From ‘Debt-heavy couple liable to fall victim to interest-rate squeeze’, FP 3 Jun 2011 – “In Ontario, a couple we’ll call Oscar, 40, and Nancy, 33, are raising two children, ages 6 and 8. The parents are both in real estate sales and bring home about $120,000 a year after business expenses and income tax. They are thriving in their commission sales work and have three rental properties of their own worth $320,000. With their home, two cars, one RV and other property investments, their assets total $732,700. But acquiring those assets has been expensive, for they owe $634,000, nearly four times their $160,000 annual gross income. Their debt-to-income ratio could put them into a serious squeeze as interest rates rise. In effect, they are living a bet that bricks and mortar will one day yield a big capital gain that compensates for the time, risk and effort of holding real estate. Oscar wants to add more properties. “Our plan is to build our real estate business to its maximum potential over the next 10 years, to acquire eight more rental properties and have all of them paid in 15 years and to be able to retire, if we want to, by the time I am 55.”
“Oscar and Nancy collect $3,148 in rents each month from their three properties. From that gross revenue, they pay $1,161 for mortgage interest, $60 for utilities, $238 for property insurance and $414 for property taxes, total $1,873, for net rental income of $1,275 a month, or $15,300 a year, before depreciation. They put down only $8,000 for all three properties, giving them an annual net return on initial equity of 192%.”[leverage looks wonderful on the way up. -ed]
“It is the result of high leverage and it is evidence of high portfolio risk. If property prices were to drop by 10%, the rental properties would be worth less than what they owe. Oscar and Nancy could face a cash calls from lenders.” [exactly. -ed.]
Amazing stuff, eh?
“Acquiring assets” makes it sound so… legit.
Assets: $732K (including depreciating ‘assets’ like cars and RV, so effectively less)
Net-worth (being charitable): $80K
Percentage of Net-worth in RE: estimated 700% (not a typo)
And… they are planning on ‘buying’ more!!
Not to mention that, as RE salespeople, their bread and butter income is almost completely dependent on a buoyant RE market.
They are juggling with burning dynamite, and they don’t even seem to know it.
These folks, and their lenders, should be held accountable for irresponsible actions.
Note that the couple have acted as RE ‘demand’ and helped fuel the speculative mania, and that they will transmorph into up to 4 units of ‘supply’ on the way down.