Hello all
Interesting Analysis from a mortgage expert :
Our vanishing RRSP…
In the Spring of 2012 after a 15 year roller coaster ride on the Stock Market (huge gains & sharp drops) with a net gain of less than 2% on the total contributions made, it was decision time. My wife and I took a hard look at our RRSP investment ‘strategy’ such as it was. Our conversations around investing always came back to the one area in which we always had great success; Vancouver Real Estate.
We had always felt a greater amount of control and flexibility over our Real Estate investments than ever over stocks of mutual funds parked in the Equity markets. Our Rock star tenants departure clearly having less impact on the value of our investment as compared to the departure of a Rock star CEO or CFO might have on a company. Overall movement in the value Real Estate tends to be gradual and certainly somewhat simpler to predict than that of a Corporate share certificate.
There is a certain confidence when it comes to investing in Bricks & Mortar that for myself is lacking with investing in ‘1’s and 0’s’.
In the stock market a loss of confidence can have an immediate and real impact on one’s net worth within minutes, something as seemingly innocuous as a false tweet trigger abrupt and unreasonable movements. Tweets do not rock the value of Real Estate to the tune of double digits in mere minutes. The impact of market sentiment around Real Estate is slower and less radical due to the product itself being far less liquid. Thus it is far more difficult to allow emotion to drive buying and selling decisions and accordingly values tend not to move in short erratic patterns.
Real Estate is like slow-cooking. Things happen gradually. Slow food is of course better food.
Based on these and other conclusions, my wife and I took what felt like a pretty radical step in 2012 and cashed out our entire RRSP choosing to invest the net (after tax) proceeds in a piece of Real Estate.
In the spring of 2012 we put 60K down on a 240K townhouse. Here are the numbers as they stand today;
We currently have a positive Cashflow of $400.00 per month, which acts akin to a 8% ‘dividend’. (The $4800.00 of positive cash flow in our hands each year representing a 8% return on the $60,000 invested in the property.)
This money remains in the Holding Corps account as a buffer against vacancies, special assessments, and future interest rate hikes. Also worth noting is that over time the rents charged will continue to rise with inflation, and of course the mortgage balance will decline. Setting us up for the closest thing our self-employed careers will get to an inflation adjusted indexed pension of sorts.
This $4800.00 cashflow return is over and above the portion of the monthly mortgage payments which represent principle paydown,
The mortgage principle paydown over the first 3 years has consistently been $3,600.00 per year. Another 6% return on the initial investment.
This elevates the return to 14% annually, assuming the market remains stable and values flat. Which for 3 bedroom townhomes in Port Moody I have little doubt population growth and inflation will ensure. Far more likely is that the property will appreciate by at least 1% per year.
1% per year on the asset itself being an effective return of 4% on the initial investment.
Since purchasing the property we have actually seen sales in the complex reflecting about a 3% gain per year on the original purchase price. (Or 12% based on our initial $60,000 investment.)
Collectively we are tracking for an ROI of 26% in 2015.
How do we sleep at night with tenants in our lives? Quite well in fact.
Vacancy rates on 3 bedroom units in particular are extremely low. With the 2009-2013 rounds of mortgage guideline changes which pushed many lower mainland first time buyers from the market, vacancies are likely to remain extremely low as many first time buyers will be forced to rent for additional years waiting for their incomes to rise and down payments savings to grow.
Finding positive Cashflow in the lower mainland is not easy, but it can be done. Arguably if one is at least breaking even on a monthly cash-in over cash-out basis then the math on the mortgage principle pay-down by the tenant still represents potential for tremendous gain over the long haul.
Real Estate investing is mostly boring, as it should be. It is a ‘get-rich-slow’ proposition. Slow and boring, which as I am now in my 40’s I can live with, at least somewhat more so than when I was in my 20’s (back then I was overexposed to late night TV personality Tom Vu “A lot of your friends will tell you, ‘Don’t come to the seminar. It’s a get-rich-quick plan.’ Well, tell them, it is a get-rich-quick plan because life is too short to get rich slow.“).
Thanks for that Tom.
Life as it turns out is not quick…it is long and slow. (Luckily)
Too bad I cannot go back in time and advise myself that getting rich slow, over say 20 years, would have been fine. Of course today we use more refined vernacular these days and it is all about ‘building wealth’.
So get out there an build some wealth.
Full disclosure;
There is one another facet of our overall investment strategy worth noting, we personally have the tremendous benefit of being Incorporated and as such we have implemented a degree of diversification around our investments via a Corporate Asset Transfer strategy which in many ways acts as an insured pension plan. Well worth further conversation as an option to an RRSP for those who own their own business’. However I will let another expert pick that topic up in depth.
Our main focus moving forward will continue to be Real Estate.
Year over year the Real Estate investments continue to trump anything we attempt in the equities market. Some may see this as the biased comments of a person deeply connected to the Real Estate market, others may see it as biased simply from 24 years of experience with owning investment properties and having had 24 years of success with them on a personal level.
Thanks for your time.
Dustan Woodhouse
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Cheers
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