Return On Equity – On Becoming a Rentier

Recently I took the time to read Thomas Piketty’s Capital in the Twenty-First Century cover to cover.1  One of the key concepts that it covers is the historical rising and falling of the “rentier” – namely a person who derives some or all of their income from rents on property that they own.  This topic is closely related to what would in modern economic parlance be referred to as “return on equity” (ROE) – in other words, the net income divided by the net investment (which can also be characterized as “assets minus liabilities”.)

One of Piketty’s theses is that ROE must “mean-revert.”  In less obscure terms, he suggests that there is some overall rate of return which is sustainable, and if the rate is higher than this or lower than this, it will eventually have to come back to this average rate.  High rates of return are only possible when there are significant structural changes to society (think “industrial revolution”) where those who start out with great resources will be the greatest beneficiaries, and will do much better than this sustainable rate.  In contrast, when the rates are too high, revolutions occur and those with the most to lose are, in fact, the ones who lose the most, while those with the least to lose are the beneficiaries.  Between these extremes, there is some stable mid-point which doesn’t greatly enrich the few or impoverish the many, and this is where society will eventually return.

Which is all really a long way of introducing the topic of whether building this house is a good idea, in both financial and ethical terms.  Let’s consider some of the relevant factors.

Income: I expect to be able to rent for something around $1300/month.  Single-room rentals near the two colleges are typically going for a lot more than $650, but they have convenience on their side; furnished two-bedroom homes can rent for as much as $1800/mo, but I’m not planning on offering this furnished.  On the other hand, the green features might command a premium with the right renters.  I could also consider trade-offs like charging a higher rent but throwing in utilities (on the assumption that utility bills will be very low) or offering some minimal furnishings (Craiglist, anyone?) but this seemed like a good starting point.

Expenses: I will minimally need to pay the current monthly maintenance fees (about $125) and property taxes (about $225).  Because the house is only legally a 2-bedroom home with a small footprint, the taxes should be considerably lower than for some of the other homes in this community.  There will be added maintenance expenses over time, but hopefully nothing major for the first few years, so I’ll allocate $50/mo for that, plus another $50/mo for homeowners insurance.

Assets: Assuming I’m on budget(ish), the home including the land and various extras such as solar panels, batteries, and water storage/treatment may cost $140k.

Liabilities: I intend to build this home with funds that I otherwise would have invested in more traditional retirement assets.  In other words, my intention is to pay cash and not take out a mortgage or construction loan to build it.  Thus,  no significant liabilities.  Ironically, the way ROE is calculated, this is considered to be to my disadvantage… but I’m much happier (and run a lot lower risks) living a debt free life.

Thus, estimated ROE is ($1300-$450)x12/($140000-$0) = 7.2% per annum.

Now, where else am I likely to find 7.2% ROE?  Mostly in things that are fairly high risk – corporate junk bonds, sovereign debt of nations in dubious straits, or real estate investment trusts.  One difference here, of course, is that I’m looking at something where I own the capital itself.  If I decide there’s another, better option, I could certainly consider selling the house instead of renting it, and get back my principal – with the possibility of additional appreciation on principal as well.  But the reality is that over my main portfolio of investments (mostly in retirement accounts), I’m only earning about 2.75% right now, because of a lot of relatively conservative and principled investments.  (Funds like LOWC, a low-carbon ETF, or ORG, an organics ETF do not return a high dividend; I do own a few stocks like PEGI, a renewable energy company, which has a >6% yield, but these are high risk and not something I want to invest $140k in.)

This was the argument I made to my financial advisor regarding the investment, and she pretty much concurred that it was a sound way to diversify.  Plus, if the economy falls apart and I lose my job or my retirement investments, the hope is that at least I’ll still have a valuable asset that I could either get income from or sell.

But is it ethical to be a rentier?  Well, I’m not really sure how to evaluate that.  I do know that the Ithaca area seems to have a continual shortage of housing, which I’ll be helping in my small way.  Furthermore, at least a few of the landlords have been reported in the news as rather unscrupulous – apartments with no heat in the winter and such things – and I certainly intend to do better by my renters than that!  What I hope to offer is something that is fair value for the area we live in, with a number of amenities that show people how to live a good life with a smaller ecological footprint.  And while I expect to make money doing this, I will certainly have put a lot of labor into making it happen.  I feel okay about this, and hopefully you, my dear reader, will not rise up in revolt against me for owning a rental property!

  1. Okay, I’ll admit I only skimmed the endnotes.  What happened to footnotes, people?  If the notes are on the same page, I’ll pretty much always read them.  If I have to keep two bookmarks just to find the corresponding endnote… less so.

A better form of weeding and feeding

Hello readers.  This morning I’m writing as I sip a homemade smoothie. My wife Raederle turned me on to smoothies and it helped me get back to the waist size I had when I was in college – I dropped about 3 inches in only a month or two, and am very pleased.

Today’s smoothie was brought to me by my back-yard garden.  And not actually by anything that I planted on purpose, but by the weeds that are growing in my pepper patch.

  • Step 1 – remove weeds
  • Step 2 – wash off stray dirt
  • Step 3 – blend1 (with some added water and a little “green powder” if you’d like)
  • Step 4 – enjoy while writing to you about this discovery

Now maybe I’m just lucky to have a really good seed-bank, but I’m pretty amazed at how many of the weeds I’ve got growing in this patch are edible.  Principle among them is purslane (Portulaca oleraceabut we also have kale (Brassica oleracea, although only certain cultivars are grown as kale), dandelion (Taraxacum officinale), wood sorrel (Oxalis acetosella), and amaranth (probably Amaranthus retroflexus, but hard to tell) in the patch.  Of these, I’d recommend keeping the amaranth for salads or cooking – in smoothies it seems to leave an unpleasant astringent sensation.  You should probably toss the dandelion if, when you pluck the leaves off, there is much visible white latex sap, as they’ll be unpleasantly bitter.  Look for these in your garden and consider whether you might make a meal of them rather than simply tossing them in the compost pile.

Between them are some not-very-edibles: quackgrass (Elymus repens) – which fortunately is no longer prevalent; ground ivy (Glechoma hederacea) – a mint-family member which some consider edible but which others consider toxic; and something that is probably Queen Anne’s lace (Daucus carota) or wild carrot (Daucus pusillusor parsley (Petroselinum crispum) but which is to easily confused with more toxic things such as wild parsnip (if I give you the binomial Pastinaca sativa wikipedia will lead you to common garden parsnip, which is confusing because USDA seems to agree that Pastinaca sativa is a noxious weed and not a food plant) or even poison hemlock (Conium maculatum).  If you were me, you’d just weed these out and not bother trying to figure out whether they were edible, because your blender would easily fill up with the known goodies above.

  1. This step is a lot easier with good high-speed blender like our BlendTec or a Vitamix.

IMBY Solution: Lemon Juice

With this post, I’m starting a new series called “IMBY Solutions” where I look at a backyard or local replacement for something that otherwise would need to come from far away.

Consider lemon juice. With the exception of little dwarf trees that can (and must) be moved in and out of the house for the winter, ours is not a climate for growing lemon trees. But lemon juice is a really useful ingredient – I enjoy it just as a hint of flavor in water, but there are many recipes that call for it.

Here is today’s IMBY Solution: pink champagne currant juice.  Although it’s not exactly the same flavor, and not quite as tart as lemon juice, it makes a pretty fair substitute.  I have one small bush in my yard, and it produces a lot of berries. Red currant could be used as well, but if you want a juice that looks anything like lemon juice and doesn’t add natural food coloring, the pink champagne current is a better match.  In terms of production – that is, converting berries to juice – one could use an electric juicer, but I don’t have one and I’m interested in lower-tech solutions anyway.  So here is my process.

  1. Collect and wash berries.  Get rid of any that look bad.  I had 1-2 cups of berries to start with.  You may want to dry them a little to prevent dilution of the juice.
  2. Wrap them in a thin kitchen towel or other clean, thin cloth, preferably cotton.
  3. While holding over a clean bowl, bunch up the towel so that all the berries are in a pocket and you can twist the loose ends to tighten the towel around the berries. As you continue to twist, the juice will be squeezed through the towel leaving the pulp inside.  You may need to “knead” the berries somewhat to make sure they’re all getting properly squished.
  4. When done squishing, pour whatever portion of the currant juice you think you can use immediately into a jar.
  5. The remainder of the juice can be put into ice cube trays to freeze for future use. (Unlike factory-processed lemon juice, this juice will start to ferment over time, so unless you want currant wine or currant vinegar, freezing is the easiest way to keep a fresh supply on hand.)


There and Back Again: Part 1

As regular readers may already know, I have been travelling a lot this year.  My latest journey was not purely work, but a combination of two weeks of work in Ferndown, Dorset, England, plus a little more than two weeks of travel with friends through Ireland and Scotland with a few days in London at the end.  Since it’s not particularly practical for me to reconstruct all of the things I may have purchased, and how local they were to wherever I was at the time, I thought I’d post a bit of a travelogue instead.  I’ll skip the worky-bits.

Jun 27-28 – Bournemouth, Chalke Valley History, Jurassic Coast

Due to the (slow) machinations of my employer, my two week stay at my favorite hotel near the office was interrupted by lack of availability. As a result, I had a brief stay further south in Bournemouth, an English south coast “beach resort” town.  In a truly tiny hotel room.  tiny_hotel_sinkJust to give you a sense, this is how they fit the sink into the bathroom – they cut it in thirds, took the middle third with the faucet, and turned that sideways. Not really… but that’s about how big this is. However,  the beach was very close – only two blocks up and about 100 feet down. It seems that most of the coast is made up of large cliffs dropping off to the beach below.


On the weekend, one of my colleagues from work kindly offered to take me to the Chalke Valley History Festival, a combination of living history (re-enactments), military history (including tank and WWII airplane demos), and talks on history ranging from prehistoric archaeology through the origins of the space shuttle program.  No easy way to sum this up in one photo, so I present here cvhf_fightera WWII bomber, cvhf_vikingsViking invaders, and cvhf_knights_interviewa group of knights being interviewed before they fought each other (with real swords and armor, but not real death) for the grand prize.  cvhf_tardisOh, and a TARDIS, because England.

The next day, another colleague graciously took me to his house, introduced me to his family, and fed me lunch.  Then, they took me on a tour of part of England’s “Jurassic Coast” – so named because the rocks that have been exposed here through tectonic activity are from the Jurassic period, and (not coincidentally) contain a lot of fossils to prove it.  You can see the strata here.jurassic_strataThis part of England is known for its chalk soils – not exactly your typical blackboard chalk, but rather harder white stone (but still soft for stone) made from the same calciferous shell sediment. One thing that I learned, and found quite surprising, is that this kind of chalk deposit is also typically rich in flint – because flint appears where siliceous material somehow infills areas within the chalk.  Interesting, even Wikipedia claims not to know exactly how this happened.  “The exact mode of formation of flint is not yet clear…” As if 145 million years hasn’t been long enough to clear this up, but we might know soon?

We walked a ways (up what my colleague’s daughter affectionately calls the “hill of death”) to see the Durdle Door, a huge stone arch carved by the sea.  For size reference, those are people on the beach.jurassic_door

The beach here was itself interesting – a typical “pebble beach” created by the sea washing away the softer materials and leaving only stones. Not as comfortable to sleep on or as practical for the building of castles, but very pretty.jurassic_pebbles


Then it was back to work (and the Kings Head Hotel) for another week. The main other exciting thing that happened was that I finally got a chance to see the changing ringing in Wimborne Minster rather than just hearing it. The church is known for having one of the finest sets of bells in the southern part of England, and every Tuesday the bell ringers practice their art. On this visit, I finally made it up into the bell tower to watch how the acoustic sausage is made.  (It does involve squeezing a lot into a small round space, and twisting and pulling things, but I think the resemblance ends there.) Suffice it to say that while I learned a lot, most of it was about the magnitude of my own ignorance.