Author: Mr. Cheap

Categories
Real Estate

Different Types Of Real Estate Investing

I’m gearing up to do a new real estate investment (being a silent partner in the purchase of a mixed use building in small town Ontario). I kept thinking about doing a post iterating all the types of real estate investing I can think of and the pros and cons of each, so this seems like as good a time as any.

Speculation – this is anyone who buys a house hoping it’ll go up in value, whether they live in it, rent it out or leaving it sitting vacant (such as buying land). If you hope it’ll be worth X% more in the future, and the bulk of your profit will come from selling at that future time, you’re speculating.

Pros:
-Very easy and fun (pick an area, listen to the reasons its “hot” and put your money down!)
-Mixed benefit, if you’re renting it out you get some income, perhaps you live in it and get to enjoy the property

Cons:
-No way to reliably pick the next hot area, you’re basically gambling

Land-Lording – This is where you buy a property that’s cheap relative to the rent it can command, find tenants, and make income from the difference between their rent and your costs. You can rent a single unit, a small building, or a 400 unit monster as you learn more and make more money.

Pros:
-VERY well established technique (perhaps the oldest on this list)
-All sorts of data you can use to reduce your risk (i.e. average rental price in an area, vacancy rates, etc).

Cons:
-May have to fix toilets in the middle of the night
-Many laws are very tenant friendly

Wholesaling – This is what the “I buy houses” signs you see mean. Basically you search for “motivated sellers”, quickly buy their properties for cheap, then turn around and sell them for market rate.

Pros:
-If you’re buying at a steep enough discount its a fairly safe way to make money
-Fast return, if you can sell the property you get your money back and are on to the next property

Cons:
-You might feel bad profiting from people who have had some bad luck (or made some bad decisions)
-You need to learn to accurately appraise what a house will sell for
-You need to be able to quickly close, so you’ll either need lots of cash or great credit

Lending – This includes funding mortgages and being a silent partner. Basically you provide the cash, someone else does the work, and you split the profits.

Pros:
-Its great to make money while someone else does the work
-Some security on your investment if your name goes on the deed

Cons:
-Some risk, if the person managing the property messes things up (or takes advantage of you)
-Since you’re not on site checking things out, the property may get into trouble or be under-performing and you wouldn’t know about it

Bird Dogging – Often pitched as the way for people with no money to get into real estate, you look for deals, then sell them to other investors who have money.

Pros:
-No cash risked
-Put as much or as little time into it as you want
-Learn while you earn

Cons:
-I believe this is illegal in Canada and some states.
-Pays quite poorly
-Requires expertise, but is often performed by newbies. People who can properly evaluate a deal to determine if its good or not, can probably pull together the money to buy it themselves.

Flipping – Based on the idea that a house in good repair is worth or then the same house in bad repair minus the cost of repairs (e.g. its worth money to have everything already done).

Pros:
-Great way to capitalize on skills you may have (if you’re handy)
-Not very risky if you can properly appraise property and get the repairs done quickly (before a market shift)
-Fun (according to the home improvement shows)

Cons:
-Very competitive, so it doesn’t pay very well these days (many people are doing it)
-Takes a lot out of your hide (you could have just worked your ass off at work and collected tons of overtime)
-Not fun (according to the reality of having to fix up a crappy house then not even get to live in it).

Any other ideas for big approaches to investing in real estate? Any ideas about more pros and cons?

Categories
Announcements

Why We Blog – Part 2

If you missed Part 1 of this post last week, go check it out first (I’ll wait for you here).

Last week’s post focused on criticisms of the Canadian Capitalist and the Canadian personal finance blogger community’s support of him.  I didn’t think either of these criticisms were fair.  Beyond, hopefully, demonstrating that bloggers are far from blindly loyal to one another, I tried to articulate some of the reasons why we choose to blog beyond what seemed to be considered in the Canadian Capitalist’s case.

In addition to “An Independant Voice”, “Money”, “Opportunities”, and “For Attention”, we blog:

To Inform Others

Some people just like to selflessly share what they know with others.  I think people claim this is their motivation more often than it genuinely is.  It takes a rare person to love a subject so much that they devote themselves to learning about it and helping other people learn about it.

I suspect that Dividend Growth Investor is an example of this, that guy LOVES dividends (and his passion is reflected in his blog).

To Inform Ourselves

Paul Graham has written that he feels students are done a disservice when they’re taught essay writing in order to analyse literature.  His feeling is that the proper perspective on writing an essay is that it’s an attempt to figure something out.  This is very much my perspective on blog posts.  I’ll make an assertion in a post, wonder if someone might challenge me on it, and go searching for something to back it up (which I can then link to).  Sometimes, I’ll find my original assertion was incorrect and I’ll have learned something (and update the post).  Other times I’ll find that the topic is more nuanced than I realized, and I’ll learn about these other considerations.  Sometimes I’ll have an idea for a post and will have to go off and research it in order to know enough to write a post about it.  I’ve had an idea about a 4 part series discussing the evolution of currency, and I’d be comfortable writing about barter, bills of credit and the gold standard, but haven’t wrapped my head around currency as debt after the US moved off the gold standard (anyone want to do a guest post? 🙂 ).

Beyond learning from writing, comments are often an amazing source of very valuable feedback.  I’ve had major blind spots identified and we’re particularly fortunate at Four Pillars that we’ve got some wicked smart readers who often are able to teach us a thing or two in the comments.

In last week’s post, the Canadian Capitalist identified this as the primary reason he blogs (and I certainly don’t see any conflict between it and his MoneySense deal).  Thicken My Wallet also seemed to identify this as his primary reason too.

To Meet Famous People

Blogging has brought me in touch with economists, journalists, members of parliament, authors, TV personalities and the lovely Kerry K. Taylor.  Twice I’ve been contacted by the Globe and Mail wanting to use me as a source for an article (unfortunately their editorial policy wouldn’t allow me to stay anonymous).  It’s cool meeting famous, accomplished people, but it REALLY rocks when they seek YOU out!

To Take Revenge on Those Who Have Wronged You

One of my favourite phrases goes something along the lines of:  “Never argue with a priest or a newspaper editor.  The priest will invoke God that he’s correct while an editor always gets to have the last word.”  It certainly isn’t the noblest part of blogging, but having a platform to denounce those who have mistreated you is certainly a perk.

For Weird Personal Reasons

Some people will set up blogs for bizarre, individualistic reasons.  This pretentious douche thinks of his blog as his gift to his children.  Sorry dude, I bet they’d rather have a Wii.

In Conclusion

I think everyone with a blog has their own mixture of these reasons why they blog.  Probably they’re all in there to SOME degree for most of us, whether we admit it or not.  Just because a reader *THINKS* they know why someone is blogging, we’re real people behind the words and our motivation may be more complex then it appears at first.

Apparently Simon Pegg has gotten a hard time from some fans that he’s gone “too mainstream”.  He responded to this that he understands the feelings of fans, it’s the same reaction when some indie band you like makes it big, you feel like you’ve lost something that was privately yours.  At the same time, he doesn’t feel like he should have to apologize for success (and neither should the Canadian Capitalist).

If you’re a blogger, why do you blog?

Categories
Announcements

Why We Blog – Part 1

The Canadian Capitalist announced last month a re-branding of his site and a partnership with MoneySense magazine.  I wanted to let the immediate reactions die down, but thought there were a few interesting reactions.  Some readers were unenthusiastic about the change, while bloggers were pretty unanimously supportive.  One of the more interesting comments seemed to suggest that support from other personal finance bloggers was somehow self-serving.

I don’t think support from other bloggers came from some sort of collusion or our own plans to “sell out”.  For the record, I think the partnership was 100% a good thing for the Canadian Capitalist, his readers, and MoneySense.  If I didn’t, I wouldn’t hesitate for a second to say so, but this is a good thing.  Bloggers (at least the ones I know) are about as far from “unconditionally supportive” as it’s possible to get.  If we disagree with what another blogger is saying or doing, we say so!

For example:

Few things amuse Mike or I as much as the other one being on the receiving end of a blistering attack.  My favourite e-mail off all time was in response to Mike’s post on “The “Myth” of Weekly Mortgage Payments” and read:  “What’s wrong with paying mortgage off faster. Fuck off you dumb, fat, fucking pig.”  I still giggle every time I read it.

The reason why we were so supportive of the Canadian Capitalist is we realize that we all have multiple reasons for blogging.  Even if our “mixture” of these reasons is different from the Canadian Capitalist’s, we understand why he did what he did and why it’s a good thing for everyone:  CC gets some money, MoneySense gets some exposure, and readers keep getting free content.

Some of the reasons why we blog include:

An Independant Voice

Some blogs certainly exist to provide a counter-point to traditional media.  The Canadian Capitalist is an excellent example of this, and even it he has some other reasons for blogging, that doesn’t discredit the work he’s done on promoting passive investing, explaining new Canada-specific investment vehicles and skepticism about certain real estate and dividend investing strategies.

Consumer Reports, NPR and PBS all try to avoid advertising, but instead you get regular “pledge drives” where people consuming the content are expected to pay for it (or subscription fees).  Personally I’d prefer CC to re-brand his site with MoneySense instead of starting to guilt-trip us to send him a few bucks (which he has never done).

Money

Part of blogging is for money.  Often this will be pitched as “to cover hosting costs”, but the reality is that hosting is pretty cheap (there are a number of free options) and many of us are making money above and beyond hosting.  Are teachers, doctors and firefighters not helping society because they draw a pay check at the same time that they do their worthwhile jobs?

I make $20 / post here at Four Pillars, and *I* think I’m worth every penny of it.  I think Million Dollar Journey is making the most in blog revenue out of Canadian PF blogs and I don’t think any of us resent him for it:  we try to learn from him.

I don’t think cash is the entire motivation for any of us.  I can make far more than $20 programming in the time it takes me to write a post, but there are other things I enjoy about blogging that make up the rest of the incentive.  I suspect this is the same for all other bloggers too, even the ones who are doing much better financially.

Every blogger has their own perspective on ad styles, sponsored posts, donation requests, specific advertisers and where to draw the line.

Opportunities

Blogging can get your name and ideas out there and sometimes lead to further non-blogging opportunities.

SquawkFox and Preet both leveraged their blogs into other opportunities.  SquawkFox used her blog to help her get a book deal, while Preet used his to help him get a TV show.  Good for them!

For Attention

I’m a total comment whore (and will be quite sad if, at the end of the day, there aren’t any comments on a post I’ve written).  Part of the joy of blogging is to get immediate feedback on the ideas you’ve written, and to be able to interact with readers.  I don’t always respond, but I read every comment left on a post I’ve written.  Beyond commenters, it’s interesting to see your page views and realize that a ton of people have taken time out of their day to consider what you have to say.

This post got too long.  Come back on Tuesday, May 4th for 5 more reasons why we blog.

Categories
Investing

Uncertainty in Stock Statistics

Yesterday Mike reposted an old blog post from my previous blog.  Commenter Adam correctly pointed out that it was quite muddled, to the point of almost being unreadable.  As a gesture of atonement, and to hopefully prove I’ve learned a thing over two over the last three years, I want to take another shot at what I was trying to get at in that post.  And I won’t use any parenthesis!  If you want to play along at home, read yesterday’s post before you read this one.

There are a massive number of statistics which are tracked for most publicly traded companies.  From price, to revenue, to dividends, to volume.  There are a number of ratios and other derived values which investors have also come to base investing decisions on:  from price-to-earnings, to dividend yield, to moving averages.

Different investing styles place greater, or lesser, weight on each of these values and ratios.  Moving average, for example, is a classic technical trader technique, while price-to-earning is a core component of fundamental analysis.  Each investor who follows one of these metrics has a great story why the indicator they believe in gives greater insight into the true value of a market and leads them to beat it.  Joel Greenblatt’s “The Little Book That Beats The Market” presents an investing strategy built on earnings yield and return on capital, Derek Foster’s first two books were built on the idea of investing based on dividend history, while Phil Town’s “Rule #1” details a slightly schizophrenic blend of technical *AND* fundamental techniques.  The famous Graham number, still in popular use by the likes of Tom Connolly and Warren Buffett, is calculated using earnings per share and book value per share.

All these strategies sound pretty impressive when you read about them for 150 pages or so.  Results are typically given which make the reader confident he’s figured out a back door to making big bucks in the equity market!  Sadly, things often don’t play out that way.  Any strategy can outperform in certain market conditions, but they also can take a beating and under-perform in other market conditions.

Beyond any specific problems with strategies, I’m suspicious about the data they’re based on.  Some metrics and the ratios based on them, such as dividend yield, are known.  Price is a record of the value a stock was assigned in a specific trade and is a known value.  Similarly, dividends are cash that actually show up in investor’s bank account.  These are known, real values.  In contrast, a number of metrics are self-reported by companies, who often have a vested interested in presenting a certain perspective on the company’s financial health to the public.  Beyond the self-reported values, other values are from stock analysts who make predictions on what they THINK the company will report in the future.  Clearly this is a spectrum of real, known values through to silly, fantasy numbers.  Some formulas combine silly numbers, magnifying the inherent margin of error.  The likelihood of  the numbers used in a strategy being correct or not clearly needs to be incorporated in the decision about whether or not to base investing decisions on them!

Between dividend yield and dividend growth, I think a case can be made that yield is the far more reliable of the two metrics.  Yield is based on the annual dividend paid divided by the stock price, while growth is the % increase over some period of time.  The yield isn’t certain moving forward, as there is no guarantee that the company will maintain the dividend.  The growth is definitely going to change.  Companies try to maintain dividend payments whenever possible, but they don’t try to maintain a precise dividend growth rate.  If the dividend growth of a company was a reliable predictor of future dividend payments, I’d agree that investing in stocks with high dividend growth is preferable to investing in stocks with high dividend yield, but I don’t believe that is the case.  Blindly investing in high dividend yield companies would be equally foolish.

As Homer taught Bart in the famous Simpson’s episode “Homer at the Bat“:  “Can’t win, don’t try”.  While this isn’t a great lesson for life, it is a good lesson with the stock market.  Instead of betting on an uncertain strategy based on uncertain statistics, investors can give up on beating the market and instead happily match it.  Passive investing lets other people do all the work of frantically appraising every gyration the markets undergo and simply reap the benefit of long-term gradual increases.

Whew – not a single parenthesis! (it just about killed me)

Categories
Real Estate

Real Return on Investment Real Estate

When I did my condo purchase series I promised to provide an update after I did my tax return and never got around to it.  Better late than never, I’ve completed my 2009 taxes and can provide a summary.

The way most investors (incorrectly) calculate their return is to take the rental income and subtract property taxes, insurance, utilities and mortgage payments.  I actually lucked out this year and that does match my return (if I can consider condo fees as utilities).  In reality, my return also included a risk element (my tenants could have moved out and I would have eaten the vacancy and something could have broken and I would have been on the hook for the maintenance costs).  Just because I got lucky doesn’t mean I can ignore this.  In future years I may lose any profits (and more) on these and other expenses.

Taking John T. Reed’s recommended approach of using my tax return to truthfully calculate my cash flow, I had a net income of about $3,000.  At a monthly rate of $250, I’m pretty happy with this.  Interestingly, this is quite close to the cash flow I projected (which makes sense, since nothing unexpected happened and the tenants remained throughout 2009).  I’ve raised the rent recently (although costs have also risen, so I suspect my return will stay pretty constant).

Return on Investment

Looking at this based on my initial investment of $43,811.68 this gives me a ROI of 6.8% (3000 / 43811.68).  This is nothing to sneeze at, but also not the greatest returns ever made.  There MAY be some appreciation (I think there would be if I sold today),  but I won’t know that portion of the return until I sell (the Toronto real estate market could crash or the building I bought in may develop expensive problems and I may lose money when I sell – the future is unknowable).

I have written in the past about the problems I see with how people think about current value.  Fundamentally, I think there is a problem thinking about investments purely in terms of return on investment.

Return on Equity

Looking at this from, in my opinion, the far more rational return on equity perspective, I currently estimate the property might be worth $160K.  Deducting a 5% transaction cost (in case I sold), and my mortgage which is a sliver above $87K gives me $65K (160*0.95-87) in equity, for a ROE of 4.6%.  This is probably more realistic, and again, is nothing to sneeze at in the current environment, but I’m not convinced it’s totally adequate compensation for the risks associated with the investment.

Tax Benefits

For many real estate investors, depreciation of real estate (and the tax benefits it brings) is a large part of their return.  For me, as a low-income grad student, this wasn’t useful to me (I didn’t take the capital cost allowance).

Moving Forward

I’ve changed my thinking on raising rent and given my steadily rising costs, the tenancy laws in Ontario, and the fact that it seems to be the standard behaviour I’m planning to be a bit more aggressive about raising rent in the future.  Unless there’s a convincing reason not to I intend to raise tenants rents systematically every year after they move in and each year after the previous increase.

I’d certainly be willing to sell if the right opportunity presented itself (if a tenant living there was excited to buy from me for example), but I’m not in any rush either.  I’ve been quite pleased with the (very low) time & effort requirements over the last 3+ years.

Categories
Investing

How To Invest In Canadian Dividend Stocks

There are two ways to make money with stocks:

  1. Appreciation (the difference between the purchase price and the sale price). Otherwise known as capital gains.
  2. Dividends (regular cash payments the company sends you a check for or which get deposited into your brokerage account).

Most investors seem to focus exclusively on speculative gains (the appreciation), going so far as ignoring dividend payments when reporting stock market results over long periods of time.

Dividends (even just considering a Canadian context) is WAY too large a topic for a single blog post, so I’ll apologize in advance for a (necessarily) shallow treatment.

New to online investing? Learn how to buy an ETF or stock using a discount brokerage – step by step instructions.

What Dividends Say About a Company

There’s some dispute about whether it’s a good thing or not if a company pays a dividend.  The argument against it is that the company can retain the earnings that would have been paid out to shareholders and grow the company in a more efficient manner.  Say a company pays out $1 million a year in dividends.  They could use this money instead to expand their sales force, increase the production capacity of their factory, acquire a small company in a related industry or increase their advertising (and hopefully future sales).  Advocates of this policy feel, given a good company, reinvesting the earnings is a better investment than anything else they could do with the money.  Berkshire Hathaway, Warren Buffett’s holding company, has never paid a dividend and Microsoft just recently started paying a small dividend (until now they’ve reinvested in explosive growth).

The counter-perspective is that dividends are cold hard cash and a company’s ability to continually pay them provides concrete evidence that the company is performing well.  Accounting malfeasance  (such as Bernie Madoff) is harder, or impossible, if a large transfer of cash is going to shareholders on a regular basis.  Further, dividend investors may feel that THEY are able to better reinvest the earnings then the company that paid them (perhaps in another company they feel is undervalued, or in another investment category like real estate or some commodity).

Examples of Canadian dividend stocks

Each of the big 6 Canadian banks is a Canadian dividend stock, as are many of the Canadian companies you’ve heard the name of (such as Loblaws, Shoppers Drug Mart, or Tim Hortons).  Personally, all stocks I own are dividend payers and in addition to the US companies General Electric and Bank of America, the Canadian dividend stocks I own are:

  • Bank of Montreal
  • National Bank
  • Russel Metals
  • Bank of Nova Scotia
  • Telus
  • Fortis
  • Imperial Oil
  • Transcanada Corporation
  • CIBC

In “The Lazy Investor”, Derek Foster recommends a portfolio made up of:  Scotiabank, Enbridge, Imperial Oil, Fortis, and Riocan REIT.  

If you come across the term DRiP while reading about dividends, it refers to a dividend reinvestment plan (which is a topic for another day).  MoneyEnergy has a VERY, VERY good series of posts on DRiPs (on the right side of her page, halfway down).

An excellent list of dividend paying Canadian companies is maintained at the Canadian DRIP & SPP List.  The Claymore S&P/TSX Canadian Dividend ETF provides a list of strong Canadian dividend stocks.  As an ETF, it’s an low-fee way to invest in a diversified collection of Canadian dividend companies (if that’s your bag, baby).

Tax Treatment

Dividends paid by Canadian  companies get a favourable tax treatment.  This certainly improves their returns for Canadians!

Canadian Dividend Investors

Tom Connolly publishes an great newsletter focused on investing in Canadian dividend companies.  While his newsletter is closed to new subscribers, there is an archive of past issues at the North York Public Library and he maintains some freely available information at his website.

While he can be a controversial figure in the Canadian investing scene, Derek Foster has published 4 books which I feel are worthwhile reading for a beginner interested in dividend investing.

 

Categories
Personal Finance

When Does Being Too Frugal Become Stealing?


Financial Blogger posted a link to a great article in his monthly round up for August. While I respect what the original poster is getting at, I’m not sure I totally agree with her.

She talks about how being “thrifty” when you’re at a fast-food restaurant and sharing a drink (with free refills) between the whole family is more likely to teach your children that stealing is ok, rather than the value of saving a dollar. Thankfully she follows this up by admissions of similar situations where she does the same thing (sneaking in food or getting in free as her daughter is an employee). I don’t buy her justification that her actions are “thrifty” while the actions of others are thievery.

My guiding principle in situations like this is that “bending the rules” is morally permissible when you’re not causing a business or individual a measurable lose. I don’t buy the argument that its theft when you deny them potential sales. Shoplifting is clearly wrong, as the Roots store has one less leather handbag to sell if you take it, and you’ve clearly hurt them. At a fast food restaurant, the fountain drinks cost them next to nothing (probably about the same amount as napkins and condiments which they give away free), therefore how you’re really hurting them by sharing is that you aren’t buying multiple drinks. You might have come in and just bought food (and no drinks), in which case they’d be in the same situation, so how have they really lost out on anything other than POTENTIAL revenue? I never feel I owe a business the amount of sales they figure I should buy.

Downloading music is similar. Sure, the artist doesn’t get paid (or, more importantly, the distribution company), when you download “Hit me baby one more time”. Britney doesn’t lose a thing (except the hope that you may have bought her CD).

The movie theatre seat that Grace sits in would have sat empty during the movie, so her being there without paying an admission doesn’t hurt them in any measurable way.

I can understand why businesses WANT to be able to collect more money, and I certainly support them in trying to limit cheap-o activities (like people sharing drinks, sneaking into the theatre and pirating movies). I think in each situation, the business is already policing it as much as its worth to them to prevent customer “abuses”, and if the odd person spends a day “theatre hopping”, good for them in the opinion of Mr. Cheap.

Categories
Personal Finance

Making A Little Bit of Money Makes Life a lot More Enjoyable


Years ago, during my undergrad, I attended a lecture about grad school. One of my profs talked about his experience being a grad student, and how he’d worked between his undergrad and starting grad school. He made the point that if you save a little bit of money and bring it into your grad studies, life can become a lot more pleasant (with the ability to take a pretty undergrad out to a movie or to purchase the odd pitcher of beer).

At the time, I thought this was the most blatantly obvious thing I’d ever heard (I’ve always been a saver and had a bit of extra cash available, even through my undergrad). The funny thing though is, 1) most people don’t realize this and 2) it’s not just true about grad school – it’s true about life.

Say someone is working paycheck-to-paycheck, maybe supporting a family or maybe just themselves and a deluxe apartment in the sky. Every two weeks, his pay is eagerly devoured by all his life expenses, with anything extra he can afford disappearing into a credit card debt (that never seems to get smaller). Say on a Wednesday before payday the boss comes in and rips the guy a new hole for something that isn’t his fault. How is he feeling?

Take another guy, similar situation but no debt and 3 months of savings in the bank. Maybe his daughter only goes to 1 dance lesson per week, maybe his deluxe apartment is actually a shared 2 bedroom in a 30 year old building. His boss comes in and rips him a new hole for something that isn’t fair. How is he feeling? Pretty willing to tell the guy off and head home to enjoy a long weekend before starting his new job search, eh?

The joke of it is, the employer would probably pick up on the first person’s desperation and would be less likely to chew the second guy out (because he’s probably stood up for himself in past situations). I suspect employers and managers often get a feel for the people who really need the next paycheck. In “The Millionaire Next Door” it talks about the two daughters of a rich guy. A man marries one daughter and accepts a cushy job at his company. The old bugger treats him like a servant in the house and after a couple cocktails starts calling him bozo. The other son-in-law politely refused a similar position and had refused monetary handouts, and every time he visited was treated as a honoured guest.

Your dignity shouldn’t be for sale. Especially for the consumer trinkets they offer these days. Having someone sense your desperation and run you down will make you feel far worse then the $300 running shoes or the trip to the all-inclusive made you feel good.

Being debt-free with 3 months of living expenses (either in the bank, in the stock market or in property) is half-way to freedom. Until then you’re just a slave.