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)
Debt: $634K
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.
- vreaa
CHINA’S ‘WEALTH DRAIN’ – NEW SIGNS THAT RICH CHINESE ARE SET ON EMIGRATING
According to a recent study, China’s richest dream of one thing: packing up and heading for other countries, especially the West. This Chinese “investment emigration” is in full swing, and can have corrosive economic and social consequences.
The poor grumble while the rich flee.
http://www.worldcrunch.com/chinas-wealth-drain-new-signs-rich-chinese-are-set-emigrating/3256
lol it’s funny because
OUR RICH / PROFESSIONAL CLASS ETC FLEE TOO!
lol
salmon’s gone
pinebeetle etc etc
we can’t all work at lulu lemon, so monaco it is!
It will be interesting to see how it all plays out. The Chinese government has the ability to bring it all to a screeching halt whenever the trend starts to bug them.
there were elements of various european and north american governments/elites/royal courts that this situation would eventually happen in the future
those damn racists, trying to be all sovereign and shit
It’s ironic how these rich people are probably the biggest reason China is such a shitty place to live ie – unregulated capitalism and corruption leading to dangerous products like tainted formula and lead painted toys, uncontrolled pollution, exploding watermelons, lack of any social support system that might ease some of the tension between the rich and poor… but instead of re-injecting that capital back into trying to make a better society, they illegally export their money to places where it has taken generations of hard work and sacrifice to make excellent places to live, ruining them in the process. Hell, even rap superstars from rough parts reinvest millions into their hometowns.
It’ll be interesting to see what the Chinese government does about it.
the problem is that it’s capitalism is actually very regulated,
we in the west have drank the koolaid that their system, at the moment, is more free for the individual than we are. i don’t know who is responsible for this canard, but my guess is the chinese themselves and the american corporations. the reality is that they are the world’s largest dictatorship, and that is not changing anytime soon. we ought to have more sense. your grandfather didn’t die fighting huns just to hand over the dominion to a bunch of smokestack owners.
I think the correct term is “levered”. How is this “amazing”? Isn’t this common?
Yeah, it’s amazingly common.
to the common, it’s amazing?
hurr durrr sorry
It’s amazing that people consider $635k in debt to be “wealth.”
At least they’re actually making some income on their rentals instead of losing money on them. I’ll give them points for that.
2% return with mega dose of risk – no thanks
sounds like vancouver
if you’re a smack addict
I’ll point out that from a Vancouver perspective, their investments look to be in good shape. Their price:rent ratio is 102, which in my mind makes those rental apartments a pretty good investment. If I could get anywhere near that kind of a ratio, I’d be buying rental units here. That’s a pretty good positive cashflow that they’re getting! It’s ~5%, which gives a pretty solid margin for occasional emptines, renos, or rising interest rates.
Where I think they’re not in such good shape is the rest of their debts– they have a solid income, but they’ve hardly managed to save anything– they’ve only got $99K in equity, considerably less than their disposable income– I’ve got several times that much money in the bank, I’m younger, have a kid, a paid-off luxury car, zero debt, and my wife and I (after tax) earn earn only 2/3 what they do. They’ve got $10K/month in after-tax income!
I think their biggest problem/risk is their lifestyle costs– clamp it down a little, and they’ll be able to knock off a heck of a lot of their debt in short order. Their debts are entirely manageable even if their income was to be cut in half, and interest rates were to rise a couple percent– as long as they reduce their lifestyle costs.
I hear this anecdote a lot. There are people who are looking for a viable exit strategy for retirement and property management seems to fill the bill. The hours are reasonable and the work isn’t complicated or that stressful. It provides inflation-adjusted returns and you have a high level of control over its eventual success. It’s like any business — if you’re half competent chances are you’ll be OK. This is part of the reason why cap rates in Vancouver stink to high heaven, and have rarely been particularly attractive from a straight investor point of view. People in Vancouver are underemployed and are willing to spend a great deal of their free time for the “security” of owning property. I just don’t see that changing unless mortgage rates are significantly higher.
I’m suspicious of the price to rent ratio. That ratio is impossible to find in Toronto these days so they are likely located elsewhere where vacancy rates can swing wildly over economic cycles. Doesn’t quite add up for a major city centre with low vacancy rates, is all. I expect their cap is lower than what is cited.
classic renter miscalculation is to only look at the debt side of the ledger. Owners in Vancouver have the most total mortgage debt in Canada – but they also have the most equity aka wealth.
It’s difficult to assess this couple’s situation without knowing the jurisdiction in which they own their property. If they have near 100% occupancy they’ll do just fine with their investments. Hard to tell.
[This from Rusty, impersonating Polly. -ed.]
can somebody translate this jibberish for me?
Easy to translate sentence by sentence:
-Looking at debt is focusing on the negative. Imagine all the great housing wealth coming your way, and debt won’t ever be a problem! Be bold!
-In aggregate, Vancouver’s homeowners look like they’re in GREAT financial shape, because the ponzi market is still in full swing, and the vast majority of people bought in early phases of the ponzi.
-The couple in this article will be fine as long as they can maintain occupancy in their apartments (I agree with this statement).
-Disclaimer that Pollyanna may have their facts completely wrong, so that he/she can claim righteousness even if (I say when) they’re eventually proven wrong.
facts don’t count in the RE casino! BE BOLD, don’t make a renter’s miscalculation.
hahahaha
Rusty, now you are impersonating other users. You are such a loser.
Btw, on many other boards, your action would result in banning.
Vreaa?
no doubt.
duhhhhh i wonder if pollanna has the same IP as rusty..?? what a f**king dumb ass.
Stupid, lazy renter! Rusty don’t impersonate. Go buy a house in Mission before it’s too late.
Look at the gravatar icon, next to the comments. Pollyanna from 9:57 has the same icon as Rusty (check out his/her comments in other articles). It is the same person.
Rusty has sunk to a new low, hard to imagine. He should go back to counting pills and lamenting his med school application rejection.
methinks rusty is dipping into his stash of cheap chinese knock-off ketamine
not that i blame him, if i were him i’d be into the dissociative barbiturates, too
Kudos to our esteemed host, for once again posting a stunning view of the warped values among debt ridden bipeds, like our two acquisitive RE fools depicted here.
I have friends that are totally into the Mantra – Real Estate always goes up.
So many of my friends are up to their ears in debt, the stress must be incredible.
My hope is that you are not in the same boat.
The economic picture is bleak, to say the least.
Regarding Cash Calls: Something I’ve been trying to understand as a Yank — a lot of people seem to have these closed mortgages that have to be renewed after about 5 years. This is different from the states where most mortgages are open and the refinancing of mortgages cost a bit more. In the states if you have a 5 or 7 year call, it is definitely NOT automatic that the bank will give you a new mortgage. But we don’t really have this practice of mortgage renewals.
In terms of these mortgage renewals — is this an automatic thing in Canada, or can the bank refuse to renew if the debtor is underwater with the house? If a price drop occurs, does that mean the bank can call in the mortgage at this time?
If the mortgage is insured by CMHC, the bank has no reason not to renew the mortgage, because if the buyer defaults the bank will be made whole by CMHC. However, any lines of credit on the home may be subject to calls. I know that was in my credit line agreement when I owned a condo.
CMHC insurance is valid for the entire amortization period of your mortgage. If you extend your amortization, I’m not sure if the insurance is still valid or not.
It’s also important to note that many people seem to think that CMHC insurance (which the borrower normally pays) insures them– it doesn’t. It only insures the bank against default by the borrower. CMHC can then pursue the borrower for the deficiency amount.
thanks M – that’s good to know.
http://calgary.en.craigslist.ca/apa/2431907246.html
It looks like there are some pretty desperate realtors in Calgary!
hmmm, I see it was Pollyanna that started the user name hijacking. Perhaps a wrist slap is in order.
[This from Rusty, impersonating bubbly. And, no, it was you. Cut it out. Very tedious. -ed.]
Fuck off Rusty.
VREAA, it’s time to ban that clown.
Poor Rusty. Impersonation is akin to child rape in the blogosphere. Seek help.
in rusty’s defense
it’s ok,
he just thought we were idiots.
unsuccessful troll is unsuccessful
that totally cracked me up!
“I am aware of all internet traditions.”
I don’t even know what to say to this incredibly ignorant bit of work:
http://www.moneyville.ca/article/1005715–this-housing-expert-waited-too-long-to-buy
The fact that he’s Central 1 Credit Union’s chief economist just blows my mind.
So he did not learn anything from the dot-com bubble and wants people to jump with him into the housing bubble.
And he used to work for the CMHC
And he’s Central 1 Credit Union’s chief economist
WOW
Data Junkie – and Mr. Pastrick story made my skin crawl.
The guy is a Keynsian, and that is his problem.
Throw money at, and all will be fixed.
I am more of the Austrian School.
Debt = DEATH – in cycles.
The Chinese have basically called the US Bluff today – watch the Stock Market – oy vey!
Pastrick is an Economist with the brains of a fly.
I’d be happy to let these people hoist themselves on their own petards if it weren’t for the fact that I (as a tax-payer) am back-stopping all of these mortgages.
OK, I admit, I started the whole impersonation mania. I guess I should find something better and more productive to do with my time.
My most heartfelt ap0logies go out to Rusty. How could I have been such a weasel?
[This post is from Rusty. His future posts will now be moderated until stops handle hijacking. If persists, adios. - vreaa]
Still not banned?
[As we said, tedious. Rusty post's will be held and moderated until he stops the handle hijacking. -ed.]
the funny part is the lack of funny
anyways, rusty, just translate your gibberish for us.
vreaa,
Hijacking user names is a pollyanna stunt. It’s chronicaled here – check it.
If you want to ban me it’ll be because you don’t agree with my real estate opinions.
[I did check the history, Pollyanna did not start the hijacking, it was actually an infrequent poster. The point is you continued after being asked to desist. If you hijack handles again you'll be banned.
If you think you'd be banned because of your powerful and persuasive RE arguments, you have delusions of grandeur. -ed.]
i think rusty and i have had a brief but torrid love affair,
unfortunately i’ve had to break off the relationship, when he began stalking old threads and taking things out of context (because he does not understand nuance or subtlety, not that i really do, either, but whatevs)
Rusty is brainless but funny guy and his comments consistently provides laughs to us. Please don’t ban him ; -)