Sept 2015 Update

“Do not be impatient with your seemingly slow progress. Do not try to run faster than you presently can. If you are studying, reflecting and trying, you are making progress whether you are aware of it or not. A traveler walking the road in the darkness of night is still going forward. Someday, some way, everything will break open, like the natural unfolding of a rosebud.” –Vernon Howard

This quote applies to the cashflow journey beautifully:

If you don’t have any money to invest, or just don’t know where to start, don’t fret grasshopper. Network and read. Talk to whomever you can. Look for local investor meetup groups. Never stop learning, always keep an open mind. Read a book (I like Rich Dad, Poor Dad). Read a blog (I like MMM or Bigger Pockets). Ask questions of anyone (people who’ve achieved what you’d like to achieve are highly preferred over friends/family). Knowledge is power. This is a journey, not a race.

DISCUSSION OF RECENT CHANGES:

The graph now more accurately reflects cashflow with the retroactive addition of an RSP fee.

I invested in another Clearsky US Real Estate offering (an apartment in El Paso). The selling feature for me was that this deal is more cashflow oriented (6-8% target). However, the downside again is that my money is locked in for the life of the deal (4-7 year target) so that is the tradeoff.

I also closed out my position in TZZ (public MIC), for a miniscule overall gain. The volatility made me super uncomfortable. From late July until today, it had a range of 5.71 – 6.88. This represented swings of over 10% more than once. Yikes! Protecting capital is the #1 rule before seeking higher returns.

Q & A SECTION?! Whee!

Let’s do something fun. I thought I’d share one of my friends’ comments (totally paraphrased of course), in case there’s some parallels with you. *Please keep in mind I’m NOT a financial planner, nor do I play one on the interwebs, so please take everything I say with caution, as I’ve given bad advice in the past.

A reader writes: “Hey man, long time reader, first time writer. I’m inspired to do something similar! Maybe I should keep track of my finances too. However, I don’t really know anything about money management. But I do have a small savings account sitting there…. etc. xoxo”

Here’s what I’d recommend: open a People’s Trust e-savings account. With this you’ll earn 1.45% (as of today’s writing. It could change at any time). Or perhaps their TFSA savings account (2%) might be a better fit for you? (Don’t forget to familiarize yourself with the TFSA rules!)

Why?

1. Liquidity. Once you have it set up and linked to your daily bank account, I find it takes about 3 days to deposit/withdraw money, via online banking. This keeps your options open, it’s not ‘locked-in’. Maybe you want to save for a down payment on a home, find an investment, or you have no f-ing clue yet. This is a great ‘temporary placeholder’ while you figure that out.
2. Habits and mindset. Once you start to make money each month for doing nothing**, you start to think, hm, maybe I should do more of this. It starts that ol noggin thinking about it. And at least you can feel good about doing something instead of nothing with your cash.
3. Baby Steps. What can be simpler than a free high interest savings account? (Hint: nothing). Everyone can understand it. Don’t run before you can walk. Park your savings here while you take your time to learn about options and vehicles that might best suit you.

I would also add: read Rich Dad, Poor Dad. Seriously. I know several people whom this book has changed the course of their life, and that’s no exaggeration. Hop on a bike and head down to your local library where you can borrow it for free 🙂

Cheers and happy cashflowing!

*Giving advice to friends is something I’m really afraid of nowadays. In 2007 I invested in mutual funds, was super stoked about it and remember talking the ear off a good friend about it. We all know what happened to stocks a year later! From 2008-2014 I was really into precious metals investing, and remember talking to friends about them with similar enthusiasm. They did quite well until 2011-2012ish, but shat the bed hard in 2013. It’s very possible some of my good friends got burned because of choices I may have influenced. So this is why I now prefer to simply share what I’m doing with my savings, but don’t really like to recommend anything. Except for People’s Trust haha, they should be super safe 😉

**Of course we know that’s actually not true! You will have spent time doing research, setting up accounts, not to mention working fucking hard to earn and save that durn money in the first place!

Aug 2015 Update

 “An expert is a person who has made all the mistakes that can be made in a very narrow field.” – Niels Bohr, Danish physicist and Nobel prize winner.

I like quotes like this – they make me feel better about myself.  In keeping with this theme, we’ll discuss some recent mistakes I’ve made in my cashflow quest. My hope by sharing is you can learn and benefit from them 🙂 But first, as always, the graphs!

Okay! It looks like the J-Curve has started picking up with the changes initiated in June finally kicking in. I wish these things were instant, but that’s life. Building passive income is slow at first until it will snowball. And it will. Also, we’re now at nearly $200/month which is slightly notable, but not enough to be exciting yet. We are laying the foundation.

More MIC crap again?!

I want to revisit MIC’s briefly. I can hear you sigh. Sorry, but they’re a key part of my long-term strategy, so it’s important to get them right. I’ve quickly learnt the hard way that not all MICs are created equal. In the June post I raved about these and was stoked to have discovered high yielding publicly traded MIC’s on the TSX. I was stoked on their high returns and liquidity. I then invested in one (TZZ) and nearly in a few more (TMC, etc). Well this, as the opening quote suggests, was a mistake. I now regret this. Although the cashflow, paid in monthly dividends, is high at 10.3%, the volatility has been unreal, stupid and simply unacceptable for what should be a stable investment. I can’t stomac it, and I can eat a lot! Also, the track record of some of these publicly traded MIC’s in terms of stock price, is one of ever-decreasing valuation, even if the dividend remains unchanged or little changed. I should have known, I saw the historic charts, but I was blinded by the high returns. What good is a 10% dividend if you loose 10%+ of your capital (stock price valuation) per year? Exactly. No good is the answer.

On the other hand, I’m very pleased with KV so far. It’s pumping out just over 8% (*annualized), reinvested monthly. And my underlying capital doesn’t fluctuate wildly like the ones on the TSX. The trade-off is it’s less liquid in terms of getting in/out than the stocks (and there’s fees to getting out too. Graduated (decreasing) with the number of years since you got in). However, it’s in my RSP, so that’s OK. So if  you are going to get into a private MIC, please consider the liquidity and how it matches your situation.

I emailed Gordon Johnson, the author of a good book I recently read called Turn Your Mortgage Into a Pension. I highly recommend this enlightening read about a powerful financial strategy tailored for Canadians.

I’ll just copy/paste his reply, as it says it all:

Hi Erich,
I would not invest in publicly traded MIC’s. The public market is volatile and share value often has no relation to underlying value.
 
Private MIC’s do not have the volatility of public MIC’s. Typically they have great track records and have proven themselves to be stable investments over time. The same is true of REIT’s. Public REIT’s can be volatile, whereas private REIT’s tend to be stable in their valuations and returns. Look at Centurion REIT compared to public REIT’s during the last downturn in the markets. 
 
KV is a good MIC. I am also quite familiar with Antrim Investments and AP Capital (formerly Alta-Pacific). Antrim is the MIC I refer to in the table in my book. I chose Antrim as it is one of the largest and most conservative MIC’s in Canada. Both KV and AP have demonstrated better annual results than Antrim. Antrim is much larger and more conservative. Invests primarily in 1st mortgages. Liquid with no penalty. Pays quarterly dividend. Both KV and AP pay monthly.
 
REIT’s have a tax advantage over MIC’s in distributions. Typically the return is paid as return of capital which incurs no taxable income (0% tax). Capital gains in the future (taxed at 50% of gains). MIC’s income is fully taxable (100% of interest income is taxed, unless sheltered in an RRSP or TFSA).
 
None of the MIC’s or REIT’s mentioned above have lost 1 cent of investors capital – this is an important consideration for me when I look for an investment vehicle. I also want strong management and long history of returns (10 years if possible)…

So there you have it. Don’t invest in public MICs kids! To me this previously would’ve seemed counter-intuitive: old Erich thought private investments sounds secretive and sketchy, whilst public investments seem open and transparent and if so, the market should be efficient at valuing them. New Erich thinks “Aaaarg, fuck the stock market!!!”  I need to research Antrim and AP now, perhaps they might offer the best combo of returns & liquidity I am seeking for my “placeholder” savings??

(**Update: AP Capital has similar graduated penalties as KV for getting out if held under 5 years, plus a $350 processing fee, and also even more restrictive liquidity: you can only cash out once a year. Being less liquid and paying slightly lower returns than KV means AP doesn’t interest me for now. Antrim doesn’t have fees for getting out, but it will likely take 2-3 months to get your money according to what I can tell from their OM, so let’s call it semi-liquid. (I spoke with their Director & Portfolio Manager on the phone and it sounded like they can often do it quicker, but they don’t like to. This investment is generally not for people who go in/out often or short term he said).

Tax strategies:

I’m slowly learning the value of a proper tax strategy. Again, based on mistakes about where I’ve “placed” my investments, which is currently not optimal. I’ll have to pay taxes on some of my cashflow, whereas if I had of structured things better I would not have had to pay taxes. Learn from my mistake kids! Here’s what I learnt today:

• Interest income: taxed 100% at your highest marginal tax rate (added on top of your income by the CRA). MIC dividends fall into this category.
• Capital Gains Income: taxed at 50%. Cashing out of a REIT or similar (eg. my Clearsky investment) falls into this category.
• Return of capital: taxed at 0%. Dividends/distributions from REITs/Clearsky, fall into this category.

In a nutshell, from a permanently-living-off-of-cashflow perspective (the goal, nay, the dream!), this means a MIC is better to place in your TFSA (0% tax). REITs, or similar investments such as my Clearsky investment, are generally better for cashflow outside of tax-sheltered vehicles: you get 0% tax on the monthly/quarterly distributions (treated as ‘Return of capital’), and are taxed on 50% of any gains only once you cash out.

You can also hold all these investments in a corporation, which would get taxed at the highest tax rate (~44-46%). However, my accountants feel that there is some kind of magic they can do to get this tax rate down to around 19-20%. So there is a lesson straight from Rich Dad, Poor Dad: surround yourself with a good team, accountants amongst them. (Also, shop around until you find a good accountant you’re satisfied with. It never hurts to get a second opinion. I recently networked with a local businessman & real estate investor who is onto his 4th property now. He said he’s on his 3rd accountant now, the current one being much better than the last, saving him thousands.)

US REI:

I wanted to talk about recent developments in pursuing real estate investing in the US, but this post is long enough. It’s a slow and arduous journey anyways, so you haven’t missed much. Till then, I really hope some of this has been useful and happy cashflowing you guys! Feel free to share your graphs and we can celebrate together!

July 2015 Update

“In school, the person who makes the fewest mistakes wins. In life, the person who makes the most mistakes wins.” –Robert Kiyosaki

Hey guys!

Once again, July’s update is super boring. I had hoped to see the fruits of recent changes, but they have yet to take effect. For now, I’m embracing what they call the ‘J-curve’: lower cashflow now, while I optimize, experiment and tweak things. It’s boring, but it’s all about being transparent and sharing the journey. And for now, the journey is anything but glamorous.

Let’s discuss what’s new:

(**Update Sept 2015: Please see discussion of MIC’s in Aug 2015 Update. I no longer recommend investing in any publicly traded MIC!).

TZZ:

Holy crap! A stock that pays >10% dividends on a monthly basis? Yes. I shuffled money out of the e-savings 1.6% and into this. If you hold stock on the third to last business day of each month, you get paid dividends around mid-month the following month. They also offer a DRIP program. My purchase price was $6.82/share and monthly dividends are currently $0.0583/share for a 10.3% annualized return. It seems too good to be true and alas might be: in their latest financials, due to loan defaults, they mentioned a possible dividend reduction in October, and the stock performed accordingly. It’s possible the dividends might be reduced to around $0.046/share/month, or ~ 8% annualized return based on my purchase price of $6.82. This seems to be typical of the luck I tend to have: they have steady dividends for 3 years and the moment I buy it could be reduced by 20%. Gah! I can’t tell you how many times similar things have happened to me lol :S

Other point to note is that People’s Trust has continued to reduce their interest rates: what was once a 3% TFSA when I signed up in Jan is now 2%, and the e-savings has gone from 1.8% to 1.45%  (Do you see the pattern emerging with my timing here?). This is in step with several government policies (more TFSA contribution room, lower Bank of Canada interest rates) and certainly makes them less attractive products, but still a good ‘placeholder’ option.

Ok that’s it for news! So we’ve already gone from 1.8% and 2.25% vehicles a few months ago, to finding over 10% returns, all as monthly cashflow. BUT it doesn’t take a rocket surgeon to figure out even compounded 10% returns won’t get me close to my goal in 2 years. Maybe in 10 years with super-frugal savings, yes. But continuing to live the kind of frugal lifestyle I’ve been for the past 3 years, as well as working the jobs and schedules I’ve had during this time, for the next 10 years, simply isn’t acceptable. It’s going to take much more creative, bold strategies.

ENTER REAL ESTATE INVESTING

The only vehicle I’ve been able to find that could achieve my goal in 2 years is real estate. Within real estate there are myriad approaches, niches and variables. Over the past several months, I’ve finally defined a clear goal (3k net permanent monthly cashflow by July 2017 starting with 75k capital) and have been examining different REI (Real Estate Investing) strategies that might achieve this. I networked with real estate agents, lenders and local investors, toured homes for sale, emailed lots of people, talked to friends also into REI, etc. (By the way, if you or anyone you know is into REI, let me know! Networking has been the single biggest tool and help so far, and you never know what you might learn. I’ve met some amazing contacts that either are, or might one day be, part of my ‘team’). A common theme has been that potential cashflow is higher in the US than Canada, due to the housing crash we didn’t have. Furthermore, prices are lower in certain markets, affording someone with limited capital a lower point of entry. A great resource has been Bigger Pockets. One strategy I looked at really closely was applying the BRRR method, both in Victoria and Nanaimo. Unfortunately, several pieces were still missing (capital & financing/refinancing chief amongst them) for these to be a really good fit locally. It was more realistic in Nanaimo than Victoria, but again, the pieces and fit wasn’t quite right.

So I’ve recently decided to turn my energies southwards, for the time being. With my summer job not panning out, the timing is ripe. I’m excited to see what happens over the coming months, and will report here as things actually unfold (but not before hand as I don’t like speculating). I’m taking a risk, I’m scared as hell, but it’s what I have to do to achieve my goals and dreams, and hopefully we’ll have some exciting progress and things to talk about on here soon!

Stay tuned and happy cashflowing!

June 2015 Update

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” -Thomas Edison

Hello again friends.

June’s update isn’t as exciting as I had hoped. But there are exciting things to talk about. I’m still waiting for some changes to take effect, which I’ll talk about after the graphs:

Ok, so you immediately notice 2 things: Cashflow has decreased (Not a big deal, I’m shuffling funds, 2 steps forward, 1 step back right?) and there’s some new items. Cool! Let’s talk about them:

KV MIC:

I transferred my RSP (previously in mutual funds, cash & stocks) into 2 funds offered through an “exempt market dealer” (islandlifefinancial.com). One is a MIC (Mortgage Investment Corporation) that has averaged 8.9% over the past 6 years (since 2009). This one is run quite conservatively. It pays monthly dividends, which I have signed up to have reinvested through a DRIP. It’s called KV Mortgage Fund. Another option is to take the monthly dividends as cash. I need to grow, drop by drop, so for now it’s the DRIP strategy. This compounds my returns monthly; and remember we like compound interest 🙂 Also, this is in an RSP, so my options are limited. The disadvantage: penalties for withdrawing money before 5 years. Annual RSP admin fee of $150. Funds are only semi-liquid now.

Clearsky Silverado (Albuquerque):

This is a more unique vehicle: essentially a pooled real estate investment offering. Tax structure similar to a REIT. It will pay quarterly dividends (from rental income) and a lump sum return in 3-5 years when the investment is sold. This is a strategy to grow my capital (aka money) for now, for more cashflow later. Essentially investors pool funds, and a management team with a proven track record takes our money, buys a commercial multifamily rental property, improves the value (through things like reno’s, increasing rents, decreasing expenses. This affects the property’s overall revenue. Since multifamily’s are valued via CAP rates, increased net revenue = increased property value to a buyer) and sells it in a few years (while earning rent during the holding period). They take a cut, we hopefully make a decent ROI (return on investment) and hopefully everyone goes home happy. This is riskier than the KV MIC, but is projected to pay a higher return (double digits annualized, their target is 14%+). Disadvantage? Funds are no longer liquid, but locked-in until our investment is sold, which we have no control over. Did I mention this is riskier?

What’s the exempt market?

It basically means the private market. That’s why you’ve probably never heard of it: Banks and Credit Unions make money offering their own products: GIC’s, Term Deposits, Mutual Funds, Brokerage Accounts. They don’t offer exempt market products/securities, so that’s why you’ve probably never heard of them. But they’re very real, and so are their returns. It all sounds sketchy at first. But dig beneath the surface. Pension Funds invest in some exempt market products, such as private REITs. And I’m comfortable in Island Life Financial’s groundwork in vetting out some of the higher quality products this market has to offer, and I’ve certainly asked a lot of questions and learnt enough to be satisfied. To invest in this market you often need to go through an Exempt Market Dealer. There are definitely bad eggs in this market, so approach with caution! It took me nearly 2 years from first learning of this market until I invested in it. To each their own.

Let’s talk about MICs:

I’ve heard a friend tell my Mom that if you’re getting a guaranteed 9% return, then it must be fraud. Well MICs aren’t technically guaranteed, but damn they’re reliable. I feel they’re less risky than mutual funds. Certainly the returns are more reliable and predictable. I encourage you to do your own research into this piece of the investment puzzle, because unfortunately each person I’ve talked to about them has immediately assumed 9% = risky, without actually knowing what they’re talking about. I’ve started researching other, publicly traded MICs. There’s a few on the TSX that currently return 7% – 10% (eg. TZZ, TMC). Wow! How come everyone doesn’t invest in these? (**Update Sept 2015: Please see discussion of MIC’s in Aug 2015 Update. Now I know why (volatility, devaluation), and I no longer recommend investing in any publicly traded MIC!). I’m not sure, but a friend named Aaron Blair once said: People out there in the real world are lazy. People just aren’t researching this stuff I guess. It seems like a no brainer to me. Now that I’ve researched publicly traded MICs, I feel this is a superior place for me to put my money than in the private MIC offered through Island Life Financial: the returns are on par with KV MIC, and they’re much more liquid: I can exit whenever I want with no penalties. So I’ve (re)opened a brokerage account with TD Waterhouse, and will move funds from the People’s Trust Savings accounts into this brokerage account to buy these publicly traded dividend paying stocks. I anticipate using this as my new “placeholder”. Here is an article on MICs to start you on your own research. Disadvantages: trading fees when buying/selling the stock. Also, the stock price fluctuates, albeit modestly compared to other stocks, so depending on your timing, one might sell at a loss. If you’re in it for an extended period of time, this should be a non-factor after taking your dividends into account. MICs certainly aren’t the end-all be-all of this game, but for me they are proving to be one piece of the puzzle.

(**Update Sept 2015: Please see discussion of MIC’s in Aug 2015 Update. I no longer recommend investing in any publicly traded MIC!).

Important notes:

1) Transferring funds to/from People’s Trust is FREE! I hate fees. Also, did I mention how fucking awesome their customer service is? Each time I phone I’m speaking directly with a human within seconds who can help me. This is super rare in this day and age and I fucking love it. I can’t recommend them enough to someone who wants a simple high interest savings account. Fuck your bank’s term deposit or GIC and get with People’s Trust!

2) Reason for opening brokerage with TD Waterhouse: you can link the brokerage (stock trading) account to your bank account at TD Bank (in my case I only have a FREE savings account with them), and transfer funds back and forth for FREE. Whilst Qtrade and Interactive Brokers are generally better brokerages that I’ve used in the past, they have fees for transferring money OUT of your account (as well as ongoing “Admin” or “maintenance” fees which eat away at your profits). That is not good if you want to live off of monthly cashflow, and are projected to withdraw money every month. This should all be seamless, quick and free with TD’s linked bank-brokerage accounts. **Update Sept 2015: yes it was!

I’d also like to thank those of you who’ve commented and written to me with suggestions, strategies and products. I have to still research some of them, and didn’t have room to write about them here as this post is already quite long. Please keep the comments coming, every new idea might be another piece of the puzzle!

What do you guys think of these new changes? What are you doing to increase your monthly cashflow? Leave a comment if you have one.

Happy cashflowing!