Collapsing our RRSP & Vancouver Real Estate
In the spring of 2012, after a 15-year roller-coaster ride on the stock market (huge gains and 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 about 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, flexibility and comfort with our real estate investments than over stocks or mutual funds. The departure of an aspiring rock-star tenant clearly has less impact on the value of our investment property than does the departure of a rock-star CFO on share prices. Overall movement in the value of real estate is glacial by stock market standards, and thus somewhat simpler to predict than the movement in share prices. Our tenants will need a roof over their head far more than they need Google shares, and they will give one up far faster than the other.
There is a certain confidence which is difficult to duplicate in a bricks and mortar investment as opposed to a paper one backed by digital ones and zeros. There are a number of reasons for this.
In the stock market, a loss of confidence can have an immediate and real impact on your net worth within minutes. One false Tweet can trigger a double digit drop in a stock price. Real estate, even in Vancouver, is thus far impervious to pernicious Tweets.
The impact of market sentiment around real estate is less radical because the product itself is far less liquid. Thus, it is far more difficult to allow emotion to drive buying and selling decisions — and, accordingly, values — in erratic short term patterns. There is no panic ‘sell’ button to hit creating a frenzy of sale with real estate. Even the perceived buying frenzy we are experiencing in 2015/2016 is still fundamentally slow moving. It can take weeks, or months, to find the right property and to win in multiple offers.
Real estate tends to be more slow-cooking sort of experience.
Based on these and other conclusions, my wife and I took what might seem like a radical step. We cashed out our entire RRSP in the spring of 2012, and invested it all in a piece of real estate. It is worth noting that as the owner of my own corporation I was able to reduce my corporate compensation that year to near zero, thereby reducing the tax implications. However, as you will soon see, the tax implications would have been minor in any event, at least in comparison to the gains made.
In the spring of 2012 we put $60,000 down on a $240,000 townhouse. Here are the numbers as they stand today:
As of 2016 we continue to enjoy positive cashflow, as we have since day one. The $4,800.00 of annual positive cash flow represents a 8% annual return on the $60,000 invested in the property. For comparison’s sake you could call this an 8% dividend, something that would sound pretty attractive to any investor. This is just part of it though.
This money remains in the holding corporation’s account as a buffer against future vacancies, special assessments, or seemingly distant interest rate hikes. Over time the rents charged will continue to rise with inflation, and of course the mortgage balance will decline, setting us up for our own indexed pension income of sorts, the true point of the exercise.
In addition to this $4,800.00 return there is also the mortgage principal paydown.
The mortgage principal paydown over the first four years has consistently been $3,600.00 per year, an additional 6% return on the initial investment.
This gives us a combined 14% annual return on investment, 14% assuming the market remains stable and values flatline for three-bedroom townhomes in Port Moody, BC.
However, as population growth and inflation ensue, my initial conservative prediction of 1% appreciation of the asset is proving overly conservative.
Factoring in the 25% down payment, a 1% per year gain on the asset itself is an effective return of 4% on the initial investment. Such is the power of leverage.
In December of 2015 we were offered a net sale price of $300,000.00 for the property. This reflects a (non-compounding) 25% gain per year on the initial investment. Better than 1% so far.
Collectively we stand at a realized return of 14% per year for four years running via the positive cashflow and mortgage balance paydown. Add in the appreciation and we have a partially realized gain of closer to 39% per year.
Perhaps 2016 will bring only the 14% baseline. Perhaps the value will move up 5% from the current $300,000 and we will be running closer to 40% again. Time will tell.
How do we sleep at night with tenants in our lives? Quite well in fact.
Vacancy rates on three-bedroom units in particular, which ours is, are extremely low. The 2009 – 2015 rounds of mortgage guideline changes pushed many Lower Mainland first-time buyers from the market. Vacancies are likely to remain extremely low as many of those frustrated buyers will be forced to rent for additional years, waiting for their incomes to rise and down payment savings to grow. Not great for tenants, not bad for landlords.
Finding positive cashflow in the Lower Mainland is not easy, but it can be done.
Arguably, if one is breaking even on a monthly cash-in-over-cash-out basis, then the math on the mortgage principal pay-down by the tenant still represents newfound (based on today’s rates) potential for tremendous gain over the long haul.
Real estate investing is mostly boring, and we are OK with this. It is a ‘get-rich-slow’ proposition. Slow and boring, which, being in our forties we can live with.
Life as it turns out is not short; it is longer than most expect. Plan accordingly.
If I could go back in time and advise my then stock-market crazed twenty-something self that getting rich slowly in real estate, over say 20 years, is OK I would be further ahead today. Hopefully my sixty-something self will appreciate today’s efforts.
So get out there and slow-cook some wealth for your future self.
There is one other facet of our overall investment strategy worth noting: we personally have the benefit of owning an active operating corporation. This has allowed investments in whole life insurance policies as well, via a Corporate Asset Transfer strategy which in many ways acts like an RRSP, but thankfully never an RRIF. However I will let another expert pick up that topic in depth.
The bottom line is that, although we do in fact have an investment vehicle in our lives similar to an RRSP, our main focus moving forward will continue to be real estate, as 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 from 24 years of owning investment properties and having 24 years of success with them on a personal level. The truth is perhaps a combination thereof.