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Vancouver Real Estate & Our Vanishing RRSP
Originally posted on May 4, 2013. Please enjoy an updated and expanded version.
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 and flexibility over our real estate investments than we ever had over mutual funds parked in the equity markets. Our rock-star tenants’ departure clearly had less impact on the value of our investment than the departure of a rock-star CFO can have on a company. Overall movement in the value real estate tends to be gradual and somewhat simpler to predict than that of a corporate share certificate.
There is a certain confidence hard to duplicate around a bricks and mortar investment as opposed to ones and zeros.
In the stock market, a loss of confidence can have an immediate and real impact on your net worth within minutes. Even a false Tweet can trigger a tumble.
Tweets do not rock the value of real estate. The impact of market sentiment is slower and 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.
This is like slow-cooking. Things happen gradually.
Based on these and other conclusions, my wife and I took what felt like a pretty radical step and cashed out our entire RRSP in the spring of 2012 and invested it all in a piece of real estate.
I plan to update this post with each passing year.
In the spring of 2012 we put $60K down on a $240K townhouse. Here are the numbers as they stand today:
We now have a positive cashflow of $400.00 per month, which I liken to an 8% ‘dividend’. The $4800.00 of positive cash flow in our hands each year represents an 8% return on the $60,000 invested in the property.
This money remains in the holding corporation’s 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 continue to rise with inflation, and of course the mortgage balance will decline, setting us up for our own indexed pension income of sorts.
… And Vancouver real estate
This $4800.00 return is over and above the mortgage principal paydown.
The mortgage principal paydown over the first three years has consistently been $3,600.00 per year. Another 6% return on the initial investment.
This gives us a 14% annual return, assuming the market remains stable and values flat. For three-bedroom townhomes in Port Moody, I have little doubt population growth and inflation will ensure. More likely we will see appreciation in the asset of at least 1% per year.
1% per year on the asset itself is 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 value, or 12% based on our investment.
Collectively we stand to see a return for 2015 of 28%.
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. 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 of them 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 principal 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 forties, I can live with. (At least, more so than when I was in my twenties—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.
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 and it is all about ‘building wealth’.
So get out there an build some wealth.
Full disclosure
There is one other facet of our overall investment strategy worth noting: we personally have the benefit of being incorporated, and thus we do have some diversification implemented around our investments 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.
Thanks for your time.
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