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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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.

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Should I Buy This Storage Business?

Should I Buy This Storage Business?

I can’t believe I haven’t wrote about this until now. This is something that I’ve been thinking about for months now.

But first, let’s talk a little about the storage business, something you’re probably only familiar with from the greatest show of all time, Storage Wars. Okay, worst show of all time. Who knew storage lockers always had at least one interesting item in them?

It’s essentially another way to invest in real estate. Most storage businesses these days are set up so folks storing their crap can have 24/7 access to the place, just in case grandma feels the need to fondle her nick-knacks. Just kidding. Grandma is dead. WILL 2016 EVER END? WHY DOES THIS YEAR KEEP KILLING PEOPLE?

A small storage business only needs a part-time manager, while one that’s a few hundred units will probably shell out the extra cash to hire someone full-time to run the place. There are a few things to do like keep the place clean and whatnot, but for the most part it’s passive income. Many people pay for years before throwing up their hands and letting Dave Hester buy it for pennies on the dollar.

dave-hester

The storage business isn’t just about lockers, at least up here in Canada where every approximately 76% of us have decided having an RV is a good use of capital. There are plenty of people who not only pay maintenance costs and depreciation on an RV, trailer, or fifth wheel, but they also pay to store said monstrosity. This continues to boggle my mind, but there’s no indication the “camping” trend is going away.

The storage business I’m looking at

You kids want the deets, huh? Well, guess what? YOU CAN’T HANDLE THE DEETS.

Yeah, that’s right. I’m on the cutting edge of pop culture here. That joke was so bad Italics Man just offed himself.

No I didn’t. 

Well, you should have.

This storage business is small and relatively simple. It consists of (with monthly rents in brackets afterwards):

  • 8×10 locker ($95)
  • 8×10 locker ($95)
  • 8×20 locker ($135)
  • 8×16 locker ($125)
  • 8×12 locker ($95)
  • 8×12 locker ($95)
  • 14×24 garage ($150)
  • 8×20 shed ($95)
  • 15 RV rental spots ($25)

As is, when fully rented, this place has the potential to churn out some pretty serious income. It could do $15,120 in annual rent. Since there aren’t many expenses besides property taxes — which are about $1,200 a year — we’re looking at profit of around $13,000, give or take.

There’s just one problem. The place isn’t close to full. Half of the storage lockers are vacant. I’m told the RV part of the business is consistently full. So approximate rental income is about $10,000.

The big appeal is potential. Income could go up by 50% by just filling the four vacant storage units. And according to the seller, there’s room for an additional 21 RV lots. I’m not sure I buy that there’s that much potential for expansion — because, frankly, adding additional RVs seems about as easy as saying “sure, you can park here in exchange for money” — but I did go check the place out and there’s definitely some extra room. Let’s say there’s room for 8 more to be conservative.

Thus, total revenue potential looks something like this:

  • 8 lockers/sheds/garages — $10,620
  • 23 RV spots — $6,900
  • Total — $17,520

That’s best case scenario. Let’s do one more set of calculations at what I’d consider to be a realistic “best case,” at 80% occupancy:

  • 8 lockers — $8,496
  • 23 RV spots — $5,520
  • Total — $14,016

So we have something that generates approximately $10,000 per year today in annual revenue, with the potential to grow it between 20% and 40%. The current owner does a pretty poor job of advertising the place, with nothing but a sign in front and an ad in the local paper. I think an additional $500 per year would easily increase the top line by $1,000 or $2,000. Nobody really knows the place exists today.

How much is it worth?

It started out for sale at $115,000, which was way too rich for my blood, even though it represented a cap rate of close to 8%. It has since been reduced to $95,000.

Here’s the way I look at the storage business. This place is, admittedly, a small-time operation. All it would take for somebody to run serious competition is having a bit of land and some capital available to buy a couple of Sea Cans. Those aren’t expensive either; they can be bought used for about $4,000, including delivery.

I’m also concerned about the future of the business. Minimalism is very much a thing today. Although I think this does change somewhat as many minimalists start having families, the trend is clearly towards having less stuff, not more. Although that may just be a product of my environment. Go ahead, ask your normal friends about minimalism. They’ll look at you like you’re a crazy person.

So I need a succulent return before I’m going to venture into such a thing.

I’m thinking I need a minimum of 12% after property taxes, preferably closer to 15%. I need a margin of safety to get into the storage business. It’s just too easy to compete.

How much can I pay? Here’s a table looking at return rates using today’s income ($10,000 – $1,200 in property taxes) and realistic potential income ($14,000 – $1,200 in property taxes).

Price Return (on today’s income) Return (on potential income)
$100,000 8.8% 12.8%
$90,000 9.8% 14.2%
$85,000 10.4% 15.1%
$80,000 11% 16%
$75,000 11.7% 17.1%
$70,000 12.6% 18.3%
$65,000 13.5% 19.7%
$60,000 14.7% 21.3%

Ultimately, it comes down to what I can earn from the place. If I think $14,000 in annual rental income is realistic, then I could pay up to $100,000 for it. If I’m being cautious, I want to base what I pay on today’s income. A purchase price of between $70,000 and $75,000 would be the better choice.

Let’s wrap it up

The good news, for me, is that this place has been for sale for months now, assuming somebody hasn’t gone ahead and bought it while I’ve sat on my hands. It’s already been reduced by $20,000, showing there’s some motivation there. And let’s face it; there’s a certain amount of work that comes from running a storage business.

I’ll turn it over to you kids in the comments. Tell me if you’d buy this and if so, what price you’d pay for it.

5 Unconventional Ways I’d Invest $100,000

5 Unconventional Ways I’d Invest $100,000

Congratulations!

No, I’m not congratulating you for finding this here blog. Or finally learning how to tie your own shoes. Or for that time you started from nothing and built a company worth billions of dollars that spins out hundreds of millions in consistent earnings. Geez, fish for compliments much?

I’m congratulating you for officially winning a cool $100,000 from the ol’ lottery. Nice work, sparky. Can I have an interest free loan? I promise I will not pay a nickel of it back.

So now you have a dilemma. For you see, this lottery told you that you’re only allowed to put the earnings to work. You must invest $100,000 all in one thing. This lottery is surprisingly restrictive.

You could follow the usual advice and invest the $100,000 into a combination of equity and bond ETFs, thereby cementing your status as the lamest person on this planet. But remember, stocks are overvalued. They’re pretty likely to underperform going forward.

Or you could do things a little different and invest $100,000 in some fun stuff. Like what? Glad you asked.

Trailer parks

Go ahead. Scoff at owning a trailer park. Take your 3% return from some Toronto condo while I collect anywhere from 12% to 20% on a trailer park.

Trailer parks get a bad rap, but they serve a very important need. Dirtbags need a place to live and cook meth. They’re affordable housing for the lowest rungs of society.

They’re also slowly going away, and municipalities aren’t allowing developers to make any new ones. Can you blame them? Why let a trailer park in when you can just sell land to a developer who will put up nice homes? A trailer might pay $1,000 per year in taxes, plus the value of the land. A nice house will pay $3,000 or $4,000.

Because nobody wants them, trailer parks offer succulent returns. About a year ago, I found a trailer park for sale in Maine that offered an 11% cap rate without any improvements. Invest a little into bringing the park up to full capacity, and I figured you could get 15% or 16% on your money.

Franchise

This one is a little tougher because a big part of owning a franchise is finding a decent manager that isn’t going to let the staff get so many free pizzas that you’ll go broke.

There are thousands of franchises out there that are for sale. Some operators want to retire. Others just aren’t cut out to be restaurant owners. And some are sick of working six or seven days a week.

$100,000 isn’t going to get you much of a franchise. You’d have to use it to borrow a couple hundred grand more. But it shouldn’t be hard to invest $100,000 and turn that into $20,000 to $40,000 annual profit after you pay the manager. Give it a decade and the business itself will pay off the loan.

Hard money lending

The personal finance crowd is very against payday loans. Partially because of this backlash, each Canadian province is cracking down on them. A payday loan shop used to be able to charge 25% for a couple of weeks. Most provinces have capped the rate at 15% or so.

This has all but guaranteed the slow demise of the payday loan. It will be replaced by its almost as bad cousin, the title loan. That’s when someone borrows using their car, jewelry, or unbroken knee caps as collateral.

Easy Financial, the big guy in this space, charges 46% a year. No, that’s not a typo. That is really how much they charge. That’s still under the criminal rate of interest, which is 59.5%.

Say you charged 30%. Assuming 10% write-offs, you’d be left with a 20% return on investment, minus any associated costs. It’s a succulent, albeit morally questionable business.

Private mortgages

I’m a big fan of private mortgages, but you’ve got to be careful. Especially if you live in a big city.

The easiest way to get into the business is to talk to a few mortgage brokers. Tell them you’re looking for deals up to a certain loan-to-value ratio (my limit is 75-80%), and promise to pay them a decent commission for their time and a quick closing process. Be prepared to finance the commission and any legal fees as well, since anyone who has to deal with a private lender doesn’t have cash kicking around.

Depending on the risk involved, I charge anywhere from 8% to 10% interest. I’ve done many of these over the years, and only one person has ever defaulted. His house was sold and we ended up making money on the deal. A $100,000 investment would spin off between $10,000 and $15,000 per year in nice cash flow, which you could then reinvest. Compounding, baby.

Rent out Airbnb places

There are two options here. You can either use the $100,000 as a down payment on one condo, or rent out a half dozen condos at a time and get cracking.

The latter is the better way to invest $100,000. You’d have to furnish each place, something that would cost $5,000 per unit or so. Add in rent for a couple months, security deposits, and other start-up expenses, and you’re pushing $50,000 invested. And if the concept doesn’t work, you’d be able to walk away far easier if you rent.

Say you can rent out each apartment for $200 per night at a 60% occupancy rate. That works out to $262,800 per year in revenue. There’s plenty of expenses there; say you’re spending $200,000 per year, which works out to $2,000 per month in rent and $777 in miscellaneous expenses. That still leaves you with a profit of $62,800. Once you’ve proven the model works, go ahead and find a half dozen more places and hire a full-time cleaner/helper.

People are doing this all around the world. It works.

Let’s wrap it up

Some of these investment ideas have an active component to them. You’re not going to rent out Airbnb space or own a trailer park without doing a little work.

Everyone is obsessed with passive income. If you invest $100,000 and a little sweat equity, there are some very attractive returns out there. It sure beats overvalued stocks, that’s for sure.