Author: Mr. Cheap

Categories
Real Estate

A Low Capital, High Labour Real Estate Strategy

Attention:  There’s a wager riding on this post.  If you’ve done something like this (or know someone who has), please leave a comment with details!  Specifically we’re interested in a) how much of the persons OWN money had to be invested, b) what their construction experience was BEFORE they did this for the first time and c) whether they were able to do this part time (did they have another job).  Please do watch the comments to see how the wager plays out in the comment (I can almost taste that beer already).

Thanks, Mr. Cheap

There’s always an interest in real estate strategies that don’t require a lot of money.  Happy to fill the void, a variety of get-rich-quick-through-real-estate types offer information on bird-dogging, rent-to-own, flipping and other questionable practices.  Sadly, these strategies have major challenges (legal, ethical and business) associated with them and are unlikely to provide what the person pursuing them is looking for.  An alternative, presented today, is something I haven’t done myself but have heard being done second hand from a number of sources.  It’s possible anywhere in the world, but is particularly well suited to Canada (and our taxation laws) and to small and medium sized communities.

The basic idea is to buy a piece of land, verify zoning and get permits and build the house yourself.  Do as much of the labour as possible, and anything you can’t do, hire someone to do it for you.  Once the house is finished, move into it.  Start working on another house.  Once this second house is finished, sell the house you’re living in and move into the new house.  Repeat as needed.

When I was studying in my undergrad, a friend of mine told me his father did this (and they’d lived in 8 different houses while he was growing up).  Apparently this was his father’s preferred form of recreation (he’d finish up at work, then head over to the building site to swing a hammer for a couple of hours each night).  A friend of my father’s has just recently stopped doing this (he did it for years and has finally “retired”).  He was an electrician, so was in the enviable position that he could do the electrical work himself, and had a number of contacts in the construction industry so he knew the other work would be done properly.  He even did this for investment properties (where instead of making a private residence for himself to move into, he built apartment buildings).

I was talking to a woman about this recently, and she said her grandparents did this is Romania (however they did it because it was the only way they could have a house:  not as an investment).

Taxation

The large benefit of the Canadian tax code for this type of thing is that we can sell our primary residence and not pay taxes on the capital gains.  In contrast, Americans pay tax on this, but can deduct their mortgage interest.  Canadians can’t deduct the building materials and expenses of construction, but these should be quite a bit lower than the sale price (so it’s better to get the tax free sale than to get the tax deductions on your costs).  Living in the house is an important step in the process (if you just build it than sold it you’d be in the construction business).  Obviously you’d want to read up on CRA‘s definition of a primary residence and make absolutely sure each of your “stays” qualified.

Investment

SOME money will have to be put into this strategy, since you’ll have to pay for the land, materials and labour as the house is being built.  A construction loan helps with this.  Basically you show the lender exactly what you’re going to do, they approve the plans and provide money at each step in the process.  This is completely different than the standard process of getting a mortgage, but in some cases it’s possible to convert the construction loan to a mortgage upon completion.

My understanding from people who’ve done this is that being involved in the process, EVEN if just as the general contractor, saves quite a bit of money.  Plus, if you decide to live in the house long term instead of continuing with this strategy, you’ll know that it’s a well built home.

Carrying Costs

There will be costs that will need to be paid during construction (such as property taxes and whatnot).  Part of what might makes this approach less appealing in a large city would be that these costs and the “opportunity cost” of having a construction site where work proceeds SO slowly (since at times only one person may be working) would undermine any gains.  Vandalism and whatnot might also be considerations and could stop this from being worthwhile in a hurry.

Required Knowledge and Ability

The more you know about construction (like the electrician mentioned above), the better off you’ll be.  Early on when I first met Mike and his wife, I was very impressed at the scale of renovation they’d embarked on with their house.  At the beginning, despite Mike’s engineering background, they didn’t know much about home construction, but launched into some very aggressive plans.  The place looked great when they showed me around (I met them after construction was completed).  Not everyone would have the energy and willingness to learn how to do the various tasks then actually do them for the amount of time to construct a house (but both are required if you’re going to build your own house).

Why I Wouldn’t Do This

I have pretty close to zero renovation / construction / home maintenance experience.  A buddy and I spent the better part of a day anchoring a runner for drapes in the ceiling once (think about two guys off of “The Big Bang Theory” with a drill and you get the picture).  If I was serious about doing something like this, I’d obviously work up to it by getting involved with some renovation projects (at home or with friends) first.  Hell, someone doing reno work will probably be happy to train you if you’ll do work for them, so it’s a way to benefit both people.

Beyond lack of ability, building a house would be A MASSIVE amount of work.  Given that I try to earn a living staring at a computer monitor (or a nice book) and not getting sweaty, this would not be for me.

That being said, maybe others aren’t as lazy as I am.  A number of people have built their own houses before, so the information and possibility is out there.  There’s also 911 hits on Amazon for “build your own house”.

Categories
Book Review

Book Review: SuperFreakonomics

I loved the original Freakonomics book and was excited when I first saw that Levitt and Dubner had released SuperFreakonomics.  I received it as a late Christmas gift and tore through it in a couple of days.  From a high level, I’d say if you liked the first book, and are willing to read more of the same, you’ll like this one.

I used to have very romantic ideas about academia.  I imagined faculty were the intellectual elite who congregated to expand human knowledge, investigate the meaning behind everything and set aside the pretty bickering of lesser minds.  While very smart people tend to be around universities, often the research is incredibly derivative, following academic fashion closer than a supermodel follows clothing fashion.  Politics and petty bickering seems to be the focus of a pretty large portion of many academics’ time as well.  The two Freakonomics books follow this spirit of intellectual inquiry I’d hoped to find at universities:  the authors are smart, follow exciting work in economics, tie in current research to the human condition and challenges facing the human race and are able to politely and smoothly demolish objections made against the findings they present.
To order this book:

From the United States then please use this link for Amazon.com

If you are from Canada then please use this link for Amazon.ca

In the first book they indirectly took a shot at Malcolm Gladwell when they ripped apart the “broken window” explanation Gladwell presents in The Tipping Point to explain crime reduction in New York city.  Gladwell offered what I found to be a somewhat lame counter-argument.  In this book they take a couple more shots at Gladwell.  They basically cast Outliers as one of three works based entirely on K . Anders Ericsson’s research (which is a fair criticism I’ve come across elsewhere).  They also present a novel (to me anyway) perspective on the Kitty Genovese murder which was an important part the The Tipping Point.  They touch on Atul Gawande’s “Better” and seem to have more respect for it than they do for Gladwell’s work.

One of my friends had said he “hated” SuperFreakonomics, and after reading it I asked him why.  His feeling was that the examination of the economics of prostitution was too similar to the examination of crack deals in the first book.  It was fair that they’re both detailed overview of the business behind illicit activities (and are based on work by the same economist), but I found them both fascinating.  His other complaint was that it was “too much of the same” as the first book, which is valid.  I view this as a positive, not a negative, myself.  His third criticism was that one big part of the book was how to catch terrorists using data mining, and they left out the final punchline in “the interests of national security”.  I agreed this was kind of anti-climatic (and they perhaps should have left this section out if they couldn’t provide all the details).

In the first book they rip into Realtors (showing pretty convincingly that most Realtors aren’t working as hard to get top dollar for properties as they claim to be).  In this book they ask who adds more value:  a pimp or a Realtor?  They compared houses sold by the owners (paying a $500 flat rate) to those sold using a Realtor (charging 5% of the sale price, $20,000 for a $400K house).  While they acknowledge possible confounds in the research, the findings were that houses sold for the same price with or without a Realtor.  The big difference was that they sold 20 days sooner if the Realtor was involved (and question how many people are willing to pay $20K to not live in their house for an extra 20 days?).  Pimps, in contrast, AFTER taking their 25% commission left prostitutes with a $85 HIGHER weekly salary than if they were working solo, and they slept with 1.6 LESS men each week.  Additionally, prostitutes without pimps were more likely to be beat up or forced to give “freebies” to gang members and police officers.

Other topics in the book include:  why current thinking on global warming isn’t productive, who terrorist are (rather than desperate, grubby people, they paint a picture of them as “super patriots”), how the introduction of television has helped women in India, an investigation into altruism (and how economic research supporting it was debunked), the (in)effectiveness of child car seats (for children above the age of 2), and whether its safer for a drunk to walk home or drive home.

Their book is well cited throughout, with footnotes directing interested readers to the original research studies this work is based on.  It may just be that I’ve read too many of this type of book, but I was already familiar with a number of the research projects they detailed (which somewhat stole the surprise of the “twist”).  If someone hasn’t read the first Freakonomics book I’d recommend reading it first, but SuperFreakonomics is just about as good.
To order this book:

From the United States then please use this link for Amazon.com

If you are from Canada then please use this link for Amazon.ca

Categories
Announcements

The TTC’s Idiotic Approach to Fare Increases

It’s always interesting seeing unexpected consequences play out in government policies.  It’s almost like the old story about the monkey paw, where every time something is wished for, it goes horribly awry (including trying to fix previous wishes).  The TTC recently embarked on a series of foolish decisions when they wanted to raise the fare.

Prices go up, and I don’t have any problem with them raising the price.  The cash fare went from $2.75 to $3.00 and a token or ticket increased from $2.25 to $2.50.  While the fare increase was still under consideration, some enterprising commuters decided that it would be worthwhile to stockpile tokens (since they’d use them anyway and if the price went up, they’d have gotten them cheaper).

For some reason, the idea of this *REALLY* annoyed the transit commission.  People were only getting a 10% discount, the commission would get the payment upfront (for services that wouldn’t be provided until the future – possibly the far future if people bought a ton of tokens), and there’s a decent chance that a proportion of the stockpiled tokens would get lost over time.  Behind all this, the TTC was terrified of the possibility that the citizens of Toronto would get this discount, the very people the service was provided for and who pay for any shortfalls in funding (through municipal taxes).

I’m 100% in favour of fees where the people using the service pay for it, and I definitely agree that the TTC’s funding should come from its riders.  *BUT* since it already gets some funding from municipal taxes, I *REALLY* don’t see why it’s so horrible if some riders get a slightly better deal for a very short time.  The people getting the deal will be the same people bailing out the TTC in the future.  Besides, how many people are really going to invest their life savings into TTC tokens?

I understand that there was probably also a concern that some people might stockpile tokens then resell them.  Given that the absolute maximum profit margin they could make would be 10% (and many people would be leery of buying tokens from some black market source) and that it would probably be less (after costs to get tokens to buyers and offering a discount to entice people to buy from the vendor instead of directly from the TTC), I can’t for the life of me see why this was would be such a concern.

So, given that their objective was to prevent a) their customers and bosses from getting a small discount & b) from business people who are bad at math and business trying to arbitrage the fare increase, what did the TTC do?

First they stopped selling tokens entirely.  This at least makes more sense then in the past when they’ve “rationed” tokens before an increase, but either approach is pretty darn ridiculous.  They created an entirely new fare ticket (a temporary ticket that would only last until the end of January) and this is the only thing riders could buy.  I wonder how much retooling everything to sell these temporary tickets cost?  And, you could only buy them from the operators in the booths (they shut down the automated vending machines).

This, of course, led to MASSIVE line ups at the sales booths (every time I used the system over the holidays there was a line).  When I asked about the temporary ticket, and if it would expire, the vendor said “no, no, you just have to pay a quarter along with the temporary ticket after the fare increase”).  This turned out to be a lie:  the adult ticket is completely non-refundable and expires at the end of the month (at which point they’re useless pieces of paper that cost me $2.25 each).  Adding a quarter will only work for the month of January.  I bought 10 tickets (so I wouldn’t have to line up again), and only used 5 of them, so I’m out the cost of the remaining 5 tickets which I won’t be able to use (I’m not planning to go back to Toronto in January).

The thing that really drives me nuts about the whole situation is this is something that happens ALL the time over the ENTIRE WORLD!  Transit fare increases have happened numerous time IN TORONTO, BY THE TTC!!!  There is NO EXCUSE for them to make such a mess of it, cheat riders who have paid for tickets they won’t be able to use and waste everyone time by massive line-ups and congestion at the turn-stills (the only way to use a ticket is to squeeze past the people in line and drop it into a box in front of the operator).  One Toronto business professor suggested sidestepping all the silliness and just letting people buy as many tokens as they want or moving to a flexible pricing technology (which is pretty cutting edge – transit systems have only been using it for 25 years).

It sure must be nice having a government supported monopoly, as I can’t see this level of incompetence existing many other places.

Categories
Announcements

Bias and Pointless Arguments

Years ago I lost all taste for arguments, debates and heated discussions.  One of the underlying basis for engaging in these is the idea that through the contest, truth will emerge.  All other things being equal, the person with the correct perspective SHOULD be able to “out-argue” the person with the incorrect perspective (since they’ll have stronger points to use as weapons).  This is, in part, the basis for the legal system in most countries.

I think this is false, and the entire exercise is, at best, a waste of time.

Logical Fallacies

Years ago I took “Elementary Logic” during my undergrad (I joked with friends that it should be easy, since it was “elementary”).  One part of the course was a list of logical fallacies which SEEM to prove a point, but don’t.  The textbook presented these saying that the intention WASN’T to use these to attack another’s position (“Well sir, you’ve just undermined your own position by making an ad hominem fallacy”), but to examine our OWN assertions and make sure they are free of fallacies in order to strengthen them.

Just about any Internet discussion forum or blog (certainly including my own posts) is RIFE with logical fallacies to the point that the discussion seems pretty meaningless.   Some communities adopt guidelines, such as Godwin’s Law, to try to prevent the most egregious instances of this, but I’ve never encountered a community that came anywhere close to avoiding them.

Desperate to Win

I think a big part of the problem with arguments is that quickly people become more interested in “winning” and any pursuit of the truth goes out the window.  I’ve known people who would just make stuff up to try and win arguments.  One of my friends may have put it best when he told me that “you can’t win debates with people who are intellectually dishonest”.  A friend of a friend once bragged that he had never lost a debate.  With a bit of digging, it turned out that he was just incredibly stubborn and would keep insisting he was right and the other person was wrong no matter what else was said.

Self Protection

It is difficult to get a man to understand something when his job depends on not understanding it.

–Upton Sinclair

I am reminded of this quote every time a real estate agent comments on one of our real estate agents posts.  I find most of the justifications of the value of agents offered to be laughably transparent (and the attacks on the original posts to be bizarre straw man attacks – they criticize Mike for things he never said in the posts or comments).

Underlying Basis for Conflicting Views

At its heart, I think this is the real reason I find arguments unproductive.  Often people disagree about very fundamental issues, and rather than discussing them they argue about derived issues.  If a staunch republican was arguing with a staunch democrat about which candidate is the better person to be president, they’ll both be able to argue forever.  They aren’t actually arguing about who is the better person for the job, they’re disagreeing about ideology (but that’s not what they’re talking about, they pretend it’s about the candidates).

Consider another two individuals, one who believes that individuals are in the best position to make decisions about themselves and their property and one who believes that people can be protected from making bad decisions and that those who are better off have an obligation to help those who are worse off.  These two people will disagree about almost every social policy that is proposed.  Rather than getting to the heart of the matter and admitting they have different philosophical outlooks, they will argue, and argue and argue the details of any proposal and will be incapable of reaching a genuine consensus.

Democracy

The truth isn’t democratically determined, but I think people living in democracies lull ourselves into thinking it is.  If everyone in a discussion forum feels A is true, but one lone person rails on about B, the view tends to be that A must be true.  If everyone thought this way we’d still be living in caves.  You get the same dynamic in group arguments where the majority can shut down the minority by interrupting them, giving “everyone a chance to have their say” (which leads to the majority getting more air time) and congratulating one another on their “iron clad” arguments (which the only thing iron clad about them is that they agree with the persons original belief).  I love an old video of one of Milton Friedman’s lectures where a hippie tries to rebut Friedman’s view (with the enthusiastic support of the audience) and Friedman, once he’s finally allowed to respond, calmly and methodically rips the beatnik’s argument to shreds.

What’s The Alternative?

People are welcome to argue with one another if they enjoy it (apparently Wikipedia has taken all the fun out of cocktail party debates – the only topic people can still argue about is whether or not Wikipedia is a valid source of information).  I think science has long had a better model of getting to the truth:  stating position on paper rather than back-and-forth dialogues.  This certainly isn’t to say there’s no disagreement in the sciences (nature-vs.-nurture in psychology and light as a wave or a particle in physics were both protracted and vicious).  Instead it forces people to state their position clearly and for the record, instead of allowing them to backpedal and use rhetorical games to make their point.

With blogs I think we get a mixture of the two conversations, comments (which are a lot more like discussion / debates) and rebuttal posts (which are more like the scientific format).  While I’ve received a large number of excellent comments, others have been of fairly low quality (and have been FAR worse then even the worst rebuttal post).

I actually think this could be a superior model of government, where an open website is provided and anyone (lawmakers and concerned citizens) can write commentaries on the issues of the day.  In a “Digg” style, the community could promote which articles recieve the focus, and it could lead to more accountable politicians (perhaps they’d be more ashamed seeing their deceits in black-and-white instead of videos or news articles where they could claim they were “taken out of context”).  Popular perspectives could originate anywhere and be promoted to provide a mandate to officials.

Categories
Book Review

Malcolm GladWell Book Review: What the Dog Saw

Malcolm Gladwell’s new book, “What the Dog Saw” is different from his previous books.  Whereas he took a core idea and expanded it to book length in Outliers, The Tipping Point and Blink, in this book he collects a number of articles he had previously written for “The New Yorker”.

A number of times I’ve complained to Mike about how under-utilized most blog’s archives are.  When someone finds a blog they like, it seems quite rare that they dig through the archives (instead they just start  reading the most recent posts, often missing some of the best stuff there).  My feeling was along these lines after reading this book:  Gladwell has published a lot of great stuff in The New Yorker and I should really dig through it more than I have (I’d only read two of his articles before this book).

The articles themselves covers a wide range of topics, such as ketchup (and how it delivers all five of the known fundamental tastes of the human palate), dogs (and how they’ve evolved to find humans VERY interesting), hair dye (and it’s connection to the evolving women’s rights movement), problems with interviews (and how this is seen in recruiting football quarterbacks), and how to deal with homelessness (in a way that will annoy everyone across the political spectrum).

At one point in the introduction, Gladwell discusses how annoyed he gets when someone talks to him about one of his articles and says “I don’t buy it”.  He writes that his intention isn’t to give the definitive last word, but to excite people about how interesting things like ketchup and hair dye are and get them thinking about some of the ideas that surround us every day.  This is exactly what I like about his books (and why I’m glad there there’s a number of authors imitating him):  the world can use more of this style.

Joel Spolsky writes some excellent posts on “Joel on Software“.  He is a former Microsoft programmer who created a company that is set up as “the type of place he would want to work”.  He treats his programmers very well, and has built a good company based on this idea.  One chapter in this book dealt with this idea (which I’ve always thought was a good one):  a company that gives its top talent a large degree of latitude.  At the company Gladwell discussed they would identify the “stars”, then give them resources for projects, let them work on things they found interesting, and pay them generous wages to keep them.  The CEO talked in one article about an employee who had, at 29, as a gas trader at the company set up an on-line trading division.  She worked in her spare time, and 6 months later, when the CEO first heard about the project, she had 250 people working for her, servers purchased and was ripping apart some of their buildings.  The CEO responded that this was “exactly the kind of behavior that will continue to drive this company forward”.  I would be tempted to agree that this is an exciting, dynamic way to create a pretty innovative company.  That company’s name, by the way, was Enron.  In another article he presents a pretty convincing case that at Enron the complexity got away from them, rather than it being deliberate fraud.

I think there’s certain information in this book that will be of interest to anyone who likes to read about personal finance topics.  Gladwell is always good at presenting a new perspective on issues (especially on irrational beliefs and behaviours), which I think is vital for investing.  His ideas about how we interact with each other and use products should be useful for anyone interested in human interactions or business.  One chapter, Blowing Up, deals specifically with two traders and their differing approaches to investing (one who tries to outsmart the market, and one who bets that the market will outsmart traders – guess who wins?).

There’s an introduction and SOME chapter have a short update at the end (if something big has changed since the article was written), but for the most part the book is a collection of his articles, so frugal fans could probably just read through his The New Yorker archive.

To read more reviews or to order this book:

If you are from Canada then please use this link for Amazon.ca

From the United States then please use this link for Amazon.com

Categories
Frugal

2011 Last Minute Cheap Christmas Gift Guide

Unfortunately, the economy is still down, and this year the pressure is still on to find cheap gifts for loved ones.  The previous edition of the Last minute cheap Christmas gift guide is still relevant for gift giving, but if you need more modern ideas for what to give on a budget, we’ve got you covered.

  • hugA hug:  The classic way t0 let someone know “I’m broke, but I care” a hug is perfect for all ages and both genders!  As it’s most acceptable with older relatives, you can also push your luck and give this to siblings and friends.  Add a kiss or other affectionate act and you can cross that “special someone” off of your list.  Not recommended in work environments (especially with your boss).
  • cdsBurnt CDs / DVDs:  Let people know that when you steal for them, you steal the best!  Whether it be bootleg music, tv shows, movies, or even computer software this is the gift that says “I thought about something that would be perfect for you, then downloaded it off of the Internet and burnt it on a $0.10 bit of plastic instead of wasting money getting it at the store.”  Edgy and “counter-culture” this tells everyone involved in the gift giving festivities that you’re a good looking rebel who plays by his (or her) own rules!
  • soapsHome Made “Spa” Gift Basket:  If you travel regularly (perhaps for business), collect the toiletries they give out free where you stay and make your own “Bed Bath and Beyond” style gift basket.  These will be name brand products (just hotel chain names instead of cosmetic companies) at a fraction of the cost!  If you don’t travel, perhaps you can ask a friend who does to collect these for you, then you’ll be well stocked for giving indulgence on a shoestring next year.
  • couponsHome Made “Savings Book”:  Fund raisers will often sell a book of coupons for samples and discounts at local businesses.  If people will buy such a thing, it probably has value and can be given as a gift.  And why buy it when you can make it yourself?  Search through junk mail and store flyers to find as many coupons as you can.  For each recipient, put coupons for things they use at the front (and bury expired coupons and things like “$0.10 off Bengay” near the middle where the recipient probably won’t notice them after receiving the book).
  • backrunGive Services You Already Provide: Every family has a natural “division of labour” where different members specialize in different jobs.  Mom does the laundry, dad shovels snow and cuts the lawn, Johnny sets the timer on the VCR and provides tech support and Suzy makes baked treats.  Instead of selflessly and freely giving these services to loved one, give them coupons to receive these services a set number of times in the coming year.  This helps them appreciate what you do for them, prevents them from being too demanding, and makes them a little worried what will happen once the coupons are gone (“What Johnny, you don’t have any more ‘home cooked meal’ coupons?  Guess you’ll be living off of microwave popcorn until next Christmas.”)

Whether you’re shopping for someone who is starved for affection, a music geek, a woman who appreciates relaxation and luxury, someone frugal or someone who doesn’t appreciate you, with a little creativity you can find a spot-on gift that doesn’t cost an arm and a leg!


Categories
Real Estate

Feudal Landlords

Quite some time ago I posted on the temperament of a landlord and how some people just aren’t cut out for it.  My focus on that post were people who walked away from disagreements or would always give in, and how real estate investing would eat them alive.  In another post, small-scale landlords, I touched on people who think “I’m just renting out a small space, I’m not REALLY a landlord” (and how wrong they are).  Another personality (briefly touched on in the previous posts) that will cause problems in real estate investing is the feudal landlord.

I’m a free market kind of guy, and I’m sympathetic when individuals invoke their rights with regard to their personal property, including land.  As Mr. Burns illustrates on The Simpsons, there are *SOME* limits to this:

Department of Labor Officer: This power plant violates every labor law in the book. We found a missing soccer team from Brazil working in the reactor core!
Mr. Burns: That plane crashed on my property!

Unfortunately, renting property seems to bring out similar feelings from some individuals.  The best parody of this I ever read was a Craigslist post for a rental in Vancouver (I love it!).  The fact that Krystal’s commenters either believed the post, or questioned whether it’s a joke or not, shows how badly some landlords are behaving (for the record: this is CLEARLY a joke).

Some real estate authors recommend abandoning the title “landlord” as inherently feudal, and calling yourself the property owner or property manager (which I find a little misleading, it seems like you’re trying to imply you’re NOT the landlord if you call yourself the manager).

To provide a brief overview of my intended usage of feudalism, I am referring to the idea that a feudal relationship exists when someone owns land, and allows another usage of it in exchange for a set of obligations.  Historically, this existed when the monarch owned all land in the country, then gave usage of large areas to aristocratic vassals (they would be responsible to pay taxes to the monarch, fight for her in times of war, etc).  These vassals could then parcel out the land they controlled to their own vassals (who would have their own obligations in exchange for the usage of the land), all the way down to peasants who would work the land.

Interestingly, often landlords who take the feudal perspective on things, view themselves as monarchs, not as someone existing at a certain level in the hierarchy with responsibilities to those “above” them in addition to obligations due them from those “below”.  Despite “ownership” of land, such obligations do, in fact, exist.  You are typically required to pay property taxes, which is a financial responsibility imposed by the municipality the property is part of.  Owners of property are subject to the laws of the country (and province or state) they exist in, and can’t arbitrarily invent their own laws.  “A man’s home is his castle” makes a nice saying, but the law doesn’t support this.

A feudal perspective is, of course, the wrong view of the landlord / tenant relationship in the modern age.  Just because someone is renting, it doesn’t mean they have to dip their head, call the landlord “m’lord” and do whatever is demanded from them.  I also don’t think the owner is required to adopt a “the customer is always right” and give tenants whatever they want.  A landlord / tenant relationship is a legal  agreement, like any other, where each side should have their rights and responsibilities spelled out and both parties should only enter into the agreement if they’re comfortable with it.  In most places there is a default agreement (in Ontario it’s the Residential Tenancies Act) which covers both parties and which they both MUST make themselves aware of.

The consequence of adopting a feudal attitude for the landlord are all negative.  This will antagonize the tenants in a major way, and chances are they will become sticklers for the landlord to follow all relevant laws and be far less flexible or accommodating.  Turn over will increase, as tenants will be less likely to stay beyond their lease.  Both of these will probably lead to a less profitable real estate venture.

Categories
Personal Finance

Using RRSP Contribution Room to Avoid Taxes

In a comment on a recent post, AS requested information about an RRSP strategy I alluded to.  In the title, please note that I refer to AVOIDING taxes (which is legal and encouraged), not EVADING taxes (which is illegal and can get you sent to jail).  Please also note that I’m not an accountant or tax specialist, and although I’m fairly sure this is ok to do, I could be wrong (my numbers below are particularly suspect).  If anyone knows more than I do, please post any clarifications in the comments.  Also, I’ll acknowledge up front that there would be a fairly limited number of people who would be in a position to benefit from this.  Finally, Derek Foster presents a very similar strategy in his new book, so check that out if you’re intrigued by this and would like to read another take on it.  Tim Cestnick, Where Does All My Money Go? (Preet is Mr. RRSP), and  Efficient Market Canada each have more information about this idea.

We’ll all, at some point, probably be in the situation where our income will drop substantially compared to the year before.  Usually this happens when you retire (since you move from a higher working income to a lower pension), but can also happen if you get laid off (not as much fun), become a stay-at-home parent or go back to school (this happened to me).  If you know this is going to happen ahead of time, it becomes tempting to try to figure out a way to move some of your income forward, since you may be in a lower tax bracket in the second year.  Unused RRSP contribution room lets you do exactly this.

Say an Ontario man was earning $100,000 / year and was planning to head back to school.  While at school, he expects to continuing working part time and will earn $40,000.  Say he has $20K unused contribution room in his RRSP.  Using the 2009/10 tax rates, he’ll be going from a 43.41% to a 24.15% marginal tax rate.  Say on March 1st, 2010 (the RRSP contribution deadline for the 2009 tax year) he contributes the full $20k that he has in contribution room to a RRSP savings account.  This will save him (give a refund) of:

0.4341*(100,000 – 81,941) + 0.3941(81,941 – 80,000) = $8,604.36

After his taxes are submitted, he can then withdraw this money from his RRSP, at which point he’ll pay a withholding tax (like when the government withholds part of your paycheck).  HOWEVER, the withdrawal will actually be taxed as income in the year he withdrew it 2010 (he’ll get some of the withdrawal tax back when he reports it on line 129).  If his other income is $40k, he’ll incur a tax penalty of:

0.3115 * (60,000-40,726) + 0.2415 * (40,726-40,000) = $6,179.18

Therefore, overall he’s netted a tax savings of $2,425.18.  If his income in the first “high income” year was higher, or if his income in the second “low income” year was lower the benefit would be even greater.

There is a cost to doing this.  In this example, $20K of his RRSP contribution room is gone forever (you don’t get this back when you make an early withdrawal).  Derek Foster doesn’t like RRSPs and I’ve never been consistently in a high enough tax bracket to really benefit from them, so for us this isn’t that big of a deal.  HOWEVER, for most people lowering your income every year and allowing the funds within the RRSP to compound faster through tax-free growth is VERY worthwhile.  Burning $20k of contribution room to save $2.5k in taxes is of questionable benefit.

Obviously if the person in question were actually going back to school (or using the withdrawl to buy a house) there are programs like the home buyers plan and the lifelong learners plan.  To keep things (relatively) simple, I’ve ignored these.