Adjusted Cost Base for Anything

Good things come to those who wait. Unfortunately that’s not always the case for investors. I missed out on a good piece of farmland recently because I didn’t act quickly enough 🙁 Saw this posting last week. It’s on the website so anyone could browse all the various agricultural listings on there. This particular land is uber cool though. It’s much better than the one I bought last year. Twice as large, 320 acres instead of 160, and more importantly 95% of its acres is cultivated so almost the entire parcel can be farmed 😀 The seller is willing to rent back the farm at $45/acre. Which translates into $13,680 of passive income a year 😀 Or a 4% return on equity pre-tax, not bad. By comparison my current tenant is only paying me $37.50/acre. That’s barley enough income to cover my interest payments, haha.

13_03_halfsection, adjusted cost base

Often these kinds of farms get snatched up by buyers with deep pockets very quickly. This one was no different. The listing went public on Friday. I was really digging this land 😀 So I made some preparations and contacted the selling agent the next day. But guess what? Somebody already bought it with no conditions. No freaking conditions! That means they probably paid in cash. Yikes, that’s a lot of capital (O_o)  But then I thought maybe it’s a good thing I didn’t buy it. In terms of value it’s about the same $ per acre as the farm I bought last year so it wouldn’t have lowered my ACB anyway, which means it’s not cheaper than the land I have already by area. Keeping track of Adjusted Cost Base will give us a good idea of when to buy low and when to sell high. It’s commonly used for stocks but in accounting it can be used for anything 🙂

When I bought my condo in 2009 I didn’t know whether its price would go up or down. But I can use my ACB to take advantage of either outcome. So far my place is worth more than when I bought it. Will we ever see home prices fall to below 2009 levels? Maybe. But if that happens I’ll just buy another property and lower my ACB. This way, I still won’t miss out on a good buying opportunity. However, in the event that real estate prices never fall back to 2009 levels again then it’s a good thing I bought when I did. Awesome sauce! It’s a win win situation 😀

Many people will say it’s dangerous to buy high. That’s true. But how should we define “high” exactly? Vancouver real estate prices were considered “high” if we asked someone back in 2006 because homes literally appreciated by double digits every year for the previous 5 consecutive years!  Understandable why some people called the market a bubble. But when we look back today in 2013, then 2006 prices doesn’t seem so expensive anymore. That’s because prices are relative 🙂 The housing market has certainly cooled recently, but we are still far above 2006 prices.  Timing any kind of market can be fun and exciting, but not always easy to do successfully. By thinking about ACB we take the timing factor out of the equation. So here’s what we can do. Start to accumulate a position first. Then buy more if the asset class becomes cheaper. But if prices only climb then just sit back and enjoy the ride 😀  This strategy can be applied to farmland, gold, other commodities, and pretty much any hard asset (^_^) It doesn’t matter if something is overpriced today. What matters is will it be overpriced in the future. And since nobody can know for sure the only thing to do is to begin accumulating a position now and create our own relative cost point.

13_03_vancouverhomes, adjusted cost base

As prudent investors we must remember that although there is always risk when investing, there is also risk when waiting on the sidelines for the markets to drop, such as the risk of losing money to inflation year after year and the risk of prices never coming back down and missing out on a great investment opportunity. But a sure way to decrease our financial risk is to educate ourselves and invest with purpose and confidence!

Random Useless Fact: This is what researchers spend their time coming up with at M.I.T



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03/27/2013 3:00 am

I’d put your graph in a logorithmic scale to make it easier to see how the growth rates have changed.

JC @ Passive-Income-Pursuit
03/27/2013 3:52 am

Interesting idea. I’d never really thought about an ACB for just about anything, of course my investments are almost exclusively in the stock market currently. I need to get some diversification on that.

By the way, that Einstein/Monroe picture is pretty awesome. Useless but awesome!

My Financial Independence Journey
My Financial Independence Journey
03/27/2013 5:08 am

I have used ACB for the stock market, but never thought about it for real estate. You gave me something to think about. Thanks.

Alex Yang (@yyangalex)
03/27/2013 4:27 pm

after you add in carrying costs like mortgage interest, maintenance/upkeep costs of land and/or property, the returns on real estate are barely better than inflation over the long run. anyone buying in within the last 5 years should expect sub-par returns for the forward 20-30 years horizon , especially vs stocks

03/27/2013 5:14 pm

I’m thinking of doing something like what you’re doing once I get a contract. I’ll have a lot of cash just sitting around, so it might as well work.

The Loonie Bin
The Loonie Bin
03/28/2013 6:38 am

I’ve been looking for just plain Jane wooded land in the middle of no where and people want more money for it then farmland! Am I missing something?!?