More On Housing Strategies - Renting Out a Part of Your Property

In response to yesterday's post, Rositta made a suggestion about how to buy more house for your money by purchasing a home with a basement suite and living in the basement while renting out the main floor for a few years.

As regular readers will know, I do own a home with a basement suite and I have tenants living below me. The person who bought my last house has roommates living with him as does another friend of mine. Someone else I know is renting out her garage, and a condo owner rents out her parking spot. All of these strategies are ways to lower your monthly costs by only using the portion of your property that you really need. And financially they work very well.

However, I can tell you from my own experience that there is more to these arrangements than the financial. Renting out space is basically like starting a part-time business. You need to find your customers, collect the money, take care of repairs and maintenance and sometimes much more. While you may get lucky and find someone who rents from you for years without causing any trouble, this is not the norm and you should be expecting to do a decent amount of work.

Also, you are sharing your space, with all that entails. You may have more noise, less privacy, and possibly inconvenience or even damage.

And from a financial planning standpoint, it is important that any of these strategies should be considered as increasing income instead of reducing expenses. Because your expenses will still be there if the person stiffs you one month or if you can't find tenants. So you need to be sure that you can make your monthly budget even if your income from the rental portion of the property fluctuates.

In summary, if this is something that you want to do for extra income, then treat it like a part time job and do it right. But you are still the person on the hook for the entire mortgage payment each month, so be sure that you plan for vacancies and repairs when making your business plan and don't overextend yourself when buying.

Looking into new directions

So here's something new for me....

I've been thinking for a while about a career change, and of course there are financial consequences to such a decision. Obviously my earning ability is fairly strong now, and I would not be doing it for financial gain, so mostly the financial impact is negative.

Here are a few of the considerations:

• Going back to school - tuition, lesser or no earnings during this period
• Other training or conferences - travel costs, conference fees
• New career - lower earnings in first 1-3 years, less developed network of contacts

Looks pretty grim, doesn't it? However, it is not all bad.

I have built up a lot of momentum in my finances and I hope that I could work part time during the transition to keep the drawdown on my existing resources minimal. In fact, I hope that my net worth would continue to grow, albeit more slowly, while I was in school and starting up the new career.

And one advantage is that I am looking into another area of consulting which would be better suited for part-time work or semi-retirement. And because I have the flexibility of private consulting, I could manage the transition in whatever way I see fit. So this would move me towards some life goals even though it may postpone some financial goals.

And of course, the reason that I am considering it is that I am getting a bit tired of what I am doing, and I'm ready for a change. :)

So what do you think? Am I doing this too early? Too late? Are there other considerations that you think I am missing? Let me know...

The Dividend Project - Setting Income Goals

Middle Class Millionaire commented that he liked my previous post where I related my new dividend income to my property taxes. This made me realize that it's an idea that I really like too - sometimes I just come up with these things and don't fully stop to see whether they are any good or not. So here are my first dividend income goals:

1. Property taxes - $210/month
2. Utilities - $350/month
3. Phone (land and cellular and internet service) - $140/month

This comes to $700 per month or $2100 per quarter. If I was able to buy dividend payers that average a 3% yield then I could do this with an initial investment of $70,000, which by coincidence is how much I have available to invest. However, I suspect that I might fall short because not all of the quality stocks pay that high.

I bought 300 more BMO when it went down further today (at 67.58 to average my cost including commissions down to 67.85 per share) which means that I now have $272 per quarter of dividend income. I think that's enough bank exposure for me now, so I think I will stop following the market movements too closely on those (I don't want to get depressed if it drops again either!).

WIth respect to my portfolio composition, I also want that to be influenced by my own living expenses to a degree. That means that in addition to the banks I am looking at some energy/utilities, and I would like to add a large consumer stock next. JNJ, WMT and HD are the three that I am watching. I will pull together some numbers on them soon and post about it.

...and now, back to our regularly scheduled program

Hello, I'm back! :)

It feels like I've been consumed by the tour for the past week, so I'm more than ready to return to posting in my own little corner and let the spotlight fade. Taking on a big task is an interesting case study for what happens when scarce resources are reallocated. In this case, my time and attention could only go in so many directions so I had to both find more time and allow certain things to pass by.

Money is the ultimate scarce resource. I suppose that if you are a government you can print it, and if you have a money tree in your backyard you can grow it, but most of us have only a finite amount of it at any given time, and additionally we know that we can only get more of it at a certain fixed or maximum speed.

Okay, not always a fixed speed. For instance I got a bit of a bonus yesterday... I sold my car. This is great because it means that I can cancel the insurance on it and I'm not going to be paying for two cars when I can only drive one. Also, I now have a chunk of money in the bank which will cover some house expenses that I have this month and probably my summer vacation as well.

In other news... The Dividend Project has reached a new stage!

I went out on a limb and bought some BMO today at $68.08. This equates to a 3.99% yield and I figure that's a good place to start. It was a bit scary to hit the buy button, because I haven't done it in so long. But I only bought 100 shares so that if the price drops further I can look at it as a buying opportunity instead of being all upset. This means that I am now entitled to a dividend of $272 per year or $22.67 per month (although it actually is neither of these since it is paid quarterly).

A reality check here-- the cost of the trading commission through a discount brokerage increased my actual share price to $68.34. It would have cost the same to buy 200 shares, so when possible I will have to make larger purchases. Fortunately I am not planning to sell if things go according to plan. :)

With an eye to early retirement, I am going to relate these dividends to real expenses. So first goal is to have enough dividend income to pay my property taxes and this first amount is about 10% of my property taxes. The nice thing about the stocks that we have been looking at is that they historically raise their dividends annually, so I can relate the amounts to current expenses and know that in most cases they should remain inflation-protected.

Measuring Net Worth – advantages and limitations

WELCOME! This article is my submission to the Canadian Tour of Personal Finance Blogs.

When I discovered the world of personal finance blogging, I was absolutely delighted to find a place where people could talk about actual numbers freely. I still find it very exciting that so many PF bloggers post their net worth, budget, debt and other numbers so that we can all gain a greater understanding of money than can be found in the single case of just your own situation.

I have tracked my net worth with various levels of accuracy for many years now, but this year I am starting to realize that this number is not to single key to success that I once thought it was. Ironically it is my success with increasing my net worth that has led to this realization.

My retirement planning has always consisted of spreadsheets that model income and expenses based on fixed assumptions. During the accumulation phase, my net worth would rise and during the retirement phase it would decline. But this past year, as my net worth passed half a million, I suddenly realized that while I have learned many things about accumulating, I have no clue about how to make the declining phase work.

Regular readers of this blog will recognize a theme that I have been moving toward for a while now. To retire, you need income. Net worth doesn’t pay the bills every month.

So although the time I spent focusing on net worth has been productive, I know that the time is now right to change this focus. I need to start developing a strategy for income and adding new measurements that will allow me to track it. I also have to determine what my goals are for this new stage.

To those who are on a different point in their financial journey, I would suggest that if you are early in your accumulation phase then net worth may indeed be the best number to focus on. But once you have some basics in place it may be better to address the income question sooner rather than later. I am beginning to suspect that I may have unnecessarily delayed my financial freedom date by coming to this issue so late.

If you have come here as part of the Canadian Tour of Personal Finance Blogs, thanks for visiting. I wish you every success in your own journey!

The Dividend Project - resources

Thanks to everyone who posted comments on yesterday's post. I am sensing that this is a topic that many people are interested in. I have started to spend some time crawling the web in search of information that will help us in this project and I have found a few to start with:

• I already mentioned the Dividend Guy blog. There are a few articles that he has gathed partway down the left side of the page under the heading "TDGs Guide to Better Portfolio Returns". These cover areas such as Why Dividends Matter and Selecting Good Dividend Growth Investments.
  On the right side he also has a section called Tools. These may be useful to us once we get a bit further along...
• At DividendGrowth.ca there is a link that says "just starting... some basic ideas" and leads to about 8 printed pages of information. I will be reading this over the weekend and coming back with a summary or any nuggets I manage to extract from it.
• At http://www.dividendgrowth.org/ there is a lot of content as well. I haven't managed to go through all of it, but it looks like a very useful site.

I have started a section of links on my blog for this project and these three will be available there. I am also adding a link to Frugal Trader's list that I used as a starting point for this project.

In addition, you may want to check out a recent post by Canadian Money who is also interested in this topic. And Frugal Trader also pointed me toward an Excel add-in that looks very useful. I will be trying it out next week and I will post a review.

I'm off early for the weekend tomorrow, so no more posts until Monday. Have a great weekend!

The Dividend Project - learn with me!

I have recently got my hands on a copy of Derek Foster's book and I wanted to take this opportunity to explore how to invest for dividend income again. But I have to admit that my 21st century attention span kicked in and I haven't been able to read the book straight through yet.

Part of the difficulty in reading the book is that I am looking for an explanation that might not be in there, so I'm skimming a lot. For some reason understanding dividend investing is still a mental block for me. I can understand that stocks that pay consistent, rising dividends have good underlying fundamentals. But I can't get past the puny 3.16% yield that RY (Royal Bank) has at market close today to see how that could ever get me retired early.

So I have a plan now for myself and anyone out there who is in the same boat. The simple version of The Dividend Project is:

1. Learn


2. Invest


3. Make lots of money :)

Hooray! However, it is very important to note that I am not rushing into this dividend thing. I think I want to be there, but I'm not quite sure when. So we are going to start the learning phase. Here is what I did today...

I took a list from Million Dollar Journey that I bookmarked last month, and I put those stocks into a spreadsheet. I then went into my RBC Direct Investing account and put them all on watchlists so that I can follow them. Finally, I entered the current price and dividend yield for each stock into the spreadsheet. Here is the result:

Now, we are going to watch. I will update this list every week or two to see where the numbers are going. Each time I check in on the list, I will try to expand on some concepts so that I (and hopefully others) can gain some understanding. I am going to visit other blogs, including The Dividend Guy Blog to see if I can pick up some pearls of wisdom there and I will keep trying to read this book. Let The Dividend Project commence!

Cash Flow is Number One

Even as I work on my net worth, I am aware that I am still missing the boat...

Having a nice little pot of money sitting somewhere is nice.

Watching it grow is nice too.

But knowing that I have money in my bank account to pay for my groceries
tomorrow is nicer.

And knowing that I will have money each week for as long as I live to buy groceries is the nicest yet!

The real reason we all need money is to pay for our lives every day, week and month. There is no single point where you get to make a lump sum payment and live for free for the rest of your life. Although it would be much easier if there were. Can you imagine if "the rest of your life" had a price tag?

Pay $1 million now and never think about money again!!

WHERE DO I SIGN UP???

Okay, all joking aside, we know that life isn't like that. So the real goal is to figure out how to turn a little pot of money into a series of regular payments that can be relied on, just like a paycheque or a pension.

And no matter how much I think about this, it's like a code I can't crack. Here are the ways that I know of to get regular income without working:

• rental property, with a mangement company to take care of it
• renting out your money through loans and bonds
• dividend paying stocks (very low yield)
• purchase an annuity (not practical for young people)
• income trusts (scary phrase in Canada these days)
• royalties - if only I had written a great book!
• own a company that you don't have to run and collect the profits

The short story is that this is not an easy task and it requires much preparation to make this work. For me, I feel like this is the "next level" in my personal finances that I need to break through. I think I understand how to grow my net worth, and that seems to be on track so now it is time to start puzzling over this next riddle...

More asset options: Dividend stocks

I have tended to shy clear of individual stocks over the past few years because I seem to have a real talent for losing money that way, but recently I have been thinking about this option again. One version that I like is buying stocks that pay dividends, and will contribute not only to capital growth but also income. So I am currently watching 3 dividend stocks to see if they go "on sale" in the next few months. I will post if I make any moves.

The downside to dividends is that the yield is quite low, so it feels like very little return on investment. In fact, unless the underlying stock also appreciates then it would not be worth it at all. But if I would have been buying stocks anyway, then the modest amount from a dividend stock is still more than from a non-dividend stock.

Another wild card is whether it is worth it to own dividend stocks in my corporate investment account. I will have to add that to the list of questions for my accountant.

Today's billable hours: 4.5
Today's contracted hours: 1.5

Crossover Point

Your Money or Your Life is a great book for those seeking to drop out of the rat race and one of the concepts that I really like in the book is the "crossover point". This is the point at which your investments bring in enough each month to cover your expenses. (A major focus in the book is to reduce your expenses as much as possible to make this point easier to reach.)

I have estimated my monthly needs (with some not very extreme cost-cutting) to be about $2,000 plus mortgage, in after tax income. Since I am hoping that my rental suite will be covering my mortgage I am going to exclude that from the calculations.

I currently have about $275,000 in investments, mostly equity mutual funds. I also have $35,000 in a savings account that ought to be invested, so I will count $25,000 from there for the nice round total of $300,000. At a 4% withdrawal rate, which is universally considered "safe", this amount would provide my with $1,000 per month. I have seen the original author of the 4% calculations quoted as saying that 4.5% or even 5% may be quite reasonable for some cases. In the 5% case, I would have $1,250 per month. I also have about $150 per month in income from my higher risk mortgage portfolio.

By my reckoning that leaves me only $600 per month short of a crossover point. At the 5% withdrawal rate that is $144,000 in investments. With an 8% return I will make half of that in investment gain in 3 years, and the remainder is quite a modest savings target if I continue to work. The outside date for hitting my crossover point is therefore about 3 years. Of course, I think that I could hit it much sooner, but I also know that I have been a bit aggressive in the assumptions on this calculation so I probably need a bit more money as well. The net effect is that I think 3 years to Financial Independence is quite reasonable.

Today's billable hours: 3.5
Today's contracted hours: 1.5

Income vs. Net Worth

I have decided in the past year that this is the area of personal finance that I understand the least. In the past I have always focused on building my net worth, even when I didn't call it by that name. I would work on saving, investing and paying down debt, which are basically the three pillars of building your net worth.

But at some point this past year I started thinking about retiring early and thinking about it in more practical terms. Like, do I really sell off my investments every month bit by bit to pay the bills? That seems like a recipe for high commissions, poor timing and hassle. And if not, how exactly am I going to get money each month for practical items like toilet paper and milk? I know that my spreadsheet projections show that I will be withdrawing a certain amount each year, but I don't know what the mechanics of that should actually be.

So I now have a couple of ideas that are a start. First, as I mentioned, I bought a house with a rental suite in the basement. While I have a mortgage it will help to pay that cost, and afterward it will be a source of monthly income for me. The second is that I was introduced to a company that does higher risk mortgages by bringing a group of investors to raise the money. For the investors, they are paid monthly interest income and the principal returned at the end of the term. Because the risk is higher I can't use this as a main source of income, but I think that it would be quite reasonable to invest 5-10% of my portfolio in products like this. Currently I receive approximately $150 per month on the amount that I have invested.

I now need to look for other ways to generate income for my future retirement. One option that I want to look into is dividend paying stocks. But I know that they tend to pay quite low rates so I'm not sure how viable that is, unless I consider it as a more mixed growth and income component. Another thing I want to look into is bonds. I've never really understood bonds though, so I'm quite reluctant to wade in too rashly.