When we told select family and friends that we were going to purchase this website, we got some stunned looks and some other words of support. The interesting part about that varied reaction is the fact that we intentionally haven’t told many people. For example, we agreed to tell our parents about the business venture after we had earned enough from our web properties and freelance work to pay the loan back in full. The reason for this is that we have grown accustomed to having our eardrums intact and would rather not have them burst by hearing, “Are you insane” shouted at glass-shattering decibels. You see, many people (including banks) just don’t understand the idea of buying a blog. The business model is not well-known, and there is only very tentative precedent currently available. Seeing as how a web property is something you can’t touch, it makes it very difficult to quantify to most people, and even harder to support taking out a loan in order to buy such an entity. Interestingly enough, I am almost certain that if either my partner or I had took out a fairly large loan to buy a new vehicle that was above what we needed, we might have gotten a slight smirk at our perceived slight overspending, but overall the reaction would have been to enjoy yourself and your new toy (we probably “earned it” according to every advertiser out there).

You’re Buying A What?!

Why is this? It is socially acceptable to purchase luxury goods and enter into contracts paying relatively high interest rates for them, but yet buying an income-producing asset is met with such disbelief? If we had purchased a rental property, there would have been some words of caution no doubt, but probably far less of a reaction than purchasing a website. Again, this is interesting to me. From what I can tell, the average perception of risk is quite different than the one I have. So either I am completely wrong and will end up biting off way more than I can chew or, many of us are little mixed up in regards to how money and risk are used.

I Deserve It, Just Ask Visa

Purchasing luxury goods is not an intelligent risk, yet is generally accepted in society. Going into debt to pay for these luxury goods is also fairly common. For transactions that appear to be straight capital-for-pleasure trades, the marketing industry appears to have convinced us that we can never have too much, and that we deserve everything we can get our hands on. This of course leads to that weird lifestyle inflation phenomenon we all know and love. I must be wired differently, because I get way more of a jolt out of buying an asset than I do from buying something to wear, or drive, etc. This is not to say I’m overly cheap (although I may be). I like to pay for experiences, trips, going out with friends etc., but going into debt for luxury goods is not my thing.

My Best Investment Is My Home *gulp*

Many people who believe they know their way through day-to-day personal finance would strongly agree that going into large amounts of debt for a home mortgage (500% leverage anyone?) or for a rental property is a good investment. You can touch a home, feel a home, and the business model is very common. This is obviously intelligent risk right? I mean home rates always go up, renting property is totally passive since home maintenance is almost non-existent, what could go wrong? Paying the carrying costs on mortgages is an intelligent risk, while the carrying costs on a relatively small investment loan is insane if it’s used to buy a blog right? See where I am going here?

The Difference Between Good Risk and Bad Risk

Many of the things we believe are good risks such buying a “luxury toy” like a boat, or a new vehicle aren’t risks at all, they are merely buying something that has no way to generate cash (and will just leak value forever). Other things we believe that are considered intelligent risks include certain types of investment loans to buy real estate, or to purchase a piece of equipment for your business to make use of. To me, the bottom line on intelligent vs non-intelligent risk of your money/capital is: do you understand how your risk will pay off and do you understand the size of your risk?

If you understand the industry, you have a solid grasp on how profits are made and what “best practice” is within the field, then you can be confident that you continue to operate the asset your buying in an efficient fashion. If you believe that your risk-reward ratio carries a return on investment that is greater than 15%, then you are also in good company (the stock market by comparison has historically returned around 10%, and lately, much less than that). Finally, if you understand just how much money you are borrowing, relative to the expected income of your purchase, then you are well on your way to determining the difference between intelligent and non-intelligent risk in my opinion. If we step back a look objectively at mortgages, they are often just a socially acceptable way of leveraging your money in a massive way. There are plenty of lenders out there willing to hand out mortgages with 5% down if you have a decent credit history. That is 20-1 leverage, or 2000%!! If the housing market dips at all, you can lose massive amounts of net worth in a very short time. Yet five years ago a mortgage would have been considered a very smart risk if any risk at all.

Common Sense Makes You Average By Definition

Try not to let “common sense” money practices cloud your impression of what good and bad risk is. I find common sense a great guide in most aspects of life, but in terms of money and capital management, it has led many astray. People rarely go wrong investing in things that produce income, and are also assets that they understand. On the other hand, plenty of people go wrong when debt is used to fund luxurious tastes and overextending ourselves through social acceptable means.

 

 

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Here’s a great post by staff writer on youngandthrifty.ca, Teacher Man from My University Money. 

If you turn on the news these days, people are all hot and bothered about inflation.  There is some reason to be afraid of that big bad wolf – it kills the value of your savings after all, and when costs inflate faster than earnings (as has been the case over the last 30 or so years) your standard of living drops as well.  For the most part though, a little inflation is not a bad thing.  Our government actually plans to have a little bit of inflation (somewhere between 1.5-2% is usually considered ideal).  To have the proper amount of liquidity in your economy, and to encourage borrowing for growth, there has to be a small amount of inflation.  As long as it is controlled, and earnings inflate with costs, then there is honestly no real issue (despite what people who obsess over the prices on gas pumps might tell you).  Even with the Federal Reserve and the Bank of Canada pumping money into the economy at unprecedented rates, we are not seeing inflationary levels as high as one might expect.  That being said, many people smarter than me believe that they will catch up with us eventually.  So why is the government so adamant that we need more money shoved down our throats? Related: Lifestyle Inflation

Thy Name Is Deflation

The short version is because the powers that be are far more worried about the devil they don’t know.  This devil is called deflation, while its big brother inflation can be rude once in a while, deflation is a real jerk.  On the surface, deflation looks ok to the average person.  I mean, who doesn’t like when prospective houses get cheaper to buy, and the cost of things at the supermarket goes down a little right?  The problem is, that the deflation cycle can quickly spiral out of control.  For example, would you buy a house if you heard prices were falling (and were likely to keep falling)?  No, you probably wouldn’t.  That means no new houses get built, which means that there are fewer people with jobs to buy houses, which means there is less demand for houses, which means that the price continues to fall.  See how quickly that whole thing worked?  This scenario can be extremely destructive to the overall economy, and as long as people believe things are bad and prices are bound to go lower, it becomes a self-fulfilling prophecy.  If you want to know how bad things really are, consider that the US Government (under their big bank subsidiaries – er, arm’s length corporations?) is actually bulldozing hundreds of foreclosed homes right now, to restore the supply and demand equilibrium.  Yes, you heard that right, homes are being bulldozed purely so that new ones can be built in the same place.

Why Shouldn’t I Go Into Debt Again?

While inflation is tough on savers (especially those who refuse to have any exposure to asset classes other than GICs or government bonds), it can actually help governments who are in debt.  The less every dollar is worth, the less they owe bondholders in real terms.  When much of your debt is held by the country that is your international rival (hidden Dragon, crouching Eagle?) there is actually some positive incentive to have relatively high inflation rates.  Inflation rates were through the roof at times in the ‘70s and ‘80s yet things turned out pretty alright then didn’t they?  How about during periods of deflation like the Great Depression?  I guess the name of the era kind of gave it away on that one.

Around and Around We Go

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We just got our personal home insurance renewed and it’s such a b*tch to pay.  We pay it off in the full amount just because we don’t want to incur any further interest charges.  Since Vancouver is due for the “big one” anytime (so they say) we decided to fork up an extra $400 per year for earthquake coverage.

It would suck big time if after an earthquake, our 1960′s (?) home disintegrates into a pile of rubble (and I don’t doubt that it will haha) and we didn’t pay the extra $400 a year it cost to insure our home for that.

For the remainder of our annual insurance fee, we are paying for property coverage on the building, private structures, personal property (personal property amounts to the same cost of the dwelling- I guess that says a lot!), and additional living expenses.  To be honest, I don’t see how personal property costs that much, especially when the only “valuable” things we own that could be taken are the Macbook Pro, some garbage-y PC laptops (yeah their resale value isn’t so hot I don’t think), and the large sized (I am ashamed to give expletives on how large it actually is) television in the living room.  I always have a fear of my Macbook Pro being taken because I have hours and hours of work on there.  I guess I should learn to or get in the habit to back up my homework!

Because our basement suite is a basement suite with a stove and whatnot, that means there is increased chance for fire.  Therefore our insurance also goes up because of this.  However, it was great because when we got assessed for insurance, it was before we gutted the place and did upgrades, so the building dwelling and structures weren’t so expensive to insure. (more…)

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Here is part II on how to rent out your basement suite. Enjoy! I suggest you read Part I first if you haven’t yet.  PS the picture is my actual rent receipt booklet!  $1.25 at the dollar store

5. Advertise… on Speed!

Post ads in Craigslist, Kijiji, Facebook Marketplace, University student websites, Foreign exchange student websites, talk to people and ask if acquaintances or friends are interested in renting a basement suite.  Go to the post-secondary areas and post up some old fashioned paper ads on telephone poles.

Pick a good time to advertise.  There are good months to rent a suite out and there are bad months (from what I’ve found in my short time of having a basement suite).  Some of the popular months are December/ January and September (or before September- students are scrambling to find housing before school starts).

Keep renewing your ads.  I renewed my Craigslist ads whenever it allowed me (it locks you out for about 72 hours after then you are allowed to “bump” your ad to the top).  Otherwise, your ad falls to the very bottom and people don’t bother looking at it because they may think there has already been someone who fulfilled that ad.

6.  Show the Place (Many, Many Times)

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Some people have been writing to me asking about an update on the status of my basement suite.  I didn’t want to write about it prematurely because I hadn’t rented it out at the time.  Now that I have some tenants on a one year lease, I feel more comfortable sharing my experience, so that my words don’t bite me in the a** like last time. (In case you didn’t know, I was VERY excited to get student tenants who were 110% interested- or at least seemed to be- and they flaked out last minute and didn’t respond to my calls)

Many people in Vancouver have basement suites and mortgage helpers to help pay down their mortgages faster.  Getting a mortgage helper can be a pain in the butt, and some people would rather not bother with the extra headache.

Here are a few steps to start you off on the mortgage helper path:

1.  Think about your goals (er.. wants) before you list the ad:

• Do you want a one year lease or do you want to rent month to month?
• If you are renting month to month, are you comfortable with a possibly lengthy period of no mortgage helper?
• Who do you want to ideally rent it to (obviously you can’t be discriminatory) but if you prefer students you can state that in your ad (the downside to students is that a- they are likely poor, b- they may have crazy parties, and c-they may leave during the summer, leaving you with an empty basement)
• How much do you want to list the suite for?  Looking at other ads in the neighbourhood may help you decide where to start.  If you price it too high, people will expect more and you may get more complaints and demanding tenants who want to get their money’s worth.
• MOST IMPORTANTLY, make sure you have a significant cash cushion (aka emergency fund) in case you need to repair something (you never know when the stove is going to break or you need a new toilet).

2. Is your basement suite up to snuff?

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