Category Archives: 18. Spot The Speculator

“We live next door to a large new house that replaced a beautiful one in excellent condition. It has been empty since its construction about 2 years ago. The owners live in another house nearby.”

“We live next door to a large new house that replaced a beautiful one in excellent condition.
This new house, contrary to the bylaw, does not meet the requirement that the bulk and size of new developement is similiar to existing developement. Nor is it as required, compatible with the existing amenity and design of developement. City Planning approved this contrary to the neighborhood objections.
It has been empty since its construction about 2 years ago.
The owners live in another house nearby.
In this block there are now 3 houses that have been empty for several years.”

– B. Mcloughlin, commenting 2:58 PM on March 8, 2013 below the Globe and Mail article Kerrisdale preservationists lament a tide of bulldozers.

Misallocation of resources.
Speculation.
– vreaa

Spot The Speculators #99 – ‘Canada Don’t Let Your Retirees Grow Up To Be Real Estate Cowboys’ – Alberta Couple Late 50’s; Net-worth $196K; RE Holdings $1,850K

“Alberta couple, Edward, 58, and Sue, 56, earn gross income of $247,200 per year from working in two great jobs — his in transportation management, hers in health care. Yet they are almost broke.
The problem is they are shelling out $47,514 per year just in interest charges on liabilities that amount to 6.7 times their annual pre-tax income. Their assets add up to $1.85-million, leaving them with a net worth of only $150,000 as the end of their careers comes into view.
The problem will get worse if not fixed, because they are not making a dent in the principal they owe. When interest rates rise, their debts will become ever more costly to carry. Unless they act, they will not be able to retire as planned. They may not even be able to avoid eventual insolvency. “Should we be selling off investments, some at a loss?” Edward asks. “We are working hard to keep our heads above water, but we feel that it is a losing battle. Our goal is to quit when I am 64. Question is: Can we do it with our heads above water?”
The numbers don’t look good: Their debt is about nine times their equity and their investment income is negative.”

– from ‘High-income couple has to deal with some real estate headaches’, Andrew Allentuck, Financial Post, 11 Feb 2013 [hat-tip kansai]

Breakdown of their assets and debt:

Assets (market value where applicable):
House: $950K
BC ‘income-generating’ property #1: $540K
BC ‘income-generating’ property #2: $240K
Arizona Condo: $120K
Total assets: $1.85M

Debt
House mortgage: $758K
BC property #1 mortgage: $446K
BC property #2 mortgage: $329K
Business Loan: $75K
CC Debt: $32.7K
Car loan: $13.2K
Total debt: $1.654M

Net-worth: $196K
RE holdings: $1,850K
Ratio of net-worth to RE: 1:9.4

By sensible estimates, one should hold no more than (90 minus your age)% of your net-worth in RE.
By that measure, this couple should have 33% or less of their net-worth in properties; the actual number for them is 944% (yes, not a typo – nine hundred and forty four percent).
If RE blinks, these guys are underwater. In fact, given the current market, they very likely are already underwater in that they’d probably have to drop prices by at least 10% to liquidate their holdings.
If prices drop by 30% or 40% or 50%, or even more, their retirement plans will be completely destroyed.
This is a more extreme example, but the fact remains that a very substantial percentage of Canadian ‘boomers’ are overdependent on the health of the RE market for their future financial health. And, like the couple in this example, they will likely be advised, or forced to the conclusion, that they have to lighten up their RE holdings.
– vreaa

Spot The Speculators #98 – “Robert has been tapping his savings for years to support his biggest investment, a rental property that bleeds more than $1,000 a month over the rents it produces.”

“Registered retirement savings plans are the lifejackets for the retirement of a British Columbia couple we’ll call Robert and Jill. At 55, he is a maintenance supervisor for a small town. Jill, 48, is a self-employed management consultant.
“We need to get more money for our retirement and we have to make up for the savings that Robert lost through bad investments,” Jill says.
“We have to rebuild our investments, specifically our RRSPs, if we are going to be able to retire comfortably.”
Their RRSPs have a balance of $355,000 heavily allocated to growth stocks and mutual funds.”

“Robert and Jill have been short of cash and have abandoned RRSP contributions in the wake of a divorce that cost Robert $100,000 on top of a six-figure loss on a business.”

“Unfortunately, Robert has been tapping his savings for years to support his biggest investment, a rental property that bleeds more than $1,000 a month over the rents it produces.
If the property were sold for its $650,000 estimated value, it would leave $200,000 after paying off the $414,366 selling costs. That would pay off $30,000 in other debts and leave $170,000 to put in RRSPs. In 10 years at retirement, that would have grown to as much as $290,500 and could then add $16,000 a year to retirement income.”


Assets:
Residence $550K
Rental property $650K
RRSPs $356K
cash $10K
3 cars $35K

Liabilities:
Mortgages $414K
LOC + CC $30K

Networth:
$1.12M

- from ‘Family Finance: RRSPs to the rescue’, Andrew Allentuck, 6 Feb 2013 [hat-tip space889]

Clearly only hanging onto rental property for presumed future price gains. Ergo, speculators.
Percentage of net-worth in RE: 100%
Percentage of net-worth that should be in RE at age 55: 35% or less
Percentage of BC boomers in similar position: [your guess here]%
Implied price downside when couples like this started selling: [your guess here]%

- vreaa

Spot The Speculators #97 – “We are moving to Burnaby in March, so we decided to keep our house in North Vancouver and put it up for rent.”

craigslist

“We are moving to Burnaby on March, so we decided to keep our place and give it [for] rent, it has never been rented before, very well cared and Very nice designed two levels, 3_Bed, 2_Bath, 1 seperate entry Den, located in one of the nice and quite neighborhood.
You have the option to choose(Furnished: $2700 or unfurnished: $2500).”
craigslist ad, 21 Jan 2013 [hat-tip Guy Smiley on VCI]

The ‘speculator’ classification is based largely on the assumption that they have purchased in Burnaby.
– vreaa

Spot The Speculator #96 – “In 2008, when I was 28 years old, I had saved $70,000, enough for a 20% down payment on a triplex in Toronto. I moved into one unit and the rent from the other two units paid for the mortgage and utilities.”

“I’ve always been very focused in my life. I was born a triplet and knew from an early age my parents wouldn’t be able to pay for many extras, or for postsecondary education for all of us. But I was determined to go to university and to buy a home of my own. So in high school I started working as a waitress for 20 hours a week. During the summers I took as many shifts as possible, often working seven days straight. I was a workaholic and should have cut back because my grades were suffering, but I persevered.”

“I earned enough to pay for tuition by living at home with my parents and commuting to York University. It wasn’t easy. I didn’t have a car so I used buses to make the two-hour journey to York and back each day. At one point I considered buying a car but was shocked when my dad showed me how expensive it was. I kept commuting every day for four years. Believe me, it was really depressing. I would get home every night and it was cold and dark, and I was tired. But I knew I was saving for my big goal of owning an investment property, which kept me going.”

“After graduating with an English degree in 2006, I had no student debt and $20,000 in savings from my waitressing job. Then I got a lucky break-I landed a job as an administrative assistant, paying $32,000 a year in downtown Toronto. In 2008, when I was 28 years old, I had saved $70,000, enough for a 20% down payment on a triplex in Little Italy. I moved into one unit and the rent from the other two units paid for the mortgage and utilities. Last year, I got married and my husband moved into the apartment with me. I’ve never doubted the triplex was one of the best financial decisions I’ve ever made.”

“The key for me was tracking my spending in a journal to see exactly where every penny was going so I knew where I could cut back and add to my savings. Most years I saved 70% of my earned income, which I used to pay for university and for the down payment on the triplex. By living at home a little longer than most people I was able to really beef up my down payment. That’s made me truly independent a lot more quickly than many of my friends who are still mired in debt.”

“Now my goal is to pay off the mortgage on the property as quickly as possible. I’ve done some renos over the years and I’m putting $500 a month extra on my mortgage to pay it off faster. The triplex’s value has also gone up. I bought it for $350,000 and it’s worth $450,000 today.”

- Angie Oliveira, 32, Toronto, as featured in ‘How to become a landlord’, Julie Cazzin, MoneySense 16 Jan 2013 [hat-tip proteus, who sent this link by e-mail and added “Saving 20k waitressing is a heroic accomplishment.”]

Angie has an admirably proactive savings habit. Because of this ability, she will quite likely do fine in the long run, but we suspect this will end up occurring despite her RE investment, not because of it.
Yes, she is describing a ‘cash-flow positive’ property (something unavailable in our city in 2008), but we’d like to see more of the math before being sure about that. Also, there is downside risk of increased mortgage rates, downward pressure on rents (TO condo glut), and unexpected expenses.
She bought a few years prior to the peak of a multigenerational bubble in real estate. If property prices drop 33% from the peak, she’ll likely still be able to maintain her ownership, but she will, on paper, have lost her profits and her downpayment. This is something we’d imagine would be particularly painful for her, given the hard work it has taken for her to accumulate her savings gains.
In that regard, it is interesting to note that it took her many years of extreme saving to accumulate $70K, but her RE purchase then rose in value by $100K from 2008 to 2012. In fact, she ‘made’ more on paper in RE than she did in entire income those 4 years, when taxation is taken into account. This is a good example of how RE price rises through the speculative mania have perverted the way in which people consider the relative value of real estate, money, work and saving; and how homes have become financial instruments as much as places of shelter.
– vreaa

Spot The Speculators #95 – “Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income.”

“A couple we’ll call Tiff (49) and Sandy (45) turned their long-time friendship into a union when they bought a house in British Columbia and combined their fortunes in 2008. The relationship came with a lot of baggage, however. Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income.
Revenue from the income properties barely covers their total costs — mortgage and line-of-credit interest, taxes, utilities, insurance and maintenance. Add in falling prices in the sliding B.C. housing market and the couple is subsidizing losing investments.
They save only $100 a month for RRSPs and $25 a month in an RESP for a Sandy’s nine-year old child from a former marriage. At mid-life, the couple, each of whom works for a large publishing company, has just $31,000 of RRSPs and almost no cash.”

They started with 25% conventional down payments, but now find themselves with about 10% equity in the rental units as a result of falling property prices and debt-financed buyouts of former partners. Their return after paying all interest costs, utilities, insurance and taxes is negligible. Unless they can raise rents drastically or realize future capital gains, the investments are flops.

A financial crisis triggered, perhaps, by unemployment, illness or accident would require them to add debt, for they have just $2,000 in cash. If interest rates rise by 1% or 2%, they would be forced to refinance, but they already have 30-year amortizations. To pay more interest, they would have to face deregistration of some or all of their $31,000 of RRSPs, heavy taxes on payouts or, in the worst case, bankruptcy.

Family Finance asked Adrian Mastracci, a portfolio manager and financial planner at KCM Wealth Management Inc. in Vancouver, to work with the couple. He is candid in describing the issues.
“The couple’s problems are far too much debt, especially for properties that are poor investments, and an excessive concentration in real estate, for each unit is within just blocks of the others,” he says.

Real estate has produced substantial gains for homeowners in parts of B.C., but the boom is waning. When interest rates rise, prices could fall further, for most people buy what they can afford and, with higher borrowing costs, they will afford less.

– from ‘Bad real estate investments leave couple with $1.5-million in debt’, Andrew Allentuck, Financial Post, 11 Jan 2013 [hat-tip JoeQ]

Summary of finances for this couple:
Assets $2M [$1.862M in RE at current market prices; $137K other]
Debt $1.542M [3 mortgages, 1 LOC, CCs, Car loan]
Net worth $456K [Assets minus Debt]
Ratio of RE holdings to Net worth: 4.1 to 1
Put another way, more than 400% of their net worth is in RE.
(I find this figure as shocking as the debt to income ratio of 12)
If/when the market price of their RE holdings drop 25% they would be wiped out.

What, me, a speculator?
Just innocent locals doing what innocent locals do, right? Building wealth with RE.
How many more out there are in similar situations?
– vreaa

Spot The Speculators #94 – They’ve lowered their price to $950K already, but they’re “not going to lower it any more because they want to retire, and they really believe that’s what it’s worth because they built it themselves, and it’s one of a kind, yadda, yadda, yadda.”

“Talking to a colleague at the office this morning over coffee. Her relative is trying to sell their $950K house and acreage on the Sunshine Coast in BC, just a 45 minute ferry ride north of Vancouver. It was built it in 2000…..but they inherited the land for 10 years before that. So, a 50/50 “freebee” from a monetary perspective, but that’s only “IF” they didn’t take all of their equity out, that is……and we don’t know that they didn’t do this already.
I casually asked how long it had been listed, and I got the reply “since late 2008″. ROFL !!
Then I get told they’ve lowered their price already, but they’re “not going to do it any more because they want to retire, and they really believe that is what it is worth because they built it themselves, and it’s one of a kind, yadda, yadda, yadda”. So I go and search the town on realtor.ca and it looks like a really bad case of the measles have hit the Sunshine Coast. Not only is there literally a hundred red dots, but most of them have numbers like 12, 25, 43, 33, 17, 5, etc, overlaid on them, indicating multiple listings contained within that dot.”

Carioca Canuck at VREAA 28 Dec 2012 8:18am who added “Here’s another anecdote from the “willing to sit until I get my price crowd”.

We’re making the point here that any owners who have decided to sell, but then don’t steadily drop their ask price until they hit a bid, are delaying selling on the premise of future market strength.
This is also an example of long-term owners who have, it appears, become dependent on the presumed value of their RE for their future retirement security. We fear that there are many in their position who will have their plans hobbled in the downturn.
– vreaa