Tag Archives: financial education

Vacation Property 2021

Posted on by

One of the topics from our recent Couples Retreat was vacation property. I needed some time to show-my-work for why I’ve decided to stay variable.

The question, in the context of both buying and not-buying, was…

Will it make a difference?

The question gives me an opening to share some things I’ve learned from 25 years of real estate investing.

1/. I have yet to regret not-buying a vacation property. When vacation markets appreciate, so do investment markets.

2/. The ones-that-got-away have three main attributes: well located, easy to find tenants and decent cash yield. Vacation properties usually only have one attribute… well located.

I’ll share insights about capital allocation:

=> No one in the company is likely to care more about capital allocation than the boss – the CEO sets a cap on how much people will care about capital, and everything else for that matter.

Extend into your marriage, and family….

=> No one will care more about spending and capital allocation than the individual responsible for earning the income/capital in the first place.

Similar to work ethic… the actions of leadership set a ceiling on what to expect. No amount of legal documentation, and pontificating, can overcome this reality.

Don’t waste energy fretting about the way things are.

Be grateful when you’ve been able to create a team that, largely, follows your lead.

Now the math!

I’ve updated my #s for the two markets I follow most closely.

  • A vacation market with an effective yield of -3% (cost to own). I avoid fooling myself that I’ll be able to short-term rental myself to breakeven.
  • An investment market that is generating net cash flow of 2% per annum.

To “get my money back” in the vacation market, the value of the asset needs to grow by 2.5% per annum.

Money back does not mean purchasing power back. The “same” dollars in 15 years time will buy less due to inflation – just look backwards to 2005 in your home real estate market and see what your current place was worth.

We have no idea about what the future holds and 2.5% market growth is probably looking tiny when compared to what you’ve seen over the last year (+30% in my zip code).

You could be right.

I do, however, know markets that are just getting back to their 2008 peaks. In a negative cash flow scenario, that’s a painfully long time to hold.

My goal isn’t to predict an unknowable future. My goal is to answer the question “will it make a difference?”

In the get-your-money-back scenario (2.5% market growth):

  • Take time to calculate your true cost to hold.
  • Make sure you’re OK with permanently increasing your burn-rate, especially if there’s debt service.
  • Know your alternative use of funds => the investment property returns $1.75 for each $1 invested & Vanguard’s VTSAX is currently yielding 1.4%.
  • The vacation property requires an extra $0.45 for each $1 invested. This is before you decide to renovate and burn $$$s on rugs, curtains and furniture!

For that vacation property, here’s what I do…

  • Take the purchase cost
  • Make sure I’m OK with annually spending 5% of purchase cost, forever
  • Consider if I am OK with writing-off the equivalent of 50% for customization, the cost of ownership and agent’s fees

Then remember:

  1. My personal utilization of past destinations has been 15-45 days per annum.
  2. The future risk to my family is we are priced out of our home market (not that my spouse and kids might have to unpack/pack up from a rental).
  3. I tend to change my mind.

Feelings!

One of the challenges with new deals is my feelings are dominated by the expectation of the asset making things better.

I also enjoy the feelings associated with being able to provide for my spouse and kids.

Making things better & doing right for my family => it’s difficult to feel the benefit of doing nothing.

Once I have a good-enough position, the only person who can screw it up is me.

Freedom 2021

Posted on by

A big motivator in the finance world is the dream of earning “f-u money”.

The universal motivation for this goal is expressed in the Johnny Paycheck song, Take This Job and Shove It.

Trouble is, once you have a goal to tell people to Eff Off, you will never run out of targets for your ire.

You’ve created a habit that can’t be solved by money – and being consistently abrasive will drive good people from your life.

My friend, who changed my view on the UltraRich, demonstrated an alternative approach.

People think the benefit of wealth is f-u money. The benefit isn’t the ability to be rude with impunity. The benefit of financial independence is the opportunity to say no-thank-you to the ever-present drama around us

The goal, to opt out of BS, doesn’t require much money at all.

However, the first $125,000 I saved nudged me in a better direction, eventually, out of finance.

What my younger self found attractive (in wealth accumulation) was a pathway towards serenity. I feel very fortunate that I gave my younger self a chance to look around.

Serenity was found in nature, in connection and in exercise.

Do I want peace or drama?

Own Use Control Acquire Build

Posted on by
For some, the building (of assets) is the best part of the process.

Last Thursday, I mentioned that my son and I were talking about real estate assets.

My son, like most folks, has a bias towards ownership. This runs deep – the only relationship he sees with assets is own vs want.

Now, as any yachtsman will tell you, when it comes to assets… the person getting the greatest benefit isn’t always the person paying the bills.

Two questions that are fundamental to how you organize your affairs:

  • Who gets the benefit of the asset(s)?
  • Who gets the benefit of your time?
Back to Thursday’s strawberries, a proxy for cash flow

From Thursday’s example…

  • The direct benefit of the renal property goes to the tenant.
  • The cash flow goes towards my cost of living.
  • Not having to earn that cash flow, gives me time to spend educating my kids.

The person, or entity, that owns the rental property doesn’t matter as much as you’d think.

What matters is who uses, who controls and who gets the benefit of… the asset.

The mismatch, between ownership and benefit, is a key source of friction within family systems. To mitigate, each generation should have an opportunity to create and affirm their own values.

Short version: we each agree to pay our own way.

The mismatch is also why our political class does a poor job of picking winners, setting preferences and allocating resources.

Incentives matter.

So, are you a balance sheet builder? Are you someone who enjoys using assets? Do you seek power through the ability to control budgets? Does giving to others bring you happiness? Do you love the thrill of the deal, or is it more about the novelty of a new purchase?

As a young person, these questions can be difficult to answer. Even when you think you’ve answered them… you might think differently later.

Here’s something I’ve noticed about myself. The more I notice others, the more I need to step back, relax and recharge. When I’m getting enough time to recharge then the noise of the world flows by.

Remember time and you will make fewer mistakes.

Let It Ride

Posted on by

My son has a side-gig shoveling snow.

Side-gig money is his to spend in any way he wants (and he wants a jumbo Baby Yoda).

His surplus money goes into a bag. “Money in the bag” is real to him.

Other forms, less so.

My son’s outlook is very common and, if not addressed, will cost him a lot of wealth (directly) and time (indirectly).

Last Tuesday, he had a cunning plan to help me “get rich” – the scheme was a simple one. Sell everything I own and realize all the gains.

I left the fact that I don’t truly own anything for another lesson.

Instead, I started by pointing out that there are a lot of rich folks in town who don’t have time to ski with their kids.

Time, son. I want you to remember time.

I want you to remember time.

His scheme gave me the opportunity to teach him three things about money:

1/. We’re not going to sell the rental property…

Income, from rent, is a useful type of money – I used the example that the property he wanted to sell covers the cost of his food.

Cash flow buys strawberries.

Cash flow buys food

2/. Selling costs money…

When you sell you need to pay taxes on the gain.

Taxation was taught to him from a young age. Whenever I eat something off his plate, “I’m taxing you.”

If you don’t sell then you can pay taxes later. Pay later is better.

He was on-board so far.

  • Cash flow is food
  • Pay later is better

3/. What are we going to do with the money if we sell?

When you sell, you need to figure out what to do with the money.

The rental property is a great asset and I have no ideas for something better.

I lost him here. I think he wanted to see a _really_ big bag of money.

Opportunity cost and alternative use of funds… fairly advanced for a kid, or anyone for that matter.

How might you get this bag of money to work for you?
  • Cash Flow
  • Deferred Taxes
  • Opportunity Cost
  • Alternative Investments

Good enough is good enough.

Once you get that bag of money working for you…

Let it ride.

Learning From The Well Adjusted

Posted on by

I’ve been fortunate, to get a look under the hood at the lives of the conventionally successful.

Before we get into tactics for discretionary spending, it’s worth thinking about what our spending might bring us.

What’s the strategy? Where are we trying to get to?

Thinking back to last week => if you think about my childcare spending with this in mind… it makes much more sense. I wanted to maintain my ability to explore nature and create space for a little serenity.

My first boss was a very successful investor. He repeated his success multiple times, with different teams, across a long time horizon. I use what he taught me, every day of my life. A favorite quote:

It’s the first five million that makes a difference.

You’re going to read that line in your own voice. You’re going to overlay your own values. To understand, for myself, I had to watch what he did for a number of years.

He loved what he did and he didn’t like to be told what to do. He was living in London, with two kids, in his early 40s, with limited interests outside work… what money brought him was the freedom to leave any situation he didn’t like. To be his own boss.

Related from another self-made mentor, talking about a family member with cash flow, who left a successful firm, at a very young age.

Nobody ever goes back.

So, if your financial chase means you are beholden to your boss then you’ve missed out on a key benefit

  • the ability to control your own schedule
  • the ability to walk from unreasonable demands

Once you realize the underlying need, you will be able to address it with far less money than you think. The entire point of my financial writing.

What do successful people do when they’re not being successful?

My first boss used to read about accountancy! He’d head off on vacation with a large stack of Accountancy Age (or whatever it was called) and work through back issues. His partners got a kick out of that. If you wanted to learn about financial fraud, he was your man!

My lifestyle aspirations are a better fit with the smart folks I met through sport. There are a lot of high-achievers in masters athletics.

What did I see?

Mastery, novelty, competition, adventure, peril, connection, shared suffering… ideally, combined with heart beats in nature.

Adventure, beauty, variety – there is a ton of it within 90 minutes of my house.

No balance sheet required.

Family Spending Principles

Posted on by
West Ridge, Eldora

An observation that I am trying to pass along to my kids.

My never ending desires are rooted in a false idea of what will make me happy. I have a clear idea about the structure of the days that are “better.” Achieving better is easier, and more rewarding, than chasing pleasure from purchases.

To help me achieve “better”, I have a series of principles.

1/ Visible spending for wife, first // This works on a number of levels.

  • Don’t buy something for yourself that you wouldn’t buy for your entire family.
  • It easier to be value conscious when I remove myself from the purchase equation.
  • It’s just good policy.

2/ The minimum outlay to meet the underlying need

Strangely, I got this via Joe Friel on coaching masters athletes => the minimum, and the most specific, training to get the desired physiological adaption.

Capital takes time to acquire and is easily squandered (spendthrift heirs and lottery winners are common examples).

A default to the minimum reduces the scale of my (inevitable) errors and increases the ability to change my mind later.

3/ Do not sweat the small stuff – set a Give A Hoot threshold (links to Marriage Money article)

Set an annual plan, track the cash quarterly and promise you will not sweat the small stuff. Good people are made miserable by tracking every nickel.

Stay out of the weeds so your mind is able to think and get the big things right.

4/ Avoid Choices That Have A Material Cost to Hold => this applies across domains (assets, leases, friends, family, commitments, Facebook/eMail). The math from yesterday.

There are many ways to find yourself over-extended… debt service, cash flow, emotion & time.

Exit bad decisions => they crush you on all levels.

Mark Allen on pacing…

just because you’ve made a bad decision, doesn’t mean you have to continue it

Combine these principles and you’ll find the sum is worth more than the parts.

Dropping into West Turbo. Pali Chair, A-Basin.

My son asked about the last big purchase I made, other than real estate.

My off-the-cuff answer was “we don’t spend much money” but that didn’t line up with what I know about our cash flow statement.

So I spent January thinking about it. Next time, the best financial choices I’ve made across my marriage (16 years this summer).

Different Ways of Looking At Money

Posted on by
Yesterday morning at A-Basin. My son has developed a taste for narrow chutes.

I’ve had gigs that pay $500 per month. Let’s have a look at what that’s worth.

What is $500 per month worth over a decade?

  • 10 years, 12 months a year, $500 per month => $60,000
  • That’s straight math, no implied additional costs/benefits.

What if I swept the cash from my side gig into a Target Date Fund?

I estimate a 60/40 portfolio returned ~9.7% per annum across the last decade.

  • 10 years, 9.7% a year, $6,000 per annum => $94,250
  • So if I’d invested that money, each month, for a decade, I’d be getting close to $100K

10-15 clients at $500 per month, less a bit of overhead => close to $1M in a decade.

Flipping this example: my condo association charges me an extra $500 per month.

What kind of headwind does that put on my real estate investment?

  • We have an example from above, $94,250 per decade. $94,250 is an estimate of the cost to my balance sheet of sending money to the condo association, rather than a 60/40 portfolio.
  • However, there’s one more step because we pay expenses from after tax income.
  • Do you know your average tax rate? I use 25%.
  • $94,250 / (1 – 0.25) => $125,000 // this is called grossing-up your answer – to pay $500 per month, I need to earn $667
  • So a charge of $500 per month could drag your return down by $125,000 a decade.

Recap of the three ways:

Nominal => $500 per month is $6,000 a year is $60,000 a decade

Opportunity Cost => $6,000 a year not invested implies $94,250 in a decade if the assets earn 9.7%

Grossed Up Opportunity Cost => $6,000 not spent, and invested pretax (retirement account), has an opportunity cost of $125,000 in a decade

The exact numbers are not important. What matters is understanding the concept… repeating amounts become big money over time.

$500 per month is going to cost the family between $60,000 and $125,000 a decade.

Expenses avoided, small gigs (earned then invested), and holding costs… these can have surprisingly large impacts on your financial life.

Seemingly small gigs are worth more than they appear…

  • if they come with health insurance (my unsolved family budget line item)
  • if they come with discounted prices on goods you are already buying (part time work at a business you’re already spending with)
  • if you make a habit of sweeping the income into a Target Date Fund (side gig cash invested to benefit my future self)

Something I like to do in my financial life is look at the line items in my family budget and ask… “What’s it going to take to eliminate that cost?”

If I can’t eliminate then, “What work might I enjoy to mitigate the cost?”

The game being to get my net cash burn to zero, while sustaining a life with meaning.

This morning’s sunrise on top of Eldora Resort.

Enjoy 2021 – there remains a lot we can do, while remaining smart to mitigate COVID.

Live Free Recipe

Posted on by
This post is about creating the freedom to choose how you spend your weekdays.

Owning a place to live, and being paid to live there, will change your life beyond the financial benefit it brings.

What’s it going to take?

Capital

I outlined the educational aspects here.

The easiest time to build capital is in your 20s. You can live very cheaply because you’re either at work, or carousing. Your health insurance is peanuts and you don’t need to take on any dependents (free birth control saves lives).

Age is not a barrier. Use the recipe below and you can be living free by 2030.

Big Cities remain the best places to build experience, knowledge, contacts and skills.

When I made partner, a wise man took me out to breakfast and reminded me…

Get what you want, then get out

He didn’t tell me why I needed to get out. I learned that for myself…

  • You’ll be tempted to go private with educating your kids => $1 million you need not spend, or earn
  • You’ll be jammed into a little place and/or you’ll have your financial life tied up in a single asset – you won’t care about this after graduation, you will care about this when you have preschoolers!
  • It requires extreme luck to get yourself on the housing ladder before you’re 40 => get your timing wrong and you’ll feel trapped
  • You will be surrounded by social pressure to spend, spend, spend!

Megacities are filled with opportunity and excellent people to whom you sell your skills.

Megacities are a great place to start.

Just remember to leave.

Target Location

Having played this game three times, I think a small city is your best bet.

  • ~250,000 (pop.) in a county with ~500,000 (pop.)
  • Natural Beauty – clean water, clean air, the ability to exercise safely without driving
  • Climate – I gamed this by having a rental in the Northern Hemisphere and a low-cost Home Base in the Southern Hemisphere. Later in life, I moved to a place I didn’t need to leave (Colorado, Front Range)
  • Airport Proximity – needing to take a flight-to-your-flight will get old

Before my first kid was born, I worked in: Canada, England, Hong Kong, New Zealand, Bermuda and Scotland.

The skills to be happy somewhere are the same as the skills to be happy anywhere.

Target Property

My worst deals (financially) have been the most impressive (visually).

Buy space and let the next owner spend a fortune in renovations. The money I’ve spent beyond paint, carpets and replacing worn out appliances/HVAC has been largely wasted.

You’ve probably spent the last decade renting – your younger self is your target market. Choose a location that will be easy to rent (if you leave, if you need income).

Lock off basements, detached units, split floors… earn rental income, maintain personal privacy.

Margin of Safety – your land premium is “total price” less “value of the buildings” – the closer you get the land premium to zero, the safer your deal.

Coming out of the Great Recession of 2008, land premium was briefly negative – this was due to banks foreclosing and forcing the market down. Five bedroom houses, 15 minutes from Boulder, were selling at $75 per sq foot. Condos, apartments and houses in Arizona got even cheaper, under $50 per sq. foot.

Cheap will happen again.

Connection

It can be tempting to go remote. I feel ya.

Escapism is a recurring dream of mine, especially in times of stress. However, you need to be practical – friends, sexual partners, basic services, transport… the practicalities of life.

The purpose of setting up your low-cost base is to provide security within a life with meaning. Go to where there are people with whom you’d want to spend the rest of your life.

Shared values, within an active lifestyle.

Wait For The Fat Pitch

To get this done you’re going to need a trigger that makes the local property market seem cheap to YOU. It won’t seem cheap to the locals, who will be expecting further declines.

  • Recession combined with High Interest Rates (UK 1990)
  • Asian Crisis (1997)
  • Currency Crisis (NZD in 2000)
  • Global Financial Meltdown (2008)

I witnessed all of the above. There is ALWAYS a “next crisis”.

2020 was a boom year in real estate. When you’re living through a boom, your FOMO will be pushing you to take action.

One of the best things your first good deal brings you is a reduction in the pressure to do a deal.

To do great deals, you need to be comfortable doing no deals.

Family Financial Review: Portfolio Allocation

Posted on by

Thursday, I shared my thoughts on the real risks I face. That’s where the action happens in my life.

Still, this is a financial review, so it’s the right time to consider asset allocation.

Having spent 30+ years locking in my Core Cost of Living, the main choice I face is how much cash/bonds/no-return assets to hold.

Here’s how I approach that topic.

There is a cost to holding cash, especially today. Zero, or negative, yield.

Cash is exposed to the “ravages of inflation” – on one side.

Cash earns nothing, while you watch bitcoin, prime real estate and other asset classes skyrocket – on the other side.

Against those costs there are benefits. The three biggest (for me) are:

  • a call option to benefit from a future crisis
  • serenity
  • cash/bonds dampen the volatility of my portfolio.

Now, here’s the questions I ask..

1/. How many “years” do I need to feel serene? This will depend on your psychological make-up, earning capacity, earnings diversity and age.

Getting my net-cashflow-burn down is the only way I’ve been able to feel serene. I just don’t have the psychological make-up to soothe myself via luxury spending, more assets or more income.

2/. How many dollars might I need to capitalize on the coming apocalypse? Being able to buy real assets in a down market will make you happy for a long, long time. I’m still happy about a couple purchases I made in 2010.

My financial assets provide me with an opportunity to get out there and live my life. Financial assets provide very little inherent satisfaction – this is a good thing as I can remain (mostly) detached in downturns.

Our actions in the real world provide satisfaction => share experiences (ideally in nature) with people you respect and love.

BTW, here’s a 2019 article I wrote about wealthy people talking about cash. Back in 2019, many wanted to be in cash. Roll forward to 2021, some of the same folks want to be out of cash! Personally, I’m about the same. I spent the intervening period paying off my mortgage and clearing my car loan.

Family Financial Review: Risk, Worry, Ruin

Posted on by

I ended Wednesday by asking, Am I worried about the right things?

It’s easy to get distracted by the noise surrounding our lives.

Do you know your key risks?

It varies between people and over time => focus on habits that might lead to ruin (leverage, lack of impulse control, smoking, substance abuse…).

See also my review from 2019.

Set your financial life up so it runs on autopilot.

Did you read the PDF from yesterday? Good reminders at any age, as well as an embedded reading list.

Things I focus on more than my portfolio…

  • Near-term: keeping up with my teenagers – what is it going to take to share the outdoors with my family when I’m 60?
  • Medium-term: personal engagement when my kids are gone – what will I do with more time, and less energy?
  • Health: poor choices increasing my risk for cancer and other health issues
  • End of Life: my body outlives my brain

My actions today reflect awareness of the real risks in my life.

My portfolio? Good enough is good enough. Avoid unforced errors and keep on keeping on.

Don’t assume these answers.

Do the calculations from Wednesday, reflect on your life, write it down, review annually…

Then get out there and enjoy 2021.