Tag Archives: strategic planning

The Next Doubling

Posted on by
I was 12 years old at the peak.

A good question to consider with major assets in a portfolio…

Would I buy at current prices?

Like most real estate in Colorado, Boulder capital values have been on a 7-year upswing. According to Zillow, the capital value of where we live is $2.5 million, up 36% since the start of 2020. The only way to describe how this value feels is “too high”.

One way to consider capital values is to express them in terms of cash flow and time => with real estate, the proxy is cost to rent.

With our current address, comparing rental costs with gross capital value…

  • $3,000 per month rental => 69 years equivalent
  • $4,500 per month rental => 46 years equivalent
  • $6,000 per month rental => 35 years equivalent

With the run-up in prices, homeowners have been rewarded for properties that are larger than their needs. Like-for-like rental, doesn’t look too crazy right now. However, we could easily fit ourselves into a location that’s 40% smaller than where we live at present (implying a gross yield of less than 2%).

On to the next example…

++

In 2021, some friends exited the Boulder real estate market. Their net sales proceeds (after taxes and agent’s fees) equate to ~100x their first year rent in their new location.

Worth repeating: they are taking a century of rental-equivalent off the table.

Put another way: by selling into this market they can do the following (in current dollars):

  • Cover their future cost of living on a joint-life expected basis;
  • Put their kids through college;
  • Buy an apartment as a hedge against future rental rates; and
  • Treat future earned income as fully discretionary.

Compelling, especially if your house is the primary asset in your balance sheet.

They aren’t “set” by any means: inflation, illness, increased spending or investment losses might derail their plan. However, the asset sale greatly reduces their financial stress and buys them a tremendous amount of time.

Stress, time and the risk of ruin.

++

Another example, vacation properties.

The house we rented in Vail (2019/2020) is valued at more than 100x the rental we paid. The condo we rented in 2018/2019 sold for 50x annual rental.

There’s never been a better time to rent assets you don’t need. 😉

If you own assets in secondary locations, or are considering buying, then the above calculation is a useful one to consider. The numbers above are using gross rental figures. From the landlord’s point of view, the net rental income would be tiny (relative to capital).

Also consider the benefits of being variable…

Rather than lock in a single location for the winter, I’ve decided to try an AirBnB season. I booked in 22 days of skiing, the dates tie to school holidays => Vail, Telluride and Jackson.

Adding a bit of airfare, gas and mileage… total cost will be $15,000 to use properties with an average value of ~$1 million. VTSAX dividend yield is 1.25%.

By not owning, it was cost-free to change strategy.

++

Other questions I like to ask:

  • Assume things go well and this asset doubles in price (again), who’s going to buy?
  • What’s going to drive the next doubling in value?
  • Where’s my family exposure: (a) benefiting from the next doubling; or (b) harm from the risk of a halving?

Who’s going to buy? A smaller place in a great neighborhood is much easier to sell than the best place in that neighborhood. The top places in Boulder are now selling for around $5 million. Who’s going to buy when the market goes to $10 million? Might “ability to purchase” create headwinds for appreciation in the market?

Prime Colorado real estate benefits from buyers coming from “even more expensive” markets. Boulder remains a great place to land from one of our coastal Metros. City-based housing markets benefit from local economic growth.

Vacation-markets, at 50-100x gross rental income, are reliant on continued balance sheet appreciation for the Top 1% of society.

A comparison I follow in Colorado… Boulder rental property (house with land, no HOA) vs Vail vacation property (condo w/o land rights, HOA). In the last recession, I tracked this comparison in Arizona – unfortunately, I bought condos down there instead of houses.

What’s going to drive the next doubling? See the chart at the top of this post => there’s been a multigenerational tailwind due to declining interest rates. Every store I enter, and every manager I talk to, gives multiple examples of tight labor & inflationary pressures.

Negative real interest rates might keep the party going for a bit. With Social Security COLA adjustments over 5%, it seems nuts to buy into property that’s trading on 50-100x rental income.

Family exposure. For me this is kind of like the “who’s buying” question.

If you’re a double-income family with a diversified portfolio then sticking 10-15% of assets into a vacation market is a different choice than a single-income family with 90%+ of assets tied up in a mortgaged home. The context of the choice is worth considering.

One final point, despite living at 5,500 feet (and training year round up to 14,000), I don’t sleep well above 9,000 feet. For many, ability to sleep at altitude changes as we age.

Climate, altitude, neighbors, convenience, community, quality of local schools/governance… good reasons to rent locally before you buy.

Hope this helps.

Break Free

Posted on by
$1 well spent at Super Target

My kids have started asking me “what’s next” in terms of high school and college.

I told them to save those questions for a few years – what’s important right now is learning the basics and enjoying themselves.

They did, however, get me thinking.

This starts out as a letter to our youngest.

I’ve spent the last 20 years with ~2,000 hours (per annum) of self-directed time. When I reach “normal retirement age”, I will have had an extra ~70,000 hours versus what I was told to expect.

Consistently making choices as if time is more important than money has been a defining characteristic of my life after 30. Those choices, much more than my personal results, have been what gave me a 1-in-10,000 life, so far.

By the time you get to my age, you will have a series of stories you tell yourself about why you can’t do certain things. You’re also going to have the habit energy of 30+ years of choices.

The good news is many of our choices matter much less than we think, I got past a lot of bad choices.

Avoid ruin, build good habits, persist and you can achieve a very useful form of freedom.

My adult life, that you didn’t see, splits into three parts:

  • High school (to 18 yrs old)
  • Early adulthood (18 to 25 yrs old)
  • Adulthood (25 to 40 yrs old)

Along the way, people will be giving you never ending advice — to seek your attention, to get your money, to convince you to serve their ends…

Most of this advice is going to be tactical, short-term, single-action oriented // not particularly useful and a distraction. To blow through this (largely useless) advice I hope you to make a habit of asking yourself three questions:

  • Who is this person?
  • How do they know?
  • What are they selling me?

You’ll have to figure out your own purpose in life. Here’s what my choices say about what I did from 18-40 years old…

Free to choose…

…how, where and when…

…I allocate my time.

What I’m going to share is a strategy for getting yourself time.

What’s the role of high school?

Create options for further study. Science, mathematics, engineering, finance, accounting, technology… choose your courses so you can take any of the challenging majors in college. In 1986, I could have gone any direction at any major university in Canada.

If you can’t pull that off then learn a valuable trade, or skill, where you have a shot at becoming world-class.

The above is your “to do” list. There’s a wide range of successful outcomes possible, if you avoid early setbacks.

  • Pregnancy – avoid it in yourself and your friends – free contraception saves lives
  • Early habits of addiction and substance abuse – hook yourself on exercise
  • Suicide – keep an eye on your friends, and yourself – get help when you need it – everyone needs help

Pregnancy and addiction can be overcome. With regard to suicide, stay in the game – your future self will thank you.

Early Adulthood

Every year you take off before 25 is an extra seven years you will work later in your life.

You must have faith about the impact of long-term compounding – it’s why I started saving your allowance in Kindergarten. Our brains are not set up to comprehend exponents.

What’s the goal here?

The best technical education you can acquire without borrowing money.

But what if I could join the professional class?

If you can figure out how to do it debt-lite then fine. Otherwise, be wary of the time you’ll give away to get there — and — the habits you create from living a debt-funded aspirational lifestyle.

The professional class are just as enslaved by the system as most other people — they have nicer cars, bigger homes and beautiful wardrobes — they still lack time and cope with status-anxiety.

There are, however, certain professions that are ideal fits for a life with meaning.

For example, my friends who are docs/surgeons get a ton of satisfaction from helping their fellow citizens. They traded a lot of time to achieve their positions – a good trade, as they are valuable members of their local communities.

At 25, I was a well-trained financial technician. Globally, there are tens of thousands of people with similar training. What made the difference?

  • I was young – option value of youth!
  • I trained myself to live on half my income – I didn’t, and don’t, miss the spending
  • I was debt-free with four-years living expense saved – four years living expenses saved at 25

What mattered…

  • Valuable skills
  • Living below my means
  • Time for my net worth to compound
  • Time to follow my healthy passions (athletics, coaching, relationships)

Compare that to my smartest peers at 25 — better educated, negative net worths (due to college borrowing) and a higher baseline cost of living.

Like a lot of things, there’s no visible difference until you hit mid-life.

Adulthood

A favorite question of mine for friends who are over 60 – name something your grandparents could have done that would have positively impacted your life today.

It’s a tough question – we are talking 50-100 year timelines.

Many families settle on… core real estate holdings that enable shared experiences across generations and time — the mythical cabin on a lake, and similar (not always ideal) investments.

What might be required to achieve that vision…

  • Proximity – the family needs to live close to each other, but not too close
  • Time – the subject of this essay
  • Enjoyment – do we enjoy spending time with each other? What if we don’t? How much are we willing to compromise to get along with each other?
  • Realistic expectations – from 25 to 40 many folks will be busy seeking to free themselves from wage-slavery

When it comes to wealth, be focused on time, not money.

What’s Your Filter

Posted on by
Our youngest told me our cat needs a Halloween costume. I laughed while realizing that my home-school internet monitoring system might need improvement.

Most of us will be “adulting” for 50+ years.

Half a century is more than enough time for choice to impact outcome.

Here’s how I stack the deck.

Understanding three things greatly simplifies decision making:

  • Payoff function
  • Worst-case scenario
  • Who bears the worst-case scenario

In most cases, knowing the above eliminates the need to make any prediction (of an unknowable future).

In investing, you can bet big when someone else bears your downside (non-recourse leverage, other people’s money). At home, you will want to be more careful.

You are going to be tempted to spend most of your time predicting an unknowable future.

Don’t.

Instead, figure out the payoff function, what’s the worst that can happen and who bears that downside.

Previous writing touched on the payoff functions for fame, financial wealth, strength training and personal freedom.

Tim’s blog did a great job of laying out on his worst-case scenario – shot in his own home as well as a brain dump of everything that can go wrong, and right, with fame. It was an enjoyable read but life is too complex to perform cost-benefit analysis for every choice.

Sounds good, doesn’t scale.

One of my favorite shortcuts is to teach myself the areas of my life where I have a lousy track record, and defer to my expert advisor(s). I look for advisors with domain-specific experience and a temperament different from my own then… …I do what they recommend.

There’s deep wisdom in stepping outside ourselves => What Would Jesus Do, or Buffett, or your coach, or whomever you think knows better than you.

Each time I choose, I open the opportunity to make a mistake. To reduce unforced errors, there are filters I use to eliminate the need to make a choice and to make the correct choice obvious.

First level filter => repeat my choice for a decade, where’s this likely to take me?

What’s the worst that can happen? Live long enough and you’ll see it happen.

Specifically, I want to stay well away from:

  • Prison
  • Permanent Disability
  • Bankruptcy
  • Divorce
  • Violence
  • Self Harm

The first three are obvious, but that doesn’t stop many, many people from surfing close to the edge, or getting an emotional rush from having charismatic risk-seeking friends.

Sometimes I need to phase out a relationship, sometimes I need to adjust my own behaviors.

With marriage, specifically, it’s impossible to “see” just how challenging your life will become if you have kids. You’re going to be really, really stressed out for a decade. Every single one of my prior bad habits tried to make a re-appearance in my life!

There’s no easy way around it but you can significantly reduce your chance of disaster if you pay attention to how your potential mate approaches risk.

Personally, I like to drive with people. You can learn a lot about someone by chatting, and watching, while they drive in traffic.

It is difficult to let charismatic sociopaths out of our lives. These people are a lot of fun to hang around with, especially when we aren’t the target of their ire. It gets easier with a few bad experiences.

When you need to make a change, resist the urge to justify your choices.

Learn to ghost with grace.

What if we are the person that needs to change?

Owning my choices and considering where they might take me.

Mountaineering, peer choice, alcohol use, cigars, bike racing… as my life changed from “just myself” to “my young family” the following became clear to me…

The people who were bearing the downside had no choice in whether to take the risk.

To make myself feel better, I took out a long-term care policy. The insurance reduced the financial burden if I was disabled but didn’t address the mismatch between who was taking the risk and who was bearing the downside.

In my 40s, severe permanent disability could have been worse than death. In 2013, with three young kids and an impaired balance sheet, I was in a very different place than I hope to be when our youngest graduates high school (in 2030, or so).

Perhaps I’ll add back risky stuff in my 60s… right now, I doubt I’ll have the energy.

🙂

Divorce, violence and self-harm => the bottom half of the list.

  • Nobody gets married hoping for a divorce.
  • Nobody starts a drive hoping to get their car shot up in a road rage incident.
  • Nobody repeats a pattern of justified rage hoping to create a crisis.

But these things happen, and their seeds are small choices, repeated.

I try to be alert to habits that can lead me astray.

Anger remains a challenge for me.

I pay attention to situations and habits that reduce my faults.

I focus on better.

My definition of winning has changed over time. However you define it, success is more likely with a plan, a couple well chosen peers and a habit of referring to a clear filter.

Making a habit of the first-level filter, tosses all kinds of stuff into the forget-about-it pile.

Reminder about the 1st Filter => repeat for a decade, where am I likely to be?

The first filter very quickly gets rid of (most of my) bad ideas.

Then what.

Here’s how I set priorities and shape my “to do” pile.

When I was an elite athlete, every decision I made was passed through a filter of, “Will this help me win in August?” At that time, the filter worked very, very well.

August 2007, with my real 1st Place Trophy. Before kids, we took ~1,000 days for ourselves. Highly recommended!

In 2005, I married and quickly realized my filter (of winning) would, if applied over many years, make a second divorce more likely. Deeply seared from my divorce, I really, really, really didn’t want another divorce.

I wanted a different result so I needed a different approach.

I needed to change my filter to…

“How will this impact my marriage?”

Your situation is likely different, but your need to know, and direct, your filter is the same.

Baby, or COVID, arrives… “How will this impact my family?”

Allocating time week-after-week… “What’s my real priority?”

Trivial irritations, the opinions of strangers… “Who gets my emotional energy?”

Every single person we meet has a filter => victory, vanity, external wealth, fame, likes, validation, please the person in front of me, attention, minimize conflict, how do I feel right now, what is the last piece of advice I heard… lots of people, lots of different filters.

Make a choice.

Iterate towards better.