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

16 responses to “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.”

  1. $1000/month payment or $170K in cash. No problem here!

    • I have a problem with the idea of pumping 1000 bucks a month (over and above rental income) into an investment too, YVR. On the othe hand, lets assume Robert had bought the rental in Vancouver in 2009 for 500k and it has appreciated 7% per year for 4 years.

      So at the end of year four it would be worth 655,000 and would have made a gross paper gain of 155k against the 48k cash he put into it which leaves a difference of 107,000.

      Without getting into all the reasons that 107k will end up lower after a final sale it is easy to see how people can justify putting earned income into a speculative investment during a bubble. The rewards look pretty good on paper especially if the home is appreciating at three times the rate of net input costs monthly.

      The trick is knowing when to take your winnings and get out. That of course has been the main topic here for quite some time as the spec bubble has deflated before our eyes.

      In Roberts case he already is in trouble here as he has only 10k cash on hand. That is not much of a contingency in the event of job loss or any of a thousand things that might go wrong with the house. He is a gambler in my opinion.

      • Luckily, Farmer, we only need know that negative carry in net is unsustainable. Just as the equity is attempted to be taken the bottleneck tightens. IOW if you haven’t already liquidated chances are you cannot except at much lower prices

  2. SpecuFlip hemorrhaging cash? Why not try a Moat… DearReaders… Your FridayMorningZen…

    [UK Independent] – Moats dug around Chinese ‘nail houses’ as residents refuse to budge

    …”According to reports 99 per cent of villagers have now abandoned their homes to make way for real estate developers, but at least six families have refused to budge.

    In what is seemingly an attempt to drive the villagers from their homes, other residents, who have already accepted compensation deals, have now carved out moats around their former neighbours homes.

    Some reports claim that the moats, which have been dug over the past month, were actually created by developers in order to re-route a local river so that it surrounds the home-owners houses.”…

    http://tinyurl.com/aerdnwk

  3. Technically, the % of net worth tied up in RE is not quite 100% as they have the RRSPs, a modest sized holiday fund and 3 cars. Having said this, their true net worth is likely overstated by at least $250k – valuations used for RE are probably inflated, cap gains may be realized on any sale of the rental property (assuming prices do not fall further), RRSP can never be taken at face value as it’s 100% taxable. The author of this article has also simplified things by implying that the proceeds of sale of rental property could go back into RRSP right away. Unless these people haven’t been making any contributions for a decade or so, this would not be the case.

  4. The loss from divorce I can understand. Loss from business again I can understand, though not necessary a good decision. Ongoing loss from rental property while you are facing cash flow issues, CC balances, no contribution to RSP, and sitting on top of a good chunk capital gain, I can’t understand. Seriously with REITs and XRE, why do people still feel the need to buy condos for rental investments. Just buy XRE and save yourself the trouble and hassle. Most people wouldn’t put down $10K and borrow $100K to invest in stocks, yet a pre-sale condo, no second thought. Risk is even worse with RE if you can’t sell it. With stocks, at least your max loss is $110K + interest charges. With RE, it can be a never ending story.

  5. You gotta remember that life is merely a smoke and mirrors act for many. Some people do the strangest things to convince others that they’ve got money while others haven’t got a clue in the world when it comes to things like this. I’ve met countless people that wholeheartedly believe they are “millionaires” simply because their name is on title to a million $ worth of RE (while simultaneously overlooking the fact that they owe the bank $800k).

  6. Notice how all of these financial scenario articles from G&M have the protaganists overweight in real estate? That tells you as a sector, Real Estate is so over-done.

  7. Here’s another great analysis of a Vancouver property owner who has a hugely valuable property, high income and maxed-out line of credit.

    http://business.financialpost.com/2013/02/08/will-this-womans-out-of-control-spending-cripple-her-retirement/

    “Madeleine, as we’ll call her, is 64 and pondering retirement. Her income from her Vancouver-based management consulting business, about $100,000 a year, plus Canada Pension Plan benefits for which she applied early, $9,120 a year, leaves her with monthly after-tax income of as much as $6,400 on average.

    “Life has treated Madeleine well. Her B.C. house, for which she paid $935,000 nine years ago, has appreciated to $1.8-million and she has a total of $620,000 in RRSPs and her TFSA. Her assets total about $2.4-million and her two children, both in their 30s, have successful lives of their own. One would think Madeleine has no problems, yet she is spending 50% more each month than her take home income.

    “In fact, Madeleine is up against not only her heavy spending, but the fact that she is supporting her way of life on one income. Much of the spending is social expense, such as her $715 per month for food and dining out for one person. She spends another $888 for medical therapies the province won’t cover. With one income, even a sound one like hers, she is unable to cover her $100,000 line of credit, which is, in effect, an extension of her purse.”

  8. I suspect that there are a lot of people in a situation similar to ‘Madeleine’s’ in and around Vancouver. Also many with paper assets and high debt who have lower incomes than she does.

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