Extracted from the Family Finance section of the Financial Post, 15 Oct 2010 -
Rose, 55; Edward, 59, a couple from Toronto, are powering down their careers, hers in the airline industry, his in real estate sales.
Their assets:
$650,000 invested in three rental housing properties,
$500,000 home,
$211,000 of non-registered stocks, and
$280,000 in RRSPs.
Their liabilities:
$170,000 mortgage debts.
Total net worth: $1,471,000.
In her retirement, which began this fall, Rose’s defined-benefit pension pays her $1,900 a month. That income will continue until a $573-a-month bridge ends at age 65 and her benefits drop to $1,327 a month. Edward generates variable income from real estate sales and consulting to bring total family income up to $7,300 a month, including money taken from cash flows at three rental properties. However, the properties run at a loss. The couple are actually running a total deficit of $1,440 per month.
[In the article the financial advisor recommends they "sell the losers" (a condo and a rental house) and invest the resultant $280K equity.]
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VREAA thoughts:
1. These guys own four properties and have 78% of their net worth in real estate. Welcome to Canada, circa 2010.
2. The financial advisor gives good advice: sell two of the investment properties. Wiser still is to recommend selling all three.
3. Now, imagine if the thousands of couples in this situation in Canada had to seek and act on similar advice. Local speculators alone could crash the markets in months.
-vreaa
These folks think they are RICH. They are not. They are BROKE. They are sitting on a steaming pile of debt.
The BOC has come right out and said – we think Canadians have too much debt. Of course they say that, and then Carney and the boys keep the bar open for the martini soaked RE fool.
No one believes it – but take a look at what is happening in many parts of the World, and get ready, bunky – because it going to be nasty.
Got Cash>?
These guys are actually in relatively good shape (compared with many others) in that their non-RE investments are larger than their total mortgage load, so their leverage to RE is less than 1. If/when RE values halve, they will only lose 39% of their net worth.
Contrast this with the thousands of households where the leverage is considerably greater than one, sometimes greater than 5 or even greater than 10.
In these cases total net worth will be wiped out completely with RE drops of 20% and 10% respectively.
“Their liabilities are mortgage debts of $170,000″
then
“However, the properties run at a loss. The couple are actually running a total deficit of $1,440 per month.”
Does… not… compute. They didn’t mention the debts on the investment properties. If they’re running a $1.44k monthly deficit with today’s interest rates, they haven’t told you the whole story: that they are dependent on low interest rates and they are obviously speculating on future price appreciation to “bail” them out of negative cash flow.
What’s the bet a few other newly-minted retirees start doing the same math in the next couple of years? I know some of my family members already have, thank heavens.
jesse -> Thanks for the comment.
Look at the original article… the $1,440 monthly deficit is calculated by income minus expenses, so doesn’t just reflect cash flow from properties.
Aside from that, even with the low mortgage/price ratio, these properties are running at a loss or close to flat.
Agree re the implications of folks starting to ‘do the math’.
OK. A 20% correction leaves them down $230,000 of after tax money. That it seems is on the conservative side of the pending correction. Do they really want to wait and see? And if that correction turns south, well then, they’re not going to be happy in their retirement now are they?
Sorry, having 4 properties and non of them rented just means they’re living large. It doesn’t mean that property is a bad investment. They’re just not taking a very proactive approach in trying to rent them out to turn their RE into an investment. Of course, if it’s not a renters market, one has to sell and move on to something else.
By the way, has anyone seen their other expenses. $5000, not including their housing maintenance, RRSP, and mortgage payment.
This article is an example how Candians live beyond their means, without taking proactive changes to reduce their burdens (by making more income from their properties or reducing their budgets and assets), but crying about it. Honestly, I don’t see how they live “frugally” in way as Rose is quoted in the article. Please, someone advise them to watch, ‘Til’ debt do us apart.’
Absolutely no evidence that property is a bad investment in this article.
You have to give the pension a Net present value to accurately calculate the net worth. $1900 a month is worth somewhere between $150-250k