Sitting With Equity And Eager To Use It – “They purchased the three-unit brownstone, in the up-and-coming area of Bedford-Stuyvesant, for $725K, by re-mortgaging their Vancouver house for around 80 per cent of its value.”

“Meet Rodney Hynes and Thomas Hunt, Vancouver owners of a new brownstone in Brooklyn, N.Y.
“We’d like to thank the over-priced Vancouver real estate market for making it possible,” says Mr. Hynes, dryly.
Mr. Hynes, who works for Aboriginal Affairs, bought a home on Vancouver’s east side with Mr. Hunt, a TV producer, nine years ago. They purchased the house, which needed a $200,000 renovation, for $268,000. According to a recent appraisal, it’s worth $850,000.
They purchased the three-unit brownstone, in the up-and-coming area of Bedford-Stuyvesant, for $725,000 (U.S.), by re-mortgaging their Vancouver house for around 80 per cent of its value. Because the Brooklyn property will bring in rental revenue of $7,000 U.S., their mortgage and other expenses will be more than covered.

Full disclosure: I’ve known these guys through friends and media connections for a number of years. They are a perfect example of Vancouver buyers who were initially reluctant to jump into the market, but once in, soon embraced the seemingly endless ride, as, year after year, the value of their home climbed. They were smart, or lucky enough, not to lock into a five-year rate, but instead went with a variable rate so low that they rapidly paid down a hefty chunk of their principal. It meant they were sitting with a lot of equity, and they became eager to use it towards another purchase.

You won’t hear the Suze Ormans of the world advising consumers to mortgage one’s home to the max. Most every money expert will tell the average middle-income earner to pay down the mortgage, not borrow further on it.

Mr. Hynes and Mr. Hunt had almost paid off their Vancouver home but chose to mortgage it to the max so they could own the brownstone clear title. I spoke to a few Century 21 realtors in Vancouver and Toronto who help clients liaise with realtors south of the border, so they can work their way into the U.S. market. When I ran the idea of maxing one’s mortgage to make a U.S. purchase possible, the realtors weren’t so sure they’d personally go that far.

Mr. Hynes and Mr. Hunt say they have already endured shocked reactions from friends, of the “are you crazy?” variety. But the couple regularly travel to New York, and one day, when they’ve paid down the mortgage, they will reserve one of the small suites for themselves, as a pied-à-terre.

“Canadians are very conservative, especially around matters of money,” says Mr. Hynes.

Says Mr. Hunt: “What’s interesting is when you go to New York and you’re doing what we’re doing, you see it’s as normal as can be. There are people from all around the world purchasing real estate, and being entrepreneurial about it.

“We’re not worried.”

Mr. Hynes and Mr. Hunt aren’t alone in their quest for U.S. real estate. Overall, foreign purchases of U.S. properties have gone up 24 per cent in the last year, according to a recently released report by the American National Association of Realtors (NAR). Canadians are, by far, the greediest buyers. We account for 24 per cent of the foreign sales stateside in the last year. Meanwhile, the second-biggest buyer, China, is responsible for 11 per cent of sales. Toronto realtor Paul Indrigo said he relies on such stats to help Canadians find properties in popular hot spots in Florida, California and Arizona.

But it’s not a straightforward process, purchasing an American investment or holiday property that’s nowhere close to home.

If Mr. Hynes and Mr. Hunt want to renovate, which they do, their property management company will have to hire contractors. To do the work themselves would require a work visa. As well, non-residents of the U.S. are expected to pay a 30 per cent withholding tax on gross rental income – unless, of course, they find an accountant who can help them file the forms that will save them from having to take such a hit. Fortunately, there are local accounting firms who’ve become expert in U.S. tax laws and one of them, a Surrey firm, helped guide the way for Mr. Hynes and Mr. Hunt.

“There will be challenges every step of the way,” says Mr. Hunt. “Taxes are huge. Expenses are really high. Insurance is high. Water has to be paid for separately. We have to budget for maintenance.”

And the vacancy rate isn’t the same as Vancouver, adds Mr. Hynes. In an up-and-coming neighbourhood like Bed-Stuy, they say demand is so much lower that people might not show up for an open house on a rainy day.

However, compared to Vancouver, the New York market is a breeze, says Mr. Hunt.

“We spent two years looking for a house in Vancouver, and the fact that we survived a sellers’ market here meant we didn’t freak out about the New York purchase.

“The market in Vancouver was way more intense.”

– ‘Going all in: Canucks max out their mortgage to buy in Brooklyn’ Kerry Gold, The Globe and Mail, Oct. 19 2012 [hat-tip Jack]

So, this couple paid $468K ($268K purchase, plus $200K renos) for a house that now has an appraised value of $850K.
This means they could have liquidated their RE for a profit of about $382K (minus commissions and fees etc).
Instead of doing that, or of being content with having a paid off home in desirable Vancouver, they decide to go ‘all-in’ real estate, with leverage.
They borrow 80% of the current value of the East side property ($680K), and purchase the $725K US property.
Thus, by our very rough math:
Value of RE carried:
East side $850K + Brownstone $725K = $1.575M
Mortgages:
Eastside $680K + Brownstone $45K = $725K
(Is it also fair to assume that, because this couple paid down their mortgage rapidly, and because they required a 80% HELOC to purchase the US property, that they don’t have much else in the way of savings/investments?)
Thus they are very likely leveraged RE:net-worth at about 2:1.
Overall, this looks like a situation where a household is overextended into RE and very vulnerable to RE weakness ahead.
On their side, they likely purchased the US property at a reasonable value, and it is currently cash-flow-positive.
The US housing market may have bottomed, but quite possibly not; the Vancouver RE market has only now begun to descend.
– vreaa

43 responses to “Sitting With Equity And Eager To Use It – “They purchased the three-unit brownstone, in the up-and-coming area of Bedford-Stuyvesant, for $725K, by re-mortgaging their Vancouver house for around 80 per cent of its value.”

  1. “Who told you to buy a brownstone on my block in my neighbourhood on my side of the street?”

  2. EVERY single thing turns into a bubble. Most people have never lived in one. Take a look at all the bubbles in the world and tell me housing in CANADA will not be in one:
    http://www.sharelynx.com/chartstemp/BubbleComparisonsRankings.php

  3. The buy in Brooklyn is probably a good investment, if they handle it properly.

    And getting all in on a Vancouver property – what can they lose at this point? The Canadian bank can’t take their NYC brownstone, so they probably assume that they can either win small or win big.

    • If it’s being promoted by the media, then a lot of people are already refinancing their Canadian mortgages to purchase in the USA or the media is going to encourage this type of investment. The problem comes when the interest rates increase in Canada and USA and they are unable to pay the mortgages for both properties. Additionally, there will be problems when real estate values in Canada fall and this couple will be underwater. We are at historical interest rate lows. There is no place for interest rates to go but up. If what most economist believe that it will take about the same amount of time for values to come down as it did on the way up, then we are looking at almost 10 years for the prices of homes to fully bottom out to around 2003 prices. If this couple is really strapped, what happens if there is a vacancy or repairs needed? Their income is also eaten away by hiring a property manager, paying foreign property taxes and income taxes. I do not think they are safe or that this is a good investment. There has been a lot of Canadian investment in the USA and this does not bode well for US. Perhaps Canadians will be the trigger for the next phase of house price drops in the US?

      • There are already a lot of Canadians investing in places like Phoenix or Miami. Many of them have stretched their finances to the limit. The point I was making in my previous comment wass that if they get deeper in debt in Canada to purchase US property for cash, then one property will not be taken away from them even if they stop paying mortgage here. I think that is part of the psychology – live here and pay mortgage as usual and have a property outside of the country with “clear title”. That’s exactly what these guys have done in NYC. On top of that their NYC property is actually cash flow positive without the need for “creative” accounting.
        In the end, taxpayers will foot the bill for many of these speculators, while the speculators will be able to keep their US investments.

    • Unless they’ve been very careful to shield assets, the Canadian bank most certainly COULD take their Brooklyn brownstone; it would just involve petitioning them into bankruptcy. Some US states do have a system such as you’re envisioning, where lenders can either come after you for the amount owed OR take the house, but not both, but Canada does not. Come to think of it, I think BC has that system for auto financing…

      • OK, fair enough. I still believe that it’s part of the psychology. I think there are quite a few people with mortgages here and properties abroad (not US) that are not reported.

    • Seems like they should have mortgaged the Brooklyn house, instead of the Vancouver house. At this point there is less potential downside in NY, much less in my view. Maybe you take out a solid down payment from the Vancouver house, then get a mortgage on the NY house. It’s paying for itself through rent, and you could get a very low rate right now.

      Then if (when) Vancouver loses value, you still have a big equity cushion on that house, and the NY house is paying itself off. The way they’ve done it, they may well be put “underwater” on the Vancouver house which will make it illiquid.

  4. pffft! … the loonie carry trade! … maple syrup all over american pie … too sweet for me – wait_watcher

  5. Ironic quotation of they year…
    “Canadians are very conservative, especially around matters of money,” says Mr. Hynes.

  6. “Is it also fair to assume that, because this couple paid down their mortgage rapidly, and because they required a 80% HELOC to purchase the US property, that they don’t have much else in the way of savings/investments”

    One of them works for Aboriginal Affairs – gov’t job == gov’t db pension. This will mitigate their savings needs somewhat.

  7. Is it just ‘Nem’, or does anyone else here think that a levered CDN/USD RE CarryTrade cooked up by a couple ‘o EastSiders named, “Hynes&Hunt” is going end up like a NeutronKetchupBomb™???

  8. Anecdote with cross-border theme, and possibly a black theme and gay theme. Solar arc takes you back to a time in the Sixties when the Americans killed MLK, and Canadians elected Lincoln Alexander. Solar Arcs are all about Maximum Extension in life (45deg or age 45),.. and Over-extension (50deg, or age 50). Age at Peak Spending describes Solar Arc extension and over-extension. What are the ages of Hynes and Hunt, and how close are their births to Trudeau’s famous quip about Governments staying out of the people’s bedrooms, December 21, 1967?
    We may be conservative about money, but the rejoiner is that we were also conservative about family’s, and this means we had Large family’s. Which of course, sees itself played out today with Multiple purchase of houses.

  9. so they’re speculating on the NY brownstone?
    The purchase makes no other sense to me.
    Maybe they know something about real estate in Brooklyn catching
    fire soon.
    I guess it pays to be riding the wave, not crushed beneath it.

    • Well, the phrase “up-and-coming” was used, which is always a concern. On the other hand, they said the property was cash flow positive, so it’s possible they’re thinking of it as an old-fashioned investment, one evaluated on the basis of current yield (including the principal repayment portion of the mortgage) rather than capital gains.

    • Hmmm, unless otherwise cash flow positive real estate “catches fire”, the a purchase does not make sense? Isn’t this typical bubble thinking?

      • “Hmmm, unless otherwise cash flow positive real estate “catches fire”, the a purchase does not make sense? Isn’t this typical bubble thinking”?

        this is common sense thinking, not bubble. Why else would you pay interest to bank on a non-principal residence?

    • “it pays to be riding the wave, not crushed beneath it”

      Really? Never would have thunk it.

  10. I know of some people who did the same thing but within BC. Seeing how one of them is the “ex”, I can only sit back and laugh knowing this is not going to end well. More leverage than brains, as the old adage says. There’s a right time to leverage and this is not one of them.

  11. Renters Revenge

    “Canadians are very conservative, especially around matters of money,” says Mr. Hynes.

    As in 163% debt to income? Right.

    • This has been rumoured for some time, it’s no surprise other than it’s only now being discussed. The means by which CMHC is unwound and its other housing-related efforts dissolved to other departments, however, is going to be messy.

      I believe some of the CPC have been enamoured by the Australian private MI model, though that model didn’t prevent their prices from going to “unaffordable” all the same. Further their MI model has not been adequately stress tested against a severe housing recession.

    • A yes, just like Fannie Mae and Freddie Mac were “non-governmental” entities, which were “not backstopped” by the public. Doesn’t quite work out that way.

    • horse long gone … just positioning to ride any wave of resentment that might form

    • almost 500 comments on that article – hot topic!

  12. Renters Revenge

    In addition to going “all-in” RE, it seems they also doubled down on the “smart growth” concept.
    http://news.heartland.org/newspaper-article/2012/07/16/questioning-messianic-conception-smart-growth

  13. Is this tax wise? U.S. rental income on a fully paid off property. Don’t imagine the mortgage on a Canadian primary residence counts.

    • They can write off interest on their mortgage if it’s being reinvested elsewhere. They likely bought the NY apartment in cash because it’s difficult to secure preferential financing if not a US resident. Doing the math on this it looks like they are taking wonderful advantage of low interest rates and investing in higher-yielding assets. Is that a crime? 🙂

      A major risk is if Canadian lenders call their Vancouver-based mortgage because of equity deterioration. In that scenario they will need to figure out how to refinance their NY property to cover the shortfall, or pony up the difference.

      in principle that doesn’t sound like a horrible play, at least they’re picking a higher-yielding investment but they are not diversified and exposed to a highly leveraged asset in what appears to be an over-leveraged market.

      patriotz over at VCI makes a good comment along the same lines:
      “That’s a price/rent of 103. Even given the higher property taxes in NYC, you can see that people buying “investment” properties at today’s prices in Vancouver are out of their minds.

      Their big mistake wasn’t buying the NYC property, but mortgaging the Vancouver property rather than selling it. The mortgage appears to be uninsured. That means they are going to have a few issues with the lender if prices have gone down at renewal time.

      “Canadians are very conservative, especially around matters of money,” says Mr. Hynes.

      Talk about not getting it. Record high consumer debt in Canada, yet people are supposedly conservative about money?”

      • It is a LOC so there is no renewal. Though LOC are demand loans which means the bank can demand the loan be paid in full at any time by giving sufficient notice.

        I don’t think this is a bad move either relative to what RE investment/plays in Vancouver but it is not the best move. Although this property is cash flow positive, I think it is really cash flow position excluding HELOC interest. Note they said that expenses are very high – property taxes, management company, utilities, water, etc. This gives me the impression that it is really cash flow positive on the mortgage and operating expenses excluding HELOC interest. Add in the fact that demand for housing is low, they will likely have either higher vacancies and/or lower the rental for full occupancy. Factor all those in and HELOC interest of ~$2K/month, it might cash flow, but likely not as big as it sounds. A bad tenant or major repair will likely eat through a full year’s profit easily since they have to hire contractors and there is no reason to believe the mgmt & contractors wouldn’t gourge them on the bills.

        Personally I would just put the $$ into REITs type investments or ETFs like the Claymore Global RE funds instead. Way less hassles, especially with taxes and legal issues of owning in US.

        If I were to buy, I would probably look into incorporating a REIT trust/investment company and purchase the RE using the company’s name instead of personal name. Yes, it’s more accounting, tax, and legal work and costs but also much safer with regards to personal assets from lawsuits, IRA, etc. Also I would probably go for high quality apartment buildings or TH complexes with more units than a 3 unit Brownstone. I think more units might help reduce the impact of vacancies (eg. 1 out 20 units empty for a month rather than 1 out 3 units empty for a month).

      • patriotz at VCI c/o jesse -> “Their big mistake wasn’t buying the NYC property, but mortgaging the Vancouver property rather than selling it. ”

        Agreed.

      • An uninsured loan suddenly requiring insurance is going to be requalified at a higher rate, so one hopes they will have the income to stand the higher threshold. (Not that it matters, it’s just a bar to get over but they will get the lower rate; also I seem to remember something about limiting refianances or some such gobbledygook.)

  14. Re the “rental revenue” of $7000:
    Let’s see the actual numbers, after all taxes, fees, management, maintenance & repairs including a contingency fund? (Something expensive will show up at some point!) Include a reasonable allowance for interest and exchange rate risk, and if it still pays the mortgage it’s a good investment.
    If it takes creative accounting, infinitely favorable rates and immortal roofs…

  15. sweet inequity ?

  16. Well, the prices in Vancouver alllow things like that. But maybe when we consider all the aspects of living in Vancouver, like cultural life, job opportunities, safety of neighbourhoodsand many other, the sky-high prices might have some sense after all.

    • “like cultural life, job opportunities”. You’re joking, right?

    • It is very clearly documented that job opportunities by no means conceivable support Vancouver prices.

      Also, check out the photo used to illustrate the DTES in that ‘safety of neighbourhoods’ link: a clean alley with a vehicle in it.

  17. I think they made a wise investment over the longer term. Prices are going up in Brooklyn.

    http://www.bloomberg.com/news/2013-07-11/new-york-homebuyers-fuel-record-brooklyn-prices-in-sales-frenzy.html

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