The Road Ahead: Blogging

Blogging Joke Blogging, where is this blog going?

1) I’m not sure about the name… anyone have any thoughts on it?

2) I need to move to a hosted blog because it seems like a bit of waste to keep it hosted at WordPress.com since I can’t have any advertisements. Yes, ads suck, but it would be nice if the site paid for its own hosting and domain registration. Item (1) is a major reason why I haven’t done anything on this front yet.

3) More graphics. I’ve tried to add graphics to this recent series, and I will continue to do so in the future. It is a tip I gathered from EscapeFromCubicleNation. I think it makes the posts more inviting to read.

4) More of the same, I will continue to be focused on real estate investing, but I will also likely want to branch out into other forms of investing for the odd post. I tend to spend most of my online reading time split 60/40 between REI and the stock market.

5) More interaction with other bloggers which will hopefully increase the number of comments. I’d like to build a good community similar to the one over at GetRichSlowly or CanadianCapitalist.

This doesn’t sound like much of a plan, I know, but blogging isn’t my major focus… the investing aspect is. Are there any comments on the current site theme?

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Part of the writing project over at BiggerPockets.

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The Road Ahead: Marketing

MoneyMarketing for student rentals. What a challenge.

In years past we have used the local university off-campus housing service to list our properties, and we have also put a few ads in the newspaper.

Medium:
For 2007, we plan to up the ante because we’ve had vacancies over the summer months that aren’t acceptable. We will advertise in three mediums, the off-campus housing site, the campus newspaper, and online through iiProperty and any rental listing sites I come across. We will also expand our listings to the local college which is a 20-minute bus-ride away, but at least it is a direct route.

Differentiation:
How can we differentiate ourselves from the thousands of per-bedroom vacancies in London? Number one, we include all utilities and wired/wireless highspeed internet in our homes. Second, our properties are fairly well-kept (upper-middle of the pack) and are thus well-priced. Third, we offer free laundry in our 5-bedroom houses.

Word of Mouth:
This-year we want to expand on the power of word of mouth advertising by offering incentives to our tenants.
1) We will offer 1-month free rent to current tenants who sign a 12-month lease.
2) We will pay $150 for each referral (obviously only ones who sign leases).

Property Managers:
Because we lost a lot of revenue due to having 6 vacant bedrooms last summer ($9600), we’re going to be in touch with one or two property managers this-year. Last year we had one, but we started using her too late in the game, and she couldn’t find any tenants for us. If we start earlier this-year, we should be in luck. Last-year she only charged 1/2-month of rent for the property, which works out to only $1000… a small price to pay!

Wish us luck!

This post is part of the writing project over at BiggerPockets.

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The Road Ahead: Organization

Organization, what organization?

Now that I have three properties to take care of and my Masters is out of the way, it is time to get serious about organizing my tasks and time. Up until now, I have done as little maintenance as possible to the properties because my schedule and budget didn’t afford much of an investment. However, this-year, I need to get serious about scheduling various activities.

First comes our marketing campaign. The worst thing about renting to students is that they tend not to be repeat tenants. Once their 12-months are up, its on to bigger and better things, and that brings the potential of vacancies. To counteract this trend in 2007, we will begin an integrated marketing plan starting in the first week of January. In past years, we have left the advertising too late into the spring, and I feel we lost many prospective tenants. More on the marketing plan tomorrow.

Furthermore, two of our properties are in need of some capital investment for repairs and upgrades. Property 1 needs a fresh coat of paint inside, some new carpeting, some drywall patching, a new screen door and a new railing. The railing and door are already purchased, so the only remaining task is to schedule their installation. The problem being that I don’t know whether I can find someone willing to do it in the winter. I may just leave the drywall and painting until later in the year because they are not pressing. Plus, we can always use a new paint job as a carrot for potential renters who are sitting on the fence. I don’t think carpeting is in the budget for this-year, so it will have to wait.

Property 2 is in fairly good shape, however, I was there yesterday and am quite concerned about the 2nd floor washroom. Some water has leaked around the tub, and has rotted the sub-floor slightly. I caulked up around the shower doors, which should stop the leak, but to repair the floor will require nearly a complete bathroom reno. In the spring I’ll need to get some estimates, right now I have no clue how much it could cost. Otherwise, property 2 is in good shape, but could use a bit of paint if there is money.

So, how will I get organized? I posted previously about using Monkey GTD, which is a variation on TiddlyWiki using the GTD principles to keep track of upcoming tasks, appointments, reminders, etc. It is really a great system. You can host one on the web over at TiddlySpot making it accessible from anywhere you can find an internet connection. There is built-in security for protecting your information, and if-required, multiple people can edit the same wiki. Here’s a screenshot of my Rental project:

My Monkey GTD Rental Project

Lastly, I plan to use Quicken to better keep track of my rental expenses in 2007. I think this will help me visualize where money is going, and how I can reduce expenses and increase profits. To keep track of tenants I intend to start using iiProperty. It is free, and should help me take better care of tenant information.

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Part of the writing project over at BiggerPockets.

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The Road Ahead: Investment Goals

For the next part in this series, I would like to discuss my investment strategies over the coming 12 months. First outlining investments over the past 2 years, followed by my aspirations for 2007.

In 2005 we purchased our first rental property for $143,000 CDN. The property rents 5 bedrooms at $400/month for a cap rate of 16.8%. This, I figure, is a pretty good investment. Unfortunately, it has been a struggle to find student renters for 12-month leases and thus, the property has under-performed over the summer months. However, we have consistently made money off of it to the tune of approximately $5-6000/year.

In August of 2005, we purchased a new primary residence which included a 3-bedroom basement apartment. The rooms are again rented for $400/month. The cap rate of 4.36% on this home is not as nice, but we have the added benefit of living in a nice house, in a very desirable neighbourhood.

Then in May of this-year, we purchased a second rental home. This time it was a 5-bedroom, 2.5 bathroom condominium for $145,000. Leases were already signed from May 2006 – May 2007 for $395/month. Thus, the cap rate is 16.3%. Overall, the property nets about $600/month plus the principal payments which is about $10,000/year.

So… 2007. Since I invest with my wife, it is a bit more difficult to plan perfectly, however I’ll take a stab. We should be able to save $30,000 this-year and I would like to pour that into one more investment property, a new Etrade account, and our 5% savings account. I’ve seen a few ads around for hard-money at 0% down, so I might investigate this, which would enable us to get another property with only 5%. Why 5%? I like to own a bit of the property off the bat just in case the market tanks, I don’t want to be stuck owing more money in uncertain times if I need to sell the property in a hurry. So, investigating my funding options is a primary task.

I also want to investigate starting a small REIT, or even a LLC selling shares to small-time investors. This way I can use OPM to really start getting into bigger, more diversified real estate holdings. I’d like to investigate commercial property opportunities.

My take on the impending housing burst, is I think that property values will not crash, but will correct. I hope that they will drop no more than 10-15%, and I hope this process will take a few years to pan out. If I’m lucky (i.e. correct), we will be able to weather the storm, and ideally will still be pulling in positive cash-flow throughout.

In my Etrade account, I’d like to get into some blue-chips, as well as some iShares index funds from Barclays. Hopefully the portfolio will do well, and it will balance my bond investments through my ESPP, and all of my real estate investments. There is a REIT iShare that I am very interested in as well.

I hope that my diversification strategy pans out, and most importantly, that the real estate market in London remains strong through 2007. The forecast looks good, but it really depends what happens south of the border.


Tomorrow: Organization… How can I conquer my natural tendency towards distraction?

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Part of the writing project over at BiggerPockets.

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The Road Ahead: Net Worth Goals

At the end of 2006, my NW stands at $163,761 (or so). I estimate that this is an increase of approximately $33,000! Not too shabby. This is a conservative estimate based on the increase in NW over the last 4 months (since I have been keeping track). Much of this increase was dumped into our second rental property at the beginning of May (more to come on this topic tomorrow).

So, most of the increase can be attributed to starting work as a full-time engineer. In May, my salary increased due to being hired on full-time, which also helped greatly.

In 2007, I can expect between a 6 and 10% bonus from work (depending how my handlers rate my performance relative to the other plebs). This will hit the bank account in February and will technically count towards my 2006 income, but will be reflected on my 2007 NW.

So, for the next year, I would like to set a similar goal of increasing the family net worth by $45,000. I think this is achievable given that both my wife and I should see moderate raises in the new-year, and we hope that with a more directed marketing approach, our rental business will thrive (more tomorrow and on the 28th and 29th).

Lastly, my company’s ESPP kicked in in November netting me a company matching contribution of 3% of my base salary. This should help contributed to even better performance next year (as long as the company stock remains healthy).

Past Performance:
December 2006 (see this post)
November 2006
October 2006
September 2006

So, wish me luck, it should be a fun year… tune in tomorrow for a discussion of my investment performance in 2006 and goals for the New Year.

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This post is part of the writing project over at BiggerPockets.

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The Road Ahead: 2007 Installment

 I have some time off coming to me next-week, so I thought it would be interesting to write a bit about my goals for the coming year.

Now that my Masters degree is out of the way (since August), I’m finding I have a lot more time on my hands than when I had a full-time job and a thesis to write. So-far I’ve been using it to write this blog and read other blogs for interesting ideas on investing, personal finance, and real estate. However, next-year, I’d like to accelerate my hobby/side-business. The purpose of these posts is to help me get a sense of what is possible in the next 12-months.

I hope you’ll joing me for this 6-part series, which I think will have some interesting thoughts on investing, real estate, blogging and personal finance. Here’s an outline of what to expect:

1. Net Worth (Dec. 26, 2006):
The first post in my first blog series will deal with my net worth results from 2006, and detail my net worth goal for the end of 2007, as well as how I think I can get there.
– 2006 results
– Goal for 2007

2. Investment (Dec. 27, 2006):
– First I’ll summarize the property investments I have made thus-far
– Next, I’ll talk about capital improvements made in 2006
– Finally, what is planned for 2007 (improvements and investments)

3. Organization (Dec. 28, 2006):
– Financial steps to keep track of my income and expenses
– Tracking tenants
– Leases, using Web2.0 to get organized, etc.

4. Marketing (Dec. 29, 2006):
– New outlets and the general plan for 2007

5. Blogging (Dec. 30, 2006):
– Where is this blog going?
– What are my goals?

6. The Famous Corporation (Dec. 31, 2006):
– What’s the general idea?
– What is required?
– Structure, and outline of the potential steps in 2007.

Part of the writing project over at BiggerPockets.

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Links of Note

Today I came across some very interesting posts that I need to share ASAP. 

The first two-part series is on something called the Smith Manouevre (Part 1, Part 2) posted over at a new Canadian personal finance/investing blog called Million Dollar Journey.  The author FrugalTrader is on the warpath to accumulate $1.0M by the time he hits 35!  A tall task, and I wish him luck.

The Smith Manouevre consists of using a HELOC to invest in rental property.  The interest paid on the HELOC is tax-deductible as long as you invest in the right type of vehicle (dividend paying stocks or real estate for example).  Mr. Smith suggests reinvesting the saved tax dollars into your non-tax-deductable home mortgage, which then increases your HELOC room so that you can invest in more real estate.  The benefit is that your home mortgage is paid off faster and you have access to more OPM for investment purposes.

The second post of interest is from the Investment Property Insider who tells us a little bit about how you can use commercial real-estate to make money, even when the value of the investment declines significantly.  He goes over a quick and dirty example of how a $1M property could lose 20% of its value in 8-years, yet the owner could still make money at a 7.5% cap rate.  His calculation does make a few simplifications, but most notably it assumes that you borrow the money for the downpayment.

Lastly, I came across the first blog via Canadian Capitalist , which is a fantastic site full of great information for the Canadian investor.  I came across it a few years ago, but had lost track!  I'm glad to now have it in my agregator.

Enjoy 

The ARM vs. Fixed Rate Mortgage Dilemma

Ramit of I Will Teach You To Be Rich had a recent entry wondering why consumers are opting for ARM at 5.8% when they can get a fixed rate 30-year amortized mortgage for 6.2%.

Quickly, for comparison, a $250,000 mortgage on a 30-year amortization will run you $1531.17 per month at a fixed rate of 6.2% while an ARM at the above rate will run $1466.88.  So, people opting for the ARM are only saving themselves $771 in payments per year, or less than 1/2 of a monthly payment.  Now, this doesn’t seem like a lot when you are buying 30-years of consistency and security when you go for the fixed rate mortgage.  However, it boils down to the question of whether you believe interest rates will continue to rise, or that they will fall slighlty.

30-years is a long time to try to predict interest rates. Historically, the United States prime lending rate averages out to 7.7% over the last 50-years (source: US Federal Reserve Data).  So, there is a chance that interest rates could rise above 6.2%…  This data includes the anomaly of the early 80s where rates spiked up to 18.9%, so the average is somewhat skewed to higher rates.  The one thing you can count on is that the banks have a large number of very intelligent economists working for them, and they are obviously betting that over 30-years, the banks will make enough money at 6.2% to cover their asses.  So, they’re betting

There is, however, significant research indicating that variable rate mortgages (ARMs) outperform fixed rate mortgages historically.  These articles look at historical data for the last 50-years.  Looking at my chart below (using data from the Bank of Canada and the US Federal Reserve), you can see that the prime lending rate is always lower than the 5-year fixed rate.  Also, 30-year mortgages are often padded (depending on economic conditions of course), so they would fall higher to ensure bank profits.  But, versus refinancing every 5-years, the ARM is always going to save you money, historically speaking. 

The bottom line is that if you can afford to weather some unexpected, short-term spikes in interest rates, then you should go for an ARM.  However, if you can’t take the heat, you are better off locking into a fixed rate mortgage. 

 

Ramit has also stated that he has consciously chosen not to invest in real estate.  However, many savvy investors and bloggers hold some real estate because it can be a good way to diversify ones portfolio.  Residential real estate is somewhat more volatile.  But, if the housing market does turn for the worse because people cannot afford their homes, that means the rental market will be hotter (although rents may decrease slightly, vacancies will decline).  This is a good time to invest in more income properties due to the low prices.  Commercial real estate can often be a very good investment also because the tenants tend to stay longer, and they actually make improvements to the property rather than causing decline as most renters do. 

If you are looking to diversify, but don’t want to invest directly in properties yourself, you should consider looking into REITs.  There are many local REITs that you could look up and make investments and there are also some publicly traded REIT funds such as iShares Exchange Traded Funds (USA) from Barclays.  The Canadian REIT Sector Index Fund has increased in value by 120% since 2002 and appears to still be on the increase.  This fund will be partially affected by property values, however, the paper value of the assets of a company are not the basis for stock performance.  The REITs tracked by this fund make their money off of rents and leases, and barring a significant depression in the economy, their income should remain fairly consistent in my opinion.

Some of the comments on Ramit’s post were interesting.  There seem to be many misunderstandings about real estate in the comments section.  One reader says there are more foreclosures now because people have made bad decisions.  I question the use of the word bad because although the decisions have not turned out well, they were most likely misinformed decisions.  There are a myriad of reasons a person could end up in foreclosure such as losing a job, interest rate increases, health issues, etc.  Also, because people are entering into high-ratio mortgages, the payments are much higher, and thus more difficult to afford.  There is also talk of whether houses are good investments.  Well, there are many ways to make money from owning a house.  Improving the house will increase its value, you can invest in real estate for rentals and earn money monthly, and in general, housing prices rise over time.  Yes, prices can decline, but on-average they increase.  Furthermore, compared to renting, you are able to build equity in the home, so that must be considered when looking into whether to rent or buy.

 

For some more information on ARMs, visit the Wikipedia entry here.

 

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