“Getting a Ferrari is unrealistic though.”
“Some peoples’ families are just rich.”
“They’ve just had connections.”
“They were just [academically] smart.”
So common are quotes like the above that the average person simply throws in the towel without attempting to create a concrete strategy first to achieve a desired goal.
In places like BC, where economic opportunities are scarce, the joke on the street is the dream is to get a BA, smoke weed in Mom’s basement, and work at Starbucks. If you have money, likely your family is wealthy. Living expenses- especially housing in Greater Vancouver area- increase rapidly and home ownership is increasingly seen as only a luxury and renting a lifelong reality for most.
In academia, most people just assume you’re smart if you’re a performer. For those like myself without a wealthy family’s nurturing, performance has only been achieved through hard work and repetitive practice- like one who strengthens muscles though consistent dieting and weightlifting.
When I was 19 I was already done 3 years of university- but I knew I was no match for the elite academics that came from wealthy families’ years of academic and social training. I only performed because I worked and studied harder and more consistently than the competition. It was just unfortunate that when I spent >=4 hours everyday outside class studying for one course just to achieve a grade of 80%, I knew that was the beginning of the end for my academic career- or getting into the likes of law school or investment banking where only the top percentiles were even looked at. In my first year, I studied 60+ hours outside classes every week to obtain a 88% average. One of my peers- a stereotypical Chinese from a wealthy family- admitably put in less than half as much, only to perform just 5% under. Nevertheless, through all that rigorous studying and recital, I performed above many of my peers at the time.
I was never smart- I just worked hard, as a good high school friend would describe me. In terms of academic performance per unit of effort, I was no match for the competition. And to this day, even with any hopes of becoming the likes of a lawyer or investment banker crushed, my experience paid its worth in another area- in the Alberta oilfield and road construction industries. That attitude has earned me 3 new vehicles over time and 2 new homes, and has kept me working- with too many job or business offers to take. It was my relentless attitude to never fail that kept me going.
Growing up in BC- especially surrounded by many whose families had money and connections while mine did not- the situation seemed hopeless when I frantically applied for jobs and studied hard- only to no avail, as those around me seemed to always do well. My own family and closer non-wealthy social circle were defeatist. They believed that because we didn’t come from wealthy backgrounds, we should just been happy to find a job and go to school. There was no ambition:
“Their families just had money and knew people. Ours didn’t. We should just be happy to go to school and get a job.”
Most people just settled for an approx. $30,000/year career after 4-5 years of post-secondary and the associated student loans of often an even greater amount. Some never even found work and continued living in their parents’ basement. Some just gave up looking for work in their field and got a low-paying sales or serving job somewhere. They just pointed a finger at the economy and accepted defeat.
Many people were in their mid 20s or even nearing their 30s and still did not even own a vehicle. Their excuse? It’s unrealistic. Yet, this logic is easily countered with a simple strategy: saving and getting a extra part-time job:
Work 3 extra 4-hour shifts a week flipping burgers for approx. $10/hr to obtain $120/week extra income.
Save that money for half a year (26 weeks) to obtain $3,120. Use that on a cheap used reliable car like a Honda Civic.
As described in my past blog entries, one day I simply got fed up at the lack of opportunities and mounting debt, threw everything in my car, and drove off to Alberta looking for a new future. I simply refused to admit defeat. If there was no future in BC for me, then so be it- I’ll find my dreams elsewhere. I was prepared to perish trying to fight for something I cared about. I once said:
“No matter what happens to me, you will never see me riding the bus in the rain again.”
My next benchmark in my career and personal development is in theory straightforward: Ferrari by 30. I brought up the idea to one colleague to maybe consider a BMW X5M sometime before that, and she had a stereotypical defeatist response:
Most people would simply throw in the towel without actually sitting down and attempting to draw a concrete, calculated plan to achieve something.
According to my calculations, as visited in my previous blog entry (though the property in question I have purchased by now at $296,000), this is realistic if I make a plan and stick to it- eclipsing the college’s wishful thinking comment many times over:
Now to reach a Ferrari by 30.
My current home will still be my primary residence until then (purchased at $328,000), so no capital gains to be paid as long as I live here. The details of the unit I am writing offers on:
$306,075 asking price
662 sq ft.; $462/sq ft. Top floor.
Completion scheduled for December 2017, though for this analysis, March 2018 is assumed, as usually construction is a bit behind schedule, and for simplicity (2 years wait time).
The new condo becomes the home, while the current becomes a rental property fetching $1,900/month. No tax will be paid because of loss write-offs: -$11231 interest, -$7,440 condo fees and utilities, -$2465 property tax; -$21,136 yearly total loss. Yearly rental income is $22,800, but the $1,664 difference is assumed to be spent on maintenance for simplicity.
Recently built very similar condo building in local area: $503/sq. ft average
Unit valued at $332,669 at this per sq ft. pricing; $26,594 saving by ordering pre-construction.
Initial investment required: $19,742 (a loss in below calculations). This is <20%, so mortgage insurance is required, and I must (initially anyways) move into the new home as my primary residence at closing to qualify.
Investment time frame: Next 5 years w/ 2.35% 5 year mortgage term. 2 Years to build condo, 3 Years to contribute to principal. Assume 0 appreciation, 0 maintenance.
Current home requires $1,750/month to upkeep. This is not considered an investment and just a sunk cost as home is a place to live, not an investment, but the perceived value of home doesn’t change in this calculation. New condo requires $1,900, so the budget shortfall is $150/month. Negative cashflow on current home is considered a loss that is suddenly opened up as a result of this maneuver.
Pre-construction savings $26,594 + $31,348 principal contribution (net mortgage insurance) + $27514 principal contribution on current home – $5,400 budget shortfall – $21,600 negative cashflow on current home – $19,742 initial investment
= +$38,714 profit over next 5 years; 39.2% yearly ROI
Appreciation is difficult to predict, but historically in high demand properties appreciated around 5% YoY. If we assign a 50% probability of this occurrence, where “appreciation” begins on both homes right after the investment money is spent:
+44,179 current condo
+40,221 new condo
+38,714 profit from above
= $123,114; 24,623/year; 125% ROI
If we just assume a robust economy during the next 5 years and hence just straight 5% YoY,
+95,151 current condo
+84,563 new condo
+38,714 profit from above
= $218,428; 43,686/year; 221% ROI
With these returns, getting the pre-construction makes sense. Now to remain consistent with the original objective of 1 property per year until 3, a third property is required sometime in Spring 2018. Shooting for a 10% return, compounded quarterly, and investing $1,500/month that I save (above $1473 is mentioned, but the extra $27 is not difficult to save), I should arrive at roughly $19,000. For simplicity sake we will select a cash flow neutral property, but YoY will be 4% instead, as cash flow neutral or positive properties typically are less appreciative due to less demand (lower value results in lower tax and mortgage payments). This allows for a $292,308 property that gains:
$48,904 towards the principal (net mortgage insurance)
$30,345 appreciation; $79,249 profit total (83.4% ROI), w/ 50% probability of 5% YoY,
or $49,651; $98,555 profit (103.7% ROI) w/ 4% YoY.
in the 4 years thereafter.
For simplicity, we will assume my saving rate is consistent at $1500/month. Above I mentioned $1473, but the 27$ is easy to save. After property #3, if I only buy stocks every 3 months with monthly saving, aiming for a 10% return compounded quarterly, I would grow into +$88,661 in those next 4 years. Stocks usually have much lower returns due to much less leverage available, though they are much more liquid. Liquidity can be useful in case a tenant does not pay for a period of time or there is a sudden large expense in one of the properties or in my personal life. In those 4 years having an average of $22,165/year cushion will help hedge some of that risk.
Altogether, we arrive at a net worth gain of +$291,024 – 405,644, before taxes, and a total portfolio size of <=$1,274,152. Though implications with this figure, even at the optimistic end, are:
- Even at the higher end, after accounting for inflation, this is $367,404 in today’s dollars.
- The assumption of a steady economic recovery in Alberta so that YoY in our calculations are consistent.
- Income only increases with inflation, though if the economic recovery continues steadily, wages will recover to pre-recession rates and gradually rise, dramatically speeding this entire process.
- A very risky portfolio overexposed to real estate: $1,185,491 real estate (93%), $88,661 equities (7%), where perhaps even more exposure to real estate is required to significantly improve returns. Even investing on margin would not alter this composition ratio significantly, though it would aid in the relatively much lower ROI of the stocks portion.
- Faster progress is dependent on increasing my earning power and an economic recovery in Alberta to allow that opportunity, especially the opportunity to complete my apprenticeship to finally break the trucking and operator income ceiling of around $100,000 – 130,000. Fort McMurray or oil town incomes are higher, but as well as living costs, and living quality declines.
Five years later, this puts me at age 28. Overall I can conclude that the oilfield work, 3 property, and gradual stock addition strategy will achieve my objective. I am so far, on schedule.
I’ve always been a skeptic, but I’ve always refused to be defeated. If I’ve failed, then I will come back more powerful from the experience- to grow stronger from every battle. As a old colleague once said to me when I first started post-secondary:
“Aim to win not just a battle, but the war.”