Author Archives: dollardragon

The Allies of F.I.R.E. – Income Building

Posted on by under Hoard Building

There are precisely two controllable ways that a diligent dragon can go about adding gold to their hoard:

  1. Increasing their income, and
  2. Decreasing their expenses.

This, of course, assumes that when your income increases, you don’t immediately also increase your expenses, because adding income and adding expenses generally nets out to a zero effect. This is called “lifestyle creep”, and we’ll talk about why this is a bad thing and how to avoid it in a later post.

Of the two ways to add gold to the hoard, increasing income is undoubtedly the easier of the two. Decreasing expenses generally involves a sacrifice of some kind, such as moving to a smaller lair, or cutting down on fancy meals, or selling an expensive car and buying a more practical, cheaper model. On top of that, decreasing expenses has limits. I could, of course, move out of my apartment and live in my car – that would save me $1,500 or more a month. However, there would be multiple unacceptable trade-offs – potential to freeze to death, nowhere to store food, nowhere to shower, a probability that I’d lose my job due to being unable to present myself professionally, etc. As such, decreasing expenses can be impossible at a certain point – frugality only goes so far.

Increasing income, on the other hand, has absolutely no limits. As long as your creativity and determination persist, there is always a way to make more money. For example, consider the following:

  1. Asking for a raise at work,
  2. Working overtime,
  3. Getting a second job,
  4. Starting a side-business,
  5. Selling items you own but never use,
  6. Switching to a higher-paid field, or
  7. Renting out a spare room.

These are just some ideas out of a possible list of hundreds, but they make my point – the only limit to your income is your own drive and your own ideas. Let’s go into further detail.

Asking for a Raise

In some cases, you may not even need to ask. For instance, in my workplace, salaries receive regular reviews every September based on an annual employee evaluation. If you performed well, the raise can be quite substantial. If you performed less well, there is still a raise, but it might be significantly less, designed to combat inflation and nothing more. However, if your workplace is less structured, or you feel the structure is not working fairly, you may need to ask for a raise, and argue for it.

Regardless of whether the process is automatic or requires initiation, there is one thing you’ll need to do: Sell yourself.

And no, I don’t mean into slavery; that would defeat the whole purpose of F.I.R.E. More Daenerys, less Unsullied, okay? Here, I mean self-advertising, self-promotion, the act of painting yourself in the best possible light. If you have performed exceptionally, this is generally much easier than if you’ve simply been an average employee, but it should be noted that even mediocrity can be made to look exceptional with an adequate amount of charisma. There is a reason that snake-oil salesmen were never truly forced out of business. However, I would generally encourage you to take your parental unit’s advice and “Always do everything to the best of your ability”, because it makes financial rewards much easier to obtain.

In order to maximize that reward, before you go to your employee evaluation, or before you ask for a raise, I would suggest doing the following things:

  1. Make a list of your accomplishments: This can be anything from meeting budgets, hitting a difficult deadline, gaining a new client, changing a workplace item to be more efficient, surpassing expectations, raising revenues, or anything that could be considered praiseworthy. Often managers and bosses are unaware of these accomplishments, and won’t realize them until you point them out yourself. Be specific as possible, so you’ll be prepared to explain why these accomplishments added value to the business.
  2. Make a list of skills you’ve gained: Maybe you learned a new language, gained a new certification, or made progress towards a professional designation. Maybe you taught yourself to code in a new software, or attended a professional development course that made you a more knowledgeable employee. Maybe you took on parts of someone’s job when they went on leave and became cross-trained in another area of the business. If anything on your resume has changed since the last time you received a raise that is relevant to your job, this can be an important thing to leverage.
  3. Do some compensation research: Get an idea of what people in your field make, using parameters like years of experience, skill sets, and job descriptions. If your old job description doesn’t match your actual work, this may even be an indication that you should ask for a promotion – not just a raise. Having an idea of what you’re worth will allow you to determine whether asking for a raise would be reasonable and what dollar value that would amount to.
  4. Practice the conversation: Put yourself in your manager’s or boss’s shoes and imagine responses and questions they might ask, then formulate responses. This will help make both you and your boss more comfortable in the conversation.
  5. Don’t use idle threats: Threatening to leave when you have no intention of leaving or nowhere to go is not going to take you far, and may backfire. If you’re going to put a threat of quitting on the table, make sure you mean it, and that you know what you’re going to do if you do quit. The compensation research should help you in this regard – if you see a lot of jobs you’re qualified for elsewhere, and you know your firm is understaffed, your threat may hold a lot of weight.
  6. Prepare yourself for “No”: In some cases, it might not be the right time to ask, or your boss may have opinions that differ from yours on your performance. If you are refused a raise, be sure to follow-up and ask what you need to do to be considered for a raise in the future. If your boss can’t answer that question, then it may be possible that you’re facing more than just a monetary issue – prejudice or workplace culture could be the problem, and could indicate that you would be more valued elsewhere.

Conversations about money and compensation tend to be almost taboo in modern cultures. However, while it may seem terrifying to bring up the topic, just remember that everyone is aware that you are here because you need to be paid – money is a natural part of a capitalist society, and learning to talk about it with confidence can be very rewarding. If you are uncomfortable about approaching the topic, consider asking an HR manager or a close workplace friend if there are any channels for revisiting your salary, rather than your manager. They may have insights into the process that will make the task easier to handle before you go to your manager.

I recently used these suggestions to pursue a raise at my own work to great effect, increasing my own salary by 19%. Remember, managers are often unaware of your accomplishments and extra work you’ve been doing. Never underestimate the ability of people to get absorbed in their own lives. It’s generally best to assume people have forgotten you exist when it comes to monetary rewards, even when you know they appreciate you and your work. It just doesn’t come naturally for most managers to look around and ask “Who here needs a raise?” It will likely fall on your shoulders to make them ask that question.

Working Overtime

As I’ve mentioned in this post, overtime has its trade-offs. Another hour of work is an hour you could have spent doing something else, like reading or hiking or teaching your hatchling to tie his shoelaces. However, in most professions, an hour of overtime can also mean anywhere between 1x to 2x a normal hour’s worth of pay.

I have always considered the idea of a 40-hour work-week to be fairly random. From a mathematical perspective, let us consider a day’s worth of time, or 24 hours. We generally need about 8 hours of sleep, so that leaves 16 waking hours. Assuming 2 hours for getting ready for the day, commuting, and getting ready for bed, that leaves 14 hours. After a workday of 8 hours, that leaves 6 hours remaining. Generally, we use an hour of this on a lunch break, another hour making and eating dinner, and then the remaining 4 hours are a free-for-all. TV, reading, sports, gym, hobbies, etc., those are used to fill those last 4 hours. On weekends, a full 16 hours are free.

But what if you could monetize those hours? Working through lunch break is the easiest of these, where your work allows it – an hour on lunch break is still an hour at work, spending it making money doesn’t have much in way of downsides. But what about those extra 4 hours a day? What would those be worth? Depending on your hourly rate, it can be quite substantial. In my case, an extra 5 hours of work a day is over an extra $150. In a month, that could amount to an extra $3,000. If I were in a profession that required 1.5X or 2X overtime payout, it would be worth even more.

However, this is generally considered unsustainable. Why? Because even dragons are frail creatures, and exhaustion and burnout are nothing to laugh at. However, in general, I found I was able to sustainably manage to work for 11 hours a day, 5 days a week, by working through lunch break and trading in 2 of my free hours for more pay. I would generally also work 5 hours on Saturdays. I did not perceive a significant decrease in my overall well-being or my work productivity from working 60-hour weeks. In fact, I generally felt fairly good about my life because the pay was quite worth it, and I still had (albeit shorter) evenings and a day and a half every weekend to do what I liked. I also learned to free up more time by making my morning routine more efficient and making batches of food so as to cut down on cooking every day, routines which I have kept even though I no longer work as much overtime in the off-season.

(I also briefly experimented with cutting down sleep to 6 hours a night, but this had definite negative effects and I would not recommend it).

I imagine there would be further trade-offs to consider for someone who had bond-mates or hatchlings or pets or demanding extra-curriculars, but that is not my point. My point is that we are definitely capable of working more than 40 hours a week, and the only one preventing you from doing so is yourself.

Additionally, to give you a bit of history, the 40-hour work week has only been around for about a century. According to this article, 10-16 hour shifts used to be the norm, before Henry Ford, the automobile creator, decided to switch it up and move his workers to 8-hour shifts. His reasoning? So they had more time to spend money. Ford’s actions were not the first, but Ford was the largest company to cut down work hours. Then, in 1940, according to Business Insider, the 40-hour work-week was mandated by American Congress. Apparently, it seems, in a quest to encourage capitalism.

With this in mind, I would encourage you to test it out and see whether working beyond the 9-to-5 is worth it to you in your quest for F.I.R.E. And if you are unable to get paid overtime at work, there is always another option…

Getting a Second Job

Second jobs are generally considered the purview of students and the lower class. Which is unfortunate and rather classist, as this is definitely a feasible way to earn extra money. You may not always be able to pick up a job in the same field, due to non-compete clauses in your employment contract, but there are many types of work with flexible hours that do actually compensate fairly well, such as bartending, freelancing and pizza delivery. Of course, “fairly well” is relative, and this may not be as feasible for people with higher salaries than entry-level.

There can also be interesting money making opportunities that your work may even encourage. For instance, the CPA profession has its own professional development requirements of 20 hours a year. The CPA body needs people to teach these courses, and classically, they need CPAs to come teach them. Many accounting firms consider this to be a good way to build soft skills, generate larger professional networks, and get the firm’s name out, so it’s a win-win. More money for the CPA, more skills and potential for growth in the firm.

Similar opportunities may exist in your profession, so make sure to look around and see what precisely is available to you. For instance, I was recently contracted to mark the CPA certification exam, which will earn me an extra $5,400 over two weeks, and my employer was willing enough to give me the time off using my banked overtime hours. Keep your eyes open!

Starting a Side-Business

A side business, or “hustle”, is also a valid way to earn extra money on the side. Often, side hustles are the brainchild of your hobbies. You like writing? Start a blog, maybe it’ll earn money (haha, not this one though). Or write a book, and maybe it’ll get published (persistence required here, Rowling herself was turned down 12 times). You like paper crafts? Make handmade cards and sell them on Etsy. Good at drawing or making comics? See if people are willing to give you commissions. Or maybe you do leatherwork, or calligraphy, or coding, or baking… all of these can be monetized, if you’re willing to put in a bit of time and effort.

In some cases, something that starts out as a hobby that maybe earns a bit of money can turn into a full on business, to the point that you really can’t call it a “side” business anymore. As an accountant, I have seen many a client who has quit their day job because of a hustle that took off. It’s all a case of supplying to demand and learning how to meet customer needs.

However, I do warn the danger of turning your hobby, something you love, into something you do for a living. You may hate it by the end!

Selling Stuff You Own But Never Use

Ahhhh, capitalism! Us dragons are the worst offenders of all. Oh we hoard, yes we do. We find those shiny new things and we pile them up, up, up into a massive nest, and then we cover them in more things and forget the old things exist.

Are you guilty of this? I sure am. I have to rifle through my packed-full closet on a biannual basis and toss things into a donation bin, and every time I move I swear there’s a larger and larger truck involved.

Donating is convenient, isn’t it? There are clothing bins on corners, a Salvation Army and Value Village in every town, there’s that drop-off point in the alley behind the thrift store that’s just perfectly on the way to work. It’s almost too convenient. And taking advantage of that convenience may very well be losing you cash.

Maybe you have a garage, or a garden shed, or an attic, or a closet in a guest bedroom, that’s just full of stuff that you’ve put away for a rainy day. Out of sight and out of mind. However, if you never use the thing, what’s the harm in throwing a garage sale, or even just taking a picture and throwing it up on Craigslist or Kijiji or Castanet? Make them come to you and pick it up, and it might very well be the easiest $10, $50, or maybe $100 or more you’ve ever made, all for something you’ll never actually miss.

What’s that colloquialism people say? “Does it spark joy, Janet?!” I don’t really hold with that sheeple nonsense about decluttering, but even dragon hoards need a little spring cleaning sometimes. Might as well build the gold hoard while you lose the consumerist one! And if it really doesn’t spark joy, you can always set it on fire, I suppose.

Switching to a Higher-Paid Field

Career moves are stressful. No one is arguing that one. Generally not all of your skills are transferable, and riding a learning curve later in life is always much harder than it was in your twenties. Maybe you’ll have to go back to school, or get training. Maybe you’ll have to compete with bright little barely-grown dragons on the interview floor. All of these things can seem like insurmountable barriers, but getting past those barriers may very well be what is required to get you on the path to F.I.R.E.

Let’s try a story. Once upon a time, there was a depressed dragon who worked an entry-level warehouse job in the great city of Vanaheim. After years of service to the great corporate entity who ruled the warehouse, our depressed friend scraped by on barely any savings, his meager wage eaten by his rent and food, with no hoard to speak of, which only made him more depressed. Years later, he retired on the pitiful public stipend known as the Canadian Pity Pennies, and died soon after, with not a single shiny gold coin to pay his passage to the afterlife. He drifted in the never-ether, for all eternity, screaming in the dark. The End.

Did I say this was a happy story? No. No, I did not.

But here’s a plot-twist. What if, instead, our depressed friend had discovered this blog, even in his late adult dragonhood, and considered his future? With a change of heart, this dragon returned to the halls of learning, emerged with a professional plumber certificate and a slight amount of debt, but built his hoard, and retired within 10-15 years. Many years later, he would hand a gold coin to the Keeper of death’s doors and enjoy a comfortable afterlife in dragon heaven.

See, this is a happier story, and it all comes to one thing: Return on Investment. Changing careers has to make sense from a financial perspective. If you have to go back to school, it is entirely necessary that you research the demand for staff and the salaries of the profession. When making a switch later in life, you want to make sure that when you graduate, you are employable, not just on paper, but economically as well. There must be a need in the market for you to fill.

However, you will not be alone, no matter how intimidating it might be to return to the halls of learning over-run by hormone-ridden juveniles. Many people return to school later in life, and there are always online classes, and night classes.

And you’d be surprised how little time it takes to earn a trade certificate, and also how little it costs. I still smoke a bit at the nostrils when I think about my sibling’s bondmate, who paid less than me for school (in fact I believe between grants and co-op earnings he made money off it), spent less time in school, and still made more than me when he got out. Admittedly my earnings have greater growth potential, but his salaries are not anything to scoff at.

And while it takes longer, medical, financial, accountancy and other similar degrees can and programs can also have very high return on investment. The investment just may be higher than a trade would be.

Renting Out a Spare Room

Admittedly, if you have extra space, it might make much better financial sense to just downsize, but there are situations where that isn’t true. For instance, if you have been locked in at the government mandated rent increases for years, while the local rental market has been in a crazy bubble, it may be more expensive to rent something smaller than what you already have. My parental units have this exact problem. Or perhaps you bought at a low point and your ownership costs are much less than buying or renting a smaller place.

In any case, if it doesn’t make sense to downsize and save money that way, it might be a good idea to utilize the extra space for something other than a guest room that’s used twice a year or a place to store the gym equipment you said you were going to use and then never did. And if you have a second bathroom that you also never use… welllll…

Roommates really aren’t that bad. Typically, you’ve been living with someone your whole life. Us dragons are pack animals. We exist in family units inside family dwellings. We have parental units and siblings and bondmates and hatchlings and friends. We are inherently used to sharing space, and our psyches are inherently built for it.

Sharing space with strangers may sound like a different story, but really, it’s often easier. A roommate probably won’t blatantly steal your favourite necklace, like your sibling might. They probably won’t “borrow” your car, or eat your leftover pad thai, or track mud on the floor, like your hatchling might. And yes, there are bad roommates, but there are also good, decent roommates, who understand the social requirements of sharing space and know to do their own dishes and clean up their own messes. Not everything is a soap opera or TV show, incidentally.

So if you have the space, consider monetizing it. You could get a full-time annual-lease roommate. You could put up a student during the school year. Shards, if you don’t want a long term commitment and live in a touristy enough place, you can even consider an Air BnB. Just check your local rental ads, determine a reasonable price, post your room on a rental board, and do a thorough interview.

And remember, at least in BC, there is generally no law that can force you to share space with someone in a normal renting out a room situation. Roommate leases where the roommate lives with the landlord are way different than normal leases, and can be broken at any time, if you share a bathroom or a kitchen. So what is there to lose?

And what about that cousin or sibling or friend of yours that seems just a bit lonely? Roommates also don’t have to be strangers.

Conclusion

The key thing to remember here is that increasing your income (and thereby increasing your hoard and someday reaching F.I.R.E.) is limited only to your imagination and your persistence.

So write a business plan, list some of your monetizable skills, consider job fields that are gasping for employees, check the dust levels of your guestroom. Find that city over the hill you could raid for gold (okay not literally, stealing is bad, but moving is an option too). Be a dragon!

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Rent or Buy – A Reprise

Posted on by under Choosing a Castle

So here we are, 2.5 years after the last time this dragon has posted anything to do with choosing castles. What has that eon brought us? Well, more money (Yay career progression!), more annoying adult dragon problems, and more of the same questions:

“What do you think about the housing market?”

“Do you rent?”

“Isn’t the cost of living in this town just horrible? Rent is so expensive!”

“The prices have been going up for years, don’t you think you’re missing out?”

Honestly, I’m beginning to think it boils down to one thing: FOMO. For you ancient grey wyrms that can’t remember all the new hatchling slang, this stands for “Fear of Missing Out”. It colours every part of our dragonish society. For how can you possibly accumulate a sufficient hoard for your dragonish retirement if you don’t buy a castle?!

The real answer to this is savings. You know. Not spending all the stuff you bring in. But Canadians seem perfectly happy to sit in an empty nest with nothing but the occasional copper penny stuck in the edges – the household savings rate is a measly 1.1%. And why do they do this? Well, because the hardy, snow-tolerant dragonkind of the Great White North are far too busy throwing their hoard into one thing: Castles.

The problem is, unlike the housing stock available to dragonkind of the 1900s, these castles are selling at incredibly inflated prices pushed by insanely low interest rates, absurd levels of demand (see: FOMO), and a lack of supply as populations rush away from the country and into the city. And those are just some of the suggested factors by economists worldwide.

But I really have only one question: “WHY?” (I want you to imagine me stomping around, flapping my wings, and breathing fire, seriously).

Back in February 2017, I wrote a blog post that talked about how to compare the true cost of renting and buying. Despite my best efforts, I have still encountered an absurd amount of juvenile dragons (or even full-grown ones) who look only at the mortgage payment, compare it to the rent, and happily skip off to buy a castle instead of renting one, because it is “cheaper” (spoiler: it’s not).

So here’s a reprise. It’s been nearly three years. I myself am a slightly more accomplished full-grown dragon. I’ve got a CPA designation, better salary, 8 years of post-secondary business and tax education, and a job I love. All in all, life is good. Now, I live in a bigger rental apartment in the same building as the one I lived in in 2017. Top floor, 1 bed + den, 700 sq ft. Oh, but look! Across the street is a very similar apartment, but with one shinier, sparklier, dazzling difference: I could own it.

But should I???

INGREDIENTS FOR AN INFORMED FINANCIAL DECISION 

Do you remember this heading? I hope you do, because if you’re thinking about renting or owning, this is the recipe for your financial success. And here’s the flashback to the ingredients you need:

  1. Two COMPARABLE properties, one for rent, and one for sale. If you’re living in a small apartment and are thinking of buying a house/bigger condo, the property you are considering buying should be compared to a rental property as similar to it as possible, not the rental property you’re currently living in. After all, there’s nothing wrong with upgrading into a larger rental if it’s truly better than buying a comparable property.
  2. Information on the rental property:
    • The monthly rent
    • The annual rent increase percentage allowed in your province/state
    • Cost of parking/laundry if any
    • Cost of tenant insurance
  3. Information on the property for sale:
    • The list price
    • The annual property tax
    • Strata fees
    • Cost of parking/laundry if any
    • Cost of home insurance
  4. Financial information:
    • The dollar amount you have available for a down payment
    • The mortgage calculator of the bank of your choice

DIRECTIONS FOR AN INFORMED FINANCIAL DECISION

  1. Calculate the average cost per month of renting over the next five years (most people move every 5, though feel free to change it up if you’re positive you’re staying wherever you are shorter/longer)
  2. Calculate the average cost per month of owning over the next five years
  3. Compare financial factors
  4. Consider qualitative factors
  5. Decide

And now, 2.5 years later, let’s try it again with…

AN EXAMPLE (ABOUT ME, AGAIN)

So here we go. I will yet again throw my personal situation into the interwebs in the faint hope that someone, anyone will take a second and think before they throw their financial future onto a black arrow fired by a Bard.

I currently live in a 700 square foot one-bedroom apartment with den, top floor and corner unit. It is perfectly located to my work, central, has a billion windows for my coveted hoard of plants, and I adore it.

And like I said, across the street, there is a very similar apartment. So let’s compare these castles.

  My Rental Apartment Apartment for Sale
Size 700 square feet 631 square feet
Age Built 2016 Built 2009
Location Half a block to my work Next door to my work
Type Low-rise apartment building Low-rise apartment building
Pets No pets permitted 2 cats or one cat and one small dog
Appliances Fridge, Stove, Dishwasher, Laundry Hookups Fridge, Stove, Dishwasher, Laundry Machines in Suite
Heat/Cool Two Gree In-Wall Units Two Gree In-Wall Units
Parking Heated Underground Parking Parkade
Storage One 6-foot closet, one 3-foot closet, one 4-foot closet, laundry closet One 4-foot closet, one 10-foot closet, laundry closet
Layout See photo comparison below

Den can be used as 2nd bedroom, split floorplan, corner unit

Top floor

 See photo comparison below

Odd den placement, bedroom barn doors encroach on wall space

Top floor
Other Rentable garden boxes available Rentals allowed
Financials Monthly Rent:        $1,450.00Parking Fee:            $    40.00

(Rent includes hot water)

 List Price:      $299,900.00Strata Fee:    $        181.00

(Strata fee incl. water and parking)
Ownership and Rental Side by Side Comparison

Side by Side Comparison of Apartment Layouts

Now with all that lovely documentation managed, let’s “MATH SHIT UP”, as my favourite blog writer FireCracker would say.

STEP ONE: CALCULATE AVERAGE MONTHLY RENTAL COST

In BC, landlords are allowed to raise rent by 2.5% in 2019. As always, we must remove inflation in order to truly compare numbers. In Canada, the inflation rate in July 2019 was 2.0%, so:

Real Annual Rent Increase = 2.5% – 2.0% = 0.5% (Not a hell of a lot, what does that say about our economy?)

If we assume that my landlord (which is a corporation) will increase rent at the absolute max every year (seems like a corporate thing to do), then my rent is as follows:

2019: $1,450.00 | 2020: $1,457.25 | 2021: $1,464.54 | 2022: $1,471.86 | 2023: $1,479.22

Or, on average: $1,464.57

Now, I’m not going to bother increasing the $40 parking fee, or the $38.19 I pay for tenant insurance , as there are no real strict rules with which to calculate and it would likely be at most an inflation increase, so what this means is that over the next five years, my rental apartment would cost:

RentParking

Tenant Insurance

Total Cost

 $                         1,464.57$                              40.00

$                              38.19

$                        1,542.77

And as I’ve said before, the calculation should be completed not including utilities: remember, we’re comparing two comparable properties. If they’re truly comparable, the utilities cost should be the same.

STEP TWO: CALCULATE AVERAGE MONTHLY OWNERSHIP COST

Information collection:

  • Probable Closing Costs: The Pihl Law Corporation Okanagan Home Purchase Cost Estimator tells me that I should expect about $900 in legal fees and $400 in third-party transaction costs, but nothing for property transfer tax, because the First Time Home Buyer’s Program eliminates property tax for me.
  • My Down Payment: My net worth has improved over the past few years so I could do a large down payment, but with interest rates what they are, I probably wouldn’t do more than 10% down. There is a government program right now called “Equity Sharing” that can help with a downpayment at the cost of giving the government title to your house and a share of any profit you make. I wouldn’t touch this with a ten-foot pole, so we’ll ignore that for now.
  • Interest Rate: TD, my usual bank, if offering a 5-year fixed at 2.87%.

With that done, let’s talk about the real price. This condo has been on the market for 106 days, maybe even longer, if the realtor has delisted and relisted it to reset the clock. At that length of time on market, this seller probably hasn’t gotten a lot of offers. It’s also listed above its property tax assessment value of $293k. My personal opinion is that this is probably overvalued given the glut of new builds in the Kelowna core. For arguments sake, we’ll assume that I could buy the apartment across the street for $280k.

Now to look at the mortgage. I could technically avoid CMHC insurance by putting down a 20% downpayment, but that’s a lot of cash tied up in one asset, so I’ll stick with 10%.

At $28k down, I’ve got a 10% down payment, which means 90% leverage. According to the Canadian Mortgage & Housing Corporation, that means a 3.10% insurance premium.

($280k – $28k)*(1+3.10%) = $260,000

Using TD’s interest rate and calculator , that gives us a monthly mortgage payment of $1,213.16.

But as I’ve said many times, the mortgage is not the only cost of owning property. We also have to consider:

  1. Property Tax,
  2. Strata Fees (if applicable),
  3. Home Insurance, and
  4. Maintenance.

Now, same as I did with the tenant insurance and parking fees for my rental apartment, I’m not going to increase these costs year over year. The assumption is that they will rise at the rate of inflation, and therefore will be the same cost next year as this year, in today’s dollars.

Calculating property tax can be tricky, since not all property listings will include them. However, if you’re lucky, your province/state will have an online assessment database, like E-Value BC, where I was able to find out that the apartment I’m looking at was assessed at a $293,000 value in July 2018. Punching this value into the City of Kelowna Property Tax Estimator leads to a $1,493.73 property tax levy for 2019, or $124.48 a month.

Home insurance was easier, as finding an online calculator is pretty straightforward. This particular calculator tells me I’ll spend $98 a month on insurance at the same level of content coverage as my current tenant insurance.

Maintenance tends to be a subjective topic when it comes to home ownership. The cost can vary depending on the age of the building, how well it was built, how good its previous owner treated it, how big it is, etcetera, etcetera. However, many experts suggest budgeting 1% of purchase price for maintenance, or budgeting $1 per square foot. This creates a heck of a spread of results for the apartment I’m looking at:

  • 1% of purchase price = $2,800 per year
  • $1 per square foot = $631 per year

That’s a bit of a range, so we’ll compromise and average it to $1,715.50, or $142.96 per month. If you’ve got more knowledge about maintenance costs, go with your expertise and not a random rule, because, as you can see, math really only goes so far.

And in conclusion:

Mortgage

Property Tax

Strata Fee (see the big table above)

Home Insurance

Maintenance

Total Cost

 $                         1,213.16

$                            124.48

$                             181.00

$                              98.00

$                            142.96

$                        1,759.60

And that brings us to the next step.

STEP THREE: COMPARE FINANCIAL FACTORS

The first part of this step is pretty straightforward:

BUYING WOULD COST ME $216.83 MORE A MONTH THAN RENTING.

In pure cash flow, this means that owning would set me back over renting on a monthly basis. That $217 could be better used for other things – three weeks of groceries, a shopping spree, a payment on a new car, a ziplining experience, and so on and so forth. In a year, that’s $2,600, which could pay for a vacation, or a kayak, or a Nintendo Switch.

But as always, it’s not just the monthly cash flow that matters. What about the lost opportunity on the down payment? I have that money invested making a consistent 6-7% from a balanced portfolio of ETFs. If I use that on a condo, I lose the investment return I was making. What about if the condo rises or falls in value, where does that factor in?

The true decision here isn’t “Should I rent or should I buy – which is cheaper?”, it’s really “Will renting or buying improve my net worth more?” So let’s do the math.

Scenario 1: I continue renting and invest that $216.83 a month in my stock portfolio.

Scenario 2: I buy, and I don’t get to invest that $216.83 but I pay off my mortgage and build equity that way.

If I continue renting, I don’t have to cash out the beginning balance in my marketable securities portfolio for the closing costs and downpayment, so that’s $28,000 that will continue earning money. We plug that, plus a $2,601.96 ($216.83*12 months) annual contribution into this handy calculator with a 7% return (my average, and also the stock market’s), a 5 year timeline, and 100% reinvestment, and we get:

Net Worth After Renting for 5 Years = $55,282

Note that I will probably be investing more than $217 per month, but anything I’d invest above that is the same I’d be investing if I bought, so there’s no point in including it in the calculation.

But what about net worth when owning property? Well, that’s a gamble. House prices are a local game, and it varies. Across Canada, prices are peaking or falling. In Kelowna, they appear to be falling. With a glut of new condo builds, condos are sitting unsold for longer, and price cuts are a usual thing to see in my daily realtor update emails. If anything, this castle is likely to experience a crumble in price, rather than an increase. But let’s be optimistic, and assume it’ll still be worth $280k in 5 years. If I were to sell it, this would probably incur real estate commissions of about 4.5%, so we’ll say the real worth of the condo at the end of five years is $268,000.

The equity is simply the original downpayment of $28,000 plus the amount of principal I managed to pay off over five years. For the less math-savvy, this is because if, in five years, I sell the apartment, my “earnings” is simply the difference between the list price and the remaining loan I have to pay back to the bank.

So let’s take a look, and head back to the mortgage calculator I used back in Step 2 to punch in the same data. If we toggle the amortization graph button, it tells us how much mortgage we have left each year. At the end of year 5, the amount owed is $221,273.61.

Net Worth After Owning for 5 Years = $268,000 – $221,273.61 = $46,726

And look at that, if I buy now and sell in five years, I can lose myself a casual $8,556. So sure, sure, go ahead and tell me that “castles are the best investment you’ll ever have”. And the thing is, it’ll probably be lower than this, because god knows interest rates have nowhere to go but up and we’re rather overdue for a recession. I’d bet a lot of money that the only place Kelowna condo prices are going is down.

Why on earth would I buy when there’s a huge likelihood that even if the prices stay the same, I could lose money. And not just some money, but enough money to fund a few trips to Europe, or half a car, or hell, a couple of really really nice watches, and a new designer suit thrown in to match.

So what’s the conclusion here?

  • Per month, owning would cost me $216.83 more than renting,
  • Over five years, even if housing prices stay stable, I would lose money.

And that brings us to step four.

STEP FOUR: CONSIDER QUALITATIVE FACTORS

Money isn’t everything, so it is important to consider qualitative factors. In my case, the only true qualitative factors that would maybe push me towards home ownership is this: pets. Renting with pets is a near impossibility, and I have never lived in a rental apartment that allows them. Someday, I would like to own a pet – I am putting off that day until the day I own.

But the qualitative factors for owning are still far too negative for my liking. The financial risk in the current housing market is high. Liquidity is poor, because house equity can’t be cashed out like a stock portfolio. Owning takes work – maintenance would be on me, and not the landlord, and as handy as I might be with my dad’s teaching and a bit of YouTube, maintenance is not this dragon’s cup of tea (or rum? What do dragons drink anyway?). Add in the lack of flexibility of being stuck in one apartment until you sell, and overall, there is nothing to owning that would outweigh a near nine thousand dollar minimum monetary loss.

This can be different for everyone, and qualitative factors can outweigh the quantitative. But this is my advice: Only ever buy if you can afford it, even if the qualitative feels important to you. Generally, this means 3-4 times your income. Try to stick in that range, or I can promise you that you will never accumulate the hoard you need for retirement.

STEP FIVE: DECIDE

The answer to the question “Should I rent or should I buy?” is: “It depends.” I’ve mathed the math yet again 2.5 years later, and my answer is No. What’s yours?

And more importantly, how different will this answer be in another 3 years?

Perhaps this millennial lizard might own a castle one day after all…

Dollar dragon out.

How to Start Your Hoard

Posted on by under Hoard Building

Surely one must be a large, strong, vicious dragon to start building a hoard, you’d think. Surely fire-breathing will be necessary, angry growly noises will need to become your first language, and hours will be dedicated to sharpening those razor sharp claws. After all, it’s not like some tiny, smoke-spewing, pale-scaled wyrm could survive the stock market, right?

As it turns out, you’d be wrong!

And that, right there, is the very first hurdle that you’ll need to spread your wings and hop right on over.

I’ve had many conversations with many fellow dragonkind, from juveniles still itchy from their fast-growing scales to elder dragons with spikes the size of lances. Surprisingly, fear of the unknown does not discriminate against age. But let’s make this entirely clear:

“Investing is not actually that hard.”

Shock! Horror! Surely not!

It is a very common misconception, and one that everyone would be better off without. Yes, investing seems scary, the stock market seems complicated, it all seems very daunting. But really, once you have the basics covered, there’s really not much of a learning curve. You put money in, you top up your stocks, and you log out.

It’s not like you have to pillage a dwarven city, kill its inhabitants, and then spend the next century angrily spewing smoke signals to keep the riff raff out. That would be complicated. And possibly deadly.

However, there are ways that you can make investing deadly, and there’s a very simple way to avoid this: Accept the fact that you are ordinary.

Accept your fate! Accept it! Can you predict fortune cookies? Do you have an anti-ESP result to predicative card games? Do you have dreams that come true? Do you win the lottery on a weekly basis? No? THEN DON’T TRY TO PICK STOCKS. You will fail, you will lose your entire hoard, your castle, your bond-mate, and then some story-teller will shoot you with a massive arrow, just to top it off. Seriously! Just don’t!

The stock market, on average, makes 7% a year, just by existing. The economy chugs forward, dragonkind makes advancements, inflation happens, and the stocks, on average, just keep going up. This is on a long-term basis, but that’s what good investing is:

  1. Long-term – go for the long-haul, there is no such thing as getting rich quick
  2. Diversified – buy the whole market, and you’ll make that same 7% return
  3. Balanced – have both the stocks that grow and the steady ones that rarely falter

Good investing, which does not in any way involve stock picking, is not scary. It’s easy, it’s routine, and cheap. It doesn’t involve banks, or an advisor. It involves buying the whole market, getting the 7% at very low risk, and living your life just as you already do.

But how do I buy the whole market, you ask? Surely that’d mean you already need to have a hoard the size of a dwarven city!

As a matter of fact, no it does not, because of one beautiful thing: index fund ETFs.

You’ve probably heard of mutual funds – big bundles of stocks that the banks hoard, but they’ll sell you a small slice of it (for a fee, of course!). ETFs, or “Electronically-Traded Funds” are a lot like mutual funds, except for a few key differences:

  • They don’t have managers, so you’re not paying the exorbitant fee for some bank-mad idiot who probably can’t predict the stock market anyway (there have actually been studies where literal monkeys choosing at random do just as good in the stock market as so-called “experts”), and
  • They’re computer-run, they automatically pick up new stocks, and therefore they remain consistently balanced, never “missing out” on any part of the stock market.

ETFs still pay dividends, they’re still publically traded, and they’re way cheaper than mutual funds, usually charging an MER (management expense ratio) of a fraction of a percent, compared to the 2-3% charged by most mutual funds. And in a stock market that makes 6 or 7%, cutting out 2-3% can be a severe drain on overall portfolio growth.

In fact, if you need a million to retire, you put in $10,000 a year, and you only make 4% versus 7%, this is what it can look like:

Years to Retirement at Different Growth Rates

At 7%, it takes 30 years to retire. At 4%? Forty-one years, or eleven years longer. In short, that MER can have significant consequences over the long-term. And this is why, overall, I very strongly recommend ETFs over all other kinds of investing.

But let’s get back to the bare bones of what we’re doing here.

The Basics:

Building your hoard is a fairly straightforward process, which can be broken down into five steps:

  1. Open an investment account.
  2. Choose your risk allocation.
  3. Choose your ETF allocation.
  4. Buy your stocks.
  5. Wait, and repeat step 4 on a regular basis, topping up each ETF based on your allocation in Step 3.

Slowly but surely, over years of repeating this process (and hopefully putting in increasingly more gold) your hoard will get bigger and bigger, until it gets to the point where you can retire. You’ll never have to rely on a bank manager, or risk losing all your money. And at the end, if you want, you can take it all out, convert it into gold, and then curl up and sleep on top of it for a couple of days, just for the sheer pleasure.

…I take that back, that’s a good way to attract dwarves. And you know, get killed violently. Moving on…

STEP 1: Opening an Account

This can actually be one of the most daunting parts of starting your hoard, if only for the massive number of options that are available. But before you begin a Google search, which will ultimately scare you off, let me break it down. There are two main types of investment platforms:

  1. Bank-owned investing platforms, such as TD WebBroker, Scotia iTrade, or BMO InvestorLine, and
  2. Dedicated investing platforms, such as Questrade and Qtrade Investing.

The main difference between the two is this: One is primarily a bank. The other is primarily a broker. Banks are large, diversified, and tend to offer their investing platforms as a side-business to their bank accounts and mortgage operations. Dedicated brokers, however, are primarily about helping people invest, and so they tend to win the awards for best user experience, best customer service, and best fees. Banks generally also charge more than dedicated brokers, though this is not always the case.

If I were to recommend one investing platform over all others, I would recommend Questrade, for many reasons:

  1. Incredibly user friendly,
  2. Easy to put money in (just like any other bill payment),
  3. Easy to open an account, or multiple accounts,
  4. Excellent monthly reporting,
  5. No monthly fees if you’re under 25 or carry over $5,000,
  6. Buying ETFs is free, no commission, and
  7. Carrying both USD and CAD is hassle-free, no extra fees.

I have considered a TD WebBroker account simply due to the convenience of being combined with my banking, but it has yet to be able to beat out the advantage of absolutely no fees.

Once the trading platform is chosen (I recommend reading some reviews if you are unsure), the next steps are easier. You simply go to the bank branch or website of your choice, and you fill out the forms and hand over the appropriate information to prove you are who you say you are. Then, you choose your account. This, again, can seem daunting, but there are three main kinds of investment accounts:

  1. Tax exempt accounts – such as the TFSA or Roth IRA
  2. Tax-deferred accounts – such as the RRSP or traditional IRA
  3. Taxable accounts

For the average person making the average salary, it is best to first max out your tax-exempt accounts (which you can use as emergency savings and pull from whenever you need), and then max out your tax-deferred accounts (which you can’t without paying tax), before you ever open a taxable account. For a Canadian, this means that you max out your TFSA, then your RRSP, and then you open a taxable account. So, wherever you are in that progression, open the account you need.

Just make sure you choose a direct-investing account, and not a managed account, because the whole point of this is to be your own DIY expert in investing.

You might have to wait a few days for everything to be set up, but that isn’t a big deal, because you’ll need time to….

STEP 2: Choose Your Risk Allocation

I know I said that ETFs are low-risk, but that doesn’t mean no-risk. This is because ETFs come in big baskets of similar stocks. For instance, you could choose an ETF that holds bonds. Bonds are very stable, very safe investments. They pay very little in dividends, but they always pay dividends. They are dependable.

On the other hand, you can also choose an ETF that holds high-growth American REITS (Real Estate Investment Trusts). Real estate is sometimes a bit wobbly, it can pay huge dividends in some years and barely force out a trickle in others. They are riskier, but they also have more potential for growth. Bonds don’t grow. They just sit there. Like rocks. Really stable, valuable rocks.

In short, most ETFs can be classified into two different categories:

  1. SAFE  – which consists of dependable, low-return things like bonds and preferred shares, and
  2. GROWTH – which consists of fluctuating stocks that can grow a lot in value, like REITs and equities.

Your risk allocation, which is your own to choose, is simply the percentage of SAFE versus GROWTH ETFs that you’d like to hold. As an example, a 40:60 ratio of safe to growth is considered a fairly conservative, safe risk allocation, which is recommended by most investment advisors for those in their mid-30s and up. If you’re younger (and therefore have more time in which to accidentally lose money and make it back later), you could consider a riskier ratio, such as 20:80 safe to growth. If you’re an elder dragon just retired to a nice desolate castle and worried about the longevity of your hoard, a 60:40 allocation might be better.

As a 22-year-old juvenile dragon, I could probably slot myself into the “young and reckless” category, but part of me freaks out at the idea of losing up to 50% of my hoard if the economy tanks, and so, like a 50-year-old, I actually do hold a nice, conservative 40:60 risk allocation. Which, might I add, still makes 6-7% a year in returns. And I have not, at any point, despite Trump and Brexit, lost any money at all.

Once you have your risk allocation decided, next up is:

STEP 3: Choose Your ETF Allocation

Essentially, the idea here is to pick ETF categories that match into your risk allocation that you picked above, while also diversifying on a global scale. To give you an idea of what that looks like, here is my basic allocation:

SAFE

(40%)

 Government Bonds 8%
Corporate Bonds 7%
High-Yield Bonds 5%
Preferred Shares 20%
GROWTH

(60%)

 Canadian REITs 5%
American REITs 10%
International REITS 5%
Canadian Equities 19%
American Equities 14%
International Equities 7%

To be clear, your allocation can be more complicated or less complicated than the one above (more complicated is easier if you have more cash to buy with). For instance, you could choose to buy exactly two ETFs (this is called a “couch potato” portfolio, but is a very valid investment strategy), one that is safe, and one that is growth, such as a Preferred Share ETF and a Global Equity ETF.

Once that’s done, it’s just a matter of choosing specific ETF stocks that fit into the category that you want. My way of doing this involved a spreadsheet with different tabs for each category, while I did a couple hours of Googling and wrote down every ETF I could find in each category. I then sorted them based on their dividend payout rates and MERs and chose the ones with the highest dividend payout rates and the lowest MERs (logically, the highest return).

My information would be two years out of date and not especially useful, so I recommend that you do a similar search. Regardless of what you choose, ETFs rarely lose money over the long-term, and there is no “wrong” choice as long as you are choosing a diversified enough category. For instance, if you buy an ETF that specializes in British Columbia wineries, this will be much higher risk than a buying a Vanguard or iShares ETF that holds a huge number of American corporate growth equities.

I am somewhat preferential towards iShares and Vanguard ETFs, which are strong dividend-payers, and also to anything that specifically has “Index” or “Index Fund” in the name. However, your own research will indicate what you prefer, and I encourage you not to be scared by the influx of information. Look for these four things and these things only:

  1. The name and symbol of the ETF,
  2. The “dividend payout ratio” or the “dividend yield” or “yield”,
  3. The MER, or sometimes just “Expense Ratio”, and
  4. The price per share, which will be relevant when calculating how many to buy.

For an average investor, those are the only things you need to care about. Everything else is just window-dressing. Once you have your stocks and your allocations, it’s on to…

STEP 4: Buy Your Stocks

The first and most important part of this is actually putting money in your account. It can be as little or as much as you want, though some brokers have a limit that requires an initial $1,000 minimum deposit. Once you can see the money in the account, it’s off to the races.

Main things to remember when buying stocks:

  1. When you calculate how many stocks to buy, make sure you convert any USD shares into CAD, or you may find yourself with the incorrect allocation.
  2. It is best to buy stocks when the stock market is open (9:30AM to 4:00PM Eastern Time on weekdays, or 6:30AM to 1:00PM in B.C., where I live). In off-hours, sometimes there are restrictions where you are required to buy in “board-lot” sizes, which is generally either increments of 10 or 100 shares. This can also mess up your allocation.
  3. Leave yourself a bit of wiggle room if you are exchanging currencies, as exchange rates sometimes change and having a buy-order denied due to lack of funds is never a fun thing.

And the next part is easy. Take the cash you’re putting in, multiply it by your allocations, and divide by the ETF’s price to get the number of ETFs you are buying. For example, if I have $1,000 and I’m buying 40% of ETF 1, which costs $5.50, and 60% of ETF 2, which costs $14.75, I might do the following:

$1,000 – $25 (wiggle room) = $975

For ETF 1 = $975 *40% = $390/$5.50 = 71 stocks

For ETF 2 = $975 *60% = $585/$14.75 = 40 stocks

Due to rounding, I will end up spending $980.50 and having $19.50 in cash left sitting in my account (less than the wiggle room, which is why the wiggle room is important). Just make sure you use the price that is in the currency you are spending when doing these calculations.

Once that’s done, it’s just a matter of pressing buttons. In Questrade, for instance, I would:

  1. Log into the trading platform,
  2. Click “Buy/Sell”,
  3. Type in the Symbol for the ETF I am buying,
  4. Type in the amount of shares I’m buying,
  5. Choose the “Market” option as I just want to buy the stocks at the price the market is selling them for, and
  6. Click Buy.

Almost instantly, during trading hours, you will receive an “Order Filled!” notification that tells you that you are now the proud owner of an ETF. And that’s it, you have successfully invested!

STEP 5: Rinse and Repeat

Over the next few days after undertaking Step 4, you’ll probably feel an overwhelming urge to constantly log in and check on your investments. I encourage you not to. Investing is meant to be passive, and long-term. The ups and downs of a day are generally nothing over the long scheme of things. Log out, have a barrel of liquor of your choice, take a nice relaxing flight outside, maybe roast some knights, and continue with your life. At next month’s paycheque, that will be the time when you can log in again, because it’ll be time to put in more cash and top up your investments.

Time to build that hoard! Some prefer to do biannual or annual investments, but I generally prefer to get the cash out of my bank account and into the hoard ASAP, if only to avoid spending it on books or shiny things.

…I have a dragonish weakness for shiny things….

So go on and log back in. If you bought an ETF that pays monthly dividends (some pay quarterly and some annually), you might actually see that your cash balance has increased as well, like magic. Once you’ve put in your new investment, you should remember to add the current cash balance to the new deposit, and then it’s back to the calculations.

This time, you’ll need to add up the market value of your ETFs plus your cash balance. Lets say your stocks from Step 4 are now worth $995, and you have an initial $25 in cash (yay dividends!) plus another $200 that you’re putting in. That means your total amount is $1,220. Again, we have to multiply this by the allocation rates:

$1,220 – $25 (wiggle room) = $1,195

For ETF 1 = $1,195 *40% = $478

For ETF 2 = $1,195 *60% = $717

However, we already have stocks, so we can’t just divide this by the current stock price and buy more stocks – we wouldn’t have enough cash. So, instead, we have to deduct our current ETF values from the amount we want. Let’s say our 71 stocks in ETF 1 are now worth $400 and the 40 ETF 2 stocks are worth $595, and their prices haven’t changed.

For ETF 1 = $1,195 *40% = $478 – $400 = $78/$5.50 = 14 stocks

For ETF 2 = $1,195 *60% = $717 – $595 = $122/$14.75 = 8 stocks

We buy these, spending $195 (leaving $25 in our cash account as buffer), and we’re back to our same allocation. In some cases, you might need to sell some stocks and buy more of the other to get back to the correct allocation, and this is also fine.

And that’s it! If this same process is repeated, and more and more cash is funneled in throughout your lifetime, eventually, you will reach a point where your hoard is large enough to truly be a hoard! It might be a retirement hoard, a new-hatchling hoard, a fly-free-and-travel-the-world hoard, but it will be yours, to do with as you please.

With an initial bit of courage and some dedication, yes, even tiny, smoke-spewing, pale-scaled wyrms can have a hoard that would make Smaug red with jealousy.

Wait, isn’t he already red?

We must be doing well then!!!

Finding the Motivation to Work Beyond the 9-to-5

Posted on by under Flying Free

Finally, it’s May. I’ve survived the hellfire that is tax season, my scales only a little scalded, my wings trembling only slightly. I’ve lived through 11+ hour days, 9PM curtain draws, and 5AM alarms. I’ve given up Saturdays and lunch breaks, traded sleep for time with people I love, and learned that free food is always amazing even if it’s food that I hate.

The end result of it all? A healthy fear of the words “this one’s a rush”, the experience of preparing over 200 personal tax returns while under strict time constraints and still keeping up with corporate work, and a lovely monthly report showing over 250 hours of banked overtime.

My hoard thanks me for all of it. The thing about working a ridiculous amount of hours is that you suddenly run out of time to actually spend money. My budget surpluses have exceeded all expectations. And that 250 hours of banked overtime? That will turn into a cash payout of about 1.5X my usual monthly salary, and a nice 13% boost on my expected annual income.

Was it worth it?

Well, that’s rather the question, isn’t it?

Working beyond the 9-to-5 is stressful, time-consuming, and results in a hell of a lot of trade-offs. Co-workers who have hatchlings had to do overtime at expense of time with their kids. On Saturdays, I’d hear tax partners get calls from their bond-mates asking when they were coming home. Another hour at work is another hour lost that could have been spent doing something else.

Another hour at work is also another hour of pay. In some cases, even more. Non-CPAs in my profession get time-and-a-half. At my firm, an 11-hour day earns an extra $10 “meal credit”, as does a 5-hour non-weekday.

At what point does that trade-off stop being worth it?

For me, the threshold’s pretty high. I am single, both bond-mate and hatchling-free, and I don’t even have the responsibility of a pet to come home to. I have no volunteer commitments, my hobbies are unscheduled affairs, and the most expected of me is attendance at weekly family dinners. In short, there’s no real reason for me not to be at work every second of the day, except perhaps my mental health or a lack of work to do, the latter of which is a rare occurrence in my workplace.

Motivating myself is a pretty straightforward process, because of that. All I have to do is think about financial independence, of finally being free of having to trade time for pay (and never having to do overtime ever again, I will admit). I think about someday being able to afford a house (when the markets stop being ridiculous, that is), and of being able to pursue any number of dreams, such as:

  • Starting a business and seeing if I like it,
  • Spending weeks hiding in beautiful, deserted places and just existing,
  • Writing whenever I want, instead of scheduled around work,
  • Going back to school and pursuing a Doctorate,
  • Volunteering for causes I care about, and
  • About a billion other things I dream of at night (and sometimes during waking hours, for that matter).

I once had a conversation with a professor. At the time, she was a single parent, a newly-fledged CPA, and was telling me about the hard-earned process that was her financial stability. I asked her how she did it all, juggling multiple jobs, a child, and the hard-won 3-year process that is getting a Canadian CPA designation, and she told me this:

“I made myself a fake business card, with “CPA”, after my name, and I stuck it in the corner of the mirror. Every day, I’d see it, and I’d think about being able to be home with my kid. I’d think about not having to work multiple jobs. I’d think about stability and being able to provide for him. And then I went and earned it.”

F.I.R.E. is far from a walk in the park. It’s not a flight bolstered by a summer breeze, or as easy as sparking a flame with lighter fluid.

But it is worth it. For me, it’s worth it for the freedom to pursue my passions. For her, it was worth it for the stability it provided her son. What makes it worth it for you?

Find those reasons, and stick them to your mirror. Write them on the wall. Tattoo them on your skin.

My reminder is a dragon – many of them, all throughout my apartment, in paintings, nicknacks, drawn on whiteboards, etched into this blog:

logo-design-1-cube-smaller

My dream? Being free to fly.

Where will your freedom take you?

Central Okanagan Housing Bubble – A Data Dive

Posted on by under Choosing a Castle

And it happens again, yet another real-estate driven discussion in the lunchroom. It is February 2017, and despite red hot warnings from the CMHC, economists, and financial bloggers around the globe, my Canadian coworkers show no sign of stopping their usual castle-hunting ways.

After all, renting is just throwing your money away, right? And those warnings are really only for Vancouver and Toronto, right?!

WRONG.

I decided to take a trip into the Central Okanagan Mainline Real Estate Board‘s data archives. They produce very lovely monthly reports dating back to 2002, which show median and average prices of various types of real estate, including houses (residential), condos, and townhouses. Even better, they also have a handy report that shows average prices for all of these types of property dating back to 1987. While the old reports don’t show median prices, I extrapolated these from the average prices because the following correlations exist between average and median prices:

Houses: 99.89% | Condos: 98.71% | Townhouses: 99.73%

If you feel like critiquing my math, you can find it over in this post.

But here’s the short version – I wanted to know what the real trends in real estate prices were in my region – the Central Okanagan. And here’s the data.

For Detached Homes:

CO Home Prices.jpg

You see that little uptick in 2016? You’re not imagining things, an average priced home was actually $600k. This is higher than even 2008. Just looking at the steep slope in the past three years, does that really look like a nice, stable trend? In fact, does anything since 2002 look anything like a nice stable trend?

For Condos:

CO Condo Prices _ Better Format.jpg

And if you’d like some even crazier volatility, check out those spikes. And again, ooh, look, a very steep upswing in the last three years.

For Townhouses:

CO Townhouse Prices.jpg

Slightly less volatility in the townhouse market, but even then, check out the upswing, and the crazy 45+ degree slope from 2001 to 2008, compared to the even movement between 1987 and 2001.

MY POINT IS:

IN WHAT WAY DOES THIS LOOK LIKE A GOOD MARKET TO BUY IN?!?!?!?!

Each and every one of these graphs shows increasing prices, with housing prices even higher than the peaks of 2008. The high step-up, year-over-year, is completely insane, and can only be followed by back-breaking, stomach-lurching falls. A property you buy now is not going to increase in value, at least not for more than a few months, maybe a year. And I’m not the only one saying this.

And yet again, and again, lunch after lunch, casual conversation after conversation, all I hear is talk of mortgage specialist appointments and “Oh, we’re looking for a house!”, or, even more upsetting: “I just bought a house!”.

And always with a smile. Always a smile. I die a little inside every time.

I work with accountants, people who excel at math and detail-oriented thinking, many of whom have years of experience in financial advisory roles. These are the people giving advice on how to succeed in the market – maybe not the housing market, but markets all the same.

If seasoned business advisors are buying houses when it took me less than two hours to pull up terrifying, not-good graphs of this very region, what exactly does that say about the general population?

Let me give you a breakdown. Before 2002, which you can see in the above graphs, is when everything went haywire, these were the average inflation-adjusted median prices:

  • For a house: $224,474
  • For a condo: $133,499
  • For a townhouse: $188,063

The inflation-adjusted medians prior to 2002 are reasonable – they fall in line with median incomes. The median family income in 2015 (no need to go back further as that’s the point of inflation-adjusting) for the Okanagan Valley was $56,851 (per this report). A house price falls nicely at 3.95 this income, which is in line with the much-said 3-4 times rule, if a little on the high side. Maybe that’s the sunshine tax, who knows.

But after 2002? Check this out, inflation-adjusted median prices average out to:

  • For a house: $434,003
  • For a condo: $234,546
  • For a townhouse: $329,229

Suddenly, a house costs 7.63 times an average household’s income. Some of this might be from low low low interest rates, but can I say one thing:

UNSUSTAINABLE

I’m calling it: Fill the moat. Draw the drawbridge. Heed me and do not enter here.

I don’t care if you think renting is throwing money away. You know what else is throwing money away? An underwater mortgage and bankruptcy.

I wouldn’t buy an Okanagan Valley castle for those prices even if it had the prettiest moat in the entire universe and a legitimate tower library.

And it took me. Two. Hours.

Math Behind February 2017 Data Dive

Posted on by under Choosing a Castle

The following post contains calculation data for this post over here. In other words, unless you’re a data nerd (like me…), you’ll prefer the text version.

Data for Houses:

INFLATION ADJUSTED
House House Median CPI House House
Year Average Price Median Price % of Avg Index Average Price Median Price
1987                81,672              75,109 91.96%         113.6 1987        172,461.77      158,603.31
1988                86,558              79,602 91.96%         118.3 1988        175,517.51      161,413.50
1989                99,696              91,685 91.96%         124.0 1989        192,865.27      177,367.25
1990              121,963           112,162 91.96%         130.7 1990        223,846.60      205,859.02
1991              132,276           121,647 91.96%         136.2 1991        232,971.04      214,250.25
1992              155,163           142,695 91.96%         140.3 1992        265,294.65      243,976.43
1993              171,318           157,551 91.96%         144.5 1993        284,402.32      261,548.68
1994              174,439           160,422 91.96%         148.2 1994        282,353.63      259,664.61
1995              170,523           156,820 91.96%         152.4 1995        268,408.33      246,839.91
1996              167,982           154,484 91.96%         156.9 1996        256,825.29      236,187.65
1997              178,525           164,179 91.96%         160.5 1997        266,822.22      245,381.26
1998              176,055           161,908 91.96%         163.0 1998        259,094.83      238,274.82
1999              181,604           167,011 91.96%         166.6 1999        261,485.98      240,473.82
2000              187,265           172,217 91.96%         172.2 2000        260,868.39      239,905.86
2001              190,552           175,240 91.96%         177.1 2001        258,102.93      237,362.62
2002              204,838            186,000 90.80%         179.9 2002        273,165.37      248,043.62
2003              238,873            217,750 91.16%         184.0 2003        311,488.24      283,944.04
2004              282,616            264,700 93.66%         188.9 2004        358,891.17      336,139.83
2005              330,323            307,500 93.09%         195.3 2005        405,727.61      377,694.68
2006              402,535            370,000 91.92%         201.6 2006        478,973.09      440,259.96
2007              476,507            439,000 92.13%         207.3 2007        551,289.84      507,896.51
2008              505,320            473,000 93.60%         215.3 2008        563,007.78      526,998.10
2009              460,077            425,000 92.38%         214.5 2009        514,430.03      475,209.07
2010              481,405            439,950 91.39%         218.1 2010        529,590.94      483,986.53
2011              472,888            429,250 90.77%         224.9 2011        504,302.97      457,766.00
2012              467,809            425,000 90.85%         229.6 2012        488,771.67      444,044.39
2013              462,921            422,750 91.32%         233.0 2013        476,682.39      435,317.21
2014              498,563            451,950 90.65%         236.7 2014        505,188.82      457,956.34
2015              511,073            479,000 93.72%         237.0 2015        517,251.11      484,790.40
2016              597,698            550,000 92.02%         239.9 2016        597,698.00      550,000.00
91.96%        357,925.99      329,238.52
Correl. of Median/Avg 99.89% Average Median Price Prior to 2002      224,473.93
Average Median Price 2002 On      434,003.11

Data for Condos:

INFLATION ADJUSTED
Condo Condo Median CPI Condo Condo
Year Average Price Median Price % of Avg Index Average Price Median Price
1987                53,442              47,517 88.91%         113.6 1987        112,850.21      100,338.48
1988                58,169              51,720 88.91%         118.3 1988        117,951.87      104,874.52
1989                65,082              57,866 88.91%         124.0 1989        125,903.32      111,944.39
1990                74,209              65,981 88.91%         130.7 1990        136,200.59      121,100.00
1991                82,728              73,556 88.91%         136.2 1991        145,704.65      129,550.34
1992              102,191              90,861 88.91%         140.3 1992        174,724.16      155,352.46
1993              105,382              93,698 88.91%         144.5 1993        174,943.00      155,547.03
1994              111,446              99,090 88.91%         148.2 1994        180,390.75      160,390.79
1995              106,511              94,702 88.91%         152.4 1995        167,651.52      149,063.96
1996              104,551              92,959 88.91%         156.9 1996        159,846.54      142,124.32
1997              102,485              91,122 88.91%         160.5 1997        153,173.37      136,191.00
1998              104,010              92,478 88.91%         163.0 1998        153,068.38      136,097.65
1999              106,312              94,525 88.91%         166.6 1999        153,075.36      136,103.86
2000              110,193              97,976 88.91%         172.2 2000        153,503.70      136,484.71
2001              107,343              94,000 87.57%         177.1 2001        145,396.23      127,323.12
2002              120,034            109,000 90.81%         179.9 2002        160,073.48      145,358.89
2003              144,957            124,450 85.85%         184.0 2003        189,022.62      162,281.68
2004              200,463            160,500 80.06%         188.9 2004        254,565.92      203,817.31
2005              253,971            204,500 80.52%         195.3 2005        311,946.33      251,182.32
2006              236,821            215,000 90.79%         201.6 2006        281,791.36      255,826.73
2007              269,513            245,000 90.90%         207.3 2007        311,810.28      283,450.22
2008              287,743            260,000 90.36%         215.3 2008        320,592.00      289,681.83
2009              255,229            238,000 93.25%         214.5 2009        285,381.49      266,117.08
2010              253,849            235,000 92.57%         218.1 2010        279,257.86      258,522.18
2011              250,459            223,000 89.04%         224.9 2011        267,097.53      237,814.37
2012              239,799            215,000 89.66%         229.6 2012        250,544.47      224,634.22
2013              233,325            210,000 90.00%         233.0 2013        240,261.12      216,242.73
2014              243,443            221,000 90.78%         236.7 2014        246,678.32      223,937.05
2015              258,546            234,000 90.51%         237.0 2015        261,671.44      236,828.71
2016              291,884            262,500 89.93%         239.9 2016        291,884.00      262,500.00
88.91%        206,898.73      184,022.73
Correl. of Median/Avg 98.71% Average Median Price Prior to 2002      133,499.11
Average Median Price 2002 On      234,546.35

Data for Townhouses:

INFLATION ADJUSTED
Townhouse Townhouse Median CPI Town Home Tome Home
Year Average Price Median Price % of Avg Index Average Price Median Price
1987                72,530              67,489 93.05%         113.6 1987        153,157.17      142,512.70
1988                77,170              71,807 93.05%         118.3 1988        156,481.05      145,605.56
1989                87,009              80,962 93.05%         124.0 1989        168,321.84      156,623.42
1990              104,451              97,192 93.05%         130.7 1990        191,705.69      178,382.08
1991              116,269           108,188 93.05%         136.2 1991        204,778.72      190,546.53
1992              131,716           122,562 93.05%         140.3 1992        225,205.43      209,553.57
1993              144,399           134,363 93.05%         144.5 1993        239,714.51      223,054.27
1994              138,749           129,106 93.05%         148.2 1994        224,584.43      208,975.74
1995              136,684           127,184 93.05%         152.4 1995        215,144.73      200,192.09
1996              137,698           128,128 93.05%         156.9 1996        210,524.52      195,892.99
1997              141,549           131,711 93.05%         160.5 1997        211,558.15      196,854.79
1998              151,718           141,174 93.05%         163.0 1998        223,278.80      207,760.85
1999              147,832           137,558 93.05%         166.6 1999        212,858.72      198,064.97
2000              147,888           137,610 93.05%         172.2 2000        206,014.50      191,696.42
2001              139,027           129,365 93.05%         177.1 2001        188,312.25      175,224.49
2002              164,987            148,950 90.28%         179.9 2002        220,021.36      198,634.93
2003              187,423            170,000 90.70%         184.0 2003        244,397.90      221,678.47
2004              227,520            202,500 89.00%         188.9 2004        288,925.33      257,152.68
2005              266,287            240,000 90.13%         195.3 2005        327,073.77      294,786.09
2006              305,773            275,000 89.94%         201.6 2006        363,836.78      327,220.24
2007              348,805            327,500 93.89%         207.3 2007        403,546.34      378,897.74
2008              384,131            357,500 93.07%         215.3 2008        427,983.74      398,312.52
2009              350,707            330,000 94.10%         214.5 2009        392,139.17      368,985.86
2010              349,079            328,000 93.96%         218.1 2010        384,019.85      360,830.96
2011              345,534            328,000 94.93%         224.9 2011        368,488.57      349,789.75
2012              344,747            334,900 97.14%         229.6 2012        360,195.23      349,906.98
2013              352,626            329,000 93.30%         233.0 2013        363,108.62      338,780.28
2014              361,435            345,000 95.45%         236.7 2014        366,238.41      349,584.99
2015              371,367            354,690 95.51%         237.0 2015        375,856.27      358,977.67
2016              407,947            384,900 94.35%         239.9 2016        407,947.00      384,900.00
93.05%        277,513.96      258,645.99
Correl. of Median/Avg 99.73% Average Median Price Prior to 2002      188,062.70
Average Median Price 2002 On      329,229.28

All average and median data pulled from the Okanagan Mainline Real Estate Board (median prices prior to 2002 have been extrapolated using averages), with inflation numbers pulled from inflationdata.com.

Rent or Buy – The Immortal Q&A of every F.I.R.E. Blog

Posted on by under Choosing a Castle

Ah, Christmas… That wonderful time where the earth turns white, turkeys pop into existence over red tablecloths, and houses get invaded by hoards of relatives. And, of course, well, this:

“Are you thinking about buying?”

Shards, this is up there with “do you have a S.O. yet?” and “don’t you want hatchlings?” as my least favourite questions of all time. This is because, inevitably, if I say “No”, I end up in the following scenario:

Them:                   “But you should be building equity!

Me:                        “I am building equity. In the stock market.”

Them:                   “You can’t live in the stock market!”

Me:                        “The dividends pay for my rent, so it’s the same thing.”

Them:                   “No, it isn’t!”

Not a very productive discussion, let me tell you. Also, let me get this straight before we start – I am not inherently against the idea of owning property. I lived in mortgaged houses for all of my hatchling years, and had a nestroom painted my favourite colour, the works. What I am against is this: Making bad financial decisions.

And, regardless of what every dragon elder says about residential property and how it’s “the best investment you’ll ever have!”, houses/condos/castles are not always a good investment. In fact, I sometimes wonder whether they should even be called an investment at all, for a few key reasons:

  • The average person only stays in one place for 4.86 to 5 years. That is super short-term from an investment standpoint.
  • Buildings aren’t built to last, with most components needing replacement within 10 years. This makes upkeep a lot of work for the owner, especially with an older building. On top of this,
  • The only way to build equity in a house (or a condo or castle) is through the inherent enforced savings plan (other name – a mortgage) or through an appreciation in value, which is not guaranteed. 
  • And on top of that, any equity you do get is eaten into by all the costs of owning property: maintenance, transfer costs, property taxes, strata fees, mortgage insurance, interest…

If I was choosing an investment, the above four points would not be favourable. When I buy ETF stocks, for instance, I’m looking for long-term gains, which the stock market is very good at. I’m not expecting to have to do any work – I buy it, I hold it, when I retire, I sell it. Easy as breathing. And equity building is much more straightforward – I only buy ETFs that have a minimum 4% dividend payout ratio, that’s solid cash, every couple months, that doesn’t have the ability to vanish like house appreciation. And as for costs of ownership, the most we’re looking at is the fee from whatever broker you’re with and the commission on buying/selling, which are generally pretty reasonable if you’re a long-term, hold em’ investor.

Makes house ownership look less pretty, doesn’t it? And, unlike with purchasing a stock, to buy a house, you usually have to give up all of your hard-saved hoard as a down payment, resulting in zero diversification. In short, when you buy a property, you are betting everything on one horse. Which I think is a bad thing – I’ve never bet on horse racing, but that’s archaic English sayings for you.

In short – I do not really think of residential property as an investment. If it’s a rental property, okay, sure, that’s a business venture, I’ll give that one to you (go check out Afford Anything, because Paula Pant knows way more about that than me). But if you’re an average Jane/Joe buying a house to live in it, stop kidding yourself. You’re buying the house because you want a house, not because it’s an investment. If it happens to make you money, well, hey, lucky you, don’t go mentioning that to any of the three million Americans who foreclosed their homes during the 2008 crash.

So why am I writing this post if I don’t think houses are an investment? Well, what it comes down to is that I need to live somewhere, and my options for potential castles are pretty limited:

  • Renting – What I do now
  • Buying – What all my relatives keep asking me about over Christmas dinner
  • Roommates – What my dwelling-sharing friends complain about endlessly
  • Escaping to the Wilderness – What my dad desperately wants to do

Well, I’d survive approximately two days in the wild (some dragon I am), and as choosing a roommate is akin to playing Russian Roulette with a fully loaded gun, that really only leaves two options.

To buy or not to buy, that is the question.

There are plenty of blogs and people who have dragged out this discussion before, and the ultimate answer is pretty unfulfilling: It depends. Thus, I am not writing this as a definitive guide. My situation is not the same as your situation, and therefore cannot be compared. However, I can give you the tools and analysis needed to make an informed financial decision, and that’s what this post is about.

INGREDIENTS FOR AN INFORMED FINANCIAL DECISION 

Yeah, we’re going at this recipe style, because who doesn’t like recipes. Lots of structure, delicious outcomes… So, for this epic financial dessert, you’ll need:

  1. Two COMPARABLE properties, one for rent, and one for sale: this is where Millennial Revolution went wrong (well, the analysis worked for them, but couldn’t really be applied to anyone else). They compared their rental apartment against a $500k house. If you’re living in a small apartment and are thinking of buying a house/bigger condo, the property you are considering buying should be compared to a rental property as similar to it as possible, not the rental property you’re currently living in. After all, there’s nothing wrong with upgrading into a larger rental if it’s truly better than buying a comparable property.
  2. Information on the rental property:
    • The monthly rent
    • The annual rent increase percentage allowed in your province/state
    • Cost of parking/laundry if any
    • Cost of tenant insurance
  3. Information on the property for sale:
    • The list price
    • The annual property tax (I’ll show some calculators for this later if the number is not available in the listing)
    • Strata fees
    • Cost of parking/laundry if any
    • Cost of home insurance
  4. Financial information:
    • The dollar amount you have available for a down payment
    • The mortgage calculator of the bank of your choice

DIRECTIONS FOR AN INFORMED FINANCIAL DECISION

  1. Calculate the average cost per month of renting over the next five years (since, like I said above, most people move every 5, though feel free to change it up if you’re positive you’re staying wherever you are shorter/longer)
  2. Calculate the average cost per month of owning over the next five years
  3. Compare financial factors
  4. Consider qualitative factors
  5. Decide

Yeah, that was pretty skimpy on the details. This is because it is much easier to show you than it is to tell you.

A (HOPEFULLY) HELPFUL EXAMPLE

I currently live in a 480 square foot apartment. It’s awesome, less than a block from work, and I’m not too interested in anything larger (cleaning takes time, which I tend to have absolutely none of during tax season). So, for me, I’m going to compare my current rental situation to a similar apartment. In your case, you may need to find a different rental property that compares to the house/big condo you want to buy.

Luckily, there happens to be an apartment for sale of about the same size, built by the exact same developer, just across and down the street from where I currently live, which makes for a nice easy comparison:

  My Rental Apartment (Furnished) Apartment for Sale
Size 480 square feet 442 square feet
Age Built 2016 Built 2009
Location Half a block to my work Next door to my work
Type Low-rise apartment building Low-rise apartment building
Pets No pets permitted Two cats or one cat and one small dog
Appliances Fridge, Stove, Dishwasher, Laundry Hookups Fridge, Stove, Dishwasher, Laundry Machines Already in Suite
Heat/Cool Two Gree In-Wall Units One Gree In-Wall Unit
Parking Heated Underground Parking Covered Parking
Storage Bike Storage, one 3-foot closet, one 5-foot closet Bike Storage, one 3-foot closet, one 10-foot closet
Layout Excellent, while a studio, has definitive living, dining, and bedroom spaces with a built-in divider, no balcony Adequate, also a studio, less definitive spaces, no real “living room” as space is taken up by a balcony/40 less square feet
Other Rentable garden boxes available Rentals/investment properties allowed
Financials Monthly Rent:        $900.00

Parking Fee:            $  40.00

(Rent includes hot water)

 List Price:      $223,700.00

Strata Fee:    $        117.00

(Strata fee includes hot water and parking)

Yes, I really did say $223,700, and before anyone tries to tell me that’s ridiculous (AKA – what all my relatives/coworkers said), and that I should look for something reasonable, I’ll have you know that the median (not average!) condo selling price in the Okanagan Valley was $262,500 in 2016.

So let’s get started.

STEP ONE: CALCULATE AVERAGE MONTHLY RENTAL COST

I’m going to go with the five years I mentioned above. In BC, landlords are allowed to raise rent by 3.7% in 2017. However, we have to remember that some of this is just inflation, and since I want comparable numbers, we will be removing inflation entirely. In Canada, the inflation rate in December 2016 was 1.5%, so:

Real Annual Rent Increase = 3.7% – 1.5% = 2.2%

If we assume that my landlord (which is a corporation) will increase rent at the absolute max every year (they probably will), then my rent is as follows:

2017: $900.00 | 2018: $919.80 | 2019: $940.04 | 2020: $960.72 | 2021: $981.85

Or, on average: $940.48

Now, I’m not going to bother increasing the $40 parking fee, or the $28.49 I pay for tenant insurance , as there are no real strict rules with which to calculate and it would likely be at most an inflation increase, so what this means is that over the next five years, my rent apartment would cost:

Rent

Parking

Tenant Insurance

Total Cost

$                            940.48

$                              40.00

$                              28.49

$                        1,008.97

P.S. Before anyone asks me why I’m not including utilities: remember, we’re comparing two comparable properties. If they’re truly comparable, the utilities cost should be the same.

STEP TWO: CALCULATE AVERAGE MONTHLY OWNERSHIP COST

Information collection:

  • Probable Closing Costs: The Pihl Law Corporation Okanagan Home Purchase Cost Estimator tells me that I should expect about $1,200 in legal fees and $757.50 in third-party transaction costs, but nothing for property transfer tax, because the First Time Home Buyer’s Program eliminates property tax for me.
  • My Down Payment: Before closing costs, I have about $18k available, so after them, I could afford a down payment of about $16,000. But the BC Home Owner & Equity Program will match my down payment up to 5% of the purchase price, with no interest or principal payments for 5 years. Which is basically free money, since we’re only looking at a 5-year timeline.
  • Interest Rate: Scotiabank offers the lowest 5-year rate I can find @ 2.90%.

Now that we have the raw data out of the way, let’s talk about the logistics. First of all, the list price doesn’t necessarily mean that the price in the listing is the price you’re going to pay. Realtors generally recommend making an initial offer 10% below asking price (if the property has been at the same price for a while) and being willing to take a counter-offer of 5% less. For arguments sake, we’ll assume that I could buy the apartment across the street for $212k, which is about 5% below the list price.

So what’s the damage?! Mortgage-wise, that is.

Well, first, we have to consider mortgage insurance. At $16k down, plus another $10,600 (5% of purchase price) from the BC HOE Program (hehehe, good job, naming people), I’ve got a 13% down payment, which means 87% leverage. According to the Canadian Mortgage & Housing Corporation, that means a 2.40% insurance premium.

($212k – $16k – $10.6k)*(1+2.40%) = $189,850 (rounded)

Ah, the sweet sound of a mortgage nearly five times my salary. Lovely, isn’t it?

Now, with Scotiabank’s low low low interest rate, and their handy online calculator, this gives me…. drum roll please!

Monthly Mortgage Payment = $888.74

Well! That sure looks nicer than the $1,000 my apartment will cost me. But hold your horses (wow, English has a lot of horse-related sayings, I never realized), the mortgage is not the only cost of owning property. We also have to consider:

  1. Property Tax,
  2. Strata Fees (if applicable),
  3. Home Insurance, and
  4. Maintenance.

Now, same as I did with the tenant insurance and parking fees for my rental apartment, I’m not going to increase these costs year over year. The assumption is that they will rise at the rate of inflation, and therefore will be the same cost next year as this year, in today’s dollars.

Calculating property tax can be tricky, since not all property listings will include them. However, if you’re lucky, your province/state will have an online assessment database, like E-Value BC, where I was able to find out that the apartment I’m looking at was assessed at a $168,600 value in July 2016. Punching this value into the City of Kelowna Property Tax Estimator leads to a $1,082.44 property tax levy for 2017, or $90.20 a month.

Home insurance was easier, as finding an online calculator is pretty straightforward. This particular calculator tells me I’ll spend $36 a month on insurance.

Maintenance tends to be a subjective topic when it comes to home ownership. The cost can vary depending on the age of the building, how well it was built, how good its previous owner treated it, how big it is, etcetera, etcetera. However, most experts (AKA people like Paula Pant – I have a crush, you can tell) suggest budgeting 1% of purchase price for maintenance, or budgeting $1 per square foot. This creates interesting results for the apartment I’m looking at:

  • 1% of purchase price = $2,120 per year
  • $1 per square foot = $442 per year

That’s a bit of a range, so we’ll compromise and average it to $1,281, or $106.75 per month. If you’ve got more knowledge about maintenance costs, go with your expertise and not a random rule, because, as you can see, math really only goes so far (And here I thought math was the ruler of universe… So much for Mr. P’s 9th grade arithmetic mantra).

And we put it all together and what have we got? (That’s a song, isn’t it… I can hear it, the music, tickling at my brain. Disney, you brain washer). Bibbidi bobbidi boo!

Mortgage

Property Tax

Strata Fee (see the big table above)

Home Insurance

Maintenance

Total Cost

 $                            888.74

$                              90.20

$                             117.00

$                              36.00

$                            106.75

$                        1,238.69

Okay, that’s a little bit less magical than Cinderella’s glass slippers. And that brings us to the next step in this fancy little recipe…

STEP THREE: COMPARE FINANCIAL FACTORS

The first part of this step is pretty straightforward:

BUYING WOULD COST ME $229.72 MORE A MONTH THAN RENTING.

Notice the “me” in there. Because before anyone gets riled up, this is entirely specific to my situation and you need to go do the math yourself. If anyone sends me some kind of “But I’m special! My situation is ________.”, I swear to high dragon heaven I will screenshot it, print it, and set it on fire.

Ahem.

Now, the interesting part (at least to me), is that I could actually afford this. I have a $300 surplus (yeah, it’s low, yay entry-level salaries in accounting) in my monthly budget that I deposit directly into my marketable securities account. It would be difficult, and I would have barely any wiggle room for emergency savings, but I could technically afford that apartment across the street.

But why would I willingly spend $230 a month more on the exact same living space?!

And that’s where the usual rebuttal comes in: “Because you’ll be building equity!”

And that’s the kicker, isn’t it. The true decision here isn’t “Should I rent or should I buy – which is cheaper?”, it’s really “Will renting or buying improve my net worth more?” So let’s do the math.

Scenario 1: I continue renting and invest that $229.72 a month in my stock portfolio.

Scenario 2: I buy, and I don’t get to invest that $229.72, but I pay off my mortgage and build equity that way.

We also need to remember that if I continue renting, I don’t have to cash out the beginning balance in my marketable securities portfolio for the closing costs and downpayment, so that’s $18,000 that will continue earning money. We plug that, plus a $2,756.64 ($229.72*12 months) annual contribution into this handy calculator with a 7% return (my average, and also the stock market’s), a 5 year timeline, and 100% reinvestment, and we get:

Net Worth After Renting for 5 Years = $41,099

Note that I will probably be investing more than $230 per month, but anything I’d invest above that is the same I’d be investing if I bought, so there’s no point in including it in the calculation.

But what about net worth when owning property? Well, if we assume that the apartment will retain its value (not going up or down, for the record, I’ll talk about housing appreciation in a bit), then the equity is simply the original downpayment of $16,000 (after closing costs) plus the amount of principal I managed to pay off over five years. For the less math-savvy, this is because if, in five years, I sell the apartment, my “earnings” is simply the difference between the list price and the remaining loan I have to pay back to the bank.

So let’s take a look, and head back to the mortgage calculator I used back in Step 2 to punch in the same data. If we toggle the little “chart” button on the right side of the screen, it tells us how much principal we pay off each year:

Year 1: $5,261.36 | Year 2: $5,415.03 | Year 3: $5,573.20 |

Year 4: $5,736.02 | Year 5: $5,903.56 | Total: $27,889.17

Add all of that to the original $16,000 down payment, and we get:

Net Worth After Owning for 5 Years = $43,889

Wowza! If I buy now and sell in five years, I can make a whole… $2,790 more. No offense, dragon elders, but this is really not the mad equity I was expecting to make with all that talk about how “castles are the best investment you’ll ever have”. And the thing is, that equity isn’t even guaranteed.

See, the reason (Canadian) people believe that housing is an excellent investment is that, in the past 10-15 years, Canadian housing has shown absolutely insane appreciation, and even more so in the last couple years. Instead of just making equity through paying off the mortgage and selling for about the same price, inflation-wise, as they bought it for, people have been able to hold on to a house and sell it, 7 months later, for a price 25% higher in some cases.

If prices go up higher than inflation, suddenly, residential property starts looking like an amazing investment. However, just because the housing market has been skyrocketing like crazy for the last 15 years doesn’t mean it will in the future. This is actually something called a “gambler’s fallacy“. It’s also the reason I sometimes wonder why accounting is a profession, because what we do is create reports based on past data, and just because OpCo made $1 million last year doesn’t mean they’re going to next year (but hey, I like my job, so I try not to shout about it).

Economists all over the world have been eyeing the Canadian housing market with critical suspicion since the appreciation kept going, even when the USA’s bubble burst way back in 2008. Robert Shiller, who predicted the American crash, has been blaring red alerts for years. Garth Turner, one of the financial bloggers who actually got me interested in F.I.R.E., actually thinks the bubble started popping back in October 2016. Even the CMHC itself has called the Canadian housing markets overvalued.

So what does this mean for me, if I went and bought that apartment? Well, if housing is overvalued now, that gives me the distinct impression that in 5 years, I probably won’t be able to sell that suite for the $212k I bought it for, and the thing is, even if the value only drops 1.5% ($3,180) , I’ll actually make less than I would in the stock market, not considering closing costs and so on.

However, a 1.5% drop would be a mere blip on the radar, from an economic perspective. CMHC stress testing in Fall 2016 showed that if interest rates increased, housing prices could actually drop as much as 30%. Given it would only take a 21% drop to bring my net worth below $0 at the end of five years, that’s not exactly a point in favour of home ownership.

My point is – While, yes, you can build equity in the housing market, if you’re lucky enough to live in an area where housing appreciation is at least above inflation, this is not a guarantee,  and believing in the idea that “housing always goes up!” is part of what caused the American housing crash. Does the phrase “we must learn from history” ring a bell? It certainly does for me, because my Grade 8 social studies teacher must’ve repeated it a dozen times, and Grade 8 me didn’t give a damn when I probably should have. Better late than never, eh?

So what’s the conclusion here?

  • Per month, owning would cost me $229.72 more than renting,
  • Over five years, if housing prices stay stable, I have the potential to make about the same money owning as I would renting, net worth-wise.
  • House ownership is a hell of a lot more risky than stock ownership, especially in my region (the Okanagan, which has not escaped the effects seen in Vancouver).

And that brings us to step four.

STEP FOUR: CONSIDER QUALITATIVE FACTORS

So, you’ve done the math, you’ve seen the costs, you know the risks. If you’re lucky, you live somewhere that is not Canada or some super-expensive city, and don’t have to stare at micro-suite listings that exceed $200k. Maybe the cost actually is less than renting, in which case I am massively jealous and also happy for you. But once you’ve done all that, you also need to take a step back, and remember that money isn’t everything.

Other things to consider:

  1. Financial risk tolerance – maybe you think housing is still going to go up, and you’re good with buying and taking that risk. Maybe you’d rather take the safer route that is a healthily diversified portfolio. Maybe you found a foreclosed fixer-upper that is half as expensive as everything else and you’re going with it. Your risk tolerance is your own; make sure you listen to it.
  2. Liquidity – one of the problems with housing as an investment is that you have no access to your equity unless you sell or take out a home equity loan (dangerous). A marketable securities portfolio, on the other hand, is easy to sell – I can cash mine out in 3 business days. If you know you’re going to need cash (for school, your new hatchling, tires on your car…), investing in something that is not a house might be a better play.
  3. Your own self-control – are you actually going to put that $229.72 into savings each month, or are you going to spend it on beer? Buying a house can often be an easier way for people to save because you don’t get to tell the bank “No, I ain’t payin’ you this month”, whereas I have to physically go click buttons to make sure money ends up in my Questrade account. However, there are ways around this, like employer savings plans that deduct directly from your paycheck, or setting up a bank-automated system that siphons away your money to savings without you even noticing.
  4. Effort expenditure – owning a house takes work. Repairs and maintenance become your own prerogative; there’s no landlord to call up and inform about a problem. If you like housing maintenance and weekend projects, this might not be a problem for you, and as a hopeless white girl who has accidentally cut herself with a tape measure, I applaud you.
  5. Flexibility – the beauty of being a tenant is that it is really easy to get up and leave. My first year at my new place is a one-year lease (municipal government has rules about new buildings), but after that, it’ll transfer to month to month. If I got offered a better job, wanted to move in with an S.O., or suddenly got tired of my downstairs neighbours, moving would be comparatively painless. In contrast, with home ownership, the property needs to be either sold or rented out, which can take months to go through, a period of time where you may be paying two mortgages, or a mortgage and monthly rent.
  6. Benefits – Home ownership isn’t coveted for nothing. You get to paint your walls whatever colour you’d like, pet ownership becomes acceptable, you can rip out the ugly vertical blinds and replace them, etc. If you really want to own six dogs or a pet pig (my sister loves those things), or have an itch to constantly renovate, then ownership is probably a better option.
  7. Social pressure – Maybe your S.O. is convinced renting is synonymous with being poor. Maybe your co-workers look down on you because they think you’re bad with money because you don’t own a house. Maybe your soon-to-be father-in-law is horrified that you didn’t have a place already bought in which to house his precious daughter. Social pressure is a definite factor in a lot of housing decisions, and shouldn’t be underestimated.

And there we have it – seven things to consider, which brings us, finally, to:

STEP FIVE: DECIDE

In the end, it is ultimately your decision. Like I said, the answer to the question “Should I rent or should I buy?” is: “It depends.” But if you’ve mathed the math, researched the research, and considered the consequences, then I can honestly say that yes, you’ve done your homework. If you choose to then ignore that homework and do whatever the hell you want, then sure, okay, that’s also your decision.

You do you, mate, you do you. But don’t come crying to me in five years if you bought in Vancouver and have lost the scales off your back. I genuinely will not give an egg shard about your problems.

Me, I’m renting. The building managers are great, the commute is under 10 minutes, the dishwasher is my best friend. My stock portfolio continues to show me nice shiny dollar signs. What more could I want?

In conclusion, do the math, make your decisions. But, for the love of Smaug, make sure its a good one.

You’re a dragon, not a brain-dead sheep. Don’t follow the herd. Eat them.

…. metaphorically, of course.

Understanding the Cost of Moving Out

Posted on by under Nesting Instincts

The milestone of juvenile dragonhood – the big move, the big leap, the head-over-heels flight from the parents’ nest directly into the big scary world. Some of us manage it earlier than others, wobbling into our first independent den while still in our teens. Others stay in the nest much, much longer, living in dark basements until their scales gleam only in the light of violent video games (or so Millennial researchers would have me believe).

Others – like me – left the nest at somewhere in between. After completing a four-year Bachelor, and spending four months paying a very discounted rent for room & board to my parents, I got the itch. It wasn’t the first time I’d had it. When I first started college I seriously considered moving out, despite the fact that the campus was only a 10-minute bike ride from my parents’ place, but I eventually stayed with the financially-healthier option of living with my parents rent-free through my undergrad.

But here I was, September 2016. I’d just signed the employment offer for my new job as a baby accountant, ready to begin my CPA articling with a local mid-sized firm that paid reasonable money for an entry-level job. A new all-rental apartment building had just been finished being built, a mere block from my new workplace.

I fell in love with an adorable, brand new 480 square foot suite with an excellent layout going for $900 a month, and signed a year’s lease two days after the first viewing.

Entirely terrifying in about 3 billion different ways, let me tell you.

But I’d been planning for this since the first time I got the itch. I had spreadsheets detailing every possible item I’d need to buy, from couch to flatware to bathroom plunger. I had savings set aside for just this very moment, with some smaller things already accumulated in boxes beneath my bed.

As evidence, here, you can see the (yes, absolutely ridiculous, I know) spreadsheet:

moving-out-listing

You notice how the kitchen listing keeps going? It contains 107 items, no joke. This isn’t a very accurate listing, as everything that I already had or was given as a gift is listed at $0, but the estimated costs/actual costs of stuff I had bought or intended to buy was $5,916.30 per this spreadsheet.

Yep. I was planning to drop $6k on moving out, and that’s not even factoring in damage deposits and moving costs and that first big grocery trip.

And that’s why I’m writing this: Moving out is not cheap. While yes, everyone experiences the urge to leave the nest, and that’s a good thing, a milestone in adulthood, it is very important that you do so smartly, if you have the choice, and that you understand that if you are going to move out, you need to build savings. If you move out and just end up building up credit card debt because you can’t really afford it, you will be a very unhappy camper, and moving back in with your parents is never a fun decision.

And let me make this abundantly clear to you – I under-estimated the cost of moving out. Even with the spreadsheets, even with tons of research and talking to half-a-dozen adults about the kind of costs I’d encounter, I was still surprised by the final cost:

Deposit $ 450 Half month’s rent
Moving Costs 136 U-haul rental & pizza for family/friends who helped
First Grocery Trip 640 $111.50 of this is just for spices
Contents
  Living Room 2,326 Couch, coffee table, side table, storage unit, bookshelf, art
  Washer/Dryer 1,905 The convenience is worth every penny
  Queen Bed 1,252 Bed frame, mattress, bedding
  Kitchen Stuff 1,259 Dining set, small appliances, pot set, utensils, dishes, bakeware
  TV 872 Screen, speakers, Apple TV, TV stand
  Random 493 Vacuum, lamps, coasters, hangers, screwdriver, door mat, mop, broom, ironing board, other household
  Bathroom 234 Towels, shower curtain, mat, bin, soap dish, toothbrush cup
Total Contents $ 8,341
TOTAL $ 9,567  

It is remarkable how fast it can all add up, and this doesn’t even include the hidden costs of moving out – utilities setup fees,  apartment insurance, etc. On top of that, I didn’t even buy everything on my list! I didn’t get a gaming system, or a popcorn popper, and I still do all my baking by hand because I couldn’t justify to myself the cost of a mixer.

Yeah, I know, kneading bread by hand is definitely a first world problem.

But here’s my point – MOVING OUT IS EXPENSIVE. And it is not something you should do on a whim, or when you’re not financially stable.

I do understand however, that not everyone gets an actual choice about moving out. My parents were great about it, to the point that I actually had to low-key convince them to let me leave (oldest child, difficult to accept they’re all grown up, from what I understand). But I’ve met people who were kicked out at sixteen, or who left abusive homes, or who had to leave town for post-secondary because their city was too small to offer a good education. And for those people, I have recommendations:

1. Nix the Unimportant Things

If your building has a laundry room, don’t get a washer/dryer. My building charges $25 per month for laundry, so it’ll take 6.35 years for my washer/dryer to break even. I bought them because I valued the convenience, not because it was a good financial decision. Also, you can cut down a lot of other things – do you really need a dining set? Won’t you just eat on the couch? Do you really need a bundt cake pan? Can you make due with camping-quality silverware for a few years?  Can you handle sleeping on a camp cot (super comfy by the way) for a while? My aunt actually slept on a cot for over a year before she decided she was actually staying in the city she’d moved to and bought a proper bed, and now the cot is a very convenient stored-away guest bed.

2. Cut Costs Where You Can

Check out thrift stores! I found my TV stand for a whole 15 bucks at Value Village, and while it needed a little love, it was not difficult to refurbish. Tons of my kitchen supplies – glasses, baking sheets, plates – are from thrift stores as well. Browse your local Craigslist or look on Facebook for local shop & swap pages as well. I was able to find my compact, solid-wood dining set for $60 that way. I hit up a lot of garage sales as well, as was able to find plenty of good-quality kitchen items.

3. Look for Free Stuff

If you’re thinking of moving out, the first thing you should do is tell as many people as possible. You’ll be amazed how many of your friends and family will have random shit stored in their garages or closets that they’d love to give away. I got an iron from my aunt, was offered multiple used couches, and my great-aunt offered me a free pick from anything at her garage sale. Also – if you’re in school, and you have exchange student friends, they are going to have accumulated a lot of stuff that they don’t have space for when they fly back home. The campus rez will often have tables of household objects sitting out for free at semester-end. As another option, take a drive around some of the residential neighbourhoods in your city and pick up free stuff left out on the curb, or browse the free section of your local Craiglist or Kijiji!

4. Get a Roommate

If you move in with someone else, most of the time, all of the common areas will already be furnished and fully-supplied. All you’ll have to do is bring your wardrobe, hygiene products and maybe a bed, if there’s not already one there. If you’re moving in to a new unfurnished place with a roommate, it’ll also be cheaper, since you can split the cost. However, I would caution against going halvsies when buying things like couches and TVs, if only to avoid the inevitable conflict when one of you moves out. It’s easier to have one person buy one thing and the other buy something else of similar cost, so that the “Hey, I paid for half of that!” argument never comes up.

5. Choose Cost over Quality

I was reluctant to recommend this one, because buying low-quality items tends to create long-term financial pain, but I’ll say it anyway. If you’re in a bad situation and you need to move out ASAP, savings or no savings, don’t go shopping for a couch based on its longevity. Choose a cheap one, and GTFO. Part of the reason my moving-out cost is so high is because I chose to buy higher-quality, new items that I believe will still be in good shape in 10-15 years. But I also bought some cheaper things. My $35 coffee table is from IKEA and was described by my dad as “the cheapest thing I’ve ever seen”, but I fully intend to replace it with a collection-storing table for my rock collection someday, so it didn’t make sense to buy a better one.

And that’s it. That’s as prepared as I can feasibly make you for the leap from the nest. Save. Plan. Proceed with caution. I wish you the absolute best of luck, but remember, you’re probably going to forget something, so keep some cash in backup.

There’s nothing quite as awful as staring at a clogged toilet in your new apartment and realizing that you’re broke as hell and forgot to buy a damn plunger.

Yep. Someone’s been there.

Don’t be that person, fellow dragon. Really. Don’t.