“Here’s our family real estate history in Vancouver. I suspect we are not atypical.
HOUSE 1, Kits
1985 purchase price: $180K
Renovations, over 10 years: $150K
Mortgage & Taxes: $130K
Subtotal: $460K
Rental income (basement suite)over 14 years of ownership: $140K
Value of Occupancy over 14 years: $450K
Subtotal: $590K
Sale price after commission, 1999: $580K
What’s my profit: ?
HOUSE 2, Point Grey
1999 purchase price (land only): $450K
Building and landscaping cost: $450K
Mortgage & Taxes: $200K
Subtotal: $1.1M
Value of Occupancy over 12 years: $700K
(3 blocks from beach, water & mountain view)
Current value (based on recent sales in neighbourhood): $3.8M
What’s my (potential) profit: ?
I purchased both homes during a time when prices were flat or depressed. Definitely a buyers market which gave me some room to negotiate the purchase price.
These two homes have gone a long way to helping provide financial security for my family. Yes, a substantial part of our net worth is tied up in real estate, but how else could I essentially triple (quadruple?) my investment in around 10-12 years while providing a decent roof over our heads?
Our mutual funds have come in at around 6% the last 15 years in comparison.
Having said that, I don’t think I would be a buyer in this market. The numbers don’t make sense. And I’m often tempted to cash out and rent.
However, I’ve been thinking this for a good 10 years now. I could still live to regret my decision not to sell, but at this point my worst decision was selling our place in Kits. The place next door sold for over $1.8M in 2010.”
—
“We have been with one of the top investment firms in Canada (PHN) for over 20 years and our returns are in the 6% range. Half that for our kids RESPs the last 12 years.
Making investments with the benefit of hindsight is easy. It’s not so easy when the future is unknown/uncertain. That’s why I’m torn between staying the course and cashing out — like a lot of us probably are.”
—
“Just to be clear, I think I’ve been darn lucky rather than smart to have gotten into real estate when I did. And yes, I can’t imagine that returns over the next 25 years are going to be anywhere as good, or even positive.
The problem for many of us is that the alternatives are not that attractive either.
I’ve seen the stock market go down as much as 50% not that long ago. What’s the difference if you lose 50% of your house value or 50% of your investments?
Handing your money over to someone, no matter how reputable, to invest for you is risky. Just as home ownership is risky. Just as buying gold is risky.
Up until a few years ago, investing in real estate made some sense to me. However, I think it’s highly unlikely that the returns of the past 25 years are going to be replicated again anytime soon. I can’t imagine how current prices can be sustained at least in the medium term. However, I’m not convinced there are a lot of viable alternatives for many people.
Many of us are neither bulls nor bears. We’re trying to make the best choices for our families without a crystal ball to the future.”
—
- kautious at VREAA 30 Jan 2012 9:45am and onwards.
[Some posters have already added intelligent commentary to this anecdote on yesterday's thread. Headlined here for the chronological record. Thanks, 'kautious'. - vreaa]
Artificially low interest rates encourage speculation in whatever appears to be the current ‘hot’ sector.
In kautious’ case, we are seeing the same forces that have driven buyers into the local RE market keeping him in the market.
If he had to sell, his profits would be tax free.
14% per annum, compounded, over the last 12 years. *
Only a very small percentage of investors have beaten that performance in other sectors.
* Past performance not reflective of likely future performance.
- vreaa
Value of Occupancy? What is that number? Is that some value that one comes up with? Like goodwill? Evan as a mortgage broker I am lost on the math on this post.
Basically from 1985-1999 when there was no credit bubble, he made no money. From 1999 to 2012 we have seen real estate ride the credit bubble to the top. I would say it is all luck as this person has no foresight to see that we are de leveraging a massive credit bubble which has supported is real estate holdings to date. People always think their assets are overvalued and greed prevents them from selling.
Only if you sell. Same principle as long bonds.
His return is pretty low given how much TSX went up in the last 10 years. Maybe he has an extremely conservative portfolio with a lot of cash component that limited his return. Otherwise 6% return is pretty low for a growth or even a 75%/20% stock bond portfolio I think.
Well I guess leverage also helped with his housing gains.
I agree with a lot of what the OP has said. Just one thing I would like to clarify. A 50% stock portfolio dip is different from a 50% RE dip. For starters, stocks have a negligible carrying cost whereas houses maintenance costs a bundle. Secondly, you do not have to renew a stock portfolio like you would a mortgage
It is unfortunate that your PH&N managed portfolio has been performing miserably. It is not so much of a market problem but an agency problem. Those so called money managers look out for their own interests and yours come a distant third after the firm’s interests. The so called financial advisors who sign you up for these funds are nothing more than glorified mutual fund salespeople who will push the product that earns them the highest commission SPIF.
Savvy investors manage their own stock portfolio and take the time to learn financial literacy and the market mechanics. We use low commission brokerage houses. We structure our own self-directed RRSPs and RESPs. That is how we manage to do way better than that lousy 6%. After commissions, the lowest I can ever expect to make in a bad year would be 10%.
The same could be said about the RE gig where developers, contractors, bankers, realtors e.t.c look out for their interests first. That is why the most successful flippers are those guys who know how to do the renovations themselves without engaging a contractor and also possess a realtor’s license (or at least their wife does).
“That is why the most successful flippers are those guys who know how to do the renovations themselves without engaging a contractor and also possess a realtor’s license”
I think you underestimate how much money can be lost on fluctuating land values. Not even the most seasoned reno-flipper can sustain the types of market movements we might be in for.
Your 10% minimum returns are commendable. If you aren’t in the investment industry you should be.
“After commissions, the lowest I can ever expect to make in a bad year would be 10%.”
I’m a bit skeptic about that, but as Jesse said, if you’re being genuine and not yet working in the financial sector, you might want to consider a career change.
“I’m a bit skeptic about that, but as Jesse said, if you’re being genuine and not yet working in the financial sector, you might want to consider a career change.”
Depending on how much risk you’re willing to take on, 10% gains/yields should be achievable right now. Equally achievable are 10% losses.
“10% gains/yields should be achievable right now.”
He’s saying that 10% is the minimum he achieves, during a bad year. This is not impossible of course, but I remain skeptical (by experience…).
“darn lucky”
Yup. If he sells.
Guys, Yes I must admit that I am not an amateur investor. I really took the time to study the stock market and the psychology behind it. I once considered becoming a trader at one of those major firms. For my application I was gonna send in results of my YOY portfolio performance. However, I learned that my somewhat unorthodox trading style will not mesh in well with the rigid structure and rules of a firm. Might be successful managing my own portfolio but might suck at a firm. Even if I succeeded at a firm I would still get bored by their culture and way of doing things.
However, 10% is nothing to write home about for people who do what I do. My kind usually pulls in well north of 50%. Also, I will be the first one to tell you that what I do is not for everyone. Only less than 5 percent of people can pull it off due to the psychological factor.
However, 10% is very attainable for the average Joe schmuck as long you build your portfolio from a mix of solid and stable dividend yielding blue chip stocks and re-balance at least every quarter. Also, you need to go with a low cost brokerage. I am talking no more than $10 per trade. Additionally, you need to go in with at least $15k and make sure you use any gains to purchase more stocks. Remember, since your trading costs are fixed, the bigger your portfolio gets the less significant trading fees become. I am in the six figure range and get trading rates of $7. Practically, it does not cost me a thing to trade.
One thing I also forgot to mention is that people who have a high financial literacy score will do well either in real estate or the markets. These are people with a culture of discipline and no when to quit. As a matter of fact I plan on one day becoming a developer. I am the sort of person who would be looking at deals in Dallas and Houston since I love to buy low and sell high. I would not think twice about coming back to Vancouver if the market ever tanked and everything gels well with my numbers. Right now I will be going to purchase my first home in Alberta (this spring).
This story could be of anyone who was post-university and had a decent income for the time period. I remember seeing houses on the west side around 2001-2002 for 400-500k. At those prices, it was affordable for a family earning decent salaries. One would not be able to do this sort of “property ladder” now. Just different times – just like the recent university grads who can’t find jobs. Times are different and you can’t just walk out into a perfect job. Times are different for housing – the prices got so out of whack that it has/will seriously affect a generation of people.