Aug 042020
 

Past and future predictions

Last year I predicted rough waters for 2020’s economy, and suggested 4 investments to protect against uncertainty.

From November 2019

From a November 2019 blog post

How did those suggestions work out so far?

  • National real estate prices are +7% from last year.
  • Year to date my silver stocks (WPM.TO) is +79%.
  • Major telco stocks are down by about -3%.
  • XCB.TO, an ETF that tracks corporate bonds, is +8%.

An equal weighted basket of my picks would have earned a 23% return year to date. Not bad. πŸ˜€ Most index funds have only produced single digit returns during the same time.

What about for 2021?

Here are my top investment picks for the next 6 to 18 months.

  • North American real estate
  • Gold and silver
  • Large cap U.S. technology stocks

The rest of today’s post will attempt to unpack my reasons for choosing these investments. πŸ™‚

Continue reading »

Jul 132020
 

The new normal

low interest rates will lead to greater economic expansion, but also more debt.

The year is 2030. Self driving cars are delivering fast food right to people’s front doors. China surpasses the U.S. as the world’s largest economy. Everyone uses mobile wallets instead of credit cards. Increasing wealth inequality has created constant social unrest. But one thing hasn’t changed. Interest rates continue to remain at rock bottom. You can still get a mortgage for less than 2.5%. πŸ™‚

The economy has fallen into a deep pit of debt – so deep you can find Adele rolling in it. Policy makers around the world manufactured liquidity and bailed out corporations. Everyone has become accustomed to cheap money. If interest rates were to climb by just 1% then a third of mortgages will become delinquent.

 

Inflating money with impunity

Today in 2020 the United States government is already technically insolvent. But it can continue to make its debt payments because…

  • It has the ability to borrow money from a line of credit with no credit limit. And..
  • It can choose the interest rate at which it borrows thanks to the Federal Reserve.

From the total revenue collected by the U.S. federal government, 17% of it is used to pay interest on the debt it owes. If interest rates were to rise by just 1% then nearly a quarter of the federal revenue will have to go towards interest costs. That would be insane. Doing so would be the equivalent of someone with a $50,000 salary taking on a $500,000 mortgage at 2.5% interest rate. Nobody can qualify for a mortgage 10x their annual income. Even if the borrower thinks he can afford it, good luck finding a lender audacious enough to approve his loan application. Most mortgages are only 3 to 5 times one’s income.

Typically if a debtor starts to borrow more than he can adequately service – market forces will begin to push back. Lenders will either reject any new credit increase requests, or they will raise the interest rate to compensate for the debtor becoming a higher risk. But this doesn’t happen for governments with their own printing presses. The result: massive asset price inflation.

Continue reading »

May 112020
 

Why inflation matters

U.S. government bonds in 1990 were paying investors 8% a year. That sounds amazing! Especially for a low risk investment. πŸ™‚ But not everyone was buying them. Why? Because investment returns don’t tell the whole story. The inflation rate that year was 5.4%. That means the real rate of return on those bonds was only 2.6%. Stashing $100 under a mattress would have lost $5.40 in value during 1990. As Ray Dalio says, “cash is trash.”

 

Obtaining a mortgage from an unconventional lender

Earlier this year I bought a rental property and took on a new mortgage at 2.44% fixed interest rate for 5 years. After asking around different banks I decided to use monoline lender MCAP. They deal with broker channels and often have lower rates than the big banks. πŸ™‚

negative interest rate mortgage

Since this is an investment property the interest on the mortgage is tax deductible. My marginal tax rate is about 30%. So my effective interest rate after tax adjustment is 1.71%. But this is the nominal rate. To get the full picture we have to subtract the inflation rate. Last year Canada’s official inflation rate was 2.25%. So my real mortgage rate equals the nominal rate (1.71%) minus the inflation rate (2.25%) which comes toΒ -0.54%.

So I’m effectively paying a negative interest rate. I’m earning 54 basis points to borrow money. Woot! πŸ˜€ Personal finance author Robert Kiyosaki says smart people use debt to get rich. He’s right. I’m growing my net worth by literally having this mortgage.

The historical average inflation rate in Canada has been about 2% annually. Let’s assume it will continue to average 2% for the foreseeable future.

This is bad for my mortgage lender. The asset they are holding (my mortgage) will slowly lose value over time. Fortunately for them the 2.44% interest rate they charge me is still higher than the expected inflation rate.

 

Continue reading »

Mar 092020
 

There are lots of low rise condos like this popping up around the lower mainland

Owning a piece of the suburb

The recent stock market mayhem is a crucial reminder of how important it is to maintain a well diversified portfolio. After selling my farm last year I was too overweight in stocks so I decided to rebalance. πŸ˜‰ At the beginning of this year I welcomed a new investment property into my growing portfolio. πŸ™‚ It’s a one bedroom apartment in a low-rise building – less than 10 years old. It features an open floor plan that measures about 650 sf, and has a large balcony.

In today’s post I will explain why this purchase makes financial sense for me, and break down the numbers.

Why invest in Vancouver real estate?Β 

In a previous post I explained how to improve investment returns by primarily focusing on broad asset class trends instead of analyzing individual assets. In late 2019 I was trying to find the most undervalued asset class. At the time, stocks were at record highs. The expected return for the TSX index was just 5% a year. Likewise bond yields were a joke – and still is today. So nothing looked attractive. πŸ™ I was starting to lose hope.

But then I looked at the real estate market. To my surprise the expected return was 10% or higher. Hey, now we’re getting somewhere. πŸ˜€ I have discovered an undervalued asset class with terrific return potential. Ka-ching!

Mr. Krabs is my role model

The next step was figuring out where to buy real estate. For tax purposes I planned to stay within Canada. I also wanted to buy in a large city with steady population growth. After looking at Montreal and Toronto I ultimately decided to stay around Vancouver due to the following reasons.

  • Prices in Vancouver recently pulled back about 12% from all time highs in 2018.
  • The capitalization rate has greatly improved over previous years.
  • Insanely low vacancy rate of just 1% helps keep rental rates high.
  • Relatively high population growth.
  • Home city advantage. I can manage the investment myself instead of paying a property manager.

Choosing the right investment property

The last step was to narrow down my choices by making a list of criteria – such as the price range, rental restrictions, building age, capitalization rate, etc. The capitalization rate is a measurement of profitability. It’s the net income generated from the property divided by the property’s price. A good cap rate in Vancouver is 3.5% or higher.

A couple of years ago Vancouver was a terrible place to buy rental properties because the projected returns were abysmal. According to Colliers International, the cap rate here was as low as 2%. Ouch. Here’s the data for Q1 2018.

Low rise condos have higher cap rates than high rise condos

However, things turned around over the next 2 years. By the end of 2019 the cap rate climbed as high as 4.25% in some segments of the market. πŸ™‚ It’s still not as lucrative as in other cities, but it’s comparatively better than before. Here’s the data for Q4 2019.

An investment property in the prairie provinces would have a high cap rate

At this point I knew exactly what I’m looking for. So I was finally ready to head out and find me some prime real estate. πŸ™‚

finding the right investment property requires a good realtor

I started searching in October on the website zealty.ca. I also hired a realtor to help me filter listings and write offers. By the way, if you’re looking to buy or sell I recommend finding yourself a British real estate agent. They’re all about the proper-tea. πŸ˜€

Anyway, in the beginning all my offers were falling through. Then one day in December I came across a very promising condo in Burnaby, a vibrant city east of Vancouver.

Burnaby has about 250,000 residents and the population is growing fast

I attended the open house and liked the property right away. It satisfied about 90% of my buying criteria which was excellent. πŸ™‚ The asking price was also reasonable. The market was heating up so I knew I had to act fast. I made an offer shortly after viewing the place. After some back and forth an agreement was reached, and I paid a small deposit – or as I like to say, a condo-minimum. πŸ˜€ I removed my conditions after getting a home inspection and mortgage confirmation. A few weeks later the property was mine. πŸ™‚

Rental Property Criteria

So here are the reasons why I like this condo.

  • Low strata (HOA) fee which works out to just $0.28 per square feet.Β  (See fee schedule here)
  • High cap rate of 3.6% to 4.0% range according to comparable rents in the area.
  • Built by a reputable developer.
  • High walk score and transit score – over 80% for both. This makes it easier to find renters.
  • Safe neighborhood, with a relatively young demographic.
  • Area has a high level of education and high median household income (~$110,000 according to StatCan.)
  • Unit not facing south or west so it doesn’t become a sauna in the summer.
  • No upcoming special assessments or deficiencies in the building.
  • Friendly neighbors.

Now here are some things I don’t like the about property.

  • The underground parking spot is a bit far from the elevator.
  • Can be a little noisy due to construction down the street.

So there’s not much to complain about. Overall I’m very happy with this purchase. πŸ™‚

In any case it was finally time to make some money from my new investment. Do you know how many ants you’ll need to fill an apartment? The answer is tenants. πŸ˜€ I showed the apartment to more than a dozen potential tenants. There were a few goofballs who didn’t show up to their appointments. πŸ˜•

But eventually I found a young, middle class couple with a cat. One of them (not the cat) has a credit score in the high 700s, – surprisingly good for someone in his mid 20s. They moved in at the end of February and pay a monthly rent of $1800 – which they can easily afford on their combined gross income of $100,000/year.

This puts my rental unit’s cap rate at 3.9% – which is on the high side for a Vancouver area condo according to the Colliers table shown above. πŸ™‚

 

Breaking down the numbers

From the beginning I wanted an investment property that would be cash flow positive. A conventional 20% down payment wouldn’t cut it. So instead, I decided to proceed with a 30% down payment.

Continue reading »

Mar 022020
 

Panic in the Streets

The global stock market fell more than 10% recently. Over five trillion dollars ($5,000,000,000,000) of value was wiped out. And just like that – I have lost my seven figure net worth. I’m now a commoner once again, lol. It was fun while it lasted. πŸ˜› But I am not disheartened – because my mind these days is focused on more exciting things! πŸ™‚

New Real Estate Investment

The truth is, I’ve actually had a great start to the year so far. After selling my farmland in January I purchased a new residential property. I have been talking about wanting to do this since late last year. But now I have finally closed on a one bedroom rental condo in the Greater Vancouver area. I paid a 30% down payment (about $135,000) and financed the rest with a mortgage at 2.44%. πŸ™‚ Buying real estate isn’t easy. I kept myself motivated by listening to house music.

Anyway, my balance sheet will look a little different going forward. On the asset side I have welcomed a new line item worth $450,000 – the property purchase price. Meanwhile the liabilities side will now include a brand new $315,000 mortgage. Yay, more good debt. πŸ™‚ I’ll post more details about this over the next couple of week.

I also made new plans to buy some stocks soon to take advantage of this recent market correction so there will be lots to write about over the next little while.

Liquid’s Financial Update February 2020

*Side Incomes: = $2,500

  • Part time job =$900
  • Freelance = $200
  • Dividends =$1000
  • Interest = $400

*Discretionary Spending: = $1,800

  • Food = $400
  • Miscellaneous = $400
  • Interest expense = $1000

*Net Worth: (Ξ”MoM)

  • Total Assets: = $1,511,100 (-$290,100)Β 
  • Cash = $153,500 (-130,000)
  • Canadian stocks = $209,300 (-8,400)
  • U.S. stocks = $133,500 (-11,700)
  • U.K. stocks = $20,700 (-2300)
  • Retirement = $139,600 (-7000)
  • Mortgage Funds = $37,700 (-800)
  • P2P Lending = $35,800 (+300)
  • Home = $331,000 (assessed land value)
  • Rental Unit = $450,000 (purchase price) NEW
  • Total Debts: = $533,200 (+314,400)
  • Home Mortgage = $184,400 (-400)
  • Rental Property Mortgage = $315,000Β NEW
  • Margin Loans = $33,800 (-200)

*Total Net Worth = $977,900 (-$24,300 / -2.4%)
All numbers are in $CDN at 0.75/USD

new asset

I haven’t been in this much debt since 2013 after I bought those farms. Finally I’m back to having more than $500,000 of debt. It’s a familiar and comforting feeling to borrow so much money again – using new money that I don’t have to leverage my financial gains. Yay. πŸ˜€ Using other people’s money to get rich saves me so much time.

Here’s why I’m excited about this. Thanks to my new mortgage, I was able to buy a new property that pushed the total value of my assets to $1.5 million for the first time. πŸ™‚ If my assets can earn a mere 5% average return per year then my investments will gain an expected $75,000/year. Wow. How great is that? πŸ˜€

Of course borrowing money is not free. I’m currently paying about $14,000 a year of interest on my total debt. But that’s just a fraction of what I expect my investments to earn over the long run. πŸ™‚ This is essentially passive wealth creation – build up a large, diversified portfolio, even if you have to use some debt, and then simply be patient.

 

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Random Useless Fact:

The French sweet roll pain au chocolat can be served hot or cold.