Lower Mainland Couple In Their 70’s; RE Makes Up 216% Of Net-Worth; Desire To Buy More – “My friend is getting worried about his parents’ financial situation.”

“I was talking to a friend earlier today, He’s getting worried about his parents’ financial situation…
Get this:
$2.6 million invested in real estate… all in the Lower Mainland.
$1.4 million of mortgage debt (54%). Dad is over 70, mom not much younger.
Imagine a collapse of 50% of the market in the LM. The entire family’s net worth would be wiped out. Really scary. The irony? They want to invest even more in real estate (because they lost so much money in mutual funds…).”

Makaya at VREAA 6 March 2013 8:22am

We still believe that the (90 minus age)% guideline for maximum percentage of net-worth that should be in RE makes sense.
These guys should have less than 20% in RE, their actual number is 216%… and they want to increase it!
We’ve heard enough of these stories now to extrapolate that there are a significant number of people in this position. They are very vulnerable to price declines, and they make the market that much more vulnerable, too.
– vreaa

“Forty percent of homeowners over age 65 had mortgage debt in 2010, compared with just 18% as recently as 1992, Reuters reports.
The Investor Education Fund recently found that 24% of Canadian homeowners surveyed expect to have debt on their principal residence after they retire. Of those who expect to owe money on their homes when they retire, more than one-quarter said they don’t know how they will pay it off.”

advoc8 at VREAA 6 Mar 2013 at 2:12pm, quoting from ‘How Baby Boomers are rewriting the rules of retirement’, Financial Post, 6 Mar 2013

60 responses to “Lower Mainland Couple In Their 70’s; RE Makes Up 216% Of Net-Worth; Desire To Buy More – “My friend is getting worried about his parents’ financial situation.”

  1. Ralph Cramdown

    You already know what I’m going to say…

    Without knowing the cash flow, we have no way of knowing the situation. There’s a big difference between a strip mall with a cap rate of 8% and a house in Point Grey whose rent barely covers the mortgage even with 50% equity. One of them could conceivably decline 50%, but for the other, it’s very unlikely (and as long as the mortgage wasn’t up for renewal, who’d care anyway?)

  2. I can’t help but think that twenty years of poorly-performing mutual funds and investment services have taken their toll, and propensity for hard assets is the result.

    • I think that’s more a function of the robber barons that run most people’s RRSPs rather than the markets themselves. The GFC is a big blip admittedly, but even with that, a diversified basket of index and bonds funds has returned something in the range of 5-8% annually over the last 20 years, depending on specific fund choices, etc.

      The problem is that a lot of people tend to have chosen stupid managed funds with ludicrously large MERs (another thing Canada has dubious distinction for – highest investing costs in the world).

  3. The only bright spots in the first situation are that they still have 1.2 million in actual equity (although that will decline, if it hasn’t already) and they likely only have about 10 years of life left.

    …if those can be said to be bright spots…

    • Ralph Cramdown

      If he’s 71 he’s got a 50/50 shot of living to 85. If she’s 68, she’s got a 50/50 chance of living to 87. Does that make things better, or worse?

      • Real Estate Tsunami

        My advise to them: Get a reverse mortgage and blow it all in Las Vegas.
        That should teach the kids not to rely on their parents frugality.

      • Probably still better off than most their age. But, taking on more real estate debt (and holding what they have) isn’t going to help the situation.

        And, I’m sure Target is hiring… :/

      • Ready Torpedo

        did someone say ‘target’?

  4. The thing I see is people near or past retirement attempting to fund their retirement with real estate “investments”. I know a couple (no pension other than government entitlements) that cashed out their meagre savings and bought a house in Vernon and one on the island. Neither house has appreciated in value, the renters have not been good and the repairs just keep mounting – both places have been for sale off and on for the last three years but no bites. There is also the older couple in my neighbourhood that had run a small business for years, a business that just kept losing money, so they mortgaged themselves to the hilt and bought a tear-down in the Arbutus area for $1.52M and had a house built. The house was on the market for about nine months at $2.96M (33′ lot, they’re delusional) and now they are just renting it out. The house is a typical design, wok kitchen and many bathrooms, but with the added bonus of an illegal suite – something noone has to do in Vancouver unless they are seriously trying to avoid paying taxes on the income. I don’t know how long people in these financial fixes can hold on but eventually things just start to fall apart.

    • Lots of this going on.

    • WHy bother with real estate? WIth such a low cap rate, I’d seriously rather put my money in well-established companies with a history of increasing dividends. At least you don’t have to worry about lawyer fees, RE fees, PTT, property taxes, maintenance costs, annoying tenants, finding tenants, evicting tenants and all that crap that comes with being a landlord. The way I see it, the ONLY thing RE had going for it is that it “never goes down”. THe US experience proved us wrong. The only thing the bulls have left is that “it’s different here”, a ridiculous notion considering that if you’ve ever traveled outside of Vancouver, you will know that Vancouver is not that special, and that RE really has only been going up for the last 10 years, prior to that RE was stagnant providing minimal returns for 15 years.

  5. Cyril Tourneur

    216% of their net worth?! I like how you say that VREAA. They have basically comitted 2 lifetimes of net worth to one asset class – in one bubblicious market. The height of financial folly.

  6. Seeking knowledge...

    When this baby blows up, I’m really worried about the bailout package for the people and CMHC. Any predictions on what life and the economy will be like when Vancouver RE drops 50%?

  7. You can’t have 216% of your net worth in anything.
    Net worth = assets – liabilities

    • Ralph Cramdown

      I don’t exactly know what you’re saying, but you can certainly wager 216% of your net worth on something.

    • Surrey Girl – Look up ‘Leverage’.

      • Surrey Girl

        vreaa – I really enjoy your blog. I am familiar with leverage, I even had a margin call four years ago. 🙂 Now that was a lesson I don’t want to repeat. I’m just saying the statement is a mathematically error. I do agree that these people will soon suffer like so many Americans. Keep up the great work. I look forward to reading your blog every day.

      • A person with $1 million in the bank decides to buy a $1 million home for cash. He now has 100% of net worth in real estate.

        He then gets $5 million in mortgages to buy five more $1 million homes. Is his % of net worth in real estate still 100%?

      • SG -> It’s a semantic issue.
        I suggest taking the leap and accepting the meaning.
        If somebody says that somebody has 150% of their net-worth in asset ‘x’, it means they are all in and leveraged up another 50% of their net-worth. Pretty straightforward.

  8. It’s called leverage, aka debt… Net worth = 2.6 – 1.4 = 1.2m

    Real estate investment is 2.6m, net worth is 1.2m. 2.6/1.2 = 2.16, or 216%

  9. Its to bad their wallets aren`t as big as their ego`s ,give me a break,` they`re 70 f` in years old.They`re probably going to be dead in 10 years.Greed is a sickness.

  10. Sorry, your Net Worth is the amount of assets minus liabilities. It can’t be more than 100% – leverage or not. Notice the word NET.

    • You’ve missed the point. No one is claiming that net worth itself can be over 100%. They are saying that this couple’s entire net worth is invested in an asset whose total value is equal to 216% of their net worth. In other words, they are leveraged to the hilt.

  11. Got the point Ninja. But the headline states that RE makes up 216% of their net worth. If the real estate industry did this we’d be all over it.

    • Is “RE holdings amount to 216% of their net worth” more clearer? I can see how one could be confused but dont think its a misleading statement whatsoever.

  12. Real Estate Tsunami

    The math is a little bit of a brain twister, I have to admit.
    The way I look at it, a drop of about 45 % would put them under water.

  13. Lets hope that their NET WORTH is more than $1.2 m of equity that they presently have.

    • Real Estate Tsunami

      Looks like everything is tied up in RE.
      There’s a good chance that the children may end up inheriting debt rather than wealth.
      Suggestion: Liquidate ASAP.

  14. There is something wrong here.
    I am puzzled re. how they would be qualified for $1.4 million of mortgage debt at that age? At any age? They need to show an income of more than $ 300K per a year and their monthly payments are going to be more than 9K…

    • Real Estate Tsunami

      Nothing wrong here, Olga.
      They probably borrowed from Capital Direct or Alpine Credit.
      “You own your home, we lend you money”
      at 18%.

  15. Since they lost money on mutual funds we can assume that their net worth is higher than $1,200,000. We can also assume that they don’t have a Picasso hanging in their kitchen. So let’s just say they are real estate rich, cash poor and financially irresponsible. Let’s hope that nothing goes wrong like not being able to find a renter or the more likely expensive illness. As for a mortgage they probably have insurance assigned to it.

    • Real Estate Tsunami

      What kind of insurance?

      • Surrey Girl

        Whole life insurance. It is very expensive to buy today because interest rates are at historical lows and other actuarial variables. However, folks in their 70’s bought these policies 40 – 50 years ago. They could assign their policy or a portion over to the bank.

        Their lender could also force them to buy mortgage insurance. In my opinion mortgage is very expensive and the amount it pays off reduces every year that you pay down your mortgage.

    • No way. Fuck these boomer retards. I hope they die bankrupt.

    • What kind of Picasso?

  16. As far as mutual funds go, screw the money managers and do your own research and manage your own money. Do your research online. The only funds I buy are index funds which are generally lower cost but still high when compared to the US. I manage my own portfolio. Key is don’t be greedy. Invest in well-established big companies, re-invest the dividends and let compounding do the work. The ones who expect to strike it rich overnight are the ones who lose in the end. Same as the flippers in this market.

    • Real Estate Tsunami

      Brian,
      ever think of working from 9 to 5 like your parents did?
      Actually creating and building something, rather than squinting on a computer screen, and trying to be the next Warren Buffet.

    • Seeking knowledge...

      Brian: which index funds do you buy? I find the MER in the Vanguard ETF’s one of the lowest, but it doesn’t have as much selection as the iShares. By the way, I work more than 9~5, but I’m willing to put in the extra effort to handle my own finances because I’m not willing to let a fund manager charge me 2+ % just to possibly beat the index.

      • Vanguard ETFs are good, so is the TD Index funds series. You have to open a TD Waterhouse account though. If you are lazy, ETFs are great, but sometimes, managing your own portfolio is fun too.

  17. Whoops, I just realized that the first part of my post up there should have mentioned it’s 40% of Americans over 65 with mortgage debt. My mistake.

    I’m kind of amused by everyone trying to figure out the parents’ financial scenario. If it’s going by the exact words written, then a $1.3m drop in real estate worth means the family’s net-worth gets wiped out which means they don’t have any other financial assets.

    That is, if we’re going by what’s literally written, which I’ll assume as well isn’t really the case.

  18. I am a boomer. I am appalled at some of the financial situations that my contemporaries have gotten themselves into. They have borrowed against their homes while saying “that’s just a line of credit, the house is paid for”. They have counted on the run up in real estate without selling and now owe more on the house than when they bought it TWENTY years ago! When renewing their mortgages they roll in their latest credit card debt. Then they keep the amortization high so the payments are as low as possible. These people owe hundreds of thousands of dollars and now are having health issues, divorces, and want to retire. How can you do all that and not have a thought as to paying off your debt? Time is not on their side.

    When the lender they started with is cautious and turns them down, they go elsewhere, get the loan and a promise of more if needed and then bad mouth their first lender. They never miss a chance to go somewhere warm for a month and love the casino and the lottery. Their cars are new, Friends, family, acquaintances, I can’t stand it, it is all around me.

  19. Everthing you ever needed to know about RetirementPlanning, DearReaders [of all ages]… and, no… it’s not about TheMoney….

    [NoteToEd: Don’t settle for TheTrailer… this is a MustSee. It’s on NetFlix, you know.]

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