Jul 232014
 

Last week I invested roughly $5K into two new companies: Timbercreek, and Atrium. Both are mortgage backed securities called MICs and trade publicly on the TSX.

14-07-micbuys

Timbercreek (TMC) is based out of Ontario, where it conducts most of it’s lending business. TMC recently lowered its interest payout to 7.8% a year, which is still pretty attractive 🙂 Its CEO recently said “Given our primary objective is preserving capital, we believe it is prudent at this time to reduce our payout to maintain credit quality rather than increase risk in the portfolio.”

15-01-tmc-info

Atrium (AI) has most of its portfolio in first mortgages. Its average loan to value ratio is only 64% so a small correction in Canada’s real estate market should not affect the company’s principal investments. Atrium currently pays 7.3% a year.

15-01-atrium-mic-info

My new investments are generating $364 every year 🙂 That’s like $1 a day of passive income 🙂 #Winning! Some readers might be thinking “Yeah, but you have money to invest, Liquid. What aboot the rest of us who don’t have $5,000 to buy these MICs?” Well hold on to your toques because I didn’t have any money to invest either. In my latest net worth update I revealed that I only had $800 in cash. So here’s my secret – I used a retirement plan loan to buy these new stocks 🙂

Continue reading »

Apr 162014
 

In 2012 I found a farm I liked on the MLS website, and bought it for $150,000 🙂 I was so happy with my purchase I decided to buy another farm in 2013 for $172,500 at an auction. This one is a 150 acre, class F, grain farm. It’s located adjacent to my first farm, and both properties are rented to the same farmer 🙂

But you know what? My second Saskatchewan farm is even more cash flow negative than my first. I’m currently losing money on both properties. But it’s no big deal. I don’t mind because YOLO 😀

I’ve already broken down the numbers of my first farm in a previous post. So today I will share the financial details of my latest purchase.

Breakdown of purchase price.

  • $10,000 Personal savings
  • $10,000 Proceeds from selling stocks
  • $17,500 TD Line of Credit
  • $5,000 CIBC Line of Credit
  • $20,000 HELOC
  • $5,000 Margin account
  • $5,000 Credit Card
  • $100,000 Long term farm loan, amortized over 25 years

Total amount = $172,500

To be honest it was a bit challenging to procure all the financing I needed, but luckily everything worked out. Just like the first farm, I raised $20,000 in cash from savings and selling stocks. The remaining balance of the purchase ($152,500)  was all thanks to using other people’s money as listed in detail above 🙂

13-11-farmb second Saskatchewan farm

Continue reading »

Aug 132013
 

One of the benefits of home ownership is the ability to secure a loan against it, other than the primary mortgage. This can be done through a home equity LOC, or a second mortgage.

A few years ago I was part of the young and prudent group of people in their early twenties who bought a home in Canada when we could still amortize an insured mortgage for 35 years. I bought a $230,000 apartment with a $15,000 Down Payment which unfortunately meant I had to purchase insurance. Who at that kind of age can afford a 20% DP anyway? 😕

Most Canadian banks will let someone borrow against their property up to 80% of the market value. They call this the loan to value ratio. 80% LTV ratio gives the lender a 20% margin of safety, meaning local house prices would have to drop 20% before the bank will be at risk of losing money.

Maximum I can borrow = 80% of property value = 0.80 x $230,000 = $184,000
My mortgage balance in April 2009 = $215,000
Difference -$31,000 🙁

Since I’m already borrowing more money than what my LTV amount will allow, I can’t unlock any potential liquidity in my home 😥

Okay, now fast forward to today. By only ever paying the minimum on my mortgage payments the balance on my mortgage has barely changed. Today my mortgage balance is about $202,000. You’re probably thinking cheese-&-rice, Liquid, after 4 years you’ve only managed to pay off 6% of the initial principle? I know. It’s not very impressive :P, but that’s just how I like to roll 🙄

Earlier this year in April I blogged about how I won a farm at an auction and had to raise $25,000 to complete the downpayment by August. Luckily the purchase deadline has been pushed back until October, but I still need to come up with the money nonetheless. So back in May I decided to apply for a Home Equity Line of Credit with CIBC. The appraisal came back valuing my apartment at $280,000 🙂

Maximum I can borrow = 0.80 x $280,000 = $224,000
My mortgage balance in May 2013 ~ $203,000
Difference = $21,000 😀

Ding Ding Ding! I can get another loan 😀 The entire application process took about 5 weeks. Afterwards I saw that a new HELOC has been added to my list of Credit accounts. I haven’t used it yet but I will when I require the money.

13_08_helocpapers_bankacct

For a long term investing strategy I believe it’s much more effective to invest aggressively, especially when you’re young, rather than pay down the mortgage quickly. I could have committed an extra $200 every month towards tackling my mortgage. But that wouldn’t even add up to $10,000 over the last 4 year period, which is almost laughable compared to the property appreciation realized in the same amount of time 😉

Just imagine the massive savings effort it would take for someone to pay down an additional $50,000 off the principle on their mortgage 😯 Now imagine someone else who buys a 2nd home, waits around for several years, and also experiences a $50,000 net worth increase. Which person would you like to be 😎 ? Nobody ever gets rich by paying off their debts 😐 We get rich instead by continuing to build our asset column. This is exactly why I chose to put my savings into acquiring that farm (an asset that will generate $5,000 of income per year) instead of into the equity of my home. Continue reading »

Dec 262012
 
durum wheat farm farmland investing

Earlier this year I blogged about why I was interested about farmland investing. And earlier this month I posted about how I was really close to buying my first farm. Well drum roll please because earlier this week I officially became a farm owner 😉 That doesn’t mean I’m a farmer though. I still live in the city, but I’m the landlord of a farm in eastern Saskatchewan. With farmland prices growing at double digit rates in the United States, Australia, United Kingdom, and pretty much all over the world, Canada is certainly no exception to the global trend :0)  Buying farmland as a long term investment is not for everyone, but if you’re interested to learn more about the business, please read on (*^_^*)

 About my Farm

Saskatchewan is divided up into small squares called rural municipalities (RMs) Each RM has a number and a name. My farm is in the RM of Sliding Hills (RM #273) Below is a map of Saskatchewan.

lots of farms in saskatchewan

And here’s a close up shot of the RM

farm squares

My farm is used for agricultural purposes to grow grains (wheat, barley, canola, etc) There are no buildings on the land. It’s in the black soil territory of Saskatchewan, the best kind 🙂 Total area of the land I bought is 160 acres, or 1 quarter section. That’s about 7 million square feet. 135 acres is cultivated, and the remaining 25 are bush or slough.

my new farm in saskatchewan

 

Buying Procedure

Buying farmland is similar to buying a house. I get emails from my realtor periodically about new listings. I also went to the mls.ca website and filtered for “Agriculture” and searched for listings based on my price range. Super easy to do. Eventually I came across the following listing. Except it wasn’t sold at that time yet.

farm listing details

The seller wanted $167,000. I offered $145,000, to which he counter offered with $150,000. And that’s the final price we agreed on. I think it was a pretty good deal (works out to $937.50 per acre) because when my bank did their own assessment of the land they valued it at $154,500 so according to my bank, technically I’ve made $4,500 on my investment already :0) The crop insurance rating of my farm is an “F” meaning it’s Fantastic 😀 Haha. Just kidding. All farmland has a letter grade based on it’s soil quality, ability to hold water, etc. The better the land the better the grade. F is pretty high up there 😀 You might see a C or E but they are super rare and go for a much higher premium 🙂

farm offer

After I removed my subjects on the purchase agreement I found a lawyer in Saskatchewan for all the legal stuff, and went to my bank to get financing. TD requires a 25% down payment and lent me 75% at 3.89% fixed rate for a 1 year term. Took a Prt Scr of my account details below. Total lawyer and bank fees: about $2,500.

farm loan

 Rental Income

Luckily there was already someone renting the land from the seller when I bought it. I talked with this farmer and he said he is interested to continue farming there. So we signed a 2 year agreement where he pays me $37.50 per cultivated acre of land every year. Right now there is 135 cultivated acres so I will be paid $5062.50 per year. That represents about 3.4% return on the value of the land with no operational risk to me 😉 Payment is to be made twice a year, half of it when he seeds in spring and the remaining half is paid when he harvests in the fall. Pretty typical rental agreement. Anyone can download these lease templates from the government of Saskatchewan website.

leasing out the farm land to a farmer

Behind the Numbers

Now to tackle the ultimate question. Does this investment make sense from a financial point of view? Let’s go through the numbers.

First, breaking down the cost of $150,000. As mentioned earlier, I needed to come up with a 25% down payment, or $37,500. Notice how I haven’t been blogging about the stock market much lately? That’s because I didn’t buy any new stocks since July. I started researching about farmland back in the summer and decided to start saving as much as possible. I had saved $10,000 in my bank account by the time I bought this farm.  I had also mentioned I sold about $10,000 worth of stocks in September. So that’s $20,000. The remaining $17,500 I borrowed from my line of credit.

Downpayment

  • $10,000 Savings
  • $10,000 Procedes from selling stocks
  • $17,500 Line of Credit at 5.25% floating
  • Total = $37,500

Farm Loan

  • $112,500 loan amortized over 25 years, currently at 3.89%
  • Total = $112,500

Total purchase price = ($37,500 + $112,500) = $150,000

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Next, let’s compare the income vs cost of owning. This will tell us whether I’m making money or losing money.

Revenues:

  • Rent = $37.5 x 135 acres = $5062.50
  • Total Revenues = $5062.50 / yr

Expenses:

  • TD Farm Loan: $112,500 at 3.89% interest rate = $4376.25
  • Line of Credit: $17,500 at 5.25% interest rate = $918.75
  • Property Tax: $475
  • Total Expenses: $5770 / yr

Net Income/Loss:

  • Net Loss = $707.50 

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Not sure if that’s the proper way to do a balance sheet. Lol, I’m obviously not an accountant 😛 But basically I’m paying more than $700 out of my own pocket every year. I’m not surprised though. If you think about it, I’m really only putting down $20,000 of my own hard earned money which is about 13% of the land’s entire value.  The remaining balance is financed one way or another, we’re talking about serious leverage here. This is what’s known in the mortgage industry as a high ratio loan, lol. Some readers might think I must be high on paint thinner. What kind of loony investor would put $20,000 of his own money into something that clearly will give him a negative return! He would be better off putting that money under his bed. He should at least save enough for a proper down payment like 20% or higher, and not rely on his credit line.

I agree that the conventional way of analyzing cashflow would label my farm purchase as a bad decision. However many of my investment ideas are anything but conventional, and this is yet another example 😛 Despite losing $707.50 a year, I still think this is a good investment. I have 4 reasons for this.

1)  The bigger picture
In Chess we sometimes have to sacrifice pawns in order to win the game. In the game of investing, a short term loss is sometimes a necessary part of the longer term strategy. A lot of businesses are not solvent at first but over time they can grow to become very profitable. Farmland is such that investors need to have a long term view of the situation. You cannot buy and flip farms for a profit like you can with houses. I may be losing money now, but the entire loan is amortized over 25 years. And in the second year I will have paid off a portion of my principle, which means I’ll be paying less interest than today. I will probably break even some time in 2014. So for the majority of the amortization period I WILL be making a profit, just not right now.

2)Rent/Income to grow over time
This one is pretty self explanatory.

3) Capital Appreciation
Because farmland tends to hold its value over time we can assume with relative certainty that my farmland will grow in value over the next decade or so if we continue to have inflation. In fact, historically farmland prices have pretty much consistently beat inflation because the global farmland supply is shrinking, at the same time demand is growing.  Just to be on the conservative side, let’s assume farmland prices in Canada will increase by only 1% to 2% on average over the next 10 years. Even so, that means by next year my farmland will be worth $1,500 to $3,000 more (1% to 2% of this year’s purchase price of $150,000) That is more than the $707.50 I lose in my first year of operations. Below are what returns will be given 3 likely scenarios of different appreciation amounts.

Initial Investment$20,000$20,000$20,000
Price of Farm$150,000$150,000$150,000
If Farm Appreciates by1.0%1.5%2.0%
Farm will be worth an additional$1,500$2,250$3,000
Net loss from operations$707.50$707.50$707.50
Total gain$792.50$1,542.50$2,292.50
Net Return on Investment4.0%7.7%11.5%

Those returns aren’t great, but they’re not that bad either I think.  A classic example of sacrificing income, for growth, which is good, because realized wealth (capital gain) is taxed less than realized income anyway 😀

4) Inflation Hedge
With all the money printed by the Fed, there are some people who think we might see inflation reaching 3% or higher in the future.  Remember in 2011 when everything from food to gas appeared to have gotten really expensive? That’s because the inflation rate in 2011 was 2.9%. During that same year, the average price of farmland in Canada increased by 14.3%! I missed out that time but there is NO WAY I’m going to miss out on another opportunity like that (>_<)

D:DCIM100DICAMDSCI0003.JPG

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farm land price increaseThose are my 4 reasons why I purchase the farm despite being cash flow negative 🙂  I choose to assume a modest 1 to 2 percent growth rate so even if prices fall next year my long term view should give me plenty of time to recover. But what if we used some actual numbers, some real data! To the right is a chart that shows how much farmland prices have appreciated over the last 5 years. Source: FCC

Holy macaroni (o_o) those numbers are much higher than the 1%-2% annual growth rate I’ve predicted. Longer term data show similar results with farmland increasing double digits per yer on average over the last 10 or 20 years. If I make 4% return on my investment when my land goes up just 1 percent in value, imagine what my ROI will be if my farmland continues to appreciate next year like it has been doing in the last 5?

farm price grow surprise

 

 

Final Thoughts

As with any investment, past performance is not an accurate indicator of future gains. The boom in global farmland prices will not last forever and there are many risks in the agricultural business. But I believe the potential for profit far outweighs those risks, especially if one has a long term investment view. According to a study by Enquirica Research, Canadian farmland has seen a 10.6% increase in returns over the past 10 years, compared with 3.8% for the Toronto Stock Exchange Index. I don’t believe farmland is a better investment than the stock market. The truth is nobody knows what the price of farmland will do next year. But I already have over $100,000 in stocks, so I’m just looking for ways to diversify my investments. Will my new farm be a good investment or did I just make a big mistake? We’ll just have to wait and find out (~_~)

 

farm land pun long post

Sorry for the long post 😛

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[Edit June 2013] All information above was posted in December 2012. Months later the farmland value report came out and Canada’s farmland increased 19% in 2012 😀 Wow, the reality of land value appreciation turned out to be much better than the 1% or 2% I was expecting. See my post about how this investment has been paying off so far. This makes me want to buy another piece of farmland!

I also wrote a FAQ for how to draft up lease agreements, rental rates, free lease templates, etc [/edit]

[Edit June 2014] Okay. In 2013 I purchased another farm for $172,500 with a $20,000 down payment. Now I have 2 farms, yay! According to FCC during 2013 Saskatchewan farmland values increased 28.5%. That means my first farm purchased in 2012 for $150,000 is now worth more than $200,000! OMG! 😀 [/edit]

Jul 032012
 
After a few months of stagnation my net worth is finally starting to climb up again. This is largely thanks to a bonus check I got in June.  We don’t get bonuses every year so we were lucky this time. I almost feel bad accepting it though because Italy (the world’s 8th largest economy, which is even larger than Canada’s) has an unemployment rate over 10%.  Not to mention the millions of people in eastern US without electricity. And yet I work in an air conditioned building and get paid (O_o). Can you imagine living in a world without electricity/internet? You can’t even tweet about how frustrated you are. Good news is Canada has sent a team of professionals to help. I don’t know how long it’ll take their canoes and dog-sleds to get down there though ;). Anyway, I hope they can get the power back soon.
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*Side Income:
  • Part-Time Work = $1100
  • Dividends = $300

*Discretionary Spending:

  • Eating Out = $100
  • Others = $100

*Net Worth: (MoM)

  • Assets:
  • Cash = $3,000 (+$1000)
  • Stocks = $74,600 (+$6,200)
  • RRSP = $31,100 (+$10,400)
  • Home  = $248,000
  • Liabilities:
  • Mortgage = $206,500 (-$300)
  • Margin Loan = $18,900 (+$1,500)
  • RRSP Loan = $10,000 (+$10,000) <– New Debt
  • Bank Line of Credit. = $1000 (+$1,000)

*Total Net Worth = $120,300 (+4.7%

For the first time in my life I am holding over $100,000 worth of stocks. The process to get here was pretty straight forward. In 2009 I saved about $10K, the following year $20K, and last year I saved about $30K. The main catalyst fueling this growth in savings is increased earnings with controlled spending. For example I used 100% of my bonus this year to buy stocks which distributes about $15 per month in dividends. This means I just increased my income by $15 a month instantly!  And from now on this new found income ($15/month) will go directly into purchasing more stocks to make me even more money (DRIP.)  At no point during this entire process does my expenses ever increase. And why should it? It’s not like my car needs repairs or I have the sudden urge to go traveling or anything ( ・_・) Other ways I increase my earnings are: getting a raise at work, increasing my tutoring fee, dividend increases on stocks I own, etc. It’s true, that the more money you make the more you can spend. But stay wise my friends, “can spend” should never be confused with “should spend.”  I’m also using leverage to get my assets over $100K :D. In fact just recently I borrowed $10,000 from the bank to fund my retirement account (RRSP.) Without leverage I would probably have only around $70,000 today.

* Numbers are rounded to the nearest $100.