She’s 38. He’s 45. The kid’s five. “I stumbled upon your blog today and read through the scenarios that you post for others to comment on,” Lisa says. “I think I might need a reality check, so I’d appreciate it if you’d do me the honour.”
Lisa, Lisa. Are you sure?
The house in Halifax is worth $225,000, with $145K left on the mortgage. Recent renos dinged the LOC for forty grand, and they have $70,000 in combined RRSPs. “We do not budget our money wisely. We are learning but it’s been a steep learning curve for us as we kept our finances separate until about 2 years ago. We do struggle with cash flow from time to time, although we certainly earn enough to meet our needs.”
“We are very interested in buying an investment property which we feel would add good diversification to our portfolio. We are considering borrowing against our home equity for a downpayment of 20%. Financially, I’m hesitant to make the plunge and I’m a little wary of doing so in particular because of our line of credit debt. However, we can still find lower-than-market priced properties in convenient areas of the city. The consolation is that if we find ourselves “over our heads” we could off-load the property quickly and at a profit. I’d appreciate your reality check and that of your readers. Thanks!”
Lisa adds that it’s different in Halifax (of course) due to the recent announcement Canada’s new war ships will be partially built there. While that’s cool, the province has troubles. The NDP premier recently warned of a ‘turbulent’ year, with growth barely eking above 1%, and the government’s desperation is showing as it tries to bail out jobs at failing mills. Of course, there’s also the highest HST in the nation (at least among provinces that matter).
But apart from that, nautical Lisa and her hubs have eighty thousand in equity, forty in debt and seventy in a tax shelter. That’s a net worth of $110,000 – which is hardly a success by the time you hit your forties. Of that, 73% is in one asset – their house. So how the heck can buying another house be ‘diversification’?
In fact, these misguided souls are proposing to suck off at least half of the equity they have to use for a downpayment on a seedy rental property. By the time it’s over, their debt will have ballooned and risk swollen, as they stuff even more eggs in one basket. Plus, with current rents in Halifax (like the rest of the country) it’s virtually impossible to buy a SFH and be cash-flow positive, even with dirt-cheap mortgage rates.
I mean, has this pathetic blog ever carried a more naive statement than this? – “If we find ourselves ‘over our heads’ we could off-load the property quickly and at a profit.”
This is what I wrote about yesterday. The Nortel moment. That point in time when people are blinded. Together. Wilfully. No longer can they see the risk surrounding them since they’re in a crowd.
Lisa, my little sailor, abandon ship. Nobody gets rich by taking on more debt with scant, if any, net income. The borrowed downpayment will be at floating rates against your home. The rental property will have 100% financing. Not only will the numbers not work, but you’re exposing yourself to interest rate, economic and market risk.
A batch of new navy tubs will do nothing for the HRM housing market but offset some of the gathering economic weakness. Real estate in the city will be impacted along with every other urban market in the inevitable correction. Nothing turns illiquid faster than residential real estate. And the little orgy of cheapo mortgage rates visited upon us this week by hungry bankers is only going to make the future worse – sucking in more victims like you.
Lisa, babe, if you don’t believe me, listen to this. Even the bank economists – at least those allowed out on day parole – are warning you off.
- “I think it is fairly clear that home prices are overdone in certain urban areas. The map I’ve done says if we ever return to normal interest rates, home prices are 15 per cent too high,” says RBC’s Eric Lascelles said.
- “If indebtedness continues to grow at its current pace, the household debt-to-income ratio will reach 160 per cent by 2013 – the level hit when U.S. households got into trouble,” says TD’s Diana Petramala.
- “Corrections in housing do occur and they can occur suddenly, so while this is not a red alert, we are not flashing green, either,” says BMO’s Sherry Cooper. BTW Lisa, Sherry is selling her mansion in Toronto – bailing out – doing the opposite of you.
If you want to do something smart, pay off your non-deductible line of credit. If you’re hot to invest for an income stream, slap your extra income into a portfolio of preferred shares and REITs – the returns will be fatter and the taxes skinnier. But if you’re moist and horny to get another house, there’s nothing this over-sexed blog can do to help.
Lisa. It was an honour.