Blessed by the Potato

I’ve written many times before about how basement suites (BS) are not magical. They are a way to live in less space, in what becomes a non-detached house, with an option to take it over and make a SFH detached again. However, if the rental market in general is crazy, the added costs of a basement suite generally is, too.

Well MoneySense recently featured a very short article touting how a BS could help a Vancouver couple become mortgage-free faster. Unfortunately given the length, they didn’t examine any of the underlying assumptions.

The assumption was that they could renovate their house for $75,000 to create a two-bedroom BS, which would then rent for the princely sum of $1800/mo. There are no additional costs with this rent — which either means they had an even higher gross rent, or neglected the added costs entirely.

So, reality check time, how might this actually play out?

Firstly, $1800 sounds really steep for a basement suite. I know Vancouver is a bit pricier than Toronto, but really. So I did some checking on Craigslist. I found one outlier basement suite at $2495/mo, one at $2150/mo, a small handful at $2000/mo, and then just 10 starting at $1800 — so that might be possible for them, but it’s at the very upper end of the basement suite market (and at that price point I can see they are competing with a number of above-ground units or exceptionally large basement units). Even at $1700 many of the suites were above-ground or fully furnished. $1650 seems to be a more reasonable rent expectation.

And that is not going to come free. In addition to the effort and loss of privacy (which we won’t slap a price tag on), they’ll have increased utilities usage¹ and likely a higher insurance premium. Let’s call that $50/mo. So they’re now bringing in $1600/mo.

But they’re going to have some other expenses to account for, like vacancy and maintenance. Let’s be generous and assume the unit turns over every four years, with just a month of vacancy and a quick paint, patch, and appliance tune-up of $3000. Now they’re down to netting an average of $1500/mo. On which they have to pay some tax — sure, they’ll have some interest and property tax to write-off, but even figuring on 4% of the $75k invested, if they’re in the 40% tax bracket their after-tax amount to help pay down the dreaded mortgage is just $9k/yr.

Bring that figure back to the mortgage calculator and their mortgage-free date goes from age 68 to… 68. Yep, taking all that risk, living first in a construction zone and then with lowly basement-dweller renter scum beneath their feet will likely leave them paying off the mortgage on the very same date as if they had done nothing. To be fair, that’s using a 5% mortgage rate as in the article. If their base case is topping up a (today’s) realistic 3% mortgage to the same $3k/mo as used in the article, then they’d be done at 67.7 in the base-case payoff, and 67.5 in the rental suite case — ahead by two months.

Not examined in the article is the other alternative: downsize. If all they need/want is the space in the upper unit, and obviously don’t mind sharing walls, then they could move to a townhouse (or rent or move out of the GVA entirely) and move their mortgage pay-off day to right now.

1. Contrary to stereotypes, basement-dwellers² do shower, which adds to the water and water heater (whether gas or electric) bill. Plus the other incremental utility usage.
2. Again, 96% of my readership, so no offense intended in tackling these persistent stereotypes head-on.

In a non-registered account you will at some point have to pay tax on any capital gains, and you have to report that amount yourself. You’ll need some method to properly* track your cost base so that when you sell you know how much of a gain (or loss) to claim on your taxes. [TL;DR — click here to download the spreadsheet]

I often get asked whether tracking ACB yourself is really necessary. Brokerages and mutual fund dealers will track your book value for you, and most of the time they’re accurate. So you could save yourself a fair bit of effort by just relying on their calculation for tax purposes, especially if all of your accounts are in one place. However, if you have holdings of the same ETF/stock/fund at different brokers (e.g., if I had an account at TD Waterhouse holding VDU and one at Questrade holding VDU) then they wouldn’t talk to each other and there would be no option other than to track it myself. They also don’t seem to catch superficial losses. The bigger issue though is that the brokers sometimes make mistakes in the book value calculations, and it is ultimately your responsibility to report correctly to the CRA.

So the only proper advice I can give is to carefully track it yourself to double-check your broker/mutual fund dealer because the onus on being correct will fall on your shoulders. But that said, I do personally know a few people who do not track it themselves and who come out fine (either because the broker/dealer gives them correct information, or because even when there are errors they don’t get audited) — in the real world it’s very tempting (and understandable) to take the free tracking offered. With mutual funds there’s one less step for information to go wrong (at least if you’re buying funds from the issuing company, like TD e-series at TD), so it’s even more likely to be correct, but you’ll never know if you’re the one unlucky customer with a bad book value calculation until you get audited. And of course, the errors they’re making could be costing you money. If you do let the company track for you, at least be sure to hold on to the statements you’ll need to re-do the calculation if it comes to it.

Tracking it is not all that hard a mathematical exercise, the tricky part comes in being careful to put everything on the right side of the ledger and to follow-through each year. There can be a lot of transactions to put in there, including annoying “phantom” distributions that change your cost base but didn’t actually show up in your brokerage statement. There are a number of tools out there to try to help you with your ACB, including a web-based calculator and spreadsheets from several sources, like this classic (if sparse) one from the old Canadian Capitalist blog.

I myself use a very barebones spreadsheet similar to CC’s, but it’s not a great model for others to use because it depends on me knowing what it is I’m doing with the ACB calculation to create each new row as needed.

So I’ve created a new template that I hope is better suited to the target audience for the Value of Simple (click here to get the sheet). This sheet assumes that you’ll have a fairly typical experience of buying/DRIPing many shares/units over time, and only occasionally selling. So rather than save space and intersperse all the transactions as they happen, it’s set up to go with your workflow. I assume that you’ll go through various modes. First you’re buying and holding, then it summarizes your ACB for a sale with all the adjustments from RoC and reinvested capital gain distributions, then you make a sale (or series of sales), and then get back into buying mode. Then each of your funds gets its own tab.

As with many ACB trackers, the superficial loss rule can throw you for a loop. It’s hard to catch everything that can trigger a superficial loss, so there is no automatic check for it so you won’t have a false sense of security — you’ll have to catch those situations yourself (though there is a sample of that case so you can see how to adjust your cost base for when it does happen).

* – I often stress the importance of tracking this yourself. That’s because it’s so tempting to not track it properly and independently and rely on the “book value” or “cost” listed on your brokerage statement. Most of the time this will be correct and you could have saved some record-keeping effort. However, sometimes it won’t be, and then you’ll be mis-reporting to the CRA. It’s analogous to tracking your TFSA contributions yourself: the CRA online tool or phone reps may be able to accurately tell you how much room you have left, but in the rare case where that’s wrong the penalties will still fall in your lap. So I’ll try my best to tell you how to track and report properly, and make it as easy as possible; if you choose not to and get audited, at least you’ll know what you did wrong!

Word on the Street is just three weeks away, and I’m excited to have a booth there this year, where I’ll be hawking the Value of Simple (the booth will be called Simple Investing).

It’s tough to estimate how many copies I’ll need on hand, so I just figured that if I sold a copy every five minutes I’d be doing pretty well, did the math, and will arrive with just under 100 copies. Running out would be a good problem to have, so I’m hoping that it turns out to be a conservative estimate — but if I’ve over-estimated, expect a sweet sale for xmas orders this year.

I’m gearing up for it in other ways too. While I’ve long been with PayPal to accept credit cards for orders through my direct site (and to invoice for credit cards for side business stuff), for this kind of event I wanted to get a mobile card reader to take payments on-site. I was briefly excited to see that PayPal had one called PayPal Here — and it even supported Windows tablets! — but then saw that they don’t like Canadians and I had to go find someone else until some indeterminate future date when the rollout came north of the border. Intuit has an option for Canadians, but only works on iOS devices. That leaves Square¹, which I had actually heard of and knew as the little start-up that kicked off the use-your-mobile-phone-to-take-credit-cards business. Though they don’t support Windows tablets or Blackberries (the devices I will have on-hand at WotS), they did support Android, and Wayfare is currently shopping for a new cell phone and will likely go Android.

I have to say I was impressed with the whole process — easy to sign up, and the hardware is tiny and light and arrived in just a week. Thanks to this thread at CrackBerry I was able to get the app working on my BlackBerry (which does run many Android apps — getting them on is usually the tricky part), and have charged myself a $1 sample transaction just to see how it worked. Other than having to sign with my finger (no pen or stylus I have seems to work on the BB’s screen), it was incredibly smooth and easy. As an aside, given that new BBs run Android apps, I’m surprised companies with apps like this don’t bother to port their apps over so us dinosaur BB users can download them without workarounds. I know we’re a small and dying breed, but it’s not nothing.

Other than that I’m trying to come up with all the material I will want at the booth to give away and help with promotions. I’ll be bringing along some hardcopies of the reading guide, which makes me wish I had designed it for standard print sizes instead of for screen display. Bookmarks tend to be a standard thing, but I’m not sure what to put on mine that would make it useful or stand out against a sea of hundreds of other bookmarks (maybe one of the comparison tables? “Don’t Panic”?).

Wayfare had a great idea to take advantage of the family-oriented nature of WotS: have stickers for the kids and RESP info cards for the parents, so I’m working on the design for that, with not much time left to send it to a printer and get it back before the big day!

Readers, anything else you think I should include? Or is this getting to be too many little bits of cardstock at the table?

1. This is an affiliate link, but that didn’t affect my review of Square. If you use this link to sign up they’ll waive my credit card processing fees, but if you do so after WotS it’s likely that will be of no benefit to me anyway.

Stamp collecting is pretty much the definition of boring. Yet stamps are useful things that enable exciting mail to happen. Most people just care that they can put a stamp on an envelope and a birthday card or letter will show up in someone else’s mailbox a few days later. So if we had some big national collective worry that not enough people were getting birthday cards, I don’t think we’d start by trying to get people excited about stamps in and of themselves — we’d just want to get people using them. And to stretch the metaphor, we may see people using high-priced couriers and worry that they’re not getting value for money. Maybe FedEx comes right to your door, but for just a bit of effort to walk down to the post office and source an envelope yourself, you could get your mailing done a lot cheaper.

Because you read the post title, you know this is turning into a stretched analogy to investing.

A few months ago a writer for the Globe contacted me for a short interview¹ around the premise of how to make investing more exciting.

I think investments and the whole process of investing are — to most people — pretty boring. And that’s a good thing: investing should be boring. No one’s going to text their friends about putting their money in a diversified, balanced portfolio with reasonable fees and deciding on a level of professional advice that they think they need and is appropriate and delivers value. It’s like watching a kettle of water boil or paint dry or grass grow, except instead of a few minutes, hours, or days to see some action you’re talking decades for your investments to do their job for you. It’s beyond the scope of our every-day sense of scale. Fortunately, with index funds and automatic purchases the boredom doesn’t have to be noticeable, either: you can do some reading and come up with a basic plan over a weekend or two, and then your plan only takes a few minutes or hours per year to maintain — the boring investing stuff can become a background process — so you can get on with your life and do all the fun, exciting stuff you want to do.

And then that’s ultimately what the point of investing is: to help you meet your goals. Watching your child graduate from university, that’s exciting — and having the resources to help pay for your child’s post-secondary education helps make that happen. Clocking out at your job for the last time and knowing you’ll have the money to enjoy a comfortable, stress-free retirement, that’s exciting — and signing up for a company RRSP match and investing some savings yourself can help make that happen. Having an emergency fund to act as a cushion so you’re not constantly stressed out about your financial situation… ok, well that one isn’t terribly exciting, either, but it’s nice and a lot better than the alternative.

Putting money away and investing it — using your RESP, RRSP, and TFSA — will help get you to those exciting goals, but that part of it is dull dull dull². And that last point about having an emergency fund for security so you know that if your furnace breaks down you can handle it speaks to the other side of the coin for not trying too hard to solve the problem of your investments being boring: they should help remove stress from the rest of your life, not add to it. There are some weeks where boring would be just fantastic.

So rather than trying to shift the way you view investments from boring and stressful to some form of exciting, I think they should be boring — complete with all the wonderful things that being boring brings.

As for getting motivated enough to take that first step towards investing, instead of gamifying investing or finding some way to make it feel exciting, instead I suggest asking yourself what are some things you’d like your investments to do for you? What are some of your dreams or goals that your investments may help you realize?

For me, I like to view my investments as a great pool of potential, all the future stuff I will want and need, just gestating and developing. Somewhere in there is the seed of the new car I’m planning to get in about 8-10 years when my current one (now 5 years old) is ready to be replaced — it’s maybe got vestigial gills and a tail, but it’s starting to take shape. There’s all the stuff I’m going to have in retirement, which are little more than blastocytes out there in this stretched metaphor, but the seeds have been sown, and I’ll just have to wait to see how they develop.

1. Given the time that’s passed, I suppose it’s safe to say that that interview is never going to see the light of day and I’m not scooping anyone by sharing some of what I said.
2. Well, for most people. Some of us, like stamp collectors and baseball fans, are totally engrossed in this activity which to outsiders is totally boring.

I’ve talked about fee-for-service planners before, and how I think it’s how the financial advice industry should evolve — it’s a model that removes many conflicts of interest from the relationship, and maximizes transparency. I’ve even said that as a heuristic for finding an advisor it’s not a bad one, especially as at this point only a few have opted to go down that road.

So it was great when MoneySense created a directory of fee-only planners. ‎I linked to it a lot, it’s included in the book as a valuable resource, and lots of other people liked having it available, too.

They’ve now scrapped the list and are starting something new where they will not just provide a list of planners and what some might see as implicit approval, but also give them ‎an explicit seal of approval. The new process involves a hefty application fee, which will help pay for the magazine to do a survey of past clients, but will mean many fee-only planners will not choose to pay for inclusion so the list will be less inclusive. $2500 is a big fee for a directory listing, so the MS version of the directory is likely to become substantially smaller, and likely skewed towards the most expensive advisors.

I think there’s a lot of value in a free and open directory of fee-only planners.

So I’m going to create my own directory of fee-for-service planners. This will be a more buyer-beware type of directory. It will have no seal of approval, and use free tools and a minimum of volunteer effort (so forgive the barebones look). The only requirement for an advisor to get listed is to fill in the intake survey and have the appropriate business model (i.e. primarily fee-for-service). Those caveats out of the way, I think it will also be hugely useful to the community and capture a lot more planners and coaches than a closed directory with a high entry fee.

The directory is a simple Google Docs spreadsheet and there is also a sidebar link for the directory that more plainly introduces it than this post — please link to that version of the post and directory.

The intake form for advisors/planners/coaches to use is here.

Caveats: the important caveat is that this is meant to be an open listing and these are not recommendations. I don’t have the resources to vet any of these listings. I’ve mentioned a few more on the permalink.

Through the rest of this week I will start contacting the advisors that I know of to start filling out the form and adding themselves, so expect the directory to be a bit barren for the first little bit.

Thanks, and I hope you all find it helpful!