This obviously adds to the ‘normal’ RE leverage very substantially. They are in a situation where a very small drop in housing prices would wipe out their entire equity.
Their speculation is a little like taking out a loan, buying stocks with the borrowed money, then going full margin on the account to buy more stocks, and then borrowing even more against that account to buy even more stocks. It’s unlikely any brokerage would let you do anything remotely like this (although you could get similar suicidal leverage through synthetic instruments).
It never fails to amaze us that citizens merrily do with RE what they wouldn’t dream of doing with other assets. It’d be interesting to know their exact leverage ratio; it sounds very high.
This kind of behaviour, IMHO, is why our market is so ill. -vreaa
YLTNboomerang at vancouvercondo.info January 17th, 2011 at 7:51 pm – “My brother and his wife must be sweating now! They have their owner-occupied house, investment condo, and vacation condo where each one was purchased with the down payment coming from a HELOC on the previous property. Due to an unexpected career change (she got laid off), they had to rent out both properties but are still not cash flow positive. To deal with this they are currently in the process of re-financing (increasing amortization and consolidation).
I know for a fact that they are negative equity on the vacation home and that they are probably close to neutral on the primary residence however they have a little equity left in the investment property purchased 8 years ago (only a little as they borrowed a lot on this property to buy the others). As long as they finance before the 18th of March they should be able to scrape by until his wife gets a job however I wonder how many other financial retards like my sibling are out there? If his wife still worked but got laid off after March 18th they would be completely screwed!”