Author: Mr. Cheap

Categories
Real Estate

Rental Income vs. Property Value

I’ve posted on the topic before, but I’ve been looking at Toronto area multiplexes and have bumped up against the issue of asking price vs. market rent again.

ICX (like mls but for commercial properties) has some nice little properties listed (this link will expire in the near future, don’t feel bad if its dead). The property linked to is a nice 3-plex in North York which brings in $2,075 / Month ($24,900 / year) and the owner is asking $299,500.

A good “back of the envelope” calculation for real estate investors is the GRM (gross rent multiplier). This is basically the price / rent (so a lower ratio is better than a higher ratio). Its a good way to ballpark if a property is worth looking at more closely or not. Some sources claim you should use the monthly rent, some claim you should use the annual rent (it doesn’t matter which you use, as long as you’re consistent).

Capitalization Rate is far more illuminating (its based on the net profit instead of the gross income), but takes a bit more digging to calculate.

My condo, with a monthly rent of $1300 and a purchase price of around $134K (accepted price + renos – not including legal or anything else) would have a GRM of 103 (134000 / 1300). In comparison, this building has a GRM of 144. Given that multiplexes should be MORE lucrative than condos (not far less), this especially pitiful.

High GRMs also are good at telling us when housing prices are getting far above rental rates (which is a good indication of an overly frothy real estate market).

If we turn our eye north, and have a look at this gem in Thunder Bay (its a 6-plex but we can ignore that for the time being), we see that in the true great white north a rent of $4,100 / month (49,200 / year) can be had for $249,000 (twice the income for a lower price). This gives us a GRM of 61, which is far more like it!

“But Mr. Cheap…” you protest, “Toronto is a big city, OF COURSE property costs more here!” Yes. But shouldn’t rents be higher too? GRM lets us see the relationship between the stream of income from a piece of real estate and the purchase price of that stream. Even if its harder to find tenants or to sell the building in the future, the higher income for lower purchase price certainly makes property outside the GTA look attractive (not even mentioning the upcoming increased transfer tax).

Any other towns in Ontario that you guys think give a better GRM than Toronto (or perhaps to belabor the point, any with worse numbers)? What do the numbers look like in Windsor Telly?

Categories
Announcements

Getting Fired

For those who may have missed the announcement, krystal from “Give Me Back My Bucks” was fired last week. I’ve been wanting to write something on her blog, or e-mail her, or post something but have been holding off as the last thing I want to do is make her feel worse (so its more important than usual to actually make sure I express what I want to convey).

To shift the conversation back to me (which I love to do), I’ve been fired twice. I’ve “mutually gone separate ways” from other jobs / contracts more than twice. It sucks.

I was sitting around one time with a group of people (this was after I’d been fired once), and they were all stating with pride that they’d never been fired. I kept my mouth shut and nodded approvingly as they patted themselves on that back. This felt really crappy.

To shift from a depressing topic to a more depressing topic (happy Canadian Thanksgiving!) supposedly miscarriages are far more common then people realize. No one talks about them, so people are shocked when they lose a baby, then traumatised and they never talk it. This makes it even more painful for couples in the future who go through the same thing without warning (its a vicious cycle). I think getting fired is similar. Lots of people probably go through it, then they keep their mouths shut and don’t talk about it. Then people who do get shit-canned feel like they’re the only ones its ever happened to and that makes them feel even worse about an already crappy experience.

After getting fired the second time I had, not necessarily what I’d call a breakdown but definitely an “extended period of self-reflection”. I spent about 6 months playing Everquest, drinking instant french vanilla coffee and eating bagels with cream cheese (I wasn’t working and lived off of my savings during this time).

I think possibly these two negative experiences early on contributed to my aversion to 9-5 work and why I want to ideally be financially self-sufficient, or at the very least be captain of my own ship when it comes to earning a living. To this day, if I’m having a bad day and I see “higher ups” at a company I’m working at talking discretely I start getting paranoid.

Getting back to you Krystal. You’re a super-star! Your blog is proof of what a great communicator you are, and you shouldn’t doubt yourself because some silly people at a company thought you needed to be part of their clique. As much as North American society puts a large emphasis on our job and skills in our chosen profession, you’re more than what you do, and don’t let arbitrary staffing decisions at some company lead you to doubt yourself. Perhaps this company is being incompetently run, maybe they’re total idiots who are hurting themselves by letting you go, only time will tell…

Its great that you’ve jumped right back on the wagon at your old position, it sounds like they’re happy to have you back, which says nothing but good things about you. Perhaps 10 years from now you’ll look back and decide that not wasting any more time at your old company is the best thing that ever happened to you. I’m doubtful (having gone through the experience myself) that spending a lot of time doubting yourself will lead you to any great insights or understanding. Bad things happen to good people unfortunately.

Happy Thanksgiving Krystal and congratulations on the terrific person you are and all the wonderful things you have to be thankful for!

Categories
Business Ideas Frugal Investing

Recession Investing

Apparently Alan Greenspan has gone on record saying a recession may be coming.  He doesn’t think its likely (less then 50% chance), but its a possibility.  Others (also mentioned in the article) think a recession is far more likely to hit other economies/markets.  This got me thinking, if a recession is coming or has hit, what are the best places to put your money in such an environment?

A recession, according to the first line in Wikipedia, “is a decline in any country’s Gross Domestic Product (GDP), or negative real economic growth, for two or more successive quarters of a year.”

Following some Googling, it seems that stock prices are hit just about immediately at the beginning of a recession, so having cash on hand to buy would seem to be a prudent move.  Also, since unemployment often skyrockets, having some sort of emergency, easily accessed funds for living would be worthwhile (either in a high yield savings account or with a unsecured LOC set up if you live in Canada).  Supposedly 3-6 months is the recommended level of funds.  This assumes you’re a wage-slave, if you’re not, congrats – no worries on this front.

Clearly if we’re buying stocks at a discount, we want companies that are going to weather the down-turn, so “blue chips” are probably even more appealing in this environment.

Luxury spending will decrease, so focusing on businesses that supply the necessities of life would probably be preferably to companies that supply luxury or optional goods (Loblaws might be a better buy then Leons).

Moving beyond stocks, with everyone afraid to spend money, what might be some other opportunities for good deals?  Real estate will probably be offering good prices (since anyone who needs to sell will have trouble finding buyers).  Connected to this, REITs might be on sale (since their inventory will be undervalued, but their future prospects should be good after the recession ends – they provide a necessity, shelter, so they’d probably be worth considering).

As much as interest rates sometimes go up during a recession, I don’t think GICs or bonds are the best purchase (as you’ll be heavily taxed on these high rates while inflation will be rampant if the rates skyrocket).  These *MIGHT* do ok in a RRSP account, but I still wouldn’t like the bite inflation always seems to take out of them.

While buying companies that supply luxury goods is a bad idea, it might actually be a good time to buy luxury goods if you’re able to accurately appraise them, since there won’t be many buyers.  If you know how to value artwork, comic books or vintage cars, a recession *may* be a good time to hunt for bargains.  Liquidation sales from failing businesses might be another lucrative (if depressing) strategy.

As counter-intuitive as it may sound, a recession MIGHT actually be a good time to start a business (assuming you had lots of capital and could keep costs low).  You should be able to get a cheap lease at a good location (no competition and lots of sites available), easily hire skilled, motivated employees (high unemployement), cheap supplies (again, low demand), etc, etc.  This could be a bit of a dangerous gambit (you’re counting on the recession ending before you run out of money).  If you’re *already* a business owner and you have a pair of steel ones, this could be a great time to expand on the cheap.

Investing in education, while always a good idea, is even more appealing when the job market is tight.  I said to myself that I’d go get my Masters when it became hard to find a job, and that’s exactly what I did when the dot-com boom went bust.  16 months later, when I was coming out of the program, things were starting to pick up again.

Some people talk about gold being a great inflation hedge (and maybe its good during recessions too, I don’t know).  I don’t like gold.  I’m too worried about a cheap method of converting lead to gold being developed and immediately devaluing it.

Travel (and other luxury goods for your own consumption – not investments) are also bargain priced during recessions and “states of emergency”.  Supposedly you could go to Thailand super cheap during the SARS epidemic.  You’re worried about catching SARS if you go?  During the height of the “crisis”, people were three times more likely to die of pneumonia than SARS, and even the people who contracted it had an 80% survival rate. SARS was devastating for Toronto tourism, but was basically a non-issue from a health standpoint (far more people died from car accidents than SARS during the “epidemic”).  You could have had a very nice trip here during that time (short lines and cheap rates).

Categories
Personal Finance

Mr. Cheap’s October Networth

There seemed to be renewed interest in my networth, so I’ll put that back into “the mix”, but preface it every month as being unimportant.

It was a good month to be a Cheap in September (from a financial perspective). I managed to get my last check out of the recruiter (which was quite a trial and may make for a future post). I also got my first check from my new job, so as much as I was worried the “lag time” of pay would hit me, I managed to avoid it.

I managed to save $4062.54. There was also a $739.64 increase in the value of my E*Trade account (this is totally irrelevant, I’m holding these stocks for the long term for dividends, not looking for short term capital gains). My networth increase seems to be pegged at about $4800 (which, to stress for a third time, is totally irrelevant for anything), for a current networth of $91,654.11).

My savings rate is going to start decreasing (because of tax withholding as an employee), but this will also decrease my tax obligation in April, so its all good (as Casey Serin would say).

In September I pursued a variety of long-term, delayed pay-off investments, so unfortunately didn’t make any progress on increasing the proportion of my cost of living being covered by passive income (which currently is at $300.08 or around 26%). My passive income increased slightly because I paid down my margin account due to a false margin call.

I managed to get my cost of living down to $1,151.75 (this decrease is what lead to the “increase” of my passive income paying 2% of my living expenses, which I don’t think is actually going to be sustainable), which will go up after I move into an apartment at the end of October (one of my roommates has annoyed me to the point that I’m moving out). I’m paying $500 / month for a room in a 3 bedroom house and want to find a bachelor for ~$700 / month on the subway line as close to downtown as possible (I work near Union station if anyone wants to suggest a place to live 🙂 ).

One “delayed payoff” investment is my dividends, which are heavily margin-ed now (about 60%). The dividend payments pay off the interest debt (its “cash flow positive” by roughly $33 / month). As long as the dividend payments increase faster then the interest rate raises this should work out well. If it doesn’t, it won’t be a tragedy (I have the income to cover the debt interest). This changed the dividends from being something I was getting a monthly income from, to something that pretty well moves along on its own steam (which I’m optimistic will lead to a higher income later).

The other “delayed payoff” is being a silent partner in a mixed use building purchase (the purchase of which is set to go through in early October). This was $12.5 K so far (which pretty well wipes out my free cash, there’ll be another ~$5 K payment for legal fees). I’m not looking for monthly income from this, as our plan is to save up more in the building’s account, use this to renovate, and convert the building from a rooming house type structure (which it is now) to a bunch of individual apartments (which hopefully will be more lucrative and less work going forward). We’re hoping to immediately change the downstairs bar from being kind of a dive to a higher end place (our ideal clientele would be local business workers going for lunch or an “after work” drink). My “active partner” will be paid 10% of the gross rent for doing all the management (and we’re putting money into the venture on a 50/50 basis).

This is definitely a new sort of venture for me (and hence a bit scary), but my partner is a guy I’ve known for years (he’s been my real estate “mentor” if you’ll forgive the “get rich quick” lingo). I was in his wedding party and have hopes that it’ll work out well (although if it goes belly up, I’ve already categorized this as a “higher risk” investment). He has a wide variety of residential management experience, so I’m also hopeful that he’ll have the background to transition into managing a different sort of residential (rooming house) and commercial (a bar and a retail outlet).

So there’s the “state of the Cheap Union”. My plans going forward (after paying the upcoming legal bill) are to start focusing on my RRSP contributions (looking for about $14K for 2007) and saving to pay off my April tax bill (which I’ll ballpark ASAP to make sure I have enough to cover it). I’m torn between doing a mix of US market / EAFE index funds for my RRSP or getting a couple good US dividend payers (BAC & WM look good right now, and I’d be tempted by something long term like JNJ or KO). I keep advocating index funds to friends and family, so part of me feels like I should actually buy some myself :-).

I’ve mothballed the idea of buying more real estate in 2007. It *might* be possible to get something with a very low down payment (especially now that I have a regular job and am not a contractor any more), but I think the stress of pushing my finances that far wouldn’t be worth the benefits.

Categories
Personal Finance

Saving Money Purchasing Computers

I have a very definite philosophy for buying computers. I tell it to anyone I meet who is planning a purchase, they all agree that it makes complete sense, and then none of them ever actually do it.

Computers drop in value quickly as we call know. They’re right up there with cars (except worse) in that you buy it and it starts depreciating quickly and immediately. This isn’t going to change in the near (or arguably far) future (I can post arguments backing this up if you want, but just Google Moore’s Law and you’ll get the basic gist if you don’t believe it).

Based on this, my philosophy has always been to buy the cheapest computer that will meet my CURRENT needs, and give myself permission to upgrade once I run in to ANYTHING I want to run that the computer can’t handle. Even if its fairly frivolous (such as watching videos with cutting edge video encoding or playing a new game). You will have to upgrade more often following this approach, but if you’re buying $1000 machines instead of $3000 machines the math still works out.

Say a cutting edge machine costs $2500. Six months from now, it’ll be the “budget beast” they’re selling for $600. Buying the high end machine will give your computer an added lifespan of 6 months. I usually get 3 years out of the low end machines I buy, so I’m paying ($600 / 36 = $16.67 / month). With the higher end machine, lasting the extra 6 months, you’d be paying ($2500 / 42 = $59.52 / month).

So clearly (even if you want to quibble about the numbers) we’ve disproved that paying more for a computer “so it will last longer” is a good strategy. Related to this is the idea “if I pay more for a computer, it’ll be higher quality”. It won’t. Computers are made with commodity hardware (it all pretty well functions the same way), and more expensive is usually just newer, not higher quality (some exceptions to this, but you can actually buy lower performance higher quality parts cheaper than higher performance lower quality parts).

The second argument people make for buying an expensive new machine is “it will let me do XYZ which the cheaper one won’t”. Often XYZ is something the cheap one WILL do (you can’t purchase a computer that isn’t powerful enough to surf, playing music and write e-mails). Unless you’re going to be doing video editing or playing the latest first person shooter game (3D games where you run around blowing other people up), you probably don’t need the latest and greatest machine. If you think you *MAY* want to do one of these processor intensive activities, get the cheap machine, find an older version of the software, and if you do use it and like it, then buy the more expensive machine (most peoples’ intentions are never followed through on, so paying lots of money to have a machine powerful enough to run software that you’ll never use is a waste).

I’m a computer nerd, work in the field, do a fair bit of programming and whatnot, and I’m using a 3 year old notebook (notebooks are less powerful dollar-for-dollar than desktops). A low-end new computer is more hardware than I need (although if its cheap enough I’ll take it), how many people are out that that honestly need more horsepower than I do?

The third argument, which no one ever says out loud, is that a new computer has bragging rights. Your friends come over to a dinner party and are interested in seeing the new Vista. Computer nerds will help fix your computer so you can send an e-mail, and admire how fast it runs. Bragging rights are great and all that (hell, how many expensive cars would be sold if not for bragging rights), but is it really worth an extra $2K to try to make people envious?

Next time you’re going to buy a computer, look at the one you would have bought, buy a cheap one instead, put the difference in a PC Financial bank account ear-marked as your “new computer fund”. When you run into something your old computer can’t handle, buy a new one out of that fund. I can guarantee you that the same amount of money will last you FAR, FAR longer than buying top-of-the-line would have, and after the first computer, you’ll be running a more powerful machine too (the second cheap one will be way better then the first expensive one would have been).

Categories
Personal Finance

Deciding Where to Live

Some time ago, in a comment, Telly expressed interest in how I go about comparing different living situations. This seems to be as good an inaugural topic as any :-).

My current living situation is a house that’s rented out by the room (with 3 of us in the main house) plus a basement apartment that’s rented out separately. I pay $500 / month all inclusive (with one shared bathroom and a shared kitchen). Before this, I lived with my ex-girlfriend paying half the rent ($440) + cable + some utils. Before that I rented a basement apartment for $650 / month all inclusive.

I’m considering staying here, renting a cheap downtown bachelor or buying a house / condo and renting out the extra rooms.

For a downtown bachelor, the advantages would be lower transit fees (I wouldn’t need a monthly pass if I was within walking distance of my job, this would probably cut my $99 tax-deductible transit costs to ~$40 / month), shorter commute (I spend 1.5 hours on the subway each day) and not getting annoyed by my roommates. The cons would be more expensive (it’d probably be a minimum of $750 for anything within walking distance of my work), I’d probably need to make a 1 year commitment, I may change jobs (but would then have an apartment that might not be close to my new work).

Buying a house or condo and renting out rooms is tempting. The pros would be I could be living for $500 or less a month, with my rent going to the housing expenses. On a place like the condo I currently own, I could live in the solarium, then rent out the two bedrooms. If I could get $500 for each, that’s pretty well cover my costs (and basically my downpayment / equity would be covering my monthly shelter costs). The negatives include room-mate aggravation, a longer commute (since the area I’d want to purchase in is even further from downtown then where I am currently) and having more cash tied up in real estate (this is a debatable con).

Another option (that I just came up with while writing this), would be to rent a house or a multi-bedroom apartment/condo then rent out individual rooms to subsidize what I’m paying. I came across a 3 bedroom house for $1200 / month. If I could get $500 each for the two other bedrooms, I’d be living pretty darn cheap.

Currently I’m leaning toward staying where I am (moving is a pain), but recently one of my housemates gave me the silent treatment for 3 days because I wouldn’t get off the phone with a friend and go help him with his computer, so after experiences like that a studio apartment starts looking mighty appealing…

Categories
Real Estate

5 Ways to Make (or lose) Money With Investment Properties – Part 4 – Taxation

Go the first post in the 5 ways to make money with investment properties series.

I haven’t had personal experience with this part of making money with real estate, but everything I read and hear seems to make the case that its typically a significant part of an investor’s return.

Once I read that basically the more “unusual” whatever you’re doing is, the better the taxation. At a certain level this makes sense, the government is best served by getting the biggest chunk of the largest amount of economic activity. Based on this idea, the advice was that the more “typical” an activity (like working a 9-5 job), the heavier the taxation. Real estate investing is hardly new, but not everyone does it, and therefore its given a bit of a tax break. Additionally, its viewed that there’s a positive outcome for society (increased amount of shelter) and its worthwhile on that basis as well for the government to encourage the activity.

Go the first post in the 5 ways to make money with investment properties series.

Anything you spend on your property is typically a deduction (i.e. you don’t pay tax on the money you earn to pay for that). So if you pay $1000 to get your property re-painted, you won’t have to pay taxes on $1000 of rental income (since you spent it on the property instead of putting it in your pocket). SOME people exaggerate their expenses to keep more of their money from being taxed, but I think this is a very bad idea (if you want to pick a fight with someone, don’t go after Revenue Canada!).

The real advantage (which I’m looking forward to) is the ideas that you can “depreciate” your property. Say you had a rental property that had earned you $250 / month ($3000 over the year). Typically if you were in a 40% tax bracket you’d owe $1200 in taxes on this money. What depreciation lets you do is assume that the value of your property declines over time. You get tax savings based on this decline. When you sell your property, you pay capitial gains taxes on the sale price – the purchase price + the depreciation. Thus depreciation lets you defer taxes until you sell the property (which its obviously better to pay the taxes in the future instead of right now). ADDITIONALLY, depreciation lets you not pay taxes on income, and instead pay it later as capital gains (at half-rate) (Please see the comments, I misunderstood this).

Obviously I don’t have the best grasp on this yet (I’m planning to take the H&R block course this fall so that I’ll gain a better understanding), but the basic ideas that real estate investors all seem to agree on is that you pay a lot less taxes on money you make from real estate then money you make from other investments.

Ways that you might abuse this concept to lose money is when you pay for a deduction (e.g. if a real estate deal is a bad deal, doing it for the tax deduction is probably a bad idea). Also, if you get too caught up in this idea and start doing illegal things (again, a very bad idea), you might be trading slight gains for jail time (no fun).

Go to the next post in the series buying at a discount.

Categories
Real Estate

Another Perspective on Real Estate Investing

I’m a big fan of listening to different people on a subject, considering what they have to say, then making up your own mind. Violent Acres (a really funny, evil blog!) recently posted an article “Formula For Calculating the Profitability of a Rental Property“. Its definitely worth reading over for anyone who’s interested in real estate investing.

I think her approach of working out market rent then working backwards from there in order to determine a “fair price” for a property is great. My gut reaction would be the $50 / month / unit profit is on the low side (it wouldn’t take much to get $50 in unexpected costs or miscalculations), but she seems to acknowledge that there’s actually a potential for profit in some of her other factors (such as assuming 1 month per year vacancy, increasing equity, tax write-offs and increasing rents). Also the $50 profit seems to be “cash in your pocket”, whereas I prefer to consider it “equity + cash in your pocket” (paying down a liability is as good as saving in my book).

Great post, great ideas and definitely something worth reading (and re-reading if any part doesn’t make sense) if you’re thinking about getting into real estate investing.

Canadian Dream originally posted a link to this and helped me re-discover Violent Acres (thanks!).