Adjusted Cost Base for Anything

Good things come to those who wait. Unfortunately that’s not always the case for investors. I missed out on a good piece of farmland recently because I didn’t act quickly enough 🙁 Saw this posting last week. It’s on the realtor.ca website so anyone could browse all the various agricultural listings on there. This particular land is uber cool though. It’s much better than the one I bought last year. Twice as large, 320 acres instead of 160, and more importantly 95% of its acres is cultivated so almost the entire parcel can be farmed 😀 The seller is willing to rent back the farm at $45/acre. Which translates into $13,680 of passive income a year 😀 Or a 4% return on equity pre-tax, not bad. By comparison my current tenant is only paying me $37.50/acre. That’s barley enough income to cover my interest payments, haha.

Often these kinds of farms get snatched up by buyers with deep pockets very quickly. This one was no different. The listing went public on Friday. I was really digging this land 😀 So I made some preparations and contacted the selling agent the next day. But guess what? Somebody already bought it with no conditions. No freaking conditions! That means they probably paid in cash. Yikes, that’s a lot of capital (O_o)  But then I thought maybe it’s a good thing I didn’t buy it. In terms of value it’s about the same $ per acre as the farm I bought last year so it wouldn’t have lowered my ACB anyway, which means it’s not cheaper than the land I have already by area. Keeping track of Adjusted Cost Base will give us a good idea of when to buy low and when to sell high. It’s commonly used for stocks but in accounting it can be used for anything 🙂

When I bought my condo in 2009 I didn’t know whether its price would go up or down. But I can use my ACB to take advantage of either outcome. So far my place is worth more than when I bought it. Will we ever see home prices fall to below 2009 levels? Maybe. But if that happens I’ll just buy another property and lower my ACB. This way, I still won’t miss out on a good buying opportunity. However, in the event that real estate prices never fall back to 2009 levels again then it’s a good thing I bought when I did. Awesome sauce! It’s a win win situation 😀

Many people will say it’s dangerous to buy high. That’s true. But how should we define “high” exactly? Vancouver real estate prices were considered “high” if we asked someone back in 2006 because homes literally appreciated by double digits every year for the previous 5 consecutive years!  Understandable why some people called the market a bubble. But when we look back today in 2013, then 2006 prices doesn’t seem so expensive anymore. That’s because prices are relative 🙂 The housing market has certainly cooled recently, but we are still far above 2006 prices.  Timing any kind of market can be fun and exciting, but not always easy to do successfully. By thinking about ACB we take the timing factor out of the equation. So here’s what we can do. Start to accumulate a position first. Then buy more if the asset class becomes cheaper. But if prices only climb then just sit back and enjoy the ride 😀  This strategy can be applied to farmland, gold, other commodities, and pretty much any hard asset (^_^) It doesn’t matter if something is overpriced today. What matters is will it be overpriced in the future. And since nobody can know for sure the only thing to do is to begin accumulating a position now and create our own relative cost point.

As prudent investors we must remember that although there is always risk when investing, there is also risk when waiting on the sidelines for the markets to drop, such as the risk of losing money to inflation year after year and the risk of prices never coming back down and missing out on a great investment opportunity. But a sure way to decrease our financial risk is to educate ourselves and invest with purpose and confidence!

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Random Useless Fact: This is what researchers spend their time coming up with at M.I.T