to chipping away at your ROI. So what I did is I created a comparison of our own, like one of our own properties. So this is, one half is the real world example of what we actually did, and then the other half of the example is the fictional scenario if we had paid off that mortgage entirely. So.
The property was $449,000 to buy. And if we had mortgaged it, which we did, that was $999,000 to close the deal. that's down payment, lawyers, inspection, everything.
Jessilyn Persson (10:12)
And so just to clarify, that's 20 % down, correct?
Brian Persson (10:14)
20 % down. Okay. And so on the non-mortgage side, your cash to close is $458,000.
Jessilyn Persson (10:24)
And that is because the purchase price was $449. you're paying the whole price upfront, but then also closing costs, you said, inspection, lawyers and all that.
Brian Persson (10:34)
Yeah, yeah. Effectively 100 % down plus the exact same closing costs as if you had mortgaged it. Yeah, so already your total investment is almost four times higher than if you had had a mortgage property. Now let's look at cashflow. So for this particular property, our cashflow is $758 a month and that generates a return on investment of 9.1%. And if you had no mortgage, the cashflow is
$2,418 a month or a return on investment of 6.4%. Now you might want to ask, you why is the number so much higher on the cashflow side where you have no mortgage and yet the return on investment is so much lower. And that's basically just because you've put so much more money into the deal that the amount of return that you're getting from that money is actually lower, even though the volume of that money is higher.
And I think ⁓ that's one of the big misconceptions of why you should not pay off your mortgage is because people look at that volume number, they say, look at that, like $2,400 a month in cashflow. That's way better than $700 a month in cashflow. But the reality is that you have to use so much more money in order to get that cashflow that your actual return on investment is actually quite a bit lower than it.
Jessilyn Persson (12:01)
Right. So not only am I putting like 450,000 down, which if I went with this 99,000 down for the mortgage, I could technically buy four of these properties. But if I'm making a cash flow of 2400 a month, for example, versus the 758, the tax man's taken a nice little chunk of that too.
Brian Persson (12:15)
Yeah, we're going to get into that,
That's the other thing, yeah, is that $2,400 a month at your cash balloon is taxable.
Jessilyn Persson (12:32)
⁓ I mean it's taxable either way, but this is a much higher bracket now.
Brian Persson (12:36)
Yeah, you're getting taxed more on, yeah, you're in a higher bracket and a higher volume of money that you're getting taxed on. Okay. Yeah. So the second thing that we need to look at for this particular example is the mortgage pay down. So on your mortgage property, you earn another $8,700 a year on paying down your mortgage for an additional return of your investment of 8.1, or sorry, 8.8%.
And then on the flip side, there is no mortgage pay down because you paid it off. So your return on investment for your mortgage pay down is zero. Right. Nothing to add there. And then the last thing is appreciation. So we'll assume that the property appreciates exactly the same of 2%, which is 9 % or $9,000 per year or an ROI of 9%. So on the mortgage side. Yeah.
Jessilyn Persson (13:25)
9 % on the market.
Brian Persson (13:28)
And, if you, because again, you put so much more on to the non-mortgage side, your actual ROI for appreciation is only about 2%, quite a bit lower. Yeah. So when you total up all those numbers, your mortgaged ⁓ ROI, your return on investment is almost 27%. On the non-mortgage side, your return on investment is a little over 8%. So by mortgaging your.
investment property, you're actually generating a return almost three times as high as your non-mortgaged property. And you mentioned it earlier, you can buy four of the mortgage properties for the same exact cash as the non-mortgage property. So technically you got to multiply that 27 by four and you're actually over a hundred percent ROI for the same cash as if you had
paid off your entire mortgage and only generated 8 % ROI.
Jessilyn Persson (14:31)
Yeah, and for our mathematical listeners here, as we mentioned, the non-mortgage you'd make just over $2,400 a month. On the mortgage, you'd make $758, if you had four of those, you're now making $3,000. So you are making more cash flow on four properties with the same money down than one property completely paid off.
Brian Persson (14:53)
True. Yeah. One of our, one of our mentors, Don Campbell from the real estate investment network, the way he always put it is that it's much better to buy a hundred percent of something for one fifth of the cost, i.e. 20 % down than it is to buy a hundred percent of something for a hundred percent of the cost. And that's exactly what you're doing when you're mortgaging your property. You're buying the entire property for a fifth of the price.
Jessilyn Persson (15:17)
Yeah, and you're growing a much larger portfolio, making a bigger return, and it just keeps multiplying. How the wealthy get wealthier.
Brian Persson (15:23)
Exactly. Yeah, you're multiplying every number you can add into the equation there.
Jessilyn Persson (15:30)
Okay, so let's go back to the original concept of you should pay off your mortgage first. That's what we, I can hear the voices from our parents. And I'm sure many of our listeners also have heard that and it's whispering in their ears. ⁓ So now that we've explained how you can make money by not paying off your mortgage and different ways to go about that, there's some questions to consider around that. There are things to think about.
And one of them I think is debt. Because so many people are just terrified of debt and adverse to it. what are your thoughts on that?
Brian Persson (16:10)
⁓ Well, it's not for everybody. Debt's not for everybody. You really got to look at your personality and understand how you can handle debt. ⁓ Like on a functional level for your finances, the right debt is really good debt. You just need to make sure that you are properly getting into the right debt. So a debt like against a property where it pays you more than what you need to pay into it, that is a good debt.
⁓ And that's what we do as real estate investors. We find we want lots and lots of debt, but we want the debt that we have to pay more than what we're at. It's actually costing us.
Jessilyn Persson (16:51)
So this
debt equates to what we would call a business. Yes. Right. It is making us money. It is making us cash flow. It is not sinking us further. Like, let's say credit card debt. That is what we would deem a bad debt.
Brian Persson (17:07)
Exactly. Right. And I want to, I want to illustrate one other thing about debt, ⁓ is that debt has no inflationary aspect to it. So a hundred thousand dollars of debt today is still a hundred thousand dollars of debt 10 years from now. So you have all the inflation that happens, especially over the last five years, that doesn't count towards your debt. Whereas everything else is increasing.
So whatever you buy a real estate investment property for today and whatever that debt level is, it's basically stuck in time at that point that you bought it. And that's a great thing because now your property and your asset is paying you more and more throughout the years. And yet the, the amount you paid for it, the debt that you have on that is staying the exact same. And ideally you're paying it down. So it's actually lowering into the future, but never ever will it inflate.
unless you choose to inflate it by what we do refinancing it and going and buying new property.
Jessilyn Persson (18:11)
Interesting. something else to maybe consider is as a listener who wants to invest in real estate, we want to talk about your awareness of macroeconomic trends. And we're talking things like interest rates, which of course you're to have an interest rate on your mortgage, on your debt if you borrowed to invest outside of your mortgage. ⁓ And then rental demand. Like are you investing in a space where there is rental demand? Because if you're not making the money,
then that debt gets bigger and it causes the stress and the anxiety.
Brian Persson (18:43)
Yeah, and the thought here is that if you're not gonna pay attention to these factors, ⁓ doing real estate yourself is probably not for you. But find a partner. Find a partner who's gonna invest into real estate with you so that they can pay attention to those things and they can have the expertise around what is going on in the real estate portfolio.
Jessilyn Persson (19:04)
Yeah. So for macro economic trends, sure. But also experience. So do you have the experience, if not, do you have the time to learn and do you have the time to create a performing, I'm going to repeat that, performing rental portfolio. And again, this is where we lean on, if you don't work with a partner, even work with a partner for the first one or two so you can learn hands-on knowledge. But if you're going to pick a partner, please pick a partner who can actually show and prove that they're
rental portfolio is performing because you know know a lot of people when they find out I'm a real estate investor you can see they just kind of get the shivers are like
Brian Persson (19:41)
Like.
Jessilyn Persson (19:43)
you have to deal with renters and then they talk about experiences they've had because they put their in-laws or someone in the suite and they don't want to up the rent. So it's costing them money and it's like, ⁓ you're not treating it like a business then.
Brian Persson (19:58)
Yeah, or they're not even into it and they find out we're a real estate investor and they bring their ideal deal to us and it's just a really bad deal.
Jessilyn Persson (20:09)
It's a bad deal and they think it's an incredible deal. And so I really appreciate and have respect for people who will bring those forward to us. And I know a lot of people are like, I don't want to bother you or bug you. I'm like, no, please do. Because this can cost you money and we want to help save people money and invest and create money. And I know we spoke to one of our friends who found an incredible property, according to her, and we
Brian Persson (20:32)
It was a really nice property.
Jessilyn Persson (20:33)
And we ran the numbers for her and showed her and when I spoke with her probably about a month later, she's like, yeah, I'm really glad I brought it to you. She's like, and then she started talking about all the things of why she wanted to buy it. And I looked at her and I'm like, and I just started kind of ⁓ refuting them. I'm like, she goes, it was a really nice property. goes, but I was worried that I wouldn't be able to resell it. And I'm like, yeah, but did you think that you're not selling it to a normal homeowner? This was an investment property. She goes, I'm like, yeah, yeah, you don't buy a sweeted property for a.
traditional homeowner, you buy it for investors. goes, ⁓ I'm like, so you would have been able to resell it, you know? And she looked at it, she goes, and I thought the backyard wasn't big enough. like, yeah, but is it for you? Or is it for your renters? ⁓ right. And so if you don't, if you're going to buy an investment property and you're looking at it, like, would I live here in respect to like, I need it for my animals, I need to know resale value, need to, so you do need to think about rentability and sellability.
Brian Persson (21:14)
You gotta think like a rent.
Jessilyn Persson (21:30)
but from an investor's mindset, not from a homeowner's mindset.
Brian Persson (21:35)
Exactly. And that's why you need some experience. So if you, if you don't have the experience, go find somebody who does have the experience because they will point out ways of having that portfolio or that rental property perform in ways that you never thought of.
Jessilyn Persson (21:49)
Yeah, I know we talked a lot of numbers here and sometimes numbers make people's brains hurt. ⁓ But we would love to review. If you've got properties, please send them our way. ⁓ Info at weekendwealth.ca and we'll take a look for you and we'll give you our honest opinion on whether it's a good deal or not. So the key takeaway for me today would be be okay with thinking outside the norm of what
how you're raised or how people even everyday today, colleagues, coworkers, friends, family might try to tell you and be okay with thinking outside that and going forward with what works for you.
Brian Persson (22:30)
My key takeaway is very, very similar, and that is challenge your traditional thoughts just one at a time and make sure that you can think out these thoughts. Because for us, it wasn't smarts and hard work that got us to where we are today. It was thinking different.