Spot The Speculator #33 – House $650K; Rental $585K; Debt $995K; 450% Of Net Worth In RE

Anecdote extracted from ‘Two properties, one complex problem’, Financial Post, 1 Apr 2011 [hat-tip SM]-
“In British Columbia, a couple we’ll call Harry, 36, and Felicia, 33, have a 15-month-old daughter and a complex problem. Their total combined monthly take-home income, $7,594, plus $400 of rental income, adds up to $7,994 per month. It covers current expenses, but for the future, income gains will have to come from Harry’s job.
Felicia, recently diagnosed with a neurological condition, is on long-term disability that pays her $2,394 a month after tax. Harry, an architect, works four days a week for monthly take-home income of $5,200. Their combined income services mortgages of $606,000 on their house and $384,000 for a rental property. Those two mortgages with associated property taxes take $5,420 out of their monthly take-home income. Property taxes take another $509. That’s a whopping 74% of after-tax income. ”
“Harry and Felicia have just $20,000 in RRSPs or other financial assets, not including $2,400 in a registered education savings plan. Expenses eat up total after-tax income with almost nothing left for little extras.”

Assets
House $ 650,000
Rental property $585,000
RRSPs 20,000
RESP 2,400
Car 10,000
TOTAL $1,267,400

Liabilities
House mortgage $606,000
Rental mortgage 384,000
Student loan 4,680
TOTAL $994,680

Net Worth $272,720

This, people, is why the Vancouver RE market is so very, very ill.
Harry and Felicia have 450% of their net worth in RE (yes, 450%, not a typo).
If RE drops just 20%, they are wiped out.
When RE drops 50%, they will have a negative net worth of $345K.
($618K drop in value of RE – $273K current net worth).
They are relatively young, but this setback will colour their financial health for decades to come.
Again, we see rabid speculation in the guise of normality.
There are many in this kind of situation, and only a very small percentage will be able to lighten up before the market crashes.
– vreaa

12 responses to “Spot The Speculator #33 – House $650K; Rental $585K; Debt $995K; 450% Of Net Worth In RE

  1. I call BS. I can’t believe it! 😛

    Let’s back-calculate the rental: $384K mortgage at 5% is say about $1700/month. Taxes and maintenance would be about $400/month totaling $2100/month. Add $400 income produces $2500 or 5% yield, which seems about right in the current environment. That $400/month “income” is probably generous because they should be saving some of it for CCA.

    Their LTD may not last forever: many plans require the person to search equivalent work equal to 70% of their previous salary and they’re cast off. Even if this is not possible they are required to look for menial work and LTD would compensate the difference. Unless this person is considered unable to work at all, they will need to consider daycare/equivalent for their child in the next while.

    It’s an important point, though, that this family will likely come out OK at the end. If, however, we put 100 such families in similar situations next to each other, we know with a high degree of certainty 5-10% of them will be cleaned out due to future “unforeseen” hardships. Guess which ones set the market price?

    • I don’t believe that anyone in Vancouver can get a 5% yield on a recently purchased property. What I usually see is around 2% to 3%. Sometimes even less that that.

      5% is pure BS.

      • Bubbly: the 5% is calculated on the outstanding mortgage. The summary shows that the rental is worth $585K, and the mortgage is for only $384K, so they’ve got 34% equity in the rental.

        If prices dropped 34%, you could probably find properties with a 5% yield. Still pretty pathetic given the risks & costs involved in ownership, but it shows how they’re getting that kind of a figure.

        I’m left wondering about their situation: their house is worth $650K with a $606K mortgage. Did they live in the rental first, then move up into the house (leveraged to the max!)? Or were they living in the house, then decided to buy the rental, and maxed out the house’s mortgage/HELOC in order to get >20% down so they weren’t subject to CMHC’s income restrictions (added last year) on the rental?

      • I agree that these people are wa-ay over extended but this one will get you 4%:

        http://www.realtylink.org/prop_search/Detail.cfm?areatitle=&ARPK=&ComID=&agentid=&MLS=V877600&rowc=3&rowp=1&BCD=GV&imdp=10&RSPP=5&AIDL=244,239&SRTB=P_Price&ERTA=False&MNAGE=0&MXAGE=200&MNBT=0&MNBD=0&PTYTID=5&MNPRC=200000&MXPRC=900000&SCTP=RS

        $1500 for the top floor, $1000 for the basement suite – pretty conservative estimates. $3000 for taxes and insurance and $2000 for yearly maintenance: 25,000/600,000 = 4.16%

        Buy the place for $600,000 w/ a 20% DP ($120,000) and your payments will be $2500/mos (3% variable, you can get cheaper). Your tenant pays $1000 (or $1500!) of that so you are actually only paying $1500/mos (or $1000). After 1 year you have made about $30,000 in mortgage payments, $15,000 of which is added to your equity.

        Chance of correction? Yes. Taking a risk? Yes.

        Happy to live in your own home for along term investment? Up to you.

        Not everyone has the 20% DP available but not everyone can own a home in Vancouver either.

      • My guess is $2500 rent which would be 5%. That is back calculating based on 5% mtg. If they have VRM the yield is around 3% like you state. I was being optimistic 🙂

      • As an FYI, here is a listing I recommended only 6 months ago:

        http://royallepagecitycentre.com/officelistings.html/details-18303843

        Asking was $619,000. You can’t get anything in that area now for less than $700K+.

        Meanwhile… as everyone is gawking at the West Side, East Van is creeping up and modest houses that generate income are being ignored.

    • “It’s an important point, though, that this family will likely come out OK at the end.”

      If by “OK” you mean spending 75% of your take-home on housing and feeding your baby watered-down ramen noodles, then yeah, they’re living the high life.

  2. 和谐的房地产泡沫

    hey, many people have survived for centuries on rice and noodles.

    you westerners are fat profligate slobs!

  3. 和谐的房地产泡沫

    my house is made of gumdrops and gingerbread

  4. A couple of seniors did very well leveraging to their eyeballs in the last 2 decades. Every year they threw their bonuses in to new revenue properties to take advantage of our tax scheme. During the current boom, they sold a few houses to take profit and promptly reinvested in acreages in the Okanagan.

    • 和谐的房地产泡沫

      i know everyone is different but if you have the means an acreage out in the boonies sounds ideal.

      it’s not like the LML is the only view in the province.

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