Our vanishing RRSP
In the Spring of 2012 after a 15 year roller coaster ride in 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 decided to take a harder look at our RRSP investment strategy. Our conversations around investing always came back to the one area in which we always had great success; Vancouver Real Estate.
Personally I have always felt a greater amount of control and flexibility over my Real Estate investments than I did over funds parked in the Equity markets. My RockStar tenants departure is less likely to have an impact on the value of my investment than the departure of a RockStar CFO or fund manager might. Overall movement in the value of the asset tends to be gradual and far simpler to predict when it is an actual ‘brick and mortar’ dwelling, as opposed to an investment in a piece paper or 1’s and 0’s.
In the stock market a loss of confidence can have an immediate and real impact on your net worth, as we recently saw even a false tweet can trigger this. With Real Estate the impact of market sentiment is slower and less radical due to the product itself being far less liquid.
We took what felt like a pretty radical step and cashed out our entire RRSP and invested it all in Real Estate.
In the spring of 2012 we put 60K down on a 240K townhouse.
On this investment property we now have a positive Cashflow of 250.00 per month, which I liken to a 5% dividend. That money remains in the Holding Corps bank account as a buffer against vacancies, special assessments, and future interest rate hikes. Also worth noting is that over time the rents charged will rise, yet the mortgage balance will decline.
The Cherry on Top;
We also have a principle reduction of 300.00 per month, this grows by a few dollars mor with each passing month. This translates into a ~6% gain assuming that the asset (the townhouse) maintains a static value.
The Cherry on Top of the other Cherry;
A 2% gain (the historic average in Vancouver) on the asset each year would equate to a further 8% gain on the original investment amount. We only put 25% down. The beauty of leverage.
This is an annual appreciation of somewhere between 5% & 19%.
Factoring in the regular strata fees, and the large contingency fund in this specific complex, maintenance costs should be well accounted for moving forward.
Vacancy rates on 3 bedroom units in particular, which ours is, are extremely low. With the recent rounds of mortgage guideline changes changes vacancies are likely to remain 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. In my opinion if one is at least breaking even on a monthly cash basis then the math on the mortgage 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 slowly thing. Slow and boring, which as I am now in my 40’s I can live with. 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.
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. 🙂
There is one another facet of our overall investment strategy worth noting, we do have the benefit of being incorporated and as such have implemented a Corporate Asset Transfer strategy which in many ways acts like an RRSP – however I will let another expert pick that topic up in depth. The bottom line is that we do in fact still have an investment vehicle in our lives similar to an RRSP, however it is significantly less volatile than an equities account.
Our main focus moving forward will continue to be Real Estate.
Thanks for your time.
AMP – Accredited Mortgage Professional
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