Two Properties; Falling Income – “Eve sees her rental property as her pension. Her goal is not to have to work for a living any more.”

Too many balls in the air?

“It would be easy to envy Eve her lifestyle. She has a mortgage-free home in a sought-after part of downtown Toronto, work she loves and a rental property that throws off substantial cash flow.
Eve’s world has changed over the years. At 46, she is divorced with shared custody of her two children, ages 10 and 12. The erratic income she has earned as a freelance photographer is dwindling and could disappear altogether before long. She’s worried about finding employment at her age and uncertain about what she wants to do.”

Summary of situation:
Monthly net income: Net real estate income before income tax $2,500; average freelance income, $2,170 and falling. Net income after tax (average, variable), $3,750
Assets: Cash and short-term $6,050; TFSA $2,015; RRSP $44,000; home $700,000; rental property $685,000. Total: $1.4-million
Monthly disbursements total: $3,545
Debt: Mortgages on rental property $375,000; line of credit $20,400. Total: $395,400

“Eve sees her rental property as her pension. She has two mortgages on the property, one that will be paid off in more than 20 years, the other in about 16. Short term, she wants to pay down her $20,000 line of credit and wonders whether she should cash in her registered savings to do so. Longer term, her goal is not to have to work for a living any more.
“I don’t drive a car, don’t eat out at fancy restaurants, don’t take drugs, but play lots of squash, which costs,” she writes in an e-mail. She is apprehensive about the future. “Given that I am not keen to get a real job and don’t think anyone will want me now, how doomed am I?”
Eve wonders if she can afford to retrain for a new career and whether it would be worthwhile. “I’m working for peanuts. I love it but it’s going to run out,” she writes. “Or should I perhaps think about buying another rental property?”
Then, as if having second thoughts: “Am I in a position to have choices?” she asks. “When can I feel safe and retire?”

– from ‘House rich but career challenged’, G&M, 4 May 2012

Many households recently featured in this G&M ‘Financial Facelift’ series involve individuals who are over-dependent on RE for their financial futures. This is not surprising, given how the housing bubble has drawn so many into buying more than one property. Also, the idea of not working and living off your RE gains has become a prevalent theme.
We have little doubt that ‘Eve’ will be better off in future if she decreases her exposure to RE as soon as possible. However, this likely won’t occur to her as a viable option until the market value of her home and rental property drop about 25% (at which point she will have lost 35% of her current paper net-worth, given her leverage). There are people in Vancouver in similar situations, only the numbers involved are usually larger.
Read the entire article: The financial planner, to his credit, advises against buying another rental property (!), but doesn’t bring up the idea of Eve decreasing her exposure to RE.
– vreaa

30 responses to “Two Properties; Falling Income – “Eve sees her rental property as her pension. Her goal is not to have to work for a living any more.”

  1. “Longer term, her goal is not to have to work for a living any more.”
    “Given that I am not keen to get a real job…”

    Summary: I don’t want to work; I want easy credit and rising housing prices to fund my lifestyle.

  2. $1M net worth in cash mean you can live like a queen in a lot of places – like say Florida, Washington, Oregon, Vegas. I haven’t even gotten to the 3rd world countries yet.

    • True, but she does have shared custody of two children, age 10 and 12, who like her, live in Toronto. So a move may not be in the cards just yet.

    • $1M in “net worth” for a 46 year old with 2 children who doesn’t want to work is a recipe for disaster. Also, it really isn’t $1 million – take $120K off for tx fees when she sells the properties plus assume the rental property has doubled so add another 80K in capital gains taxes means her real net worth is closer to 800K. Add in even a 20% price drop and her net worth drops to around 500K.

      500K net worth for a 46 year old who is willing to work is pretty good but in her case she needs a wake-up call.

  3. “but doesn’t bring up the idea of Eve decreasing her exposure to RE.”
    why would she? one of her property is owned outright. the rental income should serve the mortgage cost.
    you dont own a piece of land, doesn mean every one else should not.

    btw, stupid bears are getting more desperate; i just received a junk fax about RE crash coming 2012-2016. unforturnate, this junk fax did not have a phone number to call. stupid annoying bears!

  4. newcommentor

    it looks like to me at her age, she is much better off financialy . why not just cash out the rental property and pay off her debt — there will be 300k cash left over for her to build a portfolio and generate 10k or more annually .

    • OK I know this “makes sense” but in many circles people in similar situations to hers have tried this and come up against the formidable financial advisor racket. No doubt ‘Eve’ has some friends with tales of woe from being burned by high MERs, back-loaded fees, and promises of double-digit returns only to be disappointed and worse have less capital than when they started.

      Part of the flight to real estate is an acknowledgement of the dishonesty that permeates the financial advisor ring. The comments that “I can see my investment” and all these do have credence when you see the perils of not being able to find a competent and trusted financial advisor, or simply learn enough to do it on your own which frankly isn’t easy for many.

      Again, I cannot completely fault ‘Eve’ for her choice given the perceived, and unfortunately all too real, alternatives. A tragedy of our time is that many like her are screwed no matter what.

      • Agreed, jesse.
        The best way forward for her is likely to manage her own investments; but that requires skills that many people have trouble acquiring.
        Thus, many in Canada, understandably skittish when it comes to the financial sector, stay in RE, the one thing that seems to have been a port in the storm over the last decade.
        This is why we have kept the implications of our RE conclusions simple: If ‘Eve’ downsizes now, we predict that cash held in very conservative investments will outperform the RE she sells, in coming years.

      • vreaa here’s the dilemma, ‘Eve’ can sell and hold her money in “risk free” (i.e. short term rollover or whatever, definitely below CPI) and on an equity retention basis may be better off but in real terms will be less no matter what. Worse she needs to supplement income from this capital supply.

        So selling requires acknowledging that there is some timing here and if one believes the pundits it could be many years before prices fall. That’s a lot of years to cannibalise a pool of money. (Remember she is averse to risk). The bird in her hand is income that will increase roughly in-line with inflation.

        I do think this is a form of a dilemma with tragic consequences for a few. It may well be — in fact it is likely — that the ‘Eves’ will muddle through with passive income in tact, though my bet is they will have higher costs than they think in the longer term. A handful of ‘Eves’ will get cleaned out for the various series of unfortunate events that can occur. Overarching this is, due to the lack of diversity, it is impossible to partly divest of real estate. It’s a binary decision which makes the decision to switch that more difficult to make.

  5. She could sell her properties, pay off her debts and rent a decent place. Her freelance work could sustain her for a little while and it would give her some time to figure out something else.

    She wouldn’t have the qualms of a real estate meltdown anymore.

  6. I don’t think there’s anything wrong per se with earning returns from property investments, same as any other. I take issue with the thought that these types of investments do not require “work”. Far from it, there is significant risk involved due to her lack of diversity and she will be ultimately responsible for its management and upkeep. It looks as though there isn’t much of a buffer there.

    That aside, if she worked her rear end off in her earlier years and has accumulated a nest egg, she has every right to pull the rip cord. It isn’t always “something for nothing”.

  7. It is a phenomenon that bears a closer look. The idea is that as people age they will be less prone to work in a standard corporate environment and are looking for other avenues to fill their time and supplement their incomes. We can see it through the ones I hear in conversation: Home Depot employees (some of whom are awesome and have saved me a few times), security guards, handymen etc.

    But then there is the other option, people who are underemployed are looking to fill the void with something. The business model of renting is one that does not require a 9-5 job — repairs can be shifted and unit showings are intense while they occur but sporadic. The cheques roll in every month, it fits an underemployed schedule nicely. Enter Vancouver with an ageing workforce and the concept of “passive” rental income is more than appealing.

    Just saying, when you have to compete with a business model where the management aren’t paying themselves first, it’s quite possible it will be a long time before larger-scale investors will see Vancouver as attractive. That said, when banks demand higher incomes and higher yields to cover some risks which to now have been swept underneath the carpet, that model may come under closer scrutiny, this business model may fall decidedly out of fashion, if only for a time.

  8. This is a no brainer. She should sell her primary residence now while the market is bubbly high as she will pay no income tax on primary residence. She should then move into her rental suit wait for that to become primary and sell that too tax free. Then she should wait for a big correction and buy back in. Rince and repeat.

  9. she shold sell both properties and quit her work…live off the money until she runs out. Kids can take out student loans for their education and fend for themselves for their housing needs. By the time her money runs out she’ll be eligible for BC Housing for her rental needs and Guaranteed Income Supplement to make up the shortfall in her income.
    It’s very important she become a renter and plan for living her life in the moment.

  10. She is taking the risk and deserves to be rewarded, much more so than ordinary working people.

    • Please explain the logic of “people who take risks deserve to be rewarded”.

      If I go to the roulette table and bet my entire net worth on 0, I’m taking a big risk. Do I deserve to be rewarded for that risk? The answer is no: the expected payout is negative, regardless of the riskiness of the bit.

      • I should have added a sarcasm tag, just parroting some right wing types.

        The whole point of risk is that things can go wrong.

    • This is such a dangerous comment because risks can be either calculated or negligent.

  11. I am being nit-picky with the article here.

    She plays squash – picture shows tennis!

  12. Big deal ! – basically her only significant equity outside owning her own home is 40% equity in a 700K rental property! If she wants to retire before 50, the only feasible strategy is to sell her real estate and leave the big smoke for a much cheaper location. It will not take much of a RE market correction for her to lose in two years what she’d earn in twenty. Many people just don’t get that real estate is not a one way bet nor are they capable of understanding their true financial risk.

  13. Yellow Helicopter

    On the main page of the Vancouver Sun Online today – it`s really starting to hit the mainstream!

    • Just to be clear, this was picked up on a national feed. Show me some good Vancouver-based reporter go Bear for a few articles.

      The Sun justifiably deserves some mea culpa on its rigour regarding the housing market. I’m almost certain a few of them read blogs like this one. I’ve read enough pieces from local reporters citing the likes of Pastrick, Muir, and Sommerville, and are seemingly unable to find anyone else who’s decidedly bearish to tell the “other side”. The usual suspects are in the Rolodex and finding others to give some well-reasoned perspective is apparently offside.

      Of course there is some sense to this, no remunerated analyst will be bearish on real estate because there’s no money to be had in the endeavour, or so I thought. It brings to the fore the question: why don’t reporters find these bearish analysts? Any search of google highlights a few finance types stationed in Vancouver who will likely have bearish opinions on the state of Vancouver’s real estate insanity. Lest a reporter piece together a story based on data and thorough analysis instead of opinions from those with obvious conflicts of interest.

      Oh well. How funny it is I find more insightful market perspectives from Toronto-based paper media.

      • mentioned this earlier, but this is a killer journalism-student project, maybe Langara?

      • Good idea, MM.
        We can’t rely on the journalists, let’s see if there are student journalists with a bit of gumption and spirit and ambition.
        On this note, whatever happened to the apology/exposé that we hoped to see from Global regarding interviewing the marketer as a fake prospective buyer? As usual -> Nada!

  14. Off topic: Some interesting tidbit about where HAMs get their money:
    “Since the beginning of the year, our federal government has either cut or gutted every piece of environmental legislation designed to protect our land, air, and water while aggressively pushing for the expansion of the tar sands and the building of new pipelines, such as the controversial Enbridge Northern Gateway pipeline and supertanker project,” concluded the report. “Harper has claimed to do this in the name of Canada’s national interest while attacking anyone who disagrees.”
    Read more:

    hahaha…they dont even need to launder money to buy their houses, they just use the profits made in canada to do it! 😀

    • In the article, substitue foreign with US. HAM ownership of Canadian oil and gas stock is only just beginning.

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