Author: Mr. Cheap

Categories
Opinion

Where Does the Time Go?

Philip Greenspun was one of the founders of ArsDigita Corporation and wrote a very interesting write up about his experience getting rich through the dot-com boom, and some of the dangers of accepting VC funding.

I recently came across some of his thoughts on early retirement and found them quite interesting as this is a subject I spend a fair bit of time thinking about these days. I went through a period of “willing unemployment” (temporary retirement? a prolonged case of laziness?) and some of his insights definitely ring true to my experiences.

My mother always insisted that my brother and I stay busy, so every summer we had to be involved in an activity (or job or whatever). She made it quite clear that lounging around the house playing Atari wasn’t an option. Through childhood, school, university and work I was always busy and developed this idea that if I could free up my 8 hour school/work day then my life would stretch in front of me like an endless vista of time to do and experience everything I might desire.

As Philip discusses in his essay, when you get rid of the work and actually have the time, it disappears in a hurry without a lot to show for it. I always felt guilty when I wasn’t working (and even when I technically was doing something but wasn’t as productive as I felt I should be). It was sometimes disturbing to look back on a couple of months of life lived with nothing to show for it.

The flip side of this, of course, is why do we need to have “something to show for it”?

I always speculated with friends that this was a hold-over from society’s “protestant work ethic” and I just need to become comfortable with the lifestyle I’d created and not let nay-sayers make me feel bad.

Sometimes I wonder if early retirement will feel the same way? Does regular retirement? Most of the people I know who have retired around 65 seem to adapt well to it, but I know not everyone does…

Categories
Real Estate

Price-Rent Ratio

A valuable number in real estate investing is the price to rent ratio, which is simply the purchase price dividend by the rent received. For example, the condo I purchased for $126,000 and rent for $1,300 / month would have a Price-Rent Ratio of 96.9 (monthly) or 8.08 (annualized).

The annualized ratio is comparable to the P/E of a stock (for which 8.08 is considered quite good!).

The only real problem with this approach is that you can’t really look up ratios for different areas easily. For example, what’s the average Price-Rent Ratio for Toronto? I have no idea! I’d love to know if Kingston or Waterloo have a better Price-Rent Ratio, but that’s not something I can easily look-up, unfortunately.

If you COULD determine this Canada-wide, a community with a very low Price-Rent Ratio, a decent population size and a low vacancy rate (say under 5%) would be an EXCELLENT place to purchase / build rental properties (the other info can be easily determined).

People sometimes talk about properties being cash-flow property from day 1 with 0% down, and I can’t imagine that very many deals like this are possible! As I’m writing this, I did some calculations. Given the fact that my property is $250 cash-flow positive. At the interest rate I’m paying (5.05%), the property could afforded an additional $250 / month in interest, which means I could have afforded to borrow another $59,405.94 (250*12/5.05%). Since I’ve put less than this into the property, if I could somehow have gotten the interest rate I got with 0% down (say with a VTB or something), I could have had this property cash-flow positive with nothing down, so I guess it IS possible.

Neat.

EDIT: FinancialJungle wisely pointed out that the ratio I’ve calculated is more like the Price:Sales ratio then the price to earnings.

Categories
Real Estate

Next Property, Using a Mortgage Broker This Time

People joke that real estate investing is like a drug, once you start you want more and more. Its somewhat true (and can be a good comparison, as you can ruin your life going crazy on drugs or real estate investing).

My original idea is that I’d follow my buddy’s example and try to get 1 property per year. Since I closed on my first property last December, I still have 7 more months, but I’ve definitely been keeping my eyes open.

I always worry about getting approved for mortgages / lines-of-credit because I’m not a salaried employee. The banks can be difficult if you don’t fit into their cookie-cutter process (basically my income was super low the last few years as I was at school then trying, and failing, to start a business). I’m earning good income now, but its contract work.

Finally I figured it’d make sense to check in with a mortgage broker (like people are always suggesting) and see if they’re better then the bureaucrats I’ve dealt with at the banks so far. Wow, what a difference!

Once I told her my stellar credit rating and that I had claimed business expense over the past few years, all the problems went away. I’ve been approved for pretty well any property I might want to buy (I’m not going to go nuts and get a mansion) from 5-20% down, with rates comparable to what regular people get. Nice!

It always amazes me when organizations throw money away because they’re unable to smooth out their own inefficiencies. Basically they’re paying mortgage brokers big bucks to help them accept clients that they would have rejected if approached directly. Too weird! I had the same experience trying to get insurance, ING Direct wouldn’t insure me, and then I got insurance through a broker, and it was (yup!) ING Direct!

If you’re at all unusual and have had trouble getting a reasonable deal from the banks, I’d definitely talk to a mortgage broker! Just make sure you’re getting a rate that’s a good discount compared to those posted at the big-banks (unless you have crappy credit or no down payment).

Categories
Investing

First Dividend Payment

Woot! As I checked my E*Trade account this morning, I see that I’m up a super-sweet $72.60 as a dividend payment from Rothmans (I feel like I should go buy some smokes for impressionable teenagers with the cash 🙂 ). I was wondering how it would work, since I hadn’t seen any of the cash (the dividend was supposedly paid on the 15th, I guess it took them a couple of business days to get it into E*Trade).

This certainly cushions the dip that my stocks have taken recently (according to share prices, I’m down $439.01). Factoring in the dividend, that’s a cool -$366.41 (but I’m hoping to make it up in volume ;-).

As I asked previously, I have no idea how it would work from a tax perspective if I withdrew the $72.60 from my account (currently it immediately went to pay down my margin debt). I think I’ll leave it in the account (pay down the debt), just to keep things simple for now…

Categories
Opinion

Going Back to School as a Retirement Plan

I’ve been considering a bit of a funny idea for what to do with my retirement: go get a PhD.

Back when I did my Masters, I really enjoyed the day-to-day of being a grad student. Investigating an incredibly detailed area of study and getting to the point where only a handful of people in the world could knowledgeably discuss the issues I was investigating was definitely a fun, cool way to spend a couple of years.

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.

One area I didn’t like was having the profs treat us with contempt. Graduate students are like teenagers in a family, you want to be taken seriously, but your supervisor (parent) occasionally makes a comment that makes it QUITE clear they don’t.

One big benefit to grad school is that here in Canada you get enough funding to cover tuition and a modest lifestyle (some of my friends were able to afford to run cars while doing grad work). Currently grad funding would more then cover the “spread” between my passive income and my expenses (in fact I think I quite easily live off of my grad funding, and just let my passive investments compound for the 5-7 years I’d be working on my PhD).

The other considerations are if my desired lifestyle suddenly spiked during my studies I might be bummed out living like a starving student (I think this is unlikely).

Its definitely something to consider (finding a “fun” job, even if it doesn’t pay very well to start my “retirement”). This would help me test to make sure I can live off of what I’ve set aside. Additionally, it’d build up a buffer to deal with any unexpected emergencies (dividend cuts, rampant inflation or some such things).

One of the other big benefits during an “early retirement” is if you discover you’re falling short of what you need to live the life you want, you can always go back to work! (much harder at 70!).

Other “retirement jobs” I’m considering are some sort of technical liason with an overseas company (maybe China?), publishing (starting or writing for a magazine or self-publishing some books like John T. Reed), property management (develop my real estate skills on someone elses dime) and working for a non-profit (high pay and low stress, what’s not to love?).

Categories
Opinion

Offense and Defense of Wealth Accumulation

Yesterday I mentioned “Succeeding” by John T. Reed (I should write up a review for it). Another idea I liked in it is related to Offense and Defense in Football (pardon me in advance if I make mistakes, I’m not a football fan at all).

In Football you want to “meet strength with strength” (defense) and “attack weakness with strength” (offense). Basically you want to focus your strength where the opposition is attacking, and where it is weakest. Wealth accumulation is similar, except you’re playing against society.

Every time there’s pressure to “keep up with the Jones”, your wealth is being attacked. People who are being eaten alive by debt, can’t afford to live the lifestyle they’ve chosen and have to worry about money constantly, have to bring more of their strength to defend against these attacks. Strength in this case is mostly just a matter of giving these issues some of your attention and accepting the negative consequences of defending against them.

Perhaps your friends will give you a hard time about the old car you drive, or the crappy basement apartment you live in. Maybe your significant other will call you cheap when you don’t want to go out binge drinking at the club twice every weekend, maybe cultural pressure will be placed on you to send a check to your parents every month to help pay their bills. Each of these affect all of us differently, and you don’t necessarily need to stop ALL of them, but be aware that issues like this are nibbling away at your wealth, forcing you to work longer-and-harder than you would have had to if they weren’t in your life.

Meeting societies weakness with your strength is another issue that can be easy to articulate, but can be harder to do. Basically, beyond doing “what you want” for a career (fulfillment), you need to factor in how badly society doesn’t want to do whatever job you’re considering. After the dot-com boom, computer work took a nose-dive, because so many people started doing the work. Even though its vital new labour that’s needed by modern companies, it was so popularly perceived as in demand that soon their was a glut of labour being supplied (and salaries therefore dropped).

Currently in Canada and the US you can make a VERY good living in the trades (electricians, plumbers, drywallers, etc). For some reason the public wants to look down on people who use their hands to make a living, and because of this these jobs pay VERY well. If I was a young guy coming out of high school who had any interest in any one of the trades, I’d definitely be thinking about moving in that direction. Even with the massive investment that I’ve made in my mind and technical skills I’m sometimes tempted to move into the trades when I get a bill for the plumber for $250 to put in a new tap in my kitchen sink.

You can accumulate wealth by strengthening your defense or your offense. If you have a strong defense and weak offense, you’ll live like a miser. If you have a strong offense and weak defense, your cost of living will raise every time you get a salary increase and you’ll spend the rest of your life on a treadmill.

By combining both you can figure out what you truly value, earn enough money to pay for them, then have the time to enjoy them.

Categories
Personal Finance

A Mountaineer’s Approach to Risk

Years ago I did the cliche “backpacking around Europe” for a summer at university. While chilling out in a hostel in Moscow I got drinking with some Englishmen (and an Englishwoman) who were heading out to climb a mountain.

Besides downing the half-vodka, half-coke drinks (mixer was more expensive then booze) I was quite interested in picking the brains of these people who were quite enthusiastic about something bizarre (you’d have to pay me lots of money to climb a mountain of any height).

The one comment that I found most interesting, is that mountain climbers try to minimize the risk by climbing up and down the mountain quickly (in case the weather changes on them). Basically they’ve decided to do something that they supposedly enjoy, then they rush through it in case things turn bad. Weird.

I recently read “Succeeding” by John T. Reed, and in it he made a similar comment. Basically when he was young he decided he wanted to have a net worth of $5 million. While working towards this he had to get quite aggressive, and got hit very badly by a real-estate market correction in Texas. He has a similar idea to the mountain climbers: Make a conservative goal, then accomplish it as quickly as you can to minimize your exposure to risk. The more money you want to be worth (the higher mountain you want to climb), the more risk you’re going to have to take because it’ll take you longer to get to the top. So he advocates only targeting a networth goal that you’d really need, not just a big number for the sake of a big number.

It seems to me that there’d have to be “risk mitigation” approaches, where you’re aggressive for short bursts with only part of your savings in order to get to a goal, then you ratchet back the aggression and try to fortify your position. When you’re ready to push towards the next “base camp” of wealth, you put money and time aside for the attempt, talk to people who have done it before, then try to push up to it as quickly as you can.

I assume the very first base camp is income being greater then expenses. This is kind of like digging yourself out of a pit before you start climbing the mountain, and luckily this wasn’t ever a position I was in.

A Everest summit attempt would be getting onto the Forbes 400 I guess.

I’m not sure if this is a reasonable metaphor for accumulating wealth or not. My currently goal is the second base camp of passive income being equal to expenses. My “hustle” over the next 2 years could be to keep working contracts, even if they aren’t terribly interesting, keeping my cost-of-living down, buying blue-chip dividends, and trying to get a couple more investment properties similar to my current one in order to reach the first base camp of wealth accumulation (retirement basically).

At that point I can decide if going further up the mountain is interesting to me or not.

Categories
Real Estate

Getting Started With Investment Real Estate – Part 7

To start at the beginning – please see part 1 of this series.

So I had a 1st and last month’s deposit from my screened tenants, a signed lease and was happy to have the condo go from costing money to making money. Shortly after they moved in I got a call from the tenants saying that the washing machine was leaking water. I went and had a look, and quickly determined that the problem was the plumbing behind the machine rather then the machine itself.

I hit it with a couple of types of liquid plumber, and played around with an auger, but couldn’t get it flowing fast enough to let the washing machine drain. I contacted the condo corporation, and luckily enough they said this was their responsibility. The superintendent hit the drain with his auger and that seemed to get it working (he’s clearly better with his auger then I am with mine).

Next day the tenants call me and say the dryer isn’t working. It tumbles and heats up but the clothes don’t dry. They assure me that one of their fathers is a mechanic and that I need to replace the dryer. I come out and find that the vent is obstructed (so replacing the dryer would have been a waste of money). The condo corporation assures me that this ISN’T their issue to fix (go figure). After calling a duct cleaning company and getting a quote for $400 to clear the vent, I go at it myself with the auger (I’m not a “right tool for the job” type of guy) and 30-45 minutes later I’ve pulled a bird’s nest out of the vent and now have a steady stream of hot air coming out of the exhaust.

Next day another call comes in. They had done a couple of loads the day before and it had worked fine, now the dryer wasn’t drying any more (and wasn’t heating up). I talked to a few people and looked on the internet and had the idea that there are TWO fuses for the dryer, and the theory is that one of them had blown. I wasn’t able to really figure out the fuse panel (its all the old style plugs instead of the flips I’m used to). An electrician I talked to was positive that the heating element was blown and I needed a new dryer, so I head out and bought one for $400 (after taxes, delivery and paying to get my old dryer taken away). The dryer that came with the place didn’t look that old, so I was sad to see it go, but I figured it must have burnt out working away at the bird’s nest (although it seemed suspicious to me that it burned out AFTER the nest was cleared).

The delivery and installation wouldn’t go through since my ducting wasn’t metal. I had to buy duct materials from Canadian Tire, hook it up myself, and after I plugged it in and pressed the start button, nothing happened. I had a sinking feeling as I pulled out the multimeter that I’d been afraid to use before, get a battery for it, found the fuses for the dryer (sure enough there were two) and found that one of them was a 25 Amp (should have been a 30), and sure enough that was blown. I replaced it, and the dryer started working immediately.

Therefore I’d spent $400 on a new dryer, replaced the ducting to accommodate that new dryer and paid Future Shop $20 to take away a perfectly good dryer (and I could have avoided all that by testing the fuse and replacing it for $4).

Live and learn, this was an expensive lesson, but one I hope I won’t need to repeat – don’t be afraid to learn new things with home maintenance. Ignorance is VERY expensive.

My next (and final for this series) post will detail all the financial elements of the purchase and the first 6 months of operation.

(continued in part 8).