Jan 132020
 

Farewell to my 310 acres of Saskatchewan farmland

Farmers and Wall St. bankers don’t have much in common. But something they both seem to enjoy is getting down and dirty with their hoes. πŸ˜‰ Farming can be difficult. Some grain farmers barley scrape by. Luckily for me it’s a lot easier investing in farms than working on them. πŸ™‚

Thank you so much everyone for following me on my 7 year farmland journey. I have received a lot of comments and support regarding this major investment. But all things must come to an end. As you may be aware, last year I put my farmland up for sale with a real estate agent. Well as of last week I have successfully sold my farmland. πŸ™‚

I received my first offer after a few months of listing my land. The buyer and I negotiated and we ultimately settled on a price of $445,000. This is 5% below my initial asking price.

The advantage of getting out of an investment is being able to reflect on my decisions, and consider where I could have done better. In today’s post I’ll review my experiences of buying, managing, and selling the farmland.

Breaking down the numbers

I invested $40,000 of my personal savings, and leveraged up to buy $322,000 worth of farmland. It was basically a 12% downpayment that allowed me to greatly improve my returns by 8-fold. πŸ˜€

Farmland profitability 2013 to 2019: Let’s start by looking at the farm’s income statement over the years. In 2013 my operating costs were low because I only had a mortgage on one farm for most of the year. It wasn’t until the end of 2013 that I had closed on the second farm. I operated at a small loss in 2014 before turning a profit again in 2015.
Net operating profit: $10,000Β 

Let’s look at my capital gains next.

Capital gain = sold price – purchase price – transaction costs
Sold price: $445,000
Purchase price: $322,000Β 
Total commissions and other transaction fees: $26,000
Capital gain = $97,000
Cheese-n-rice! That’s the most money I’ve ever made buying and selling a single investment! This must be what affluent people feel like all the time. πŸ˜€Β 

Finally the return on investment can be determined using the following formula:

ROI = (Net gain from investment / Cost of investment ) x 100%
Net gain = $97,000 capital gain + $10,000 net operating profit
Cost of investment = $40,000

Return on Investment = 268%Β 

 

Wow. 268% ROI over 7 years works out to a 20% annualized return. πŸ˜€ Sweet sassy molassy! I feel simply elated! By comparison the TSX stock market index returned about 60% over the last 7 years, including reinvested dividends.

Here is a look at my farmland balance sheet over the holding period. $40,000 of cash savings was turned into $260,000 due to price appreciation and gradually paying down the farm loan.

Continue reading »

Dec 162019
 

I attempted to join Mensa. What happened next wont surprise you.

So I ran a Twitter poll asking what topic people would like me to write about. The top 2 picks were my Mensa test results and financial plans for next year. πŸ™‚

In today’s post I will discuss all 4 topics from the poll, but focus primarily on the 2 that got the most votes.

Mensa: The smart people club

So out of vanity I decided to take the Mensa exam earlier in the fall. 😎 Mensa is a non-profit international organization for the intellectually gifted. Only the top 2% smartest people in the world can be accepted into this private club. In Vancouver there are only about 200 Mensa members. There are other high IQ societies out there, but Mensa is the oldest, and most well known with over 130,000 members worldwide. Mensa members can attend local meetups and enjoy exclusive intellectually stimulating social events. I decided to join this club because I wanted to feel special. πŸ™‚ So I handed over the $90 to take the formal Mensa exam.

There were 4 other applicants that day. We had a chance to make some small talk. They all seemed to be smarter than me. I felt like a Morty in a room full of Ricks. The test was 50 questions, and we only had 12 minutes. In the end I managed to answer 30 questions correct. Not bad. But unfortunately I needed 35/50 to pass.

How it feels to fail the Mensa exam.

So I failed to get into Mensa. πŸ™ Oh well. I guess I’m just an ordinary peasant after all. Apparently I can re-take the test after a year. But I don’t think I can handle the rejection a second time. πŸ’”

 

The Real Estate Market

Sales is a leading indicator for price. Both Vancouver and Toronto saw strong sales in the last couple of months, signalling potential higher real estate prices in the new year. In a typical cycle the market goes through 3 stages: from boom, to slump, to recovery, and then repeats.

In Vancouver I believe we are currently in a real estate slump. However we are either nearing the bottom of this slump, or have already hit the bottom and are now transitioning into the recovery stage where prices will start to climb again. If you plan to buy property around the Greater Vancouver area, the latest data from the Real Estate Board suggests the window to get in at the lowest point of this real estate cycle is closing fast.

Finding Neverland real estate meme

Toronto is a bit of a different story. The low point was already hit last year in 2018. The recovery has been strong, and average prices now rival the 2017 peak. I anticipate interest rates will fall early next year. If that happens, property prices in major Canadian cities will become more expensive by the summer of 2020.

Continue reading »

Sep 162019
 

One advantage of owning real estate is being able to access the value of the underlying asset for financial gains. The more properties we own, the more equity we can use to buy additional properties. This is why it’s often easier for homeowners to grow their net worths, but harder for renters. One of the best reasons to refinance is to lower the interest rate on your existing mortgage. Historically, many lenders agree that refinancing is a good idea if you can reduce your interest rate by at least 1.00%.

As we know, a mortgage balance gets paid down slowly over time. In the beginning you might have a $300,000 mortgage. But maybe after the first 5 year term is over, your balance is only $250,000. When you go to renew your mortgage you’ll likely have a couple of options. One is to continue paying down the $250,000 balance. Assuming interest rates haven’t changed, your monthly mortgage payments would also be unchanged, because that’s how mortgages are designed. But the other option is to refinance at a higher balance so your total loan amount is increased. By refinancing, you can access up to 80% of your home’s value less any outstanding mortgages. So if the value of your property is now higher than when you bought it, you could potentially borrow more than your initial mortgage amount against your home. πŸ™‚ But your monthly payments would go up in this scenario because you have more debt.

In order to figure out when is a good time to use one method or the other, we need to consider the following factors.

  • How tight is your budget?Β 
    If you are already struggling to make ends meet, then it’s usually not a good idea to refinance at a higher balance. Just keep to the lowest amount until your income and spending situation improves.
  • Are there any investment opportunities out there?
    If you expect a good return on a potential investment, then it may be worth it to borrow more money against your home. For example, the Canadian Apartment Properties REIT (CAR.UN) has performed somewhat predictably over the years. Its 1-Year, 3-Year, 5-Year, 10-Year, and even 15-Year returns have all averaged over 10% per year. If my mortgage rate is 3% then that’s a 7% gap minimum, before taxes. It’s reasonable to assume that a margin of safety of 7% is a low level of risk, considering the stability of Canadian real estate.
  • Do you have any other debts?
    Using home equity is a great way to pay out higher interest debt through a refinance. For example, let’s say you have outstanding car loans, student loans, and credit card balances that combine to equal $50,000. Chances are these are all charging a higher interest rate than your mortgage. So instead of refinancing at $250,000 you could simply grow your mortgage debt to $300,000. And use the extra $50,000 to pay off your other debts, saving interest expenses over time.

In terms of how to get more equity out of your home, you could either take on a home equity line of credit, or blend and extend your current mortgage with your lender. Please be aware there are costs associated with refinancing. If you want to refinance in the middle of your term to access equity or lower your interest rate your lender will charge you a penalty. For fixed mortgage rates this penalty is the greater of 3 months interest or the interest rate differential payment (IRD). For variable mortgage rates this is simply 3 months interest. There may also be lawyer fees involved with a refinance. You can also have multiple mortgages from different lenders at the same time, but a 2nd or 3rd mortgage will often come with a higher interest rate and may not be worth it. So it’s important to consider which type of refinance you need before renewing your mortgage. πŸ™‚

 

____________________
Random Useless Fact:

May 212019
 

Farmers are feeling the pain

Last year Canadian farmers couldn’t grow enough canola to satiate China’s appetite. About 40% of Canada’s canola exports go to China every year. In 2018 that worked out to about $3.8 billion. But it all changed this year after Canadian officials detained Meng Wanzhou, the CFO of Chinese tech company Huawei, due to an extradition request from the U.S. government.

In March, China started to ban shipments of Canadian canola on the grounds they’re plagued with pests, even though Canadian authorities say they’ve received no evidence to support that claim. Unfortunately the trade war and political shenanigans between the U.S. and China have affected households around the world, including Canadians. Our farmers in Saskatchewan are in trouble. They’re caught up in a global conflict between the two largest economies in the world, that has nothing to do with them. I canola imagine what they’re going through. Prime Minister Justin Trudeau recently announced financial aid for canola farmers. But it’s not a proper long term solution.

value of major exports from Canada to China

Major export products Canada shipped to China in 2018.

 

But canola isn’t the only export facing bans in China. Canadian peas and soybeans also have restrictions. And earlier this month, China suspended imports from two major Canadian pork producers over paperwork issues. According to the Canadian Pork Council the suspensions appear to stem from a labelling problem and are not tied to any political moves by China. But some people think that excuse is complete hogwash. πŸ™‚ It’s ironic that China is currently experiencing a major pork shortage due to swine fever. The country could lose up to 200 million pigs to disease during the epidemic. To put that into perspective that’s about 3 times the pig population in the U.S. :0 And yet China still refuses to buy our pork. But that’s because China is so big, it can afford to cut off its snout to spite its face. It doesn’t need Canadian bacon because it can import it from other countries.

 

Farm prices rose modestly last year

The new farmland values have been published by Farm Credit Canada. It appears the average value of Canadian farmland increased 6.6% last year. That’s down from 8.4% in 2017 but at least it’s still going up. πŸ™‚ Quebec had the highest increase, while Nova Scotia actually saw a decline.

It’s nice to prices continue to rise for farmland almost across the country. By contrast, Canada’s housing market fell about 5%Β  in 2018, according to the Canadian Real Estate Association (CREA.) But maybe farmland prices naturally lag the residential market? It would be interesting to how prices change in next year’s value report. πŸ™‚

Continue reading »

Jul 042018
 

Five years ago I acquired a variable rate mortgage from CIBC. It was the cheapest rate I could find at the time. I was quite pleased with the rate but that mortgage term expired a couple of months ago. So I shopped around to see if I can find another good deal.

I expected my mortgage to become more expensive. Surely rates would have climbed over the last 5 years right?

But no. To my surprise I found a lender that offered me an interest rate that’s lower than my previous mortgage by 43 basis points. πŸ˜€ CIBC was not able to match this offer so I switched. The new financial institution I am with is not one of the big 5 banks in Canada. It is a lesser known company called National Bank.

I wasΒ paying 3.05% with CIBC. This was a variable rate 5 year mortgage at prime minus 0.40%. This was the best CIBC could do.
But my new mortgage with National Bank is only 2.62%. This is also a variable rate 5 year mortgage term. Except the rate is Prime minus 0.83%

A 0.43% difference in interest rates doesn’t sound like a lot. But my mortgage balance is around $193,000. So I will be saving roughly $4,000 over the next 5 years because I switched to a cheaper mortgage provider.

However there are costs associated with changing lenders. Appraisal costs $600, and legal documents from a notary public was $800 in my case. Luckily National Bank has a $750 rebate program for transferring over an existing mortgage. πŸ™‚

In the end the cost of changing banks was worth the extra savings in my case.

Even though most Canadians are choosing fixed rate mortgage I still believe that variable rate is the way to go if you want to save money.Β The increase in fixed rate mortgages locked in by most home buyers this year is “seen as a response to rate hikes, and fear of higher rates in the future.” But critics have been calling for higher rates for over a decade. Yet rates haven’t actually gone up much. In fact, mortgage rates have dropped over the past 5 years as shown in my post today. That’s why we have to be informed of economic conditions so we can make our own financial decisions, instead of following others. πŸ™‚

I have been a homeowner for almost 10 years. During this time my mortgage interest rates fluctuated from 2.3% to 3.2%. It doesn’t look like rates will climb significantly any time soon. Until we see increasing mortgage rates, I would expect Canadian housing prices to climb even higher.

 

__________________________________
Random Useless Fact:

30 years ago only 5% of the population admitted to being chronic procrastinators compared to 25% today. Some believe technological advances is the main cause of this change.