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Personal Review, June 2009
This week I will hit on a few topics that might prove useful. Personal Review Similar to the markets, some times all it takes to feel better is for the situation to stop getting worse. There was a lot of negative shocks in 2008, these have stopped coming through as often so even if things merely stay the same... they appear to be improving. Two quotes I'll share with you:
"Life is dealing with problems" When I can hold these thoughts in my head as acceptance, rather than resistance, they help me maintain perspective. My goal being to deal with things, rather than arrive at a place where everything is "fixed". Not that there is much screwed up in my life. However, if you look for it then there's pretty much always something you can find to get yourself worked up. If we can't get to relentless positivity then striving for consistent acceptance is reasonable alternative. Two questions remain outstanding right now:
Athletically, I think that I need to remember that this current position I am in is offering me all the success I "need" from training. Marko invited me up Mt Evans today and I, wisely, declined noting... "why would I want to do something stupid when everything is working so well?" Besides, I might get a shot at heading up during one of our Boulder Camps. MonGo Review
The #1 thing that I'm working on right now is consistent kindness in my tone of speech. M asked me to improve in that area. Perhaps this means that my listening has improved. Not sure but working on consistent kindness now. Financial Review When the market was rising and finance was readily available, it was easy to ignore the costs associated with holding property assets. As part of my review, I did a detailed calculation on what our home is likely to cost us over the medium term. Capital Cost - this is the opportunity cost of having equity tied up in a home or vacation property. Different from the cost of finance (debt cost), the opportunity cost is what you miss out on by being locked into your current position. Here in Boulder, the net yield that you can receive appears to be ~3.5% for high-end residential. Folks present numbers better than that but I don't see it. The true cost of property ownership is always higher than we expect. Putting this another way - every $1,000 of capital in our house could be earning us $35 per annum. There is a TON of hassle and switching costs with property, that's why I buy with a 25-year time horizon. NOTE - I'm not talking about leveraging to buy an investment property. What I wanted to do was price the likely investment return to better understand the capital cost of living in a large, expensive, non-yielding asset. Taxes & Association Fees - here in the Rockies, association fees are material and can run up to 2.5% (per annum) of the value of the property. That puts a big headwind on long term investment return. We don't have a homeowners association but we did receive a 20% increase in our tax assessment for 2010 (thank you Boulder County). With the tax base shrinking in many cities, expect property tax (and all taxes for that matter) to continue to increase much faster than inflation. Running Costs - insurance, utilities, maintenance... everything that comes out of your pocket. It might be tempting to see these as fixed costs regardless of location but there is a lot of variation caused by location, size of property and how you live. This is a hidden cost of living in your home - we're pretty efficient. I've seen properties that cost more than $50,000 per annum just to maintain. So those are the big one's that I've focused on. Taking those incremental costs together, our current house costs the family ~$100 per day of incremental costs. In an environment where my portfolio yield is close to zero, that's a lot of after tax income, especially if you project through to Lex's graduation. Roll those costs for nine thousand days, add inflation, add various layers of increased government taxation... this becomes an area worth mitigating. So I've been thinking... To protect the family's personal position, I've been looking at residential income properties here in Boulder. Here's my logic: Aim for a multiple unit property:
The above has a lot of attractions to me. If purchased in the right neighborhood then it's my cost of living hedge. Strictly speaking, property values (in most markets) will keep pace with the real incomes of local populations. So when we buy property as an investment we are often making a long term bet on a city or region. This can work great (Silicon Valley) or less great (Detroit). I don't plan on moving now, perhaps not even in the future. What I want to do is create an option to move and, thereby, insure my position. This is a much better form of "life" insurance - an investment to protect MY position if I happen to live a long time. So, for strategic reasons, I pulled the trigger and made an offer on a local investment property. My bid was priced at a projected 5% net return. My offer wasn't accepted. In re-entering the investment market, I was reminded:
When I consider what happened over the last 25 years (1984-2009), I am certain that I'll get a shot for at least two more great deals in my pre-65-years. The source of the 5% net projection is:
With the rest of my financial life, there hasn't been much change. Endurance Corner managed to cover the family's expenses with a June distribution so the score is now:
Gordo Inc.= 2 months Incremental progress! gordo
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Over the last couple of weeks, I made my way through my half-yearly review. Not quite as detailed as my full-blown annual review but useful none-the-less.