Saturday, February 27, 2010

Fix(ed) Income?

So a GIC is basically a loan from you to the bank or another financial institution for a ‘guaranteed’ interest rate and for a specific period of time or term. Canada Savings bonds would fall in a similar category of lending, now to the Government, and usually for even worse rates.

So what is the difference between a Canada Savings Bond and a Government of Canada Bond? Basically the only difference is that the Government of Canada Bond can be traded and it has terms that range from a few days to ten years or all the way up to 30 years. So how does it work?

Typically, you can buy a government bond from a brokerage who has carved it in slices of $100. The government pays an interest on the principal ($100) and repays this principal (and stops paying interest) at the end of the bond’s term. The bond’s interest rate is often called the ‘coupon rate’

The government has issued or sold to you a $100 bond with a coupon rate of 5% for a 10 year term. So the government pays you (typically every 6 months) interest i.e. 5% x $100/2 = $2.5 or a total of $5.00 per year. The government will do so for the next 10 years and then repay you the $100.

A year later after buying such a bond, interest rates for 9 year term government bonds falls to 4%. You still receive your $5 per year over the nine remaining years, while new bond buyers would only receive $4. So wouldn’t you agree that there may be people who would consider your $100 bond worth more than the new $100 bonds? So they may want to buy your bond. How much should they pay?

High school math. My little Excel Spreadsheet calculates the new value as: 106.62. So at 4% would I still make $45 worth of interest? You pull out your calculator and press 4% x 106.62x9 years=$38.38. Eh? Oh, but my bond value went also up from $100 to 106.62. So I made a capital gain of $6.62 and... $6.62 plus 38.38=$45

Now why would you sell a $100 government bond that pays you $45 interest for one that pays $38.38 in interest plus capital gains of $6.62? Answer, you get the $6.62 right now and... there is more!

Taxes! At Alberta’s top income tax rate of 38%, you pay $17.10 in taxes over $45 interest income.

But if you sold it and reinvested at the new rate (4%), you'd pay ‘only’ 0.38x38.38= 14.59 plus 0.38x0.38/2=1.26 or a total of $ 15.84 in taxes. So on an AFTER tax basis you made $27.90 or 3.1% per year without selling and $29.16 or 3.24% per year with selling. With a yield of 3%, your after tax return would increase to 30.59 or 3.4%. Little things add up.

So yield is the current interest rate plus annual capital appreciation-or-loss divided by the purchase price and equals the coupon rate of a similar bond issued today. The Yield on a Canadian Government Bond for a 5-year term is now only 2% but 100% guaranteed by the Government of Canada. A 10 year bond yields 3.75%

Government of Canada Bonds are more secure than a similar GIC which is only covered by the CDIC for $100,000 per account. Hence a slightly lower yield than the GIC interest rate. Of course, you could not cash in your GIC because it is not tradable like a government bond is. If you invest in Provincial Government bonds, depending on the Provincial credit quality, yields are higher and corporate bonds for the banks, the same ones that you lend your GIC money to, are still higher and may exceed GIC rates.

Due to the ‘extreme large drops’ in short term interest rates from the highs in the middle of the 2008 credit crisis and before to today’s levels many long term bonds generated significant capital gains in addition interest income totalling close to 10% per year. During times of depression and recession, interest rates often fall and bonds can prove to be quite profitable. Also investing during the highly inflationary early 1980s in long term bonds resulted in very high interest income and capital gains during the subsequent 10 to 15 years, in fact all the way until today. 2008 may become a turning point from where we may go into a decade of ever increasing interest rates and bond yields. How much the increases are going to be is a sensitive topic of discussion amongst today’s financial gurus and demographers. If you want a copy of my tiny ‘Bond Evaluator’ Spreadsheet just e-mail me.

Friday, February 26, 2010

Let's talk Interest(ing)

Now that we have bought a home, first we set our financial future on a more solid footing by paying off the mortgage as soon as possible. There is the eternal conundrum about what to do first: paying off the mortgage or contributing to the RRSP?

Why not do both? Make your maximum contribution to your RRSP and use the tax refund to make your maximum allowable or affordable annual mortgage lump sum payment (often 20% of the original mortgage principal). Ah... but what to do with the money inside the RRSP?

Cash gives no return on investment these days. So let’s look at GIC’s or Guaranteed Investment Certificates. Many GIC accounts are insured through the Canadian Deposit Insurance Corporation (CDIC) up to a maximum of $100,000 per account. Make sure yours is! Guaranteed Investment Certificates do not guarantee that you will get your money back (as usual, I found that out the hard way). It only guarantees a certain interest rate over the life of the GIC. Today many GICs don’t pay interest equal to inflation (currently around 1.5% per year). Even within a RRSP the most you can expect is to break even or slightly better in terms of purchasing power.

If you park cash in a GIC outside a RRSP you are nearly guaranteed to lose money. Say you get this very good interest rate on your GIC (5 year rate at Scotia in Feb 2010 is... 2.6%). Also let’s assume you have the top marginal tax rate in Alberta: 38%, what is your after tax and after inflation return?

2.6% x (1-38%) – 1.5%= 0.12% real rate of return (If you lived in most other provinces you would lose money). You may say, “Yeah but at higher inflation I get higher rates and then I should make money”. Try the same exercise on your own: GIC rate 12.5%, inflation 10%, and tax rate 38%. And if you think inflation will stay as low as 1.5% over the coming years, think again. In 2008, Canada’s inflation rate was 3.5%. What would happen if you were locked in for 5 years at an interest rate of 2.6% and inflation rises? So are you still keen on investing in GICs?

Eh, before you sign off, cash and GICs are low risk, not like stocks. At least I preserve my capital!” is your cheap shot at the departing author of this blog. From the distance I yell back: “We’ll discuss risk after we went through various investment types later on. B.T.W. discussing ‘risk’ will take me at least another 5 blog postings! So brace yourself”

We have a new domain name

Our blog has a new domain name that should become active over the next few days.

Thursday, February 25, 2010

Something worth to consider:

America -- buy or bye?
07:19 EST Tuesday, Feb 23, 2010
Rob Carrick

Buy American?

Yes, and now’s the time. That’s the conclusion of some research by Calgary-based McLean & Partners that predicts the U.S. dollar’s 10-year bear market will come to an end in the next year or two. McLean’s research notes the high level of concern about the a U.S. debt load (government and consumer) that is now approaching $14-trillion, but it also says this debt is a fair bit less dire when viewed as a percentage of U.S. economic output.

Still, the consensus view of the U.S. dollar has been overwhelmingly negative. Over the past 10 years, the U.S. dollar has depreciated 28 per cent against the Canadian dollar and 26 per cent against the Euro. Over the past 20 years, it has depreciated 37 per cent against the Japanese yen. McLean believes this trend will ease in the next 12 to 24 months, with the U.S. dollar starting to strengthen slightly. Two supporting factors for the currency: U.S. headway in reducing its budget deficit, and a turnaround the U.S. real estate market that will drive demand for U.S. dollars.

McLean sees this as a buying opportunity for Canadians. “Buying U.S. dollar-denominated assets, such as select real estate and stocks, is proving to be an excellent opportunity. Although it might feel like the beginning of the end for the U.S. dollar, in
reality we think it is the beginning of the end of its descent as the race to economic recovery continues.”

Buying U.S. stocks has been a losing proposition for Canadian investors for years now. Soft U.S. stock market performance and currency-related headwinds have combined to produce an average annual loss of 5 per cent for U.S. equity mutual funds over the past 10 years. The lesson many investors have absorbed is that it’s smarter to buy Canadian.

Now’s the time to start thing about buying American, too. If you do, remember to give the issue of currency hedging some thought. Hedged U.S. equity funds and ETFs filter out distortions caused by currency fluctuations, but they have higher fees than unhedged funds and they’re imprecise in matching the returns of their underlying stocks. Even so, hedged funds have been the way to go in recent years as a rising Canadian dollar eroded returns from U.S. stocks.

Now, it’s time for a re-think. You could take a conservative approach and leave half your U.S. exposure unhedged, or go unhedged altogether. The usual advice from money managers on hedging is to use it if you’re holding for a short to medium term, and not to bother with it if you’ve got a long term outlook. If you go the unhedged route, prepare for volatility. The U.S. dollar may indeed reverse its downward trend in the next two years, but there could be some scary moments along the way.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

If you are a GlobeinvestorGold member here is the address:

Wednesday, February 24, 2010

Dear Home Buyer

As a realtor, I help aspiring home buyers with finding a property they want to call ‘home’. Buying your next home is an important step on your way to realizing your vision of life.

As such, rather than focusing on the house you want to buy, it may be better to first define what you want from life. It is much easier to determine what home you’re looking for if you know what you want to achieve with that home and how it fits on your way towards fulfilling your dreams.

If you haven’t done so, ask yourself and ask your partner what kind of a life you really want. Visualize yourself together say five (5) or ten years from now and what you would like to have achieved. Near term goals are often easy to define; those farther out may still be vague and can be adjusted later on. But I bet, you can already outline some things you want: a certain career, a cottage, time to travel, children or not, a house along the shoreline of a tropical island (Belize), or running a cozy neighbourhood pub. Visualize this goal and then try to trace back a path towards the present which (in reverse order) shows the road you need to travel in order to realize your life vision.

Without a life vision, you don’t know what direction you want to go. You will be like a traveler without a destination and you’re likely end up running in circles for many years to come. Having a life dream is not the same as getting there; obviously you need the motivation and drive to get there. With a partner in life, you both have to believe in that vision and you both have to be motivated and willing to work towards it. So, this is a very important step, something I cannot emphasize enough.

Once you have defined your ‘personal Belize’ and a path of how you plan to reach it, you will have an idea as to how your next home fits in. Now, you can set the financial targets needed for the purchase of your new home, a home that is a steppingstone towards fulfilling your dreams. This steppingstone will have to fit both in your current life style and with achieving your Belize. I cannot set your dreams, it is your life. But I can help you planning out your budget for your next home.

I have created an EXCEL spreadsheet that helps plan your home buying finances

Tuesday, February 23, 2010

Update of my October 2010 forecast

On another forum, I made some long term forecasts regarding the economy. I won't reprint the entire posting other than the introduction.

From time to time, I develop my 'main economic scenario' to set direction for my investments. I like to post it here at REIN not only to share my ideas, but also because of the feedback (i.e. testing my economic model for weakness). I would like to point out that I am not a financial planner or stock broker. I do plan to become a real estate agent and hope to do so coming January. Any investment ideas mentioned are my personal opinions and I may own or have owned a large number of the investments mentioned below. So, if you follow up on any of the ideas discussed below, you'll do so at your own risk. Neither will I follow this up with specific advice to anyone but myself. I have to be this circumspect because after posting my ideas before on this forum I was asked for advice privately by some people. I did and will decline to do so other than what I post here on REIN.

A forum member folowed up yesterday:
[quote name='Yev' date='Feb 22 2010, 11:59 PM' post='79919']

I've read the books that you quote (both Harry S. Dent and Jeremy Siegel). What I wonder is how do you include in your forecast/outlook the following list of facts:

1. US unfunded debt is ENORMOUS and getting much larger all the time. I.E. when the US dollar collapses - it will make our lives in Canada MUCH harder.

2. US (and to a lesser extent) Canadian GDP figures are 'up biased' due to a large 'consumer component' as the cause of them historically - but likely NOT in the future (more savers)

3. China is likely in a Real Estate bubble Jim Chanos with MASSIVE over-construction. When this bubble blows, the demand for a lot of the raw materials that we export to China will significantly decrease.
........... etc.

Thanks for the opinions
Yevgeni [/quote]
Hi Yevgeni,

The best forecasters are those who forecast often. Don't you know how long ago I wrote this forecast? Having said that my first prediction, that I would be a realtor by January 2010 was dead on. Amazing! :)

Regarding Harry S. Dent, I think he counts too much on demographics, just like Jeff Rubin counts too much on oil. Jeremy Siegel was trying to create his own simulation after running into Harry S. Dent and added the impact of increased savings and increased economic growth in the emerging markets (in particular the BRIC countries).

I think that the Harry's assumption that retiring babyboomers will behave the same as previous retirees in regard to spending habits is flawed. I think babyboomers will reinvent retirement; we see that already now. Babyboomers may consume less because the kids are out of the house, but they will keep working much longer. Even affluent boomers are likely to do so because of the social interaction. So many boomers will be maintaining their lifestyles and possibly buy a recreational property in addition to their city condo.

Overall, I still think leverage is on the decline. In Canada, Jim Flaherty helped a bit as well lately. Many companies are reducing leverage dramatically, babyboomers and many Americans have increased there savings rates big time (from -3% or so to nearly +7%). Other than energy prices, inflation is still tame.

That leaves U.S. debt. Well, they are working on that. Everyone is down on the U.S. debt but they greatly underestimate the fundamental strength of the U.S. and the American Dream. This is a democratic society with lots of education and entrerpreneurial savvy and truly brilliant corporations like GE, Microsoft, J&J, Pfizer, Exon, etc., etc. Yes they have problems, but think back how long it took Canada to turn from high debt to envie of the world - less than 5 years!

China has many problems ranging from population unrest to fixed currency, a stale state industry and strange banking practices. It is far from certain in my mind that China will become the economic leader it aspires to be.

Monday, February 22, 2010

Your Personal Belize

Before talking more about investing and asset classes and diversification and stock markets or real estate, I think there is one critical issue to be examined. Why do all this stuff?

Investing in a bull market is fun. I loved to come home from work and say, “Today I made more in the market than I did working”. It is kind of a foreshadowing of your upcoming retirement years – the ‘Golden Years’, the ‘Sunset year’.

However, there are also bear markets, down times, periods of extreme frustration, seeing your retirement dreams evaporate in a time span of a few days or months. “Gosh, I am so happy to still have a job. No way, I could have come through this down turn without a salary!”

So why have a job, why do invest? Why have a home? Why have a lovely, although sometimes extremely cranky, spouse? Why have children? Why not throw your teenagers for the dogs? By God, they deserve it. As babies and toddlers they were so darn cute, but now ten years later...

Because... eh, because it is supposed to... make us... eh.... eh... happy! Yeah!!! They are, whether we think about it or not, our vision of life. These are the things, as everyone knows, that make your life happy. But it often it doesn’t seem to work that way, does it?

Whether you hear Don Campbell talk about building your “personal Belize’, or you learn about the ‘Laws of Attraction’, or the ‘Hoffman Process’, or affirmations, or visionary entrepreneurs, or ‘The Answer’ for setting up successful businesses by John Assaraf & Murray Smith, it is all about visualizing and making dreams into reality.

This is a recurrent pattern amongst successful business leaders or

Cash and Cash flow

There is an important distinction between having cash and having cash flow. Cash is created when selling investments. Cash flow is generated from operating our assets. Cash flow produced as savings from your employment income. Cash flow is also generated from your business(es) and from your investment operations

Running a business is entirely different from investing – a whole different blog topic (there are soooo many!). Suffices to say, ‘a good business man is not necessarily a good investor’. Up to recently, you could consider Robert Kiyosaki to be a good business man, but I am not sure he is that good of an investor – no matter the opinions of all his fans. Having said that, a successful business operation produces positive cash flow

Other sources of cash flow are your investments and here one must be careful as well. REIN’s Real Estate ‘investors’ are not necessarily investors but rather business operators. Don Campbell states that REIN members should see their real estate investments ‘as a business’. This is because there are two components involved with real estate investment: buying and selling properties (investments) and rental and other income minus expenses from operations related to the properties.

1.     Cash flow from real estate is: income from rental and other real estate operations (e.g. laundry or parking fees) minus operational expenses minus financing payments.
2.     Cash flow from investments are dividend, return of capital, distributions and interest minus investment account charges, minus legal fees, accounting fees, interest payments etcetera.

Cash is an investment asset, just like real estate or stocks. Cash flow represents your incoming and outgoing cash from operations. If your operations are profitable then you have positive cash flow. During bad times you don’t sell investments in a panic – that is the sure way to unrecoverable losses. Instead, a strong positive cash flow will help build your cash position together with the profits you made when you sold excessively overvalued assets in the preceding ‘boom’. Cash flow is adding to your emergency funds and provides funds for further investment. So, the saying “Cash is King” is not entirely correct, in my eyes it should be “Cash Flow is King”

Thursday, February 18, 2010

Cash is King - I must be on a tear with all these postings!

Cash is King

Cash as an investment is terrible – it only loses purchasing power over time. A loss one cannot even deduct from one’s taxes. (I recently read ‘A Time of Changes’ a Sci-Fi story by Robert Silverberg about a civilization where one is not to communicate in the first person, i.e. ‘I’ is a four letter word. The story got quite boring after the first 10 pages). Back to Cash.

So why bother with cash as a significant proportion of one’s portfolio? Cash is liquidity, it provides you options and in times of uncertainty it may even provide some capital protection. That is the reason why one should take profits when an investment becomes significantly overvalued like during ‘bubbles’. Even Warren Buffett states: ‘Nobody has made a loss by taken profits’. Another investor’s adage is: ‘Bulls and bears make money but pigs get slaughtered’. You see, “Greed is NOT good” in the world of investors contrary to what you may have heard from Michael Douglas. Value investor ‘par excellence’ John Templeton claimed that you should always sell so that there is still a bit left on the table for the next buyer.

You sell when profits are becoming excessive and buy when prices are good, thus you will have cash during the down times which inescapably follow the good times. “Seven years of prosperity followed by seven years of famine”, where did I hear that? Oh, yes that is a saying as old as ‘Methuselah’. Never let your cash level fall below 5% of your portfolio and during periods of overpriced assets (when you harvest your profits) you could build a cash position as high as 30 or 40%. Cash that is waiting to be invested in a well priced investment. You always hear Warren Buffett says things such as, “There are currently no well priced investments – I haven’t bought in years”. Or like last year: “This is this the best time to invest in a generation”. After building cash for years, Warren bought into GE and in Goldman Sachs and recently he bought an entire rail road (Burlington Northern) – his largest investment ever! Oh, there is another lesson in Warren’s philosophy: never sell in a panic.

One of the worst things you can do is selling into a major down turn. Things always (unless it is truly the end of the world) will get better. There are only 2 situations from which you cannot recover (one of them debatable). The company in which you invested goes broke (and even then there may be a chance to recover some of the money) or when you sell. When you sell there is no hope to recover. When Microsoft fell in 2008 from $32 to $12 dollars with no chance of bankruptcy I BOUGHT more. Now I have a tidy profit. Or when Bombardier crashed from $7 down to $3, I did nothing and we’re back over $5. All those analysts that were ‘whining’ in 2008 are now screaming ‘BUY’. We will talk more about ‘selling’ in later blogs – it is one of the toughest investment decisions to make!

So cash is an important part of everyone’s portfolio, you may need it for an emergency or for an investment opportunity of a lifetime. It helps you preserve capital in times of excessive overvaluation and lets you be ready to grab opportunities in an undervalued market. This has nothing to do with market timing, where you try to ‘pick market lows or highs’, but it often results in buying during bad times and selling during booms as a result of your cash management. Many people do not have the stomach to buy in bad times – that is one of the real reasons there are so few millionaires. Another blog topic.

In coming blogs I will discuss ‘fixed income’ – stay tuned.

Wednesday, February 17, 2010

Five steps to buy your home: Step 5 - Closing and Possession

When fulfilled, I will help you to waive the conditions. You and the seller are then fully committed. The offer becomes now the purchase contract. If your conditions are not met, the contract is void and your deposit will be returned. Next you sign the legal papers including the mortgage documents and you present a bank draft with the remaining moneys owed at your lawyer’s office.

There will be additional transaction costs that you should consider. These costs can sometimes be included in the mortgage. They may be:
1. Legal fees
2. Mortgage fees
3. Late interest fees
4. Title insurance
5. Costs of bridge financing
6. Appraisal fees
7. Home Inspection fees
8. Condo Paper reviewer fees
9. Property tax adjustments
10. Utility deposits

These fees can add up to several thousand dollars, so make sure you understand them and realize they may pop up as late as the closing date. When all is checked and dots have been put on the ‘i’s, all funds will be transferred to the seller’s lawyer (excepting ‘hold-outs’) on the closing date.

Possession is when you have been given the keys and are authorized to move-in. Usually it takes some time after closing to register you on title as the owner. Your lawyer will send you the final copy. I will be there to help you to ‘take possession’ as smooth and comfortable as possible – the day you move in should be a happy one – emotions ON.

Five steps to buy your home: Step 4 -Making Offer(s) to Purchase

We’ll discuss the Offer to Purchase form before we’re going out to hunt and again when ready to make an offer. There is no reason that we cannot make offers on more than one property. But suppose two offers are accepted simultaneously then you would have to buy both. So, we don’t mind making more than one offer but never simultaneously.

Negotiations around an offer to purchase can be exiting and tense. We want to stay cool and ensure we don’t overextend. I will advise you as best as I can, but the ultimate decision is yours. Upon acceptance of the offer by both buyer and seller (in writing) it becomes a binding contract. Often the buyer makes a deposit in a trust account administered by the seller’s brokerage. This is to show the buyer’s good faith and commitment to the deal. If you break the purchase contract, the deposit money will be forfeited and the seller may still claim additional damages.

The purchase contract is forwarded to your real estate lawyer who will ensure it is properly executed. Also, your Mortgage Broker will work on securing the mortgage on the terms promised in step 2. I advise you to have a home inspection done by a professional. When buying a condominium, have a professional review the condominium documents. The purchase contact should be made conditional to such matters. Also, have a condition ensuring that you get proper financing. Conditions may be entered in the purchase contract regarding any other issue that is important to you regarding your new property.

Five steps to buy your home: Step 3 - House Hunting

Now that you have determined how much you wish to pay for your house, we can sit down and see how to fit your needs and desires in your budget. All those systematic steps we are taking towards buying your home are to ensure we act with as little emotion as possible. Before starting the hunt, I would like to advise you against getting into situations with multiple offers. If you cannot buy a house you like in today’s market without a multiple offer, maybe that market is too hot and you can get a better deal when things cool down. We can always come back 6 months or a year later. What is more expensive, paying $30,000 too much or paying rent a bit longer? Don’t you want to buy when things are ‘on sale’?

Ready for the hunt? Now, we’re going to find out where you want to live and in what kind of a home you want to live for the next 3 to 5 years. All of course within budget. You will let me know what you want and then I’ll send you and your family home... to surf the net. Using your computer at home, you can visit, the public version of the MLS database. I will show you in the office how to skim the listings. I will also e-mail you property listings I found four you. Select around 10 properties you like best.

From now on, we’ll be talking about ‘properties’ rather than ‘homes’, thus we keep the emotions as low as possible. We will fine tune and get information on the selected properties and reduce the candidates down to four. We should visit no more than 4 properties at one time. People typically lose track when looking at more than 4 properties. Things become ‘blurry’. Maybe we don’t find the right property right away but at least we will learn what you don’t want. Thus we refine our criteria (sounds cool and unemotional he?) There may be a 3rd and a 4th round, until we find the right property to make an offer on.

Five steps to buy your home: Step 2 - Setting the budget

Your house is one of the larger purchases you make in your life and it has an important place in how you envision your life. Some people consider their residence strictly as investment. However, for most people it is more than that; it is your home for years to come. Therefore, buying your home is often an emotional event for you and your family. Yet when doing such a major transaction, nothing is more important than keeping a cool head. Strange as this may sound from a guy that is selling houses, I would like you to realize that there is hardly ever a ‘once in a life-time opportunity’. In my experience there exists always another deal that is at least as good as the one that right now makes you feel all ‘woozy’. The other thing not to forget is that the average Canadian buys another house every three to five years. So this is not likely going to be your ultimate dream house. I myself have yet to buy the perfect home, although I did buy my current place nearly 30 years ago. I am an exception to the 3-5 year rule and maybe you will too. But for buying purposes let’s assume you will move on in 3 to 5 years.

You can buy a house to the maximum of what you can afford and sweat at every little bump in your life fearing its loss. You may tie a lot of money up in your house paying interest galore. Interest payments which could have been invested in your retirement or your child’s education. So, do you really need the most expensive castle in Mount Royal or Pumphill? I suggest, just like with a car, especially when starting out, that you only buy what you truly need. If you wish we can sit down at this point and discuss how this new house will fit in your future. We also will have to set up a budget as to what you can afford, or better how much you are willing to spend on a house.

Most people finance their home, i.e. they use a mortgage. I am not a mortgage expert or broker. In our discussions I can give you some ideas as to how to finance your new home.

Five Steps to buy your home - Step 1 - Find a Realtor

You’re tired paying rent or you want to move to a larger home for your growing family. But how do you go about buying a home? Especially when you never before bought a house? where do you start? You can start with me and my 5 steps to buy a new home.

Step 1 – Find a Realtor

Realtors like me, help you find a place that meets your needs. They can point you to financing options; help locate properties; help recognize pitfalls; help you negotiate the purchase; assist in completing the purchase transaction and finally they help you take possession of your new home (short of moving the furniture).

To make sure that your Realtor does a good job for you the Alberta Government legislates how real estate transactions are to be conducted and what the role of a realtor is. Actually it is not me who represents you; the brokerage I work for does. I represent the brokerage. Kind of convoluted and you can read about it in more detail in the AREA Brochure I gave you. According to the law, your Realtor owes you the following duties:

1. Undivided loyalty

2. Confidentiality

3. Full disclosure

4. Obedience

5. Reasonable care and skill

6. Full accounting

The confidentiality remains after our working relation ends.

Other than ending our relation, there is one exception that may change it and that is if you decide to buy a property already listed with my brokerage The details are described in your AREA brochure and of course, you can always ask me to explain these matters to you.

Realtors are professionals and as such they are paid for their services. Payment is done through commission; the commission rates are determined by the seller’s brokerage and are included in the purchase price. My brokerage charges 7.0% commission for the first $100,000 and 3% over the remainder of the purchase price. This commission is split between the listing brokerage and the buyer’s brokerage. The split may be uneven. When you feel ready to house hunt we will go over these issues when filling out the ‘Buyer Brokerage Agreement’ which spells out how we are going to work together.

Finally, if you do see a property for sale, even when not listed on the MLS, do call me to help you. Do not feel that you disturb me in an important moment of naval gazing. This is my job - to help you find your new home. Call me: 403-880-3275. We are ready for the next step.

Tuesday, February 16, 2010

A difficult choice - how to continue this investment rant?

I am torn apart (mentally) and full of anxiety about how to continue the postings on this blog. This is afterall about diversified investing not just real estate. So, should I write about buying call options? Should I write about stocks? Or about buying your first home in a systematic and 'cool' fashion?

Since your home is your financial base plate, maybe we should continue our real estate posts regarding the 5 steps of buying your home. Then we are ready to discuss some stock market stuff and how to build your security portion of your portfolio.

Enjoy competition? Becoming a realtor is for you! Part III

Finally, how competitive is it to be a realtor? Extremely

Do not feel bad about this, I don’t. But be aware.

In Alberta, to become a realtor you have to follow an education program that is approximately 3 to 4 months long on a full time basis plus you need a high school diploma. The program tuition and exam fees amount to roughly $7000. You have to do 3 or 4 major exams. Once qualified, you have to do annual mandatory professional development (typically a 3 days to a week or so of education every year). This can often be done in classroom or on-line.

You have to be licensed by RECA and accepted (in particular when doing residential) by the local real estate board. You also need some gadgets to access MLS and to be able to enter properties for showing. This amounts to $2000 in the first year and $1200 to $1500 in subsequent years. You must be associated with a brokerage firm such as Royal LePage Pinnacle or Royal LePage Solutions. This costs you about $1000 per month.

You need to advertise, have open house signs, pay gas to drive your clients around (and fuel the clients with coffee) as well as an accountant and numerous other standard business expenses. You have no fixed working hours and may work until deep into the night. Clients do not come running into your arms – you have to do extensive marketing for yourself. Typically you should not count on any income during the 3 to 4 months of education nor during the first 6 months or so when starting up. That means, you may need to live close to a year without income to become a realtor.

80% of the properties are sold by 20% of the realtors.

Enjoy Competition? Becoming a Realtor is for you! Part II

About those darn realtor commissions:

The complaints are that realtors are not competitive; do charge too much; and they by-pass houses listed for lower commissions and FSBO! Excuse me!

You do not have to sell through a realtor as shown above. But a realtor makes it a lot more easier. The realtor sets up a custom made searches on his fabulous database. By the way, did you ever ask the Bay how much underwear they sell and for how much and what the manufacturer got paid for it? So you can go to Superstore and see if you get it cheaper? Of course not. But that is what many of you want from MLS. The Multiple Listings System only tracks sales made through CREA realtors. In fact realtors are happy to share this data with you so you can make a buy or sell decision. But... you have to pay for it and obey the rules.

You can buy just MLS data from some realtors – though of these go broke and can’t make a living. MLS access is only a small part of the services offered. How many hours does the realtor spend making appointments to enter listed homes; to show the homes; to check out the data of the properties that you would want to make an offer for? They are even liable if they do not help you sell or buy according to the laws of the land, province or according to the interpretation of those laws by the Real Estate Council of Alberta(RECA).

RECA’s sole purpose is to protect the public against erroneous, omitted and misleading behaviour by realtors. It is funded by mandatory payments (outlined in law) by realtors. They also provide errors and omission insurance to compensate the public for damages suffered. MLS means that the data on properties meet certain standards to ensure accuracy and disclosure. If it is not in MLS, it is the realtor’s job to find and disclose issues important to their buyer or seller clients as much as is possible. While at the same time there is a commitment to confidentiality between client and realtor even after their contract has ended.

So you, inexperienced first-time buyer or seller goes up against a sophisticated investor or an experienced home owner without a realtor. You can, be my guest. Oh, by the way, who needs a lawyer, or a home inspector or a mortgage broker or a condo doc reviewer? After all, all those people charge too much commission and you can do this by yourself as well.

Sunday, February 14, 2010

Enjoy competition? Becoming a REALTOR is for you! Part I

I hear a lot of moaning and groaning about realtor commissions and the MLS monopoly, so I would like to point out some facts – as I see them in this three part posting series.

The Competition Bureau claims the MLS system has to open up further and emotional claims about a realtor monopoly and unrealistic commissions can be heard everywhere. So I want first to address the MLS system.

The MLS system started about 54 years ago and was brought onto the internet some 10 years ago and is in part available to the public. The creation of the MLS software and database did cost millions that were paid for by the membership of CREA (Canadian Real Estate Association) of which close to a hundred thousand realtors are members. Not all realtors are members but most who sell residential real estate are. The success of MLS as a marketing tool is undeniable and consequently a large percentage of people think that they should have access to it as well. It is their right they claim. Really??

You can market your properties outside MLS, there is Craig’s list, Kijiji and just plain personal websites. Many REIN members sell without realtors or they only use a realtor some of the time. Tony Peters finds renters-to-own via an extensive marketing campaign. Mark Loefler uses the find-tenant-first strategy; only once he qualifies his tenants he contacts a realtor (to save time and money) to help the tenant select the RTO property. But when he sells to his tenant there is no realtor.

Anybody heard of Ron Le Grand? Yellow letters? Excuse may, that is buying and selling without a realtor. And guess what? How many learned the hard way that ‘yellow letters’ cost a lot of money and sweat and even... police calls. How many REIN members placed classifieds or send around newsletters to sell their properties? Is that for free?

Financial wellness, organic apples, and a bit of Babyboomer

An exchange of ideas between two REIN investors:
[quote name='wgraham' date='Jan 29 2010, 10:01 AM' post='77619']
Tammy and I were at the farmers market the other day. What a great place! Fresh produce, organic meats, art and music everywhere. You just have to love the vibe of a place like this. If only there was one in Canmore or Banff (why don't we set one up - this is definitely another topic).

But then you get to the car and add it all up!! Wow, this wellness stuff ain't cheap!!! Tack on the gym membership, the gear for whatever sport(s) you choose, the green energy upgrade for your home, a hybrid car, the free trade coffee, acupuncture sessions and the raw dog food (because you don't want to leave the dog out of the "wellness" picture) and you have just created one very healthy albeit expensive lifestyle. Therein lies the is statistically proven that those with the highest income live the highest quality of life. I didn't say happiest....I said highest quality! It might not be fair but it is the truth.

I was at the Canmore Life Fest earlier this winter. Another great event! There were all of the people and businesses you would expect to be there, from yoga studios to organic product producers to chiropractors but there was a distinct lack of any financial wellness programs. If you can't afford this lifestyle in the first place isn't all of this other stuff a mute point? Don't get me wrong, I am not saying that if you don't make top dollar you can't be green, organic and healthy but you have to admit that having the financial means sure makes it a lot more attainable.

So I got to thinking about the entire "wellness" equation. Most people would agree that eating healthy, exercise, being environmentally conscious and living a balanced lifestyle constitute the 2010 version of wellness but where does a solid understanding of how money works and finance come into play? Why is it that most people neglect this side of the equation? They work out daily but don't figure out the more interesting side of financial planning. They eat healthy but fail to think

Tuesday, February 9, 2010

Are you curious about the Competition Bureau and MLS?

Here is an interview with REIN's Don Campbell about this issue. or just press below:

Sunday, February 7, 2010

Ten Rules for successful investing from the book of Godfried

The 10 commandments of investing are based on my personal experiences over the last 25 years or so. Many of those rules have been stolen, copied and plagiarized from numerous newspapers, books and other sources including REIN:

1. Cash flow is Number One.
Financial independence means your investment income (dividend, rent, interest, or distributions) exceeds your cost of living. You also need to generate cash for new investments this is done in 3 ways:
a) Live below your means – i.e. save money for investment.
b) Only invest in self-sustaining investments (i.e. it generates cash or it does not require additional cash)
c) Sell current investments that met your investment goal(s) and re-invest

2. Survive the ‘flue’ in your financial life.
Have sufficient money to avoid forced asset sales of stocks, real estate, paintings and your favorite yacht in Belize. There will always be times of hardship during market crashes, economic down turns, high rental vacancy, loss of work, unexpected medical expenses, and the early demise of your gold fish. You need enough cash reserves to get through these times for cost of living expenses and, very important, for buying opportunities in depressed markets.

3. Diversify but don’t diworsify.
Diversity of investments is a must, i.e. don’t put all your eggs in one basket. So buy real estate, gold, resource stocks, financials, pharmaceuticals, bonds, mortgages, etc. Subdivide those investments in cash flow generating investments and appreciating investments. Often, stocks bought at a good dividend yields (note: NOT EXTREMELY HIGH) tend to outperform most others most of the time. Investments that provide pure appreciation are gold, some real estate, some stocks, some bonds (coupons).

The big mistake with diversification is that one tends to buy everything including the kitchen sink and sometimes only kitchen sinks. This, Peter Lynch calls ‘Diworsification’.

If you have a small portfolio, index funds (example: S&P/TSX60 i-shares Symbol: XIU) can be bought to buy Canada’s top 60 public companies or a basket of Dow Jones or S&P500 companies. You can buy small amounts of these index funds at regular intervals regardless of price for many years and concentrate on real estate as your prime form of investment.

4. Don’t sell in a market or personal panic
All markets go up and down, some more so than others. It is nearly impossible to predict and time when markets top or bottom. Therefore buy when prices become attractive based on fundamentals and sell when you have made your price targets (unless your fundamentals have changed – then you re-asses). Always buy and sell in small, but meaningful chunks. If you have 100million then buying chunks of $1000 is meaningless. If you have $2000 to invest, the same $1000 represents half your portfolio – that would be clearly too much. If you think in allocation percentages, you can more easily determine what is meaningful. Suppose you have 40% in real estate, 30% in a diversified stock portfolio, 15% in fixed income and 15% in cash. A typical stock portfolio has 30 to 50 different stocks and with holdings forming between 1 and 10% of your stock portfolio.

Wednesday, February 3, 2010

A faster way to home ownership

RTOs or Rent-To-Own transactions can bring you closer and faster to home ownership.

Some people may have a bad credit rating but yet are committed to the road of financial independence. They would like to own a place rather than rent. Although their income would qualify them for a mortgage, the credit record won't let them. They even have some money to put down but the mortgage is out of reach. For such people rent-to-own may be the way to go.

Others may have no credit record, because they never borrowed money in Canada. For them, it may be a significant waiting time before they qualify for a mortgage as well, even though they have sufficient funds for a down payment. Rent-to-Own may help. Finally, there is a group of people who have some money saved towards a down payment, but not enough to their liking or to the liking of their bank. Here rent-to-own may help as well.

The RTO transaction is a way to speed up your dream of home ownership and a forced savings plan all-in-one. Rent-to-own, means you rent the place you would like to own but which is out of reach for the next year, two years, or three years. You find an investor who is willing to buy the house for you with you having the right to buy the house at the end of your rent term, say 2 years from now at a pre-set price.

So we're dealing with two contracts a) a long term lease contract (1 - 3 years) which is a normal rent contract and b) an 'option to buy' contract or a 'post-dated' purchase contract set to go into effect at the end of the lease term. The rental contract is a normal tenancy contract outlining the (market) rent payable, a safety deposit (which goes towards your down payment) and the other standard clauses.

The second contract outlines the terms of purchase at the end of the lease, and the creation of a savings account where your down payment accumulates. This account holds an initial deposit, say $3000 to $5000 or more if you want to. It could be an interest bearing savings account, although in today's economy the interest accumulation won't amount to much. When you make your monthly rent payments, you also commit to pay ,say a minimum of $200, extra that goes towards your down payment account. That way, you are building up your down payment to the desired level by the end of the lease term.

The 'down payment' is the security for the investor/landlord in case you decide to walk away. He bought the house for you after all and if you don't buy it at the end of the term he will be stuck with it. This way the 'down payment' account is for the benefit of both. So rent and down payment are out of the way.

Next is the purchase price. Typically, this is negotiable, but the investor does not buy your house out of the goodness of his/her heart. He/she wants to make a return on investment. Usually, the investor supplies the down payment and a mortgage to finance the remainder. Thus he can use leverage to increase his returns.

The investor's first goal is to have positive cash flow on his rent - in Calgary that is usually difficult to achieve so, the investor may be happy with $200-300 per month. (Positive cash flow is the money left-over from the rent after deducting property taxes, mortgage payment, advertising, condo fees, etc.)

Another source of his return is the appreciation of the property. In Calgary, properties over the long term appreciate around 6% per year. So if the house was bought for $200,000 it would appreciate by 6% or $12,000 per year on average. Now, part of the reason you, the Renter-to-own, are interested is that you would like to enjoy that appreciation as well. So you split kind of the appreciation: rather than taking all the investor would take 4% and leave you with the remainder of the appreciation.

In return the investor can sell the house for a preset price to you. In our simplified example, over a two year lease of the $200,000 house that would be 4% of 200,000 = $8,000 dollars for the first year plus 4% of $208,000 = $8,320 for the second and a total profit of $16,320. A nice return on the investor's down payment of say $40,000.  Also, the mortgage has been paid down somewhat over the 2 year lease term; say $3,500 and that goes to the investor as well.

For you, the Rent-to-Owner, there are rewards too. Because you get the rest of the appreciation.If the property value actually increased by 6% you would have made approximately 2% of $200,000, or $4000, in the first year and another 2% over $204,000 or $4080 for the second. You had a minimal down payment, say $5000 plus your monthly payments toward the 'down payment' account of $200 per month leased. So you invested on average $5000 plus 24 months/2 times $200 = $7400,00 and made how much profit? $8080 in other words you doubled your money. If the actual market in Calgary went up by 8% over those two lease years you would have done even better.

There is risk, more for you than the investor whom you guaranteed the purchase price. But higher risks give higher returns. What is your risk? The risk is the same as for any other home owner, namely that the market value of the house goes down rather than up. That definitely happens from time to time. But guess what?  At the end of the lease term the house maybe less than your guaranteed purchase price, but you're there for the long haul. You are going to stay there for at least another year or three so the market will have time to recover and you will still be doing fine. Real estate is for the long term (5 to 10 years).

Rent-to-own deals are examples of a win/win transaction. If you are interested in this type of investment, let me know, you can e-mail me at
Just another idea!