Author: Mr. Cheap

Categories
Frugal

Another week in the life

I’ve been tracking my daily spending (basically every time I buy anything I make a note in a notebook I carry around with me. As mentioned, I’m spending far more then I thought I was, especially on food.

I’ve tracked spending from May 7th to May 26th I seem to be spending on average $54.49 per day ($21.93 of that on food). My big purchase for the last few weeks was a plane ticket to New York (for $440). Adding in my monthly fixed costs of $695 (rent, internet and whatnot), it looks like I’m spending around $2,352.40 / month, or $28,228.85 / year.

My “annual” food spending of $8004.45 is about the same as the average Canadian HOUSEHOLD spending on food (8,035 in 2005 for Toronto), so I think there’s definitely room for improvement.

On the other hand, I’m very frugal in other areas (in the last 3 weeks I’ve spent $24 on entertainment).

In theory, if you accept that you can live off of 4% of your savings indefinitey in retirement, I’d need $705,721.25 to retire on, which seems awfully high. People often say they want 1 million to retire on, and that’s considered too high a sum (and I usually think my spending is lower compared to most people).

In a future post I’m going to try to estimate what my current “passive income” is, considering my investment condo (which arguably isn’t so passive) and my dividends. I’m also going to start trying to cut back on food spending (I shopped at “No Frills” today, and it acutally *IS* cheaper, at least for bananas, yogurt and no-name pop, three things I checked). If I can start making and taking my own lunches (and eat at home at night), I think I could dramatically lower my cost of living.

Categories
Opinion

Incentive

I feel like an often-overlooked perspective in life is why people do the things they do, that is, their incentive.

Quite a while before “Freakanomics” came out (great book, read it if you haven’t yet) I had the epiphany that Real Estate agents weren’t being paid properly to achieve what is generally thought of as their principle aim: to sell your property at the highest price. They are paid a percentage of the sale (usually 5% in Canada) and they get 5% of the ENTIRE sale price.

Say I had a house worth $100,000. Any chimp could sell it for $50,000. But I’m paying them 5% of the nothing-to-it, super-easy-to-sell first $50,000 of the sale price. It probably wouldn’t be too hard to sell it for $75,000 (in both cases the challenge would be reassuring people that there wasn’t some hidden defect). Again, I’m still paying them 5% of the entire sale price, even the majority of it that would be very easy to sell.

The incentive that *WOULD* encourage agents to get top dollar would be if you split with them however much they got above a certain price, or if they got to keep the ENTIRE amount above a certain price (e.g. if I said I’ll give you 50% of anything paid over $95,000, or if I said I’ll take the first $100,000 of the sale price, you get anything left over).

Since they’d have to work harder in these situations, obviously agents wouldn’t be interested (actually some agents would be very interested, and would probably do very well in such a situation, the challenge would then become haggling with the seller over the “low-end” price, and haggling with the buyer over the “high-end” price, the further apart these went, the more money for the agent).

Its true in many (all?) fields that how the person is paid determines how they do their job. Financial advisers who get paid on commission have an incentive to sell you the products that pay them the highest commission (note, they don’t make money for increasing your wealth, they get paid for SELLING you things), 9-5’ers have an incentive to maintain their jobs (and maybe get extra hours), not to be productive (greater productivity isn’t directly rewarded, it *MAY* get you a raise, but it just as easily might not, why kill yourself for an extra 2%?), teachers get higher academic qualifications to increase their pay not to be better educators (so you get gym teachers who have a Masters from a school no one has ever heard of), etc, etc, etc.

Joel on Software debunks the “Econ 101 Management Style” which tries to tie pay to performance, and I agree with him generally, but at the same time I think many professions are already “gaming the system” and that things could be improved.

Categories
Business Ideas

Starting a business

I’m always attracted to the idea of standing on your own two feet and running a business where your compensation is directly in sync with your productivity, and the only person your beholden to is your customers. I’ve tried starting a fair sized venture (a software company that I devoted myself to full-time for about 2 years, and part time for about 4 years) which unfortunately never reached the point where it was even possible to support myself on.

Thoughts are constantly bouncing around in my head about how to escape the 9-5 grind and live the lifestyle of an entrepreneur. I’m honestly not after a “get-rich-quick” scheme, but would rather just live life on my own terms and be able to do what I think is best/right instead of being told what to do by someone else.

Real estate investing has worked out well along these lines, however my approach seems to be quite capital intensive (especially in Toronto right now, the rent:price ratio just doesn’t work out very well for land lording). I would need quite a bit of cash to buy enough property to make even a meager living on (although as time went on I suspect my standard of living would shoot up).

I came across an interesting list of 20 things NOT to do when starting a small business. It prompted a bit of a debate in the comments. I think I agree with the original post, that for a small start-up business, keeping costs at the absolute minimum is a good idea while you test whether your business actually works or not. I think that might have been part of my problem, I kept rolling along with my business and didn’t test whether I was on the right track (and make corrections) enough.

Categories
Investing

Stock Watching

I was talking to a co-worker about sports recently, and I admitted to him that I couldn’t care less about any of them. The made the astute observation that you need to be invested in the outcome of the game to care about it, otherwise it was just people doing bizarre things on a play field that hardly anyone could appreciate on their own merits. You have to buy in to the concept that the Raptors winning a game somehow improves your life in order to enjoy watching a basketball game.

I’m not sure about sports, but that’s definitely been the case with dividend stocks for me so far.

I definitely agree with the idea of buying blue-chip dividend payers for the long term (they’re for buy-and-hold, not for day trading). If you’re the type of person who will lay awake at night worrying about share prices, you should avoid the stock market entirely. If however you can buy them, ignore them other then to occasionally tune or add to your profile, the common wisdom seems to be that its a fairly straightforward path to growing wealth.

Instead I’ve been watching my E*Trade portfolio multiple times a day and taking great delights in the tiny movements of Rothmans and Bank of Montreal. After making $350 on my first day of trading I wanted to call up Warren Buffett and taunt him. I was less eager to do so the next day when I lost $200. Suddenly these random numbers that had had absolutely no impact on my life and have been bouncing around many times a day for decades had become very interesting.

I’m *hopeful* that since I watched them raise and fall with equal interest and detachment (when I shared my good and bad news with indulgent friends I prefaced the news with “no this doesn’t matter in any ways, but…”) that I won’t stupidly sell at a loss if they ever take a big drop (I hope I have cash to buy more at that point).

Time will tell, but so far I’ve been enjoying investing in dividends. And as of 10 seconds ago I’m up $320.15!

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Categories
Investing

Buying Dividend Stocks on Margin

Buying on margin is a fairly straightforward, but somewhat dangerous way to buy stocks. Basically the idea is that you buy stock using money that you borrow from your broker. The broker has your stock as collatoral to force you to pay your debt, and will use the value of your account to determine your credit limit.

Usually the interest they charge you on what you borrow is based on how much you have invested and prime (for example, in my E*Trade account right now I’m paying prime + 1%, or 7% interest). If you can earn more then this amount through your investment, borrowing is good. If you can’t it’s bad.

Every book and article on investing that mentions buying on margin says how dangerous it is. Basically it magnifies your returns. If you make money, you make more, if you lose money, you lose more (because you’ve bought more stock and because you have to pay the interest).

If you’re buying very volatile stocks, your “credit” will fluctuate wildly (when the stock is high, your broker will loan you a lot, when the stock is low, he won’t). This can lead to a “margin call” when your debt becomes higher then your limit. At this point, if you can’t “top up” your account to deal with the loses, your broker will sell your stock to cover it. Since the stock is down at this point, you probably won’t be happy with the sell decision.

In Canada you can deduct expenses for investment, including interest, which can make trading on margin more attractive. Instead of paying 7%, I’m actually paying 7% * (1-marginal tax rate). Say my marginal tax rate was 25%, I’m actually only paying 5.25% after I get my tax deduction. With the Bank of Montreal stock I bought recently, I’m anticipating a 4% dividend-yield, which should be 3.5% after I’ve paid taxes (since dividends are taxed at 1/2 the income rate). Therefore if the long term appreciation of this stock is greater than 1.75% buying it on margin makes sense (which is what I did).

The additional benefit is that I won’t always have the opportunity to buy Bank of Montreal stock when its at 4% yield. By the time I’ve saved up more money to buy more of the stock, its price may have gone up and it might not be as attractive. By buying on margin, I can buy when the stock is attractive, then use my savings to “pay off” my broker.

Obviously buying more speculative stocks on margin is far more dangerous than buying “blue chips”. Additionally, anything I owed to my broker, I’d want to feel confident I could pay it off in the near future, whatever happened to the stock.

Categories
Investing

Dividend Growth

I used to wonder why anyone would buy Disney or Coca-Cola or any of the big name companies. Sure they were leaders in their fields and great companies and all that, but there stock price seemed pretty stead (with modest gains year-after-year) and it just seemed like GICs and more conservative investments could match them with zero risk (instead of the slight risk these companies seem to offer).

Even when I started getting into dividend stocks, I looked at the dividend-yield on these companies, and just couldn’t figure out why anyone would buy them (at 1% dividend-yield it still seemed like a savings account was a better bet).

What I was missing was the rate of the growth of the dividend. Sure Coca-Cola’s dividend might be 2.58% today, but given there 5 year dividend growth of 11.49%, means the dividend should be 4.4% in 5 years and 7.6% in 10 years, 13.2% in 15. Along with that dramatically increase dividend-yield (relative to our original purchase price) will be the new dramatically higher price for the stock to support the higher yield. Rob Carrick and Tom Connolley make a very convincing case that over the long term these high-growth dividend stock prices will keep shooting up, supported by the ever increasing dividends. A retirement income that increases by 11.49% per year is exciting both from a “easily fend off inflation” perspective as well as a “no worries about running out of money” perspective.

Consider instead a stock that pays a high yield, but which doesn’t increase. You’d be happy receiving the higher amounts in the first years, but when a growth stock overtaxes the yield and keeps going you then might become a little less happy.

I’m convinced there’s some way to factor in the current yield and the growth yield to figure out which is a better buy, but am somewhat at a loss how to calculate this. One idea I had is to get a “short list” of companies I like, which are all blue chip, long term increasing dividend payers. Sort the list in order of the 5 year dividend growth and throw away the bottom half. Then rank the remainders in terms of dividend-yield and examine the first few companies as potential “buys”. Repeat when funds allow.

Alternatively, you could only look at the top half of the current yield, then examine the first few when you order for growth. I’m not sure how much weight should be given to each element of a stocks history if you wanted to order them taking both ratios into account (naively I’d guess 50/50). Define “dividend strength” as yield x growth and rank. Start at the top and look for good buys.

There’s probably a mistake in this overly-simplistic approach, if any readers know better than I do (and have been good enough to read this far), I’d love to have my error pointed out in the comments!

Categories
Real Estate

Getting Started With Investment Real Estate – Part 3

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

My agent was actually very useful in targetting areas of town to look in. After repeatedly telling her my criteria (very affordable, near a subway, possible to rent) she focused on two areas of town. One wasn’t on the subway and so we quickly stopped looking there. I got her to show me two other areas that I didn’t believe her when she said they wouldn’t be the best locations to target, but after seeing some units and becoming more familiar with the area in the end I agreed with her.

If you want to be a total jerk, at this point you could dump your agent and put in offers yourself (which would be quite a bit more attractive without the buying agents 2.5% cut). I did NOT do this and view it as a pretty scummy trick to pull (and this is the main reason buyers’ agents get the signed contract, to prevent people from doing this). My agent had very real knowledge of the city and was able to help me quickly cut through the enormous number of listings and find the right area for me to target, this was VERY valuable, and for it she definitely deserved to be compensated. I’m a believer in “statistical karma”, and if you behave badly towards people enough, eventually you’re going to do it to the wrong person and get majorly burned.

With the area targetted (there were three buildings that were very similar in the area I liked), it is then worthwhile to view EVERY unit available that meets your criteria (a 2 bedroom condo or a very cheap 1 bedroom was mine). The advantage you have as an investor is that you aren’t going to fall in love with any unit. When a buyer loves something, the seller can get top dollar out of them. Conversely, when a buyer is willing to accept multiple properties, it becomes like an auction where the seller who’ll agree to the lowest price gets to sell first. Don’t fall in love. You can’t afford to as an investor. Its expensive, but permissable as a home-owner, but not if you’re looking to make money.

One thing I didn’t do which I should have is factor in the quality differences in the unit. They aren’t interchangeable, so viewing them all as acceptable/unacceptable then putting in equal bids on each in order of desirability (which is what I did) is a mistake. Instead you want to come up with a very low offer price, consider that the price for a unit in good repair, and discount this price by what you think it would cost to bring each unit up “good repair condition”.

E.g. I bought my condo (sorry to skip ahead to the end of the story 🙂 ) for $126K. I had to put $6K of repairs into it (supplies and labour) and it took 2 months before I was able to rent it out (at $500 / month in condo fees, +100 / month in property taxes + interest on the mortage). So basically, I should have offered $134K to a similar unit that didn’t need repairs and they would have been equal offers (instead I offered $126K to the units in better repair, and unsurprisingly the roughest unit was the first to accept). Live and learn.

Your agent is going to hate you (mine got to the point where if the offer that was accepted hadn’t been she was going to cut me loose), but you put in offers on ALL the properties, with the repair adjusted prices. Let your agent tell the selling agents that you’re looking to buy one of X units, and that you’ll be back with another offer if all of the others say no. This will scare the heck out of the selling agents (all it takes is one of the others to say yes and you’re gone) and they’ll champion you to the seller (I’ll discuss motivations and incentives as it relates to real estate agents in a future post).

If one of your first round of offers is accepted, you probably paid too much. Tough luck, try to be cheaper in the future. My first offer on the place I bought was $122K which was rejected. Clearly the minimum price the seller would have accepted was somewhere between $122-126K, which I’m very happy with as a small range (I’d be depressed if I paid $126K to a seller who would have accepted $110K).

Your agent will try to get you to let them handle the negotiations or will provide advice. Don’t take it. Unfortuately your objectives at this point in the process are not in line, so you have to set the offer price yourself.

Each round when everyone rejects your offer (which should happen at least once so all of the sellers had a chance to give you a low price), you up your offer and go through them again. Agents will try to scare you with the idea that you’ll “offend” the sellers and they won’t listen to future offers. Malarkey! An offer is just that, an offer. Which is an option the seller didn’t have before. They can say no, in which case they’re no worse off then before they heard the it. If their time is so valuable that spending 30 seconds hearing the offer is a huge inconvience they have some sort of mental illness. If someone is such a child that they won’t listen to future offers because I don’t worship their property the way they do, I’ll happily buy from one of the other 11 people I’m offering to.

Even if someone SAYS they’re offended and won’t listen to future offers, they still will.

The only time I wouldn’t follow this advice is if I found my dream house and fell in love with it (again, this is the high price of falling in love with a property). In that case, you’ll want to keep the lines of communication open and stay on good terms with the sellers, in which case low-balling isn’t in your best interest. If someone has just listed a property at a good price in a hot area, you’re wasting everyones time with low-ball offers. HOWEVER, if there are multiple property in the area that have been available for an extended period (the condo I bought had been vacant for 7 months), you should get a good deal.

(continue to part 4)

Categories
Real Estate

Getting Started With Investment Real Estate – Part 2

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

My strategy was to find a condo that I felt I could afford and be happy living in (this basically meant quite economical and on the Toronto subway line as I don’t own a car and don’t want to have to buy one). I intended to try and rent it out, and if I couldn’t find a tenant, decided I didn’t want to be a landlord, or couldn’t charge enough rent to make it worthwhile, I’d move in myself (I was hedging my bets).

I met with a Real Estate Agent, and early in the relationship caught her in a few lies. I debated whether it was better to stay “with the devil I knew” or find one I didn’t. In the end I figured I didn’t think I was going to find any saints working as Real Estate Agents and stayed with her.

I met with her and she kept pushing me to get pre-approved for a mortgage and to buy a pricier condo in a “hot” area of Toronto. I kept repeating that I wanted to buy something for a low price near a subway line, and that I wasn’t looking for appreciation (since my intention was to hold the unit for a long time). I think RE Agents are used to selling speculation to clients and it took a while for her to get that my interests were in a different direction, but eventually she got it.

Once she realized that I wasn’t going to stretch my budget, a pre-approval wasn’t necessary any more (I had 25% down for the price range I was targeting). She tried to get me to sign a “buyers agreement”, which would have locked me in with her for a set period of time (if I bought property without her I would have had to pay her commission). I was willing to sign for short periods, but in the end once we’d talked a bit she didn’t bring up the agreement again and neither did I. It kind of bugged me that she tried to tell me the “buyers agreement” was for my benefit (it was clearly for her’s). I’m a pretty straightforward guy, and it bothers me when people try to deceive me.

With an agent to work with, we were ready to start seeing units!

(continue to part 3)