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.

 

____________________
Random Useless Fact:

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

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 »

Nov 252019
 

investment ideas for 2020

Looking Ahead – What to Expect in the new year

The last decade has been one of the best times for investors of any generation. πŸ™‚ It didn’t matter if you had money in stock, bonds, or real estate. Almost every major asset class delivered terrific returns on average. But I think 2020 will be a very pivotal year.

The U.S. will hold a presidential election. Stock markets are about to head into the new year at record highs. And there’s a greater than 50% chance Canada will fall into a recession according to Oxford Economics.

The U.S. is even more likely at 64% probability to hit a recession in 2020 according to the New York Fed.

Data seems to indicate consumer spending in North America will almost certainly slow down next year. The U.S. government will spend a buttload of money to desperately prop up the economy. Deficit spending will go through the roof. But the market demand for U.S. bonds won’t be there unless interest rates rise. But rather than let natural market forces drive up interest rates, the Federal Reserve will step in and buy up the newly issued bonds at lower rates. This will likely create some inflation which will be felt in Canada as well.

Protecting Your Net Worth

No matter how we look at the financial markets it’s not hard to see how overvalued most asset classes are. A straightforward way to reduce our exposure to the markets right now is to become more conservative with our investment strategy. If you’re worried about a financial crisis here are some ideas to consider…

  • Emphasize investing new savings into value stocks and dividend stocks rather than growth stocks.
  • Sell some equities and hold onto short term bonds or cash.
  • Stay away from IPOs and ICOs.
  • Find value in alternative investments such as peer to peer lending.
  • Write covered calls or buy some put options.

Any of those methods should help reduce portfolio losses in the event of a stock market correction.

My Strategy for 2020Β 

We can’t predict the future. But there are events we can anticipate ahead of time and be ready to make the correct decision when the time comes. Given what we know so far, I think one of two scenarios will happen next year.

1st scenario: The current course of expanding asset bubbles will accelerate – widening the wealth gap between the haves and have-nots even more. Private and public debts will grow.

2nd scenario: We see a dramatic economic slowdown followed by a recession in the U.S. first, and then probably in Canada. Central banks inject over $100 billion a month of new liquidity into the markets. Public debt grows. Private debt shrinks through paydowns and defaults.

Right now it’s impossible to know which scenario will play out. But I don’t see an in-between scenario happening. This isn’t financial advice or anything, but if I’m right about next year, then here are some investment opportunities to watch out for.

  • Real estate.
  • Silver stocks.
  • Telecom stocks.
  • Investment grade corporate bonds.

If either of the 2 scenarios play out then there will be a lot more debt owed by governments. This will cause inflation, especially if the money makes it into financial markets and trickles down to the consumer level. Inflation is also good for precious metals, and silver appears to be undervalued compared to gold right now. Phone and cable companies should also perform well next year as telecommunications tends to be an inelastic service. Canadian real estate prices have been cooling off since 2018. Meanwhile the TSX/S&P composite index climbed to an all time high last week. Compared to the stock market, the real estate sector seems like a bargain. Personally I will be looking at buying an investment property around the Greater Vancouver area. The expected return on investment for real estate about 7% under current conditions. If I see something I like and the price is reasonable then I will buy it. πŸ™‚

____________________
Random Useless Fact:

Facebook’s content moderators make about $29,000 per year.

Nov 182019
 

Time + Ownership = Financial Freedom

When financial writer David Bach was just 7 years old his grandma took him to McDonald’s and explained to him that there were 3 types of people in the world: The minimum wage employees working there, the consumers who pay money and eat there, and the owners who aren’t there but can still make money from the restaurant. David’s grandma helped him buy 1 share of McDonald’s, and taught him how to read and follow MCD’s stock chart.

The next time they went to a McDonald’s restaurant she told him, “now you are not just a consumer here, you are also an owner. Every time you eat here you are paying yourself.” It’s a brilliantly simple concept; easy enough for a child to understand. Yet it’s an inspiring and powerful idea. David became hooked on investing. He bought other stocks over time to eventually become a millionaire. πŸ™‚ From the time he bought his first stock to today in 2019, MCD shares have increased in value by over 250 times! But it didn’t happen overnight. It took decades.

McDonald’s menu in 1973 when David Bach was a kid.

Fortunately anyone can become an owner by investing in established companies like McDonald’s. And the best part is you get to earn all your money while you sleep. πŸ™‚

It all comes down to saving a percentage of your income, and investing it on a consistent basis. And then simply wait. The longer you wait the more your money will have time to compound and grow exponentially. Although you can schedule to invest every month, or every quarter, studies suggest you should invest as soon as possible to maximize potential returns.

People who try to get rich quick stay broke long.” ~ David Bach

If we understand that financial success requires patience, then investing will appear to be easier and less risky. For example, imagine if 2 investors held 2 different views about buying a house.

Investor 1) I’m afraid prices might drop in the next year or so. πŸ™ And it’s a rather large investment so I question if now is a good time to be buying.

This mindset makes it difficult to pull the trigger when a good opportunity comes. We act based on what we believe. If we believe prices may fall then of course we will experience more hesitation and concern when buying a house. But let’s look at the second mindset where patience is paramount.

Investor 2) I have the patience to hold this property for at least 7+ years. So after the year 2026, based on macro trends, house prices will probably be much higher than it is now. Most likely rent in the city will be higher as well. Therefore buying a house now and locking in a mortgage balance is probably better than buying a house later and risk taking on an even larger mortgage.

The first person is thinking about the short term, while the other is thinking only long term. The second investor has a better chance of putting his intent into action because his long term perspective provides him with more investment certainty. That’s because it’s hard to know what the market will do next year. But due to inflation and urban densification, it wouldn’t be hard to predict that Vancouver’s home prices will trend upwards over the long run.

Continue reading »