Categories
Real Estate

Feudal Landlords

Quite some time ago I posted on the temperament of a landlord and how some people just aren’t cut out for it.  My focus on that post were people who walked away from disagreements or would always give in, and how real estate investing would eat them alive.  In another post, small-scale landlords, I touched on people who think “I’m just renting out a small space, I’m not REALLY a landlord” (and how wrong they are).  Another personality (briefly touched on in the previous posts) that will cause problems in real estate investing is the feudal landlord.

I’m a free market kind of guy, and I’m sympathetic when individuals invoke their rights with regard to their personal property, including land.  As Mr. Burns illustrates on The Simpsons, there are *SOME* limits to this:

Department of Labor Officer: This power plant violates every labor law in the book. We found a missing soccer team from Brazil working in the reactor core!
Mr. Burns: That plane crashed on my property!

Unfortunately, renting property seems to bring out similar feelings from some individuals.  The best parody of this I ever read was a Craigslist post for a rental in Vancouver (I love it!).  The fact that Krystal’s commenters either believed the post, or questioned whether it’s a joke or not, shows how badly some landlords are behaving (for the record: this is CLEARLY a joke).

Some real estate authors recommend abandoning the title “landlord” as inherently feudal, and calling yourself the property owner or property manager (which I find a little misleading, it seems like you’re trying to imply you’re NOT the landlord if you call yourself the manager).

To provide a brief overview of my intended usage of feudalism, I am referring to the idea that a feudal relationship exists when someone owns land, and allows another usage of it in exchange for a set of obligations.  Historically, this existed when the monarch owned all land in the country, then gave usage of large areas to aristocratic vassals (they would be responsible to pay taxes to the monarch, fight for her in times of war, etc).  These vassals could then parcel out the land they controlled to their own vassals (who would have their own obligations in exchange for the usage of the land), all the way down to peasants who would work the land.

Interestingly, often landlords who take the feudal perspective on things, view themselves as monarchs, not as someone existing at a certain level in the hierarchy with responsibilities to those “above” them in addition to obligations due them from those “below”.  Despite “ownership” of land, such obligations do, in fact, exist.  You are typically required to pay property taxes, which is a financial responsibility imposed by the municipality the property is part of.  Owners of property are subject to the laws of the country (and province or state) they exist in, and can’t arbitrarily invent their own laws.  “A man’s home is his castle” makes a nice saying, but the law doesn’t support this.

A feudal perspective is, of course, the wrong view of the landlord / tenant relationship in the modern age.  Just because someone is renting, it doesn’t mean they have to dip their head, call the landlord “m’lord” and do whatever is demanded from them.  I also don’t think the owner is required to adopt a “the customer is always right” and give tenants whatever they want.  A landlord / tenant relationship is a legal  agreement, like any other, where each side should have their rights and responsibilities spelled out and both parties should only enter into the agreement if they’re comfortable with it.  In most places there is a default agreement (in Ontario it’s the Residential Tenancies Act) which covers both parties and which they both MUST make themselves aware of.

The consequence of adopting a feudal attitude for the landlord are all negative.  This will antagonize the tenants in a major way, and chances are they will become sticklers for the landlord to follow all relevant laws and be far less flexible or accommodating.  Turn over will increase, as tenants will be less likely to stay beyond their lease.  Both of these will probably lead to a less profitable real estate venture.

Categories
Announcements

Tiger Woods LinkStuff For Dec 10

Tiger Woods…”links”…linkstuff?  Haha – get it?  Ok, I have to admit I’ve been following the Woods sordid saga pretty closely.  My only question is why did he bother get married?  I had to wonder at the comments of one of his “friends” who was annoyed that he was seeing other girls as well.

On with the links (the other kind)

Larry MacDonald of was kind enough to mention this blog in another Globe and Mail article.  I gave some advice about RESPs.

Canadian Capitalist lists some 2009 year-end financial deadlines.

Million Dollar Journey talks about selling hope via lottery tickets.

The Financial Blogger explains how to make 6 figures a year.  I checked out his post and unfortunately, his method involves a heck of a lot of work.

Thicken My Wallet wonders when his dividends will go up.

Studenomics wrote a lengthy post comparing buying vs renting a house.

Where Does All My Money Go had an interesting post on the modified Dietz return calculation which is used to calculate portfolio performance.

ABCs of Investing explains what private equity is.

Categories
Personal Finance

Using RRSP Contribution Room to Avoid Taxes

In a comment on a recent post, AS requested information about an RRSP strategy I alluded to.  In the title, please note that I refer to AVOIDING taxes (which is legal and encouraged), not EVADING taxes (which is illegal and can get you sent to jail).  Please also note that I’m not an accountant or tax specialist, and although I’m fairly sure this is ok to do, I could be wrong (my numbers below are particularly suspect).  If anyone knows more than I do, please post any clarifications in the comments.  Also, I’ll acknowledge up front that there would be a fairly limited number of people who would be in a position to benefit from this.  Finally, Derek Foster presents a very similar strategy in his new book, so check that out if you’re intrigued by this and would like to read another take on it.  Tim Cestnick, Where Does All My Money Go? (Preet is Mr. RRSP), and  Efficient Market Canada each have more information about this idea.

We’ll all, at some point, probably be in the situation where our income will drop substantially compared to the year before.  Usually this happens when you retire (since you move from a higher working income to a lower pension), but can also happen if you get laid off (not as much fun), become a stay-at-home parent or go back to school (this happened to me).  If you know this is going to happen ahead of time, it becomes tempting to try to figure out a way to move some of your income forward, since you may be in a lower tax bracket in the second year.  Unused RRSP contribution room lets you do exactly this.

Say an Ontario man was earning $100,000 / year and was planning to head back to school.  While at school, he expects to continuing working part time and will earn $40,000.  Say he has $20K unused contribution room in his RRSP.  Using the 2009/10 tax rates, he’ll be going from a 43.41% to a 24.15% marginal tax rate.  Say on March 1st, 2010 (the RRSP contribution deadline for the 2009 tax year) he contributes the full $20k that he has in contribution room to a RRSP savings account.  This will save him (give a refund) of:

0.4341*(100,000 – 81,941) + 0.3941(81,941 – 80,000) = $8,604.36

After his taxes are submitted, he can then withdraw this money from his RRSP, at which point he’ll pay a withholding tax (like when the government withholds part of your paycheck).  HOWEVER, the withdrawal will actually be taxed as income in the year he withdrew it 2010 (he’ll get some of the withdrawal tax back when he reports it on line 129).  If his other income is $40k, he’ll incur a tax penalty of:

0.3115 * (60,000-40,726) + 0.2415 * (40,726-40,000) = $6,179.18

Therefore, overall he’s netted a tax savings of $2,425.18.  If his income in the first “high income” year was higher, or if his income in the second “low income” year was lower the benefit would be even greater.

There is a cost to doing this.  In this example, $20K of his RRSP contribution room is gone forever (you don’t get this back when you make an early withdrawal).  Derek Foster doesn’t like RRSPs and I’ve never been consistently in a high enough tax bracket to really benefit from them, so for us this isn’t that big of a deal.  HOWEVER, for most people lowering your income every year and allowing the funds within the RRSP to compound faster through tax-free growth is VERY worthwhile.  Burning $20k of contribution room to save $2.5k in taxes is of questionable benefit.

Obviously if the person in question were actually going back to school (or using the withdrawl to buy a house) there are programs like the home buyers plan and the lifelong learners plan.  To keep things (relatively) simple, I’ve ignored these.

Categories
Money

Cash For Caulkers – Make Your House Energy Efficient

A new government program was announced today which would provide “cash for caulkers” or more appropriately “cash for remodeling”.  The idea behind this program is to help improve the economy by encouraging home owners to spend money improving their homes by remodeling.

The improvements would have to fall under the “efficiency” category.  Things like insulation, windows and caulking would be eligible for the cash.  Improvements like new kitchen countertops would not be eligible.

This program might overlap with the cash for appliances program which gives money for buying more energy efficient appliances such as fridges, dryers etc.  Click here for the cash for appliances list of eligible appliances.

How much cash will be paid to the home owner?

According to Steve Nadel who is part of the initiative – the program might pay up to $12,000 in cash to each home owner.  This amount would be calculated according to how much work you have done to make your home more energy efficient.  To qualify for the maximum amount you would probably need a fairly energy-inefficient home in order to improve it a lot.

How will the cash grants be calculated?

The details of this program are not finalized but it is likely that there will be companies who will do an energy audit on your home before any work is done.  They will measure the energy efficiency of the home.  Then the home owner will add insulation, do some caulking etc and get another energy audit which will determine how much the remodeling has improved the energy efficiency of the home.  The grants would likely correspond to the increase in efficiency of the home.

One of the more specific details is that home owners might be eligible for a 50% rebate on both the price of the equipment and the installation, up to $12,000.   At this time there are no income restriction on who is eligible to receive grants from this program.

Categories
Book Review

Book Review: Stop Working too: You Still Can!

I was surprised recently when the Canadian Capitalist posted a “first impressions” review of Derek Foster’s new book, “Stop Working too:  You Still Can!”  I was surprised because I’ve reviewed two of Derek’s previous books (Lazy Investor and Money for Nothing – which includes an interview) and have mentioned him favourably a number of times on the blog.  In spite of this, I wasn’t on his e-mail announcement or press release for the new book (and, worse, wasn’t offered a free review copy).  If you’re reading this Derek:  You hurt me.  You hurt me real bad.

Never one to let a simple obstacle like not getting a free copy force me to pay for a book, I camped out for a few hours at Chapters and read the new book there.  The table of contents isn’t posted on-line anywhere, and I don’t have a copy to refer to, but in spite of this I think I can give a decent overview.

The Canadian Capitalist hit the nail on the head with each of his first impressions from flipping through the book.  This book is focused on the fundamentals of personal finance, and does a good job conveying some of the basic principles.  Derek comes out entirely against debt, which I don’t agree with, but he’s in good company (Squawkfox and Dave Ramsey).  He presents some basic ideas for paying off your mortgage more quickly (such as negotiating for a better rate, switching to bi-weekly payments, adding small extra payments whenever possible, etc).  He comes out in favour of TFSA and gives an overview of this (fairly) recent new vehicle for retirement.

I was shocked when banks started trying to sell principal-protected notes, PPNs (and at a very expensive price).  Derek spends a chapter explaining how to roll your own, which has been covered elsewhere a number of times, but is useful for anyone who feels drawn to this investment vehicle.  He presents three possible 10-year scenarios (the entire stock market goes bankrupt, the stock market stays the same value and it goes up) and illustrates how an investor 100% in equities would fare compared to someone investing in PPN.  I somewhat felt that he should have gone to greater lengths to convey that the first two scenarios are VERY, VERY improbably.  As he lays it out, someone who isn’t reading carefully might infer that the three scenarios are equally likely and make a very poor investing decisions (get married to the “benefit” of PPNs).

Towards the end Derek presents an “advanced idea” of using an RRSP to move income to the next year when your going to drop to a lower income bracket (such as when you retire).  I talked to Mike about doing the exact same thing when I went back I went back to school (so it was kinda cool to read about an investment strategy I’d come up with on my own before), however I didn’t feel this was worth inclusion in what was already a pretty short book (this would be useful to a small number of people VERY infrequently during their life).

Derek defended selling his portfolio and continuing to promote his earlier “buy and hold forever” books.  I’ve never been as offended by this as other bloggers / readers were, but I didn’t think his justification would sway many of his critics.  As the Canadian Capitalist mentions, he also acknowledges the risk of option trading, which is a good thing (although he still recommends it as a strategy a little more broadly than perhaps he should).

I think Derek may have rushed this book to the printers a bit, as there were a number of glaring typos (send me an early review copy next time Derek and I’ll even proof read it for you!).

Overall, I think this is an interesting, introductory personal finance book targeting Canadians.  In many ways this book does a better job than any of his previous books for providing a broad perspective on Derek’s view of Canadian personal finance and his recommendations for everyday (would be) investors.

“Stop Working Too: You Still Can” can be purchased from Derek Foster’s website (http://stopworking.ca) or from most major book chains.

Categories
Real Estate

Buying Co-Ops


I recently came across an article I’d read and enjoyed before on anoisette. Basically it’s a horror story of what can happen if you buy into the wrong co-op in Toronto.

When I first started hunting for my first condo, I kept coming across dirt cheap properties (they’d be in great areas, look wonderful and have a low price). I’d ask my agent why she wasn’t showing me these, and she kept saying “they’re co-ops, I never recommend clients buy in co-ops”. I was suspicious about this, and the main rationale she gave me against them is that it’s hard to get a mortgage, so you need to put down 35% (it is considered a different kind of non-mortgage loan).

The reason for this, as was explained to me, is that with a condo you own a deed to that space in that building. Because of this, you can borrow against the deed and get a mortgage, much as you would with a single family home. In the case of a co-op, you own a SHARE of the corporation, which entitles you to exclusive access to one of the units. When you borrow money to buy the place, you’re using this share as equity (much as you could use a stock share to borrow money or pawn your guitar).

I’m not totally sure why banks like condos but hate co-ops, but apparently there are more legal requirements about how a condo is run, and they have more options to foreclose. My agent kept telling me that I’d need lots of money for a down payment, and becuase any buyers would have the same problem, I’d have a tough time selling it down the road.

Since I was (and am) planning to hold the properties I buy for the long-term, the selling argument didn’t bother me. The massive down payment sucked, but I reasoned that if it’s tough for me to purchase, this is a “barrier to entry” that would make it tough for other people to purchase as well (and help me get a good deal).

One strategy I also considered was to offer a vendor-take-back mortgage if I ever wanted to sell, then I’d be able to get a higher price for the property by making it easier for people to buy (I’m happy to get paid over an extended period instead of upfront as long as the interest rate is reasonable for the risk I’m assuming).

In the end, this article helped convince me that a building could go to the dogs and I could be stuck with a massive problem. Part of me still feels that this risk is reflected in the price (why co-ops are so cheap), and that by doing your due dilligence you could determine if a building was well run or not (and perhaps be willing to step in and protect your investment if you saw that the building was going down hill).

Has anyone had experience living or investing in a co-op in Canada?  How did it work out for you?

Categories
Opinion

Threats as a Negotiation Strategy

I grew up with an older brother and part of that experience was learning how to deal with disagreements. One thing that I think we both discovered fairly early on is that threats are rarely a good way to get what you want. I’m amazed at how often people try to use them within an ongoing relationship and am perplexed that they haven’t clued in to how ineffective they are.

To start, I’d like to clarify what I mean by a threat (people have commented that it’s odd when I give definitions at the beginning of a post, but commenters regularly misunderstand what I was getting at, sometimes believing I’ve asserted the exact opposite of what I intended, so it’s worthwhile to take the time to be clear). A threat CAN be physical violence (“do this or I’ll hurt you”), but it can also be removing something good (“do this or no desert for you”), changing the relationship (“do this or I’ll break up with you”) or emotional (“do this or I’ll be angry with you”).  Heck, you can even threaten SELF-HARM (“Pay my rent or I’m going to be living on the street”) and use the fact that someone cares about you against them (I personally find this particularly odious).

I think in each case, it sometimes works to get you what you want, but it comes at a cost of damaging the underlying relationship. This can be fine in some situations, such as a one-off transaction with a street vendor while on vacation (“give me a better price or I’m walking away”), but usually the long term hurt isn’t worth any (potential) short term gain.

I love the board game “Risk” (and putting modesty aside I’m fairly good at it). Typically in Risk it’s important to avoid two-front wars, and if you can get the other players to leave you alone while you hammer on one of them (ideally with help from at least one other player), you’re half-way to winning.  Sometimes when I’d hammered away at someone and left them in tatters, I’d tell them I’d let them live if they promised not to attack me (a threat) or to join me in attacking someone else.  This would let me focus on a bigger threat, instead of committing resources to wiping them out completely.  They’d either refuse, and I’d have to wipe them out, or they’d agree and betray me at the earliest possible opportunity (Risk cards allow a weak player to explode later in the game).

The realization I eventually had was, it was a bigger cost to their ego to feel like they’d given in to my bullying them than it was worth for them to stay in the game.  They’d rather reject my demand (and suffer the consequences) than feel like they’d “given in”.  What’s bizarre is even when they stakes are much higher than a board game, people still have the same reaction.  For a world leader to get on the TV and proclaim “We do NOT negotiate with terrorists” makes them look strong and powerful, when in fact, they may be doing a disservice to those they represent.

I contacted some property owners who had units which had been available for rent for an extended period locally (over 4 months).  The owners were eager to talk about selling, but quickly made it clear that they expected me to jump through hoops to buy from them.  They were clearly at a disadvantage in the negotiation (since we both knew their property was sitting empty costing them money each month), but they were so desperate to strengthen their position that I wasn’t able to reach an agreement with any of them (one wouldn’t even let me make an offer – he demand the offer exceed “market rate” but couldn’t tell me what he thought market rate was or how he would calculate it).

Within an employment context, threats to fire or quit are EXTREMELY harmful.  I’ve basically taken the position that I don’t mention quitting until I’m 100% sure I’m leaving.  I’ll try to talk about problems, but I never would mention quitting until I was certain I would leave.  At a number of workplaces they tried to convince me to stay, but at that point I would be a lame duck.  They’re going to remember I was ready to leave, and that will affect any future promotions or assignments.  One retired man I talked to once told me that in all his years of working, he’d found when someone threatened to quit and were convinced by management to stay, they’d usually be fired within 6 months.  Management convinced them to stay so they’d have more time to transition them out of the role they were in, not because they wanted to keep the employee.  Similarly with threats to fire someone, how many times will they need to hear that before they decide it’s better to get another job before it happens?

There’s a clear moral reason against threats (it’s not a particularly honourable way to negotiate), but on top of that they aren’t effective at getting what you want.  On top of that, it makes it harder to negotiate with the person in the future.  If there’s ever a good time to use a threat in a negotiation, it’s very rare (perhaps in life or dead survival situations or one-off interactions like the street vendor mentioned above).

Reacting to threats is also a funny situation.  It’s always tempting (and so very satisfying) to say your own variation of “I don’t negotiate with terrorists” and shut down talks after someone has threatened you.  I think this is less than optimal as well, because you lose any options that might have come out of negotiations with that person.  Giving in to threats is very dangerous (you’ve validated to the other person that threats are a good way to get what they want from you, and they’ll be more likely to threaten in the future).  Setting aside your ego and continuing the interaction can still possibly lead to agreement.  I gave up on the for sale by owners after they’d threatened me, but I should have kept the lines of communication open and told them that I want to buy their property if they decide to sell in the future.

Categories
Investing

Why I Quit The Smith Maneuver

Almost 3 years ago I started up a Smith Maneuver leveraged investing plan which involved borrowing money using an investment loan (home equity line of credit) to invest in dividend stocks.  I wrote extensively about this process (see list at the bottom of page).  Over time I have seen this account go through some unbelievable volatility, have almost no dividend increases and watched interest rates plummet which meant that the account was quite profitable on a net cash flow basis.

Last week I decided to sell all the stocks in the leveraged investment account and pay off the line of credit loan.  I had been debating for a while if I should continue the leveraged plan and since it was at a point where there was a small capital gain, it made the decision very easy from a psychological point of view.

Why did I end the Smith Maneuver plan?

A lot of things had changed for me in the 3 years since I started the plan.  My opinion of leveraged investing hasn’t really changed but I didn’t feel that it was a good fit for my situation anymore.

Extra risk. When I started the plan I wanted some extra risk.  The problem is that as time went on and it became apparent that we were going to be a single income family and my company had several rounds of layoffs in the past year – my appetite for that extra risk diminished.

Another issue concerning risk is that when I started the plan, my portfolio was 80% equities and 20% bonds.  It didn’t occur to me until much later that adding leverage to a portfolio that isn’t 100% equities doensn’t make any sense.  All I had to do to increase risk was to decrease the percentage of bonds in my portfolio.  If your portfolio is 100% equities and you still want to add some risk then using leverage is a good tool for that.

Hassle – Having a leveraged investment account means doing a bit of work.  You have to open the account, buy stocks, transfer money, keep track of purchases for ACB values.  Transfer dividends out of the account to help pay the interest.  You also have to account for the earned dividends and interest payments when you file your taxes.  This isn’t a huge amount of work but again, my life has changed in the last few years – one more child plus a home business which takes time means that I’m a lot less inclined to want to do extra financial activities unless there is a clear benefit.

Motivation – Another thing that changed was my motivation – at this point in time we have a decent standard of living.  It’s likely that I’ll be able to retire at a reasonable age with an adequate income so the question is – why bother with extra risk?  Extra money is nice but if there is a downside then it’s not worth it for me.

Would I recommend doing or not doing leveraged investing?

My opinion on borrowing to invest hasn’t changed much – I think it is a valid tool to increase your portfolio risk as well as make extra purchases when the market is down.  Just be prepared for a bit of extra work.  Handling volatility is something that I have no problem with but if you have a hard time watching your unleveraged portfolio go down in value then be prepared for the fact that watching a leveraged portfolio go down is much more difficult.

The original leveraged investing plan

This post lays out the grand plan for leveraged investing.  I had a chuckle seeing Frugal Trader’s comment about my projected borrowing costs of 6% – he suggested increasing that estimate a bit.  As it turned out the borrowing costs were much lower than both of us anticipated.

The risks of leveraged investing were discussed in great detail.
Here is one risk which I found amusing

Future growth rate of dividends: If this doesn’t happen then the plan will fail. Not much I can do here other than to try to pick good companies with proven histories of both paying dividends and increasing them. Based on the last 10 years this looks like a slam dunk. But as William Bernstein wrote in Four Pillars of Investing “Ignore the last ten years” when looking at trends. I’ll have to ignore William on this one.

Lesson learned – Don’t ever ignore William Bernstein!

Interest rate exposure.  This is the risk I was most worried about and ironically it was a non-factor since interest went down and stayed down.  This is still a risk factor for the future however.

Conclusion

I’m glad I did the leveraged investing plan, it was quite interesting and I learned a lot.  My advice to anyone thinking about it is to start small and make sure you are comfortable with all the different aspects of leveraged investing before you go in deeper.