26 Jan 2016
Collapsing Our RRSP & Investing In Vancouver Real Estate – Annual Update
Each year I update the data in this post, the rents increase, the asset value changes, and so the rate of return changes. I look forward to writing twenty more years of updates on this specific property.
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 we ever had over stocks or mutual funds. The departure of an aspiring rock-star tenant clearly had less impact on the value of our investment than the departure of a rock-star CFO can have on a company and its share price. Overall movement in the value real estate tends to be gradual and somewhat simpler to predict than corporate shares.
There is a certain confidence hard to duplicate around a bricks and mortar investment as opposed to 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 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. There is no panic ‘sell’ button to hit creating a frenzy of sale with real estate.
It tends to be more slow-cooking. Things happen gradually.
Based on these and other conclusions, my wife and I took what might seem like a radical step and 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 were minor 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 cash flow, as we have since day one. The $4,800.00 of positive cash flow in our hands each year represents an 8% 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 money remains in the holding corporation’s bank account as a buffer against future vacancies, special assessments or seemingly distant 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.
This $4800.00, or 8% return, is over and above 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 flat for three-bedroom townhomes in Port Moody
However, there is every indication that population growth and inflation will ensue and my initial conservative prediction was that we would see appreciation in the asset of at least 1% per year.
One percent per year 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.
Collectively we stand at a realized return of 14% per year for four years running and a total unrealized gain of closer to 39% per year.
Perhaps 2016 will bring only the 14% baseline, based on it being tenanted. Perhaps the value will move up 5% from the current $300,000 and we will be running closer to 40% again. Time will tell.
Was there temptation to hit the sell button at $300,000? Yes, there was a flicker. But what do we do with the proceeds that would work as well as this? We have time to figure that out, the “for sale” sign can be put up at any point.
Or we could do a refinance transaction, triggered at any point, to pull 80% of the new found equity, and previously paid down balance from the property, to be used on another investment. It is worth noting that there are no tax implications on a refinance, and this would effectively put all of our original investment funds back into our hands.
We would then have an appreciating asset, paying us $4,800.00 per year, in which we have none of our own original money. Imagine repeating that process ten times over. I am pondering it more deeply myself as I write these words.
The flexibility to leave the investment as is, to refinance it and access capital, or to sell it is a wonderful thing. Options abound!
So, one might ask 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 – 2015 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 saving to grow.
Finding positive cash flow 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, 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 fast… it is longer than we think.
Too bad I cannot go back in time and advise my stock-market crazed twenty-something self that getting rich slowly in real estate, over say 20 years, would have been fine. 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. All I know is that year after year rents increase, mortgage balances decrease, and slowly but steadily our wealth increases. Boring, predictable, and as I get older…much more appealing.