Go Ahead. Buy a House. (Just not in Toronto or Vancouver)

Go Ahead. Buy a House. (Just not in Toronto or Vancouver)

It was about three and a half years ago that I wrote one of my most popular posts ever, called F— You, I’m Short Your House.

For those of you too lazy to click though, here’s the gist of it. House prices were insane in Toronto and Vancouver and Calgary and a few other markets as well. We were quite obviously in a bubble. Everything pointed to it including price-to-income ratios, price-to-rent ratios, the fact houses were performing much better than inflation, and temporarily low interest rates propping the whole thing up.

So I decided to put my money where my mouth was and used options to short the market. I shorted every Canadian bank (except CIBC for some reason) using long-dated put options. I entered into this trade when the banks were close to a 52-week low. It turns out I wasn’t the only one looking to do this.

After a few months of steady losses and real estate prices in both Toronto and Vancouver continuing their steady march upwards, I threw in the towel and took my loss.

It’s pretty obvious I was wrong with my bubble call. Both Toronto and Vancouver real estate prices are up approximately 50% since I wrote that piece, although growth has been much more muted in most other markets.

Speaking of other markets

I spent a little time looking into this the other day, and in the middle of my research I came to realize something. Most Canadian real estate markets haven’t done that well in the past few years.

Allow me to quote the best researcher I know, myself. From a Tweetstorm shortly before the New Year:

The average price of houses in markets that aren’t Toronto and Vancouver is $361,000. The median family income for Canada (in 2014) is $79,000. Thus, the average house costs 4.6 times income. Yes, this is higher than the traditional average of 3.5 times income, but not excessively so once we factor in record low interest rates.

A similar story appears in many different real estate markets. Values are going down, not up. In fact, over the last two years, the average price of a house has declined in Calgary, Edmonton, Regina, Saskatoon, Thunder Bay, Fredericton, Halifax, and Quebec City. Winnipeg’s home prices are largely flat as well.

Sure, these places aren’t tanking by any means, but they’re also not going up. And some of them are actually pretty darn affordable.

Take Winnipeg as an example. It has an average house price of about $280,000. In 2014 median family income was $79,850 (this was nearly $4,000 higher than in Vancouver, btw). Let’s round that up to $80,000 because I like nice round numbers. I don’t think assuming the average Winnipegger got a $150 raise in the past two years is outrageous.

Thus, the average house in Winnipeg is just 3.5 times what a typical family makes. That puts houses pretty much inline with historical price-to-income ratios despite interest rates being half of what they were just 10 years ago.

In other words, real estate in Winnipeg is quite affordable. Maybe even more affordable than 10 years ago.

The only real problem is you’d have to live in Winnipeg. Yet people do. Willingly!

More examples? Don’t mind if I do

Let’s do similar ratios for some other selected cities:

City Avg Price Avg Income P/I Ratio
Regina $292,100 $96,080 3.04
Edmonton $373,174 $101,470 3.67
Thunder Bay $198,100 $84,350 2.35
Saskatoon $346,371 $93,400 3.70
Quebec City $259,562 $86,100 3.01
St. John $178,673 $76,450 2.33
Halifax $282,700 $84,500 3.34

Some of these cities are downright affordable, with most trading under historical price-to-income ratios. And if you’re making the average salary in Thunder Bay or St. John, paying down the mortgage early should really be a snap.

Let’s compare that to some unaffordable cities.

City Avg Price Avg Income P/I Ratio
Victoria $639,687 $86,430 7.40
Vancouver $895,084 $76,040 11.77
Toronto $776,684 $75,270 10.31
Montreal $366,956 $75,010 4.89
Hamilton/Burlington $510,475 $84,980 6.00

It’s pretty easy to spot the two outliers on that chart, and there are also a few more overvalued markets out there. Hamilton/Burlington has become expensive, and I probably wouldn’t buy a place in Montreal when $1,500 per month can rent you a pretty sweet pad. Do the kids still say pad?

The bottom line

The three largest metros in Canada get all the attention. Everybody wants to live in Toronto, Vancouver, and Montreal. But like I’ve mentioned before, it’s a hell of a lot cheaper to live in smaller places — especially if you do a job that pays the same everywhere.

The anti-buy a house crowd is getting a lot of attention these days. For the most part, these people are onto something. It is cheaper to rent than buy in most markets, especially the expensive ones. But at the same time it’s also quite affordable to buy a place in a lot of medium-sized cities across Canada.

We bought a house at less than two times our household income, which saddled us with a mortgage so reasonable we’ve paid off 33.6% of it in the first six months of having it (and more since). We’d like to be mortgage free by 2019.

There’s nothing wrong with buying a reasonably priced house in an affordable market. The whole country isn’t out of control like Toronto and Vancouver. Like the United States, Canada has a few cities with crazy-high prices and a bunch in the middle that are quite affordable. Stick to the middle of the country when buying a place and you’ll likely do fine.

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2 Easy Ways to Give Yourself a Loan

2 Easy Ways to Give Yourself a Loan

Because, hey, who should be a better credit risk than yourself? (Immediately defaults)

Here at the ol’ FU machine, we’re all about giving you kids some of the most unusual investing ideas out there. I’ve outlined everything from putting your cash to work lending dirtbags money to buying a storage locker business. And that’s just in the last month. I’ve come up with more odd investment ideas in the past six months than most people do in their lifetimes.

There’s a reason why I do this. Most investment bloggers (and, hell, personal finance bloggers too) do nothing but chronicle their very predictable actions. There’s very little to gain by retracing the beaten path. The real opportunities are in the bushes where nobody is looking. Probably because there are snakes. Or spiders.

At first glance, you may not realize the benefits of something like giving yourself a loan. Why would such a thing be beneficial? You’re literally just taking money from one pocket, charging yourself interest, and then putting less of it back in the other pocket. It seems like action for the sake of action.

But there are actually two very interesting reasons why you’d want to give yourself a loan. Let’s look at each of them.

Starting a company

Every company needs a certain amount of start-up capital.

Most people fund their companies in a very predictable way. They use their own savings as initial capital.

Say you bought a fast food joint for $200,000 and immediately incorporate the thing as its own business. You decide to put in $50,000 of your own money into the company as shareholders equity and lend the corporation the other $150,000.

Most people lend their corporation money interest free because they want the business to succeed. The business then pays back the loan as it can afford it.

But there’s no rule that indicates this loan has to be interest free. In fact you can, in theory, charge yourself all sorts of interest. As long as it’s considered to be the going rate, you’re good to go.

What most people do is research a little and see the rate a bank would charge them to do the same loan. If a bank would charge 6% in a similar situation, you could easily charge your corporation the same amount.

Remember that you’ll have to make this a legit loan. Paperwork will need to be done and the corporation would have to make the designated payments. You can’t just give yourself a loan and have the terms be “I’ll pay back whatever whenever I want.” Do you really want to make your accountant cry?

Give yourself a mortgage

This one is a little more complicated, but it can be lucrative for a very small percentage of the population. It turns out it’s possible to hold your mortgage in your RRSP.

It works something like this. There are all sorts of different investments you can put in your RRSP. It’s not just stocks, bonds, or ETFs, either. It turns out you can totally invest in certain qualified mortgages inside of your RRSP. This is how those private mortgage companies can get away with saying they’re RRSP eligible.

Even though I’m in the private mortgage business I’ve never examined the possibility of holding them inside my RRSP. As far as I can tell they need to be first mortgages only, and they need to be insured by one of the various agencies that do this.

It’s less complicated to hold your own mortgage inside your RRSP, although it’s certainly not easy. Here’s how it works.

  1. You pay someone to set up the deal for you. Only certain financial institutions will do so and you’ll have to pay CMHC insurance fees.
  2. You have to make sure that you have enough contribution room to pay for the whole house, not just the part mortgaged.
  3. The interest rate you give yourself must be competitive with comparable mortgages. I’m thinking you’d pretty much be locked into giving yourself a loan at 4.64% which is sure better than a GIC but could easily be beaten by stocks.

I’ve pretty much only touched on the basics. There are a number of companies that will do this for you. Do some Googling and talk to one of them before you get started. I’m not getting too involved in this because, frankly, I think it’s kind of dumb.

This is the end

It’s not that hard to give yourself a loan if you’ve got a corporation. There are a number of advantages for self-employed people to incorporate, as I outlined in this post. Getting a little interest from your own corporation is another, but you could argue that doing so is just shuffling money from one pocket to the other.

Ultimately, I won’t spend much time doing this, but it could very well make sense in certain situations. Your accountant can probably help out with this more than I can.

The Easiest Way to Invest in Collectibles

The Easiest Way to Invest in Collectibles

Finally! One of my terrible Twitter jokes can be used in context!

Too soon? Oh come on, that was a whole week ago.

A few years ago I had a brief infatuation with autographed memorabilia. I acquired such items as a Jerome Iginla hockey stick, a nicely framed Mark Messier photo, and a Taylor Swift CD. All of these are signed and include the critical certificate of authenticity. You gotta have that.

The Taylor Swift autograph was probably my best buy. I can’t remember the exact cost, but it was well under $100 including shipping. This was back in 2012 or so when she wasn’t quite as big as today. I spent $25 on a nice frame for it for a grand total of $100 or so. A quick search on eBay shows similar items for sale for US$250 or US$300.

These days, my autograph collecting hobby is on an indefinite hiatus. I find the whole practice silly, paying $100 or $200 (or more) extra for a nice framed picture just because it has somebody’s autograph on it. Dealers can get away with charging a premium for them because we trust them far more than some random with an eBay account and 41 positive feedback rating.

How to invest in collectibles?

Often, somebody like me who thinks autographed crap is cool will try to justify their collection by saying they’re going to invest in collectibles.

The logic goes like this. They spend a lot of money on some iconic piece that the average person can barely afford. A lot of thought is put into the particular investment. It has to be somebody who’s a big deal, and usually somebody who doesn’t produce a lot of memorabilia. That’s the right kind of supply/demand equation.

Usually they tend to invest in a celebrity’s stuff who’s kind of old, since they can envision the guy kicking it sometime in their lifetime. That’s the money event for collectors. The value of merchandise shoots up when the guy kicks it.

It’s a little bit messed up, isn’t it? The guy who invests in collectibles is basically waiting for some of his favorite celebrities to die.

There are other ways to invest in collectibles. Another method is what I call the shotgun approach. That’s when you buy up memorabilia signed by someone who’s somewhat famous hoping they’ll turn out to be a big star.

I know a guy who used to do this with hockey players. He went to Red Deer when Dion Phaneuf played for the Rebels as a 17 year-old and spent $100 on an autographed stick. Phaneuf went on to be drafted by the Calgary Flames and was a very big deal for a few years before being traded to the Toronto Maple Leafs. His popularity peaked and now he’s playing in obscurity in Ottawa.

The value of this stick went from $100 to a max of $300 or $400 back down to $100. It would have been a good investment if sold at the top. He did not.

The easy way to invest in collectibles

Speculating into the future trends of athletes and actors is a dumb way to invest. I wouldn’t even try to invest in collectibles. There’s more speculation there than there is in penny stock land.

That’s not saying you should never buy this stuff. If you’re like me and think having a Taylor Swift autograph on your wall is cool, then by all means. Just remember that it’s a purchase, not an investment. You may get your money back, but that’s about it. Everything else is just a bonus.

While I think investing in individual pieces of memorabilia is dumb, there is a way you can invest in the whole sector. Think of it as the investing in collectibles ETF.

The stock is called Collectors Universe, Inc. (NASDAQ:CLCT), and it is the go-to source for authenticating autographs. The company also grades sports cards, rare coins, and stamps.

It’s not a tiny company. It has a market cap of US$180 million and is profitable enough to pay a 6.8% dividend.

Revenue and earnings have been pretty flat over the last few years. Earnings in the company’s fiscal 2014, 2015, and 2016 came to $0.90, $0.87, and $0.89 per share, respectively. Shares trade hands at $20.46 each, putting shares at about 23 times earnings. That’s not exactly cheap.

Dividends are $1.40 per share each year, which means the company isn’t earning enough to cover its dividend. It has enough cash to make up the shortfall in the short-term, but issues could arise in a few years.

The autograph business is growing while the coin grading part isn’t doing great, although the weakness in coins did correct in the second half of the year. And the company has opened an office in China that authenticates gold, which should hopefully be a decent growth driver.

And that’s it. That’s the whole business. It’s the kind of simple niche business I like to invest in, although at much less than 23 times earnings.

That’s all folks 

Collectors Universe Inc. is the easy way to invest in collectibles, a market which is growing. The company’s autograph authentication service saw 7% growth last year. It’s a much better choice than trying to figure out which terrible Carrie Fisher autograph will be worth something some day.

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Weekly Linkfest #19

Weekly Linkfest #19

Winter sucks. It sucks balls.

Canada would be the perfect place to live if it wasn’t for the four months of the year the whole damn country turns into an icicle. We have it all: a beautiful country filled with natural wonders as far as the eye can see; enough extra space to make 1938 Hitler happy; democratically elected governments (mostly) free of corruption; enough wealth that poor neighborhoods are the exception, not the norm; and finally, we don’t have some weird fascination with guns that causes an untold amount of violence.

I just can’t get over the weather. The easy solution is to schedule a couple of winter holidays to break up the drudgery of minus 20, but such vacations are expensive. It turns out EVERYONE wants to leave Canada when it gets cold. Imagine that.

Our shit-ass dollar isn’t helping, either. Back when the canuck buck at far versus the U.S. Dollar, America and Mexico were cheap. I remember staying in a four-star hotel in Las Vegas for $29 per night, plus the $329 resort fee (I’m exaggerating, but only slightly). That’s the kind of holiday I can get behind.

Although this makes my cheap, cheap heart sad, I’m beginning to think that I’m going to just start paying the extra money to go on vacation when other people do. If it’s expensive to go away between Christmas and New Year’s, oh well. If that’s the time we both have off work then I guess that’s when the vacation is happening.

Links I liked

1. Let’s start things off with Roadmap to Retire, who asked 30+ different bloggers for their top investing idea of 2017. If you’re looking for investing ideas, that’s a good place to start.

2. Oddball Stocks wrote about an interesting bank trading at just 44% of book value.

3. Bronte Capital’s blog has some thoughts about averaging down on a losing position, and how it’s (mostly) a sucker’s game. Not sure I agree with his thoughts fully, but that’s the beauty of investing. It’s hard to figure the correct averaging down strategy. Really hard.

4. Here’s a mortgage broker whose whole portfolio consists of real estate (both as a landlord and private lender) as well as cannabis stocks. Yikes.

5. Andrew Hallam asks an interesting question. 1994-2016 was the greatest bull market in the history of Vancouver real estate. Yet how did the average house do against a basket of Canadian stocks?

6. Congrats to Krystal Yee over at Give Me Back My Five Bucks, who managed to save 50% of her income in 2016.

7. Boomer and Echo is giving away a personal finance book to one lucky reader who isn’t me. It turns out I can’t enter any of his contests because I made fun of his terrible stock picks. I have no regrets.

8. Alpha Vulture wrote about a stock called Retail Holdings, which is a liquidation play that is in the process of selling off the company in parts. Here’s the most interesting part of his article:

Chris DeMuth Jr., one of the most popular Seeking Alpha authors, published his thesis on the company last week and called it his top pick for 2017. The market didn’t ignore him, and shares rose 25.8% from $14.70 to $18.50.

It amazes me that a guy on Seeking Alpha can move the price of a publicly-traded company by 25%. Aside: DeMuth and his team are absolute pros at using Seeking Alpha as a marketing tool. Every wannabe hedge fund manager should be paying attention.

9. Janine over at My Pennies My Thoughts weighed in on a thorny issue for many Albertans — the CARBON TAX (DUNN DUNN DUNN). While Janine is right that the tax will only affect the average person in a relatively small way, I’m still not going to cheer anything that takes money from my wallet, especially in the midst of Alberta’s worst recession in 30 years.

10. And finally, Ian Bezek, one of my favorites from Seeking Alpha, weighs in on recent weakness affecting traditional shopping mall retailers. I find this whole issue fascinating. On the one hand, it’s obvious a lot of traditional retailers are hurting. But on the other, I went to malls a couple times during December and they were bananas.

Stuff Nelson wrote

As a reminder, you can hire me to write for your blog, newspaper, or poorly-Xeroxed newsletter. Hit the ol’ contact me page to get the ball rolling. 

I’m currently in negotiations with a new writing client for some articles on dividend investing. I’ll make sure to keep you kids in the loop. In the meantime, here are a couple of the best articles I wrote for Motley Fool this week.

1. I talked about a little-followed demographic trend that could end up being good news for Canada’s cable TV sector.

2. I also weighed in on Kevin O’Leary’s opinion about Canada’s grocery stocks, which included this gem of a quote:

If you lived badly on earth and you go to hell in perpetuity, your job is running a grocery store.

Tweet of the week

Have a good week, everyone.

Investment Idea: Hard Money Lending

Investment Idea: Hard Money Lending

Because hey, your portfolio could always use a little more risk.

Personal finance bloggers hate the payday loan industry, for a number of very predictable reasons. Payday loans are incredibly expensive. If the borrower falls behind he’s harassed more than a moderately attractive woman at a sports bar. And getting payday loans in the first place is usually an indication of a much bigger overall problem.

Besides, payday loans are slowly going away. Provinces are reigning in the rules, announcing things like interest rate caps, penalty restrictions, and limitations on how often a borrower can renew their loan by just paying the interest. Critics have long argued that these loans do nothing but keep poor people poor, so these changes are quite popular. Even among people who aren’t finance bloggers.

But something is going to have to replace these loans. Even dirtbags need access to credit.

At least here in Canada, Goeasy Ltd. (TSX:GSY) thinks it has the solution. The company offered unsecured loans at an APR of 46%, which seems like a terribly high interest rate for anyone with a credit score starting with a six or above. But in reality those loans are much cheaper than payday loans — which cost 15% for just two weeks here in Alberta — and at least offer a little flexibility for the borrower because they’re unsecured.

This segment of the market is called hard money lending, and there’s a boatload of money to be made doing it for a small-scale investor. Assuming you can get over the skeeze factor.

The basics

Here’s how hard money lending works. Buddy shows up at an Easy Financial store or one of its competitors. Say he needs $1,000 and can pay back $100 twice per month. They agree to do the loan at the usual charge of 46% annually.

By the time it’s done, the borrower has paid back $1,119.41 in approximately six months, or a little over 11% on the original $1,000 borrowed. Math would dictate that the total cost would be $230 for six months (46% divided by two) but keep in mind it’s a declining balance. 80% of the first payment goes towards principal, with more of each subsequent payment going towards the original balance.

There are two kinds of hard money loans. The first is the unsecured one, which usually comes at a sky high interest rate. Easy Financial’s 46% isn’t that outrageous. I own a stock called Advent Wireless (TSXV:AWI) that recently got into this business and they charge 40% annually. That’s what you’re going to pay.

The interest rate goes down a little if the borrower can put up come collateral. A house is obviously the best kind of collateral, but a car or even something less will do in a pinch. These loans are typically 2-3% per month.

GICs pay about 2% a year. It might suck to have to pay 3% a month, but it sure is sweet to collect it.

How you can do hard money lending

The beauty part of hard money lending is as a small investor, the regular person can be incredibly patient.

I’d never even hint that these kind of loans should be a large part of one’s portfolio. I’d argue 5% should be the maximum allocation, and that’s only after years of experience. It’s best to start really small.

Thus, the average person who even tries this will only have a handful of loans outstanding at any time. If you’re only looking to do a few loans then you pick and choose the ones you want.

Say you charge 2.5% a month or 30% a year and you have just 2% of a $100,000 portfolio invested in these things. That’s just $2,000 worth of loans, yet they could generate $600 per year in cash flow.

You’d need $30,000 in GICs earning 2% to earn the same return as hard money lending.

The paperwork is easy. Dear lord, do your paperwork. Do not rely on your buddy’s friend’s good word. He’s borrowing money from you at 2.5% a month. There’s a reason why he’s doing this.

You’ll also have to provide a total cost of borrowing. This can be built using your own spreadsheet or using an amortization calculator online. Software also exists that does this, but you won’t be big enough to afford it.

The hard part: collecting

I have a few hard money loans in my portfolio. These are largely from folks who wanted to borrow small amounts of private mortgage money.

There’s one loan I did for $1,500 at a 2% monthly interest rate. I would have been happy to lend that person more money at 8% annually, but all they needed was $1,500. It doesn’t make sense to register a mortgage on someone’s property for a $1,500 loan. It would cost half of that just to register the mortgage.

But at the same time, I’m taking more risk by giving an unsecured loan. Thus, I want a higher interest rate.

The hard part is collecting these things, which is why I advocate being incredibly selective. If the you know what hits the fan, you better believe buddy is going to pay his rent before he pays you. Consistently bugging him on his payday could be the only thing standing between you and a capital loss.

I’m very poor at this. Just terrible. So I do very little hard money lending. It is less than 1% of my portfolio and going down. If I wanted to scale up and do tons of these things — demand I’m certain exists, btw — the best solution would be to hire someone to harass borrowers who fall behind.

Final thoughts

Hard money lending isn’t going to be a popular investment. Most of you will feel terrible just thinking about charging 2 or 3% a month to someone, even if they are a poor credit risk. And while it’s a pretty passive way to make money, there’s still work involved.

Still, it can be a very profitable way to invest some of your money. A selective portfolio will have very few write-offs. If you’re smart with it, hard money lending can be an effective way to make a few bucks.

Don't Miss our TOP Stock Pick For 2017!

Stumped for investing ideas? Aren't we all. Don't worry, I've got just the thing.

This recent Canadian IPO has everything I look for in a stock. It has huge growth potential; a succulent dividend; a sharp management team; and, perhaps most importantly of all, it comes at a very reasonable price tag because most investors don't even know it exists. 

You're not going to want to miss out on this one. Just click here to get your exclusive FREE report about the stock I'm calling my TOP investing idea for 2017!