Author: Mr. Cheap

Categories
Business Ideas

Economy Condos

Typically condos are made to be fairly luxurious accommodations.  As well as trendy features like granite counters and spa washrooms, they’ll sometimes have concierges and martini bars.  Each of these features has a cost, which gets passed along to the condo owners, typically as a high monthly condo fee.  As an alternative, this idea is to build ultra-economy condos in a convenient location of a large city, and offer them to people who want to own property at a rock-bottom price.

In terms of ultra-economy, I’m talking very utilitarian, uncool places to live.  Many of the internal units might not have windows, perhaps the size would be in the 300-400 foot range, no balconies, no in-unit laundry machines, etc.  Each would include a washroom, small kitchen area and a place to live and sleep.

I’m not claiming this should be where everyone live.  It might be a Pied-à-terre for people who work in the city (but own property elsewhere) or housing for a student or young professional.  It could be corporate housing for a law firm to offer to young associates when they first move to the city (or for them to use to sleep at if they’re working 18 hour days).  If someone is firmly of the mindset that they want to own property and not “throw away rent money“, this might appeal to them. The vast majority of people WOULDN’T find this appealing, but for a whole city, you should be able to find a building full of people who would.

The location in town should be somewhere fairly accessible to public transit (since the people who would want to live here would also be the type of people don’t want to own a car.  It definitely doesn’t need to be (and shouldn’t be) a trendy area.

The marketing would focus purely on the financial element of the building instead of trying to sell it as a lifestyle.

For this post, or any other of the wacky business ideas I post, obviously I’m releasing any ownership claims I may have over these ideas. If you like something I post and feel like you can make money from it, please feel free to do so! Let me know when you’re opening and we’ll do a post on it to give you some free advertising.

Categories
Personal Finance

Going Back to School During Tough Times

There’s a saying that when the economy turns bad, techies go to grad school which has definitely been true for me.  After the dot-com boom ended in flames, I headed back to school for my Masters, and by coincidence, soon after I started my PhD things turned south.  It worked out just about perfectly for my Masters, as 16 months later I graduated and companies had started hiring again.

If you want to read more about grad school from someone who has been through it all – check out the new site Ivory Tower Unlocked.

I have friends graduating, and finding academic jobs is VERY tough right now.  It’s a better time to be starting a program than finishing one, and if I was at the end of my undergrad I’d  consider carrying on to a Masters if I had the opportunity (and have been encouraging my PhD friends to consider doing a post-doc).

MBA programs are graduate school for business types.  They’re typically advertised as worthwhile after you’ve spent a few years in the work force, then want to put your career advancement on steroids.  Enough people bought into this that they’ve flooded the market with MBAs.  If the program content is good (makes you a better businessman) or if it’s now the minimum qualification needed to advance (an MBA is the new BA for upwardly mobile executives) it may still would be worthwhile going through a program.

Some people, talking informally, will suggest that the real value of an MBA program comes not from the classwork, but from having a chance to spend extended periods of time with people who are serious about moving up the corporate ladder.  Classmates today will be your network tomorrow, referring jobs to each other (as you reminisce about spending an all-nighter preparing an accounting project or getting drunk together on a Friday afternoon after your last exam).

There are MBA programs at a number of Canadian universities (Queen’s, York, Toronto, Ryerson) and internationally, with varying levels of prestige (and tuition).  Each asserts that their program will more than pay for itself in increased salary over the course of a career.  I think this is probably true for people who know that they want to be managers and spend a couple decades playing corporate politics.  If someone is happy doing specialized work (like a techie), and isn’t interested in becoming management, they should probably do graduate work in their own area.  I’m suspicious that entrepreneurs would be better served using their tuition money as seed capital for a business venture, but John T. Reed often refers to concepts he learned getting his MBA at Harvard Business School that he feels made him a better real estate investor, so there might be value in non-corporate areas of your life as well.

One of my friends is involved with The Rotman School of Business at the University of Toronto.  She’s working on a program which lets students get a taste of what an MBA would be like, by offering 8 three hour classes during evenings in the month of May.  Professors from the school lecture on their area of specialization and let a student know what it would be like if they took a program at the school.  It costs $3000, but half of this amount is credited towards tuition if the student then takes CERTAIN full programs at the school.  It’s like a less expensive “trial version” of an MBA.

While I’m totally biased, I definitely think this is a good way for someone living in Toronto to get a taste for what doing an MBA would be like.  If they’re on the fence, this could tell them (at a much lower cost) whether it’s worth making the time and money investment in an MBA or not.  Often companies are willing to foot the bill for education if you can sell them on how it would benefit the company over the long term.

Full detail about the program (and how to apply or get more information) is avaiable here.

The Financial Blogger is currently working on an MBA and has a number of posts on the subject.

For any readers who have done an MBA, how did you enjoy the program and did you think it was worth taking it?

Categories
Business Ideas

Wacky Business Idea #17: Timestamp, Inc. / Notary.com

Notaries are used to authenticate documents, providing additional weight that they mean what they say they do (and are between the people they’re supposedly between).  I had this idea back during the dot-com era, and the core of it is that you build a company who’s primary purpose is to authenticate that documents were created at specific times (and to a lesser degree, by specific people).

This could, in theory, be used for legal documents and whatnot, but in the early stages might find usages such as professionals who are required by law to keep notes (such as psychologists, medical doctors,  and lawyers I believe).  Having documents provided with a time stamp authentication would prove that the professional hasn’t altered the document after a problem occurred.

To set up this sort of company, you’d need to focus on establishing your site as very accurately recording time and identity (or being very precise about what you’re verifying as “the identity” it could be that you’re authenticating based on an e-mail address or phone number).  Security would be a major issue, and great lengths would need to be taken to show that it would be very difficult for someone to forge a document in your system.  You would also need to convince users that your system will continue to exists indefinitely.  If there’s any doubts about your ability to stay in business it would severely undermine you.  Obviously you’d want to have the actual data encrypted (so documents are only ever seen if the authors release them), and multiple redundancy (at multiple locations) so data is never lost.

This might work as simply as a user uploads a document along with an e-mail address and/or a phone number (with a password).  The system automatically sends out a confirmation e-mail (which they click the authentication link and enter the password).  The phone number would be called and the password requested.  After this, the system would verify that the document was submitted AT THAT TIME by someone who had access to THAT e-mail or phone-number.  If the system had a login and password as well this wouldn’t PERFECTLY prove their identify (there would be ways to defeat the security of each identifier), but it would take A LOT of work to beat all three (and in my opinion would be at least as secure as notaries – faking ID would be easier than defeating this type of system).

Documents could be released by a code which, after the author chose to release it, could be given to anyone who could then see the document on the site and verify its contents and date of creation.  Options to selectively release parts of documents would also be possible.  Extra features like automatically releasing the document to specific e-mail addresses (or mailing hard copies to specific addresses) at some point in the future or using a dead man switch could be optionally offered.

As the system became more accepted, more usages could be built on top of it (and eventually it could become a platform offering authentication of documents in a legally neutral way – not tied to any particular country or legal system).  Perhaps people could form a contract by uploading identical copies of an electronic document and both authenticating their copies.  The system could tie them together and let both parties know that the other has authenticated it.

In terms of a business model, I’d let users store small documents for free (and pay a fee to store larger documents), and pay a modest fee to retrieve/authenticate them.  This would be billed as getting all the benefits, and only having to pay it there’s a problem (and you need to produce the authenticated document).

Categories
Investing

Using Margin to Lower Trading Costs

A great way to invest is to make regular investments.  Million Dollar Journey recently outlined 4 ways to invest small amounts of money each month, all of which are solid and worth considering.  I agree with his 1% rule (the trading commission should never exceed 1% of the value of the trade), which can make it difficult to execute trades even with low cost brokers for people starting out with investing.

One idea to get around this is to use margin.  Let’s assume that we are using a brokerage that charges $4.95 / trade and that we have $150 / month to invest.  Let’s also assume that we’re aware of the risks of buying on margin and we want to keep our account, at most, at 10% on margin (a margin call occurs when your account exceeds 70% on margin). To keep things simple, we’ll ignore changes in stock value, dividends, interest (paid or collected) and brokerage fees.

Using the 1% rule, as long as we buy at least $495 of stock we’ll keep our transactions costs at or below 1%.  After 4 months we’ll have saved $600 and can make our first purchase.

Now say, instead, that after THREE months we transfer over the $450 to our brokerage account, then buy $495 worth of stock (perhaps a nice, highly-diversified ETF).  This would put us $45 on margin, or 10% (45/450) of our account.

Month Bank Account Stock Margin debt
January $150 $0 $0
February $300 $0 $0
March $0 $495 $45

Next month we transfer $45 to pay off the margin loan, then start accumulating money to buy again. After we have $405 we can afford another purchase (since we can now go up to $90 on margin and stay under our 10% rules).

Month Bank Account Stock Margin debt
April $105 $495 $0
May $255 $495 $0
June $0 $990 $90

Eventually (in this scenario in the 3rd year of investing) we’ll get to the point where we can just keep paying off the margin debt, and every time it is paid off, purchase 10% more of our portfolio worth.  This lets us put money into our portfolio every month at no cost, slowly lowers our transaction costs as a percentage of purchase (since 10% of the portfolio SHOULD be an ever increasing amount) and take advantage of dollar cost averaging.  We own the stock we want sooner, and can get a tax deduction for the interest paid on the margin debt (and avoid paying a higher tax rate on the interest we would have earned if we saved up to make purchases in a high-interest savings account).

There is also the added benefit that if we ever can’t make our monthly payment, it’s not a big deal (since the margin debt will always be conservative compared to the size of the portfolio).  Conversely, if we have a windfall, it can be immediately applied to wipe out the  margin debt (or add to the portfolio and increase the margin amount).

The dangers of this approach are quite slim, as our portfolio would have to drop by over 80% before we were in any danger of a margin call (which would be unlikely to happen in a month or two unless we were investing in VERY volatile equities).

I don’t do this and I don’t necessarily advocated others do it, but if people want to minimize their fees, while being able to add small, regular amounts to a stock portfolio I think this would be a reasonable way to do so.  Another approach is Mike’s ETF vs. Index Fund strategy (which involves simple, regular investments in index funds until a set amount is reached, depending on fees and MERs, at which point the funds are sold and ETFs are bought with the proceeds – very similar to MDJ’s idea #4).

Do you make monthly contributions to an investment account?  How do you do so to minimize fees?

Categories
Real Estate

Rent-to-Own

Rent-to-own (also known as lease-option) is a popular real estate strategy in the US and has been making its way into Canada in “get-rich-quick through real estate” circles.

This agreement, between a landlord and tenant, involves the landlord selling the tenant the OPTION to buy the property at a fixed price at some point in the future (much like a call option for stocks).  Often there will be an initial payment as well as a portion of the monthly rent payments being credited to the tenant.  This might be useful for a tenant who has trouble getting a down payment together (but can afford to put away a little bit each month) or a buyer with credit issues that they’re working out (who expects to be in a position to buy within the option period).

As an example, pretend I’m renting you my condo (which has been assessed at $156K) for $1350 / month.  We agree that I will give you the OPTION (not the obligation) to purchase it for $160K at any time for the next 3 years, with an initial payment of $5K with $150 from each rent payment being credited towards the down payment.  At the end of 3 years say the condo is now worth $165K and you have accumulated a $10,400 down payment (5000+150*12*3).  You arrange for a 5% down mortgage, using the credit you’ve accumulated over the 3 years (which is worth 6.5% of the $160K ) with me using the other 1.5% to cover your closing costs (so you pay nothing more out of pocket and are now the owner of the property).

Say, instead, the real estate market tanks and you decide you don’t want to pay $160K for a condo now worth $130K, you don’t execute the option and at the end of the 3 years there are no further obligations (although the $10,400 is forfeit, the tenant does NOT get it back).

From the sellers perspective, they get to either sell at a price acceptable to them or earn a premium over market rental rates if the sale doesn’t go through.  Additionally, the tenants will take better care of the property (since they expect to own it) and will be very motivated to pay rent on time and honour their lease (since they could jeopardize the purchase if they don’t).

From one perspective, between financially sophisticated individuals, this is a reasonable way to allow the seller to earn a premium by acting like an insurance company, taking on more risk in exchange for payment.  Sadly, rent-to-own is often instead used to take advantage of unsophisticated renters who want to become buyers but don’t have the means.

Often the tenant who isn’t in a position to buy at the beginning of the lease term STILL won’t be at the end of it (and will be $10K poorer for having gone through the exercise).  Unsurprisingly tenants will be annoyed when this money is gone, and will often become destructive or difficult tenants if they aren’t able to close on the deal (and the seller refuses to return their option payments).

From the sellers position it’s a pretty good deal, as they can set the sale price higher than they expect it will be worth within the option period, and they get paid a premium over what they’d usually earn in rent.  The law is often on their side if the market takes off and they decide to not honour the deal and fight the sale.  That being said, judges will NOT be impressed by these sorts of shenanigans and will be looking for any excuse to rule in the tenant’s favour.

I saw a classified ad from a woman who wanted to do a rent-to-own deal (with her as the tenant) in Toronto so I contacted her.  Turns out her expectation was that she’d pay market rent, but her ENTIRE rent would be credited towards the eventual purchase of the property.  Why she would expect any landlord to agree to this is beyond me, but she did.

I talked to a lawyer friend who talked to a lawyer friends of her’s who specializes in real estate and they were of the opinion that lease-options were too untested legally in Canada to get into unless you were doing them in a big way (in which case they felt it might be worth the expense to research all the legal ramifications and develop the right contracts to make it a business).  Their advice was to do a vendor-take-back mortgage if I wanted to provide seller financing.  In the US, where these deals are far more common, there are also legal and ethical pitfalls.  John T. Reed outlines some of them in an article about lease options (and offers a report for sale with more info).

More information about lease options is available here (general overview), here (with a bunch of links to more articles at the bottom) and here (details lease options in BC with a couple of quotes from Mr. Reed).

Categories
Opinion

Who Do You Trust?

Almost two years ago Promod Sharma at Riscario Insider wrote a post, partially in response to something I had written, about “Who can you trust?“.  Promod suggests referrals as a way to trust someone you start doing business with, and in the comments I mused about following the reasoning of people you first encounter, and the more you agree with them, the more you can trust them in the future and the more times you catch them making questionable assertions the less you can trust them in the future:

I’d say another good way to find who to trust (referrals is a great option) is to follow their line of thinking (don’t just turn off your brain) and increase your trust as you agree with more of what they say. John T. Reed’s thinking is very well founded and he provides extensive supporting evidence. I don’t *have* to trust him, I can follow his reasoning.

Some Christian’s who don’t like evolution will talk about Darwin recanting on his deathbed and converting to Christianity. The assumption here is “don’t trust what this guy wrote, he took it back later in his life”. The thing is, we don’t *have* to trust Darwin, his reasoning stands on its own. Even if he said “I was just kidding about that whole Origin of the Species joke” we don’t need to trust the man to believe the information (whereas a cornerstone of faith is that you have to trust the messenger since no evidence is offered).

Once you’ve agreed enough with what someone has to say when they talk about things you understand, you can start believing them (trusting them) when they tell you their conclusions about things you *don’t* understand (although the best case scenario would be to get them to explain these things to you such that you agree with them because you understand the issue and no longer have to take their conclusion on “trust”).

A while back I responded to a classified ad by a woman who was looking for a real estate guru in Kitchener-Waterloo.  I warned her that her post had a good chance of attracting people who were trying to take advantage of her and to be careful (and pointed her to some of my real estate posts).  I recommended she read as much as she could for free on-line (and in books) before she started paying people to help her.  She asked me specifically what I thought about Robert Allen, who she had read and thought was good, and I directed her to John T. Reed’s pages about him.  After she looked at them she responded with:

I read Reed’s blog before.. but to tell you the truth.. I didn’t like his tactics.. he is no different then Allen.. kind of the same idea, lot’s of: I will show you.. I will teach you.. I will explain.. but just buy this particular book that cost $xxx, if you want to know this then it will cost you $xxx.. again.. He is putting someone else’s face down and trying to stay on top by claiming that he got “the Secret” and “The knowledge”.. so pay the price and read it

I found her response somewhat perplexing. To equate Allen and Reed seemed like saying Albert Einstein is the same as Ben Stein since they’re both Jewish intellectuals (and their names end in stein) or Macauly Caulkin is the same as Lucy Liu because they’re both actors.  Where do you begin to differentiate two people who are *SO* different?

Some might say that citing Reed shows that I’ve accepted him as my guru, which is no different than people in the Whitney, Trump or Kiyosaki camps.  I think the primary difference is that Reed first of all acknowledges the bias in a number of articles (not in this one however).  Additionally there is a massive difference in price.  Reed’s books range from $30-$50 with no possibility for seminars or follow up, other than books on different topics.  This stands in stark contract to $5K / weekend “courses” (which include pitches for more expensive follow-up courses since you’ve proven you’re not very bright and you have too much money).  Finally, the gurus he debunks say “X is true.”, and provide nothing to back it up.  Many of Reed’s opinions on various gurus result from his investigating their claims (and finding them to be bogus).  Reed does an excellent job of concisely proving providing his line of reasoning.  You may not agree with it entirely, but it’s all laid out for you to decide what part you agree or disagree with (which is useful as I mentioned in my comment on Pramod’s post).  I’m pretty opposed to a draft, but John T. Reed’s article arguing in favour of it was one of the most convincing arguments from the other side I’ve ever read.

We’ve had a similar experience with our real estate articles.  An agent levelled the accusation that we wrote attacks on real estate agents in order to get readers to visit our site and make money from advertisers, so we have just as much of a bias as we’re accusing agents of having (and people shouldn’t take our posts seriously).  The strange perspective there is the expectation that somehow pointing out the bias in how real estate agents get paid leads to more readers.  Maybe we’d have gotten more readers if we’d written a manifesto detailing why people need to trust their real estate agents more.  Or maybe we’d have gotten more readers if we’d written about why Cheddar cheese is the best cheese on the planet.  We’re often surprised which of our posts get the most attention, it’s certainly not something we’re deliberate about (“let’s write about topic XYZ to get lots of readers / advertisers / cash!!!”).  Our goal is to write entertaining, informative articles.  If we write something that’s untrue, our readers and commenters catch it, so we have a bias toward providing correct information.  We could be accused of writing inflammatory posts to get attention, but I’m confident they’re fairly accurate even if they are controversial (and given some of our recent posts such as “TFSA Institution Transfer Strategies” or “Mr. Cheap Asks: What Kind of Dog Should I Get My Dad?” I think controversial might even be a stretch).

How you trust someone you urgently need something from (like a doctor during a medical emergency or a lawyer during a legal emergency) is a tougher issue.  Ideally you’ll have someone you’ll have build a basis of trust with before the emergency, but if you don’t referrals might be your best course of action.

How do you decide who to trust in the short-term or the long-term?

Categories
Real Estate

Selfish Reasons to be a Good Landlord

I recently enjoyed a post about a tenant referring her friends as potential new tenants on Single Guy and Money.  It might just be a specialized case of what I’ve wrote about before as “statistical karma” but I’ve found that being a good landlord to your tenants is a good way to help YOURSELF out.

My current (and first) tenants in my condo just extended their lease for a second time.  After we had updated the lease and when I was leaving, they told me that a friend wanted to move into the building, but they’d warned her that I just owned their unit, other landlords in the building might not be the same as me.  They told me I was “the nicest landlord they’d ever had”.

Everyone likes being told they’re a good boy (except girls maybe), but my motivations for treating my tenants well are very self-serving.  I view my condo as a business, and they’re my customers.  They’ve been good customers for the last two years (never bounced a check or paid late, have maintained the unit well, and haven’t bothered me with frivolous problems), and I want to keep them.

I didn’t raise their rent again, and I think John T. Reed would chastise me for not doing so (he advocates always raising rents to market rate).  My reasons included not being sure that the Toronto rental market could sustain a higher rate (I didn’t want to drive them out, then end up with new tenants paying the same rate) and not wanting to go through the aggravation and expense of finding a new tenant (and having to travel to Toronto to do so).  With the recent real estate turmoil, I wasn’t sure what the rental market looked like (Thicken My Wallet had an interesting post on this topic recently) and decided it was better to keep the tenants I had then risk finding new ones.

I don’t think they’re staying because of the lack of a rent increase, instead the examples they cited as bad behaviour on the part of their previous landlords were all long delays in making repairs. They told me at one place they had a closet door that wouldn’t open and close properly, and although they lived there 8 months and the landlord lived UPSTAIRS, he never fixed it.

At the current place I’m staying our landlord took 2.5 months to replace a broken dryer (I was smelling pretty ripe by the time the new one was installed).  The $375 dryer she bought isn’t any cheaper this month than it would have been in December.  All she accomplished was saving a TINY bit of depreciation of the dryer and aggravating the women who live upstairs and myself.  We’re all debating whether to stay here at the end of our leases or not, and this is a BIG part of why we’re considering leaving.

To me promptly making repairs doesn’t cost any more than delaying, and it isn’t any more work to deal with it now instead of later.  I can’t for the life of me figure out why landlords don’t make prompt repairs as a free way to keep tenants happy.

The one concern a property owner MIGHT have is that the tenants are making a frivalous repair request and that if he honours it he’ll just get a whole bunch more.  This is fair, but if the repair request is a reasonable one (like a broken dryer), FIX IT! If its an unreasonable request (one of my buddies had a tenant complain to him that another tenant’s children wouldn’t play with her kids) explain that it’s unreasonable and tell them you won’t take responsibility for it (instead of just delaying and hoping they give up on the request).

Categories
Opinion

Malice vs. Incompetence

I went out for lunch with a couple of fellow grad students recently and our conversation reminded me of a topic I’ve been meaning to post on.  One of the students has been ranting for months about a change in policy with how TA work is handled which may affect the immigration process for international students.

At our meal she got ranting again and started talking darkly about how she was convinced student leaders were getting kickbacks for allowing the policy to be changed and that they were terrible people to be screwing her over to put money in their pockets.  I told her a saying I’d thought was very true when I first heard it:  “Never blame on malice what can be explained by incompetence.”

In life we’re often going to have obstacles, and sometimes those obstacles will be put in our way by another person.  SOMETIMES they might be trying to make our lives harder, but I truly believe that it’s usually just that they aren’t thinking about us at all.  The obstacle is simply a side-effect of them living their lives and dealing with their own stuff.  If they could accomplish their goals without interfering with us, I’m sure they’d be happy to.  They either aren’t aware of the impact on us, or can’t be bothered to do the extra-work needed to make our lives easier (which doesn’t seem COMPLETELY unreasonable to me).  Often people who are just plain bad at their jobs will be viewed as a nightmare inflicting chaos on an organization.  Probably the person would love to be doing a good job, but they aren’t capable of it.  They aren’t causing problems to be mean-spirited, they just don’t know any better!

Our other friend tried as well to get her off the topic, but to no avail.  She remains convinced that someone is deliberately and maliciously benefiting at her expense.  Because of an accounting change, she’s spent a lot of time frothing at the mouth and going on about it far more than her friends are interested in hearing.  Its got to the point that she’s sounding a bit paranoid.

I think most of us have been down the same road.  A policy is made in our workplace or where we live that makes our lives a lot more difficult (maybe a lieu time policy is changed or a memo is issued forbidding something we’ve been doing).  We feel like it’s a personal attack, but perhaps its just the organization trying to run things and not even thinking about us.

When I first started at Waterloo there was a professor whom I was convinced was out to get me.  When we were walking down the hall, she’d tilt her head up (literally sticking her nose in the air) and turn away from me.  I was shocked and couldn’t for the life of me figure out what I’d done that had offended her so much (and talked to my office-mates ad-nauseum trying to figure it out).  Eventually I was talking to a couple other guys in the department and mentioned how she treated me.  They nonchalantly replied that she did the same thing to them, and pretty well to anyone else who couldn’t immediately help her career.

The behaviour I’d taken as nasty and personal was just her poor social skills.  I’m not any friendlier with her, but at least I’m not racking my brain trying to figure out what I ever did to her or why she “has it in for me” (she doesn’t).  I interpreted her attitude as an attack on me when it wasn’t.