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Investment Clubs

One of the key principles of investing is the concept of diversification.  That is one of the main benefits of most mutual funds that are available to Canadian investors.  With that concept in mind we can quickly discuss the benefits of joining an investment club.  An investment club is great if all parties that come to the table are able to contribute and spread their individual knowledge and/or research.  An investment club could also be a great sounding board to bounce your investment ideas off of.


Do a search on Google for investment clubs and see what they may have to offer you on your goal to financial freedom.


Mortgage deals and mortgage brokers

I'd just like to post some frustration and vent about my current issues. I'm in the process of purchasing a condo-hotel unit in the Quebec area and I have been offered a sweet mortgage rate for 7 years from a national Canadian bank. I have spent literally 2.5 weeks waiting for them to close the deal on the mortgage application.

I spent time calling the guy's assistant and providing her with all of the relevant information and then I find out that no action was taken because I get asked the same questions again and again. I had to ask the developer for an additional week of time, which expired on Friday, and I can sense their frustration with me as well.

The mortgage broker was supposed to get back to me on Friday after I personally ate up my lunch hour and drove through traffic to go and see him face to face. I called and called all to avail. Now, I have to hope that the application was processed on a Saturday, which I highly doubt, and go onto week 3 of just trying to get a mortgage application finalized.

This deal better make millions!!


Customer Loyalty

When it comes to the exciting world of my money and the principles of personal finance I don't mind being called names. Take for example some of my favourites: stingy, cheap, crazy, and frugal. Bah humbug!

Let's talk about customer loyalty and how it can help you keep your hard earned cash in your wallet, or purse as it may be for you ladies in the crowd.

I for one have one main credit card that collects those wonderful Aeroplan points. Now if I buy gas then I get one Aeroplan mile for each dollar of gas. If I buy an item not normally related to being on a business trip and more of an everyday essential, such as at the drug store, grocery store, etc..then I now get 1.5 Aeroplan miles for every dollar. If I purchase a flight with Air Canada then I get Aeroplan miles for when I fly, and if I get the ticket online then I get even more. Plus let's not forget the fact that I'm also getting Aeroplan miles for using the credit card in the first place. I never use cash or debit cards. I put all of my expenses on my credit card and then I'm disciplined enough to pay it off each month in full. This strategy of customer loyalty to one credit card has earned me an iPod and at leat 8 free flights in North America over the last 5 years.

So now that I have my credit card attack planned out then my next customer loyal tip is for when you have to buy toiletries. I for one only shop at one drug store and I wait until they have 15-20 times the points. I would then go in the drug store, you guessed it, with my snazzy and jazzy credit card and then buy a months supply of goods. This gives me bonus points plus I'm still getting my Aeroplan points. This has allowed me to redeem my points for an iPod as a gift; pays for all my roadtrip materials such as snacks, sunscreen, sunglasses, etc...; DVDs; and of course razor blades!

Folks. The moral of the story is that with price guarantees at most stores and comparable prices then why not be committed to one or two stores and have them work in your favour. It could even end up being like Cheers...where everyone knows your name, but you don't want to be known as the greasy guy that continually walks into Shoppers Drug Mart buying condoms, lube, and pantyhose!

Personal Finances -- Overdraft, and Instabank

Overdraft Protection

"From time to time, you may need the convenience of overdraft protection. Think of it as peace of mind for those times you need a little extra to cover a cheque or bill payment." This is from the BMO website.

During university I worked at one of the big 5 banks as a teller and I helped out with the processing of loan applications. I learned about the joys of determining your Beacon and FICO scores. Two of the main personal finance habits were learned while making $8.00/hr counting other people's money.

1.) Bank Overdraft -- Yes, they will protect you for those times when you may have forgotten to deposit your rent cheque or your cousin is two days late paying back your $50 loan. However, nothing is for free and the bank charges you interest on the overdraft amount each day. 9/10 you end up using the overdraft protection because you were either too lazy to get to the bank or you failed at planning your personal finances and you bought that new watch or the case of Guiness instead of Lakeport beer!

2.) Instabank fees -- Yes, most banks will charge you hefty service fees for using your own money. One big tip is to get out of the habit of withdrawing small amounts from the bank machine at one time. Each time that you make a withdrawl your account can get charged and if you are using another bank's machine then you're getting the 'ol double whammy of even more fees. Instead of taking out $10 each day throughout the week to buy your foot long sub combo at Subway, then why don't you take out $50 on Monday and budget it throughout the week.

It's the little things that make the world of personal finance in Canada go round.


CONDO HOTELS -- who, what, where, when, how?

Canadian Condo Hotels are a new trend in second home ownership.  Buyers can purchase luxury vacation homes at a world-class resort and receive rent revenue whenever they are not using their residence, helping to offset the cost of ownership.


There are several locations in Canada where Canadian Condo Hotels have been popping up.  Some of the more common locations are Banff, Quebec City and Mont Tremblant.


Canadian Condo Hotels are normally operated by the biggest names in the hospitality industry like Four Seasons, Ritz-Carlton and ChoiceHotels.  By capitalizing on the hotel’s name recognition, advertising, national affiliations, centralized reservation system and management expertise, Canadian Condo Hotel unit owners typically receive a higher level of rental income than they would from ownership of a traditional vacation home.


Owners normally participate in the property’s rental program and share in the revenue the unit generates.  Ownership is considered to be 100% hassle free as all maintenance and rental issues are handled by in-house management companies.


With a timeshare, owners are typically allotted just one to two weeks of the year to use their condo.  They receive the same calendar weeks unless they go through a process to trade with someone else.  With a Canadian Condo Hotel unit, owners have deeded ownership to their unit and can usually use it when they want.  Timeshares can also be difficult to resell, even if the seller is willing to take a loss.  Canadian Condo Hotels, on the other hand, because of their prime locations, limited inventory and upscale quality, are a highly-desired commodity.  They are more likely to appreciate over time and can be readily resold.


As part of the rental agreement, the hotel pays for most operating expenses such as housekeeping, administrative and marketing costs.  The Canadian Condo Hotel owner typically pays the real estate taxes, insurance and capital improvements.


Canadian Condo Hotels are attractive because they offer a luxurious lifestyle and hassle-free ownership.  In addition, low interest rates and a volatile stock market have caused investors to diversity and consider real estate alternatives like Canadian Condo Hotels.






Get it approved and get it done

Get it approved and get it done.

Just a quick tidbit to keep you informed on the importance of getting locked in guaranteed mortgage rates.

If you are considering getting an investment property or even if your principal place of residence has its mortgage up for then renewal then it is imperative that you continue to get locked in mortgage rates from either your mortgage broker or main bank. You can request this guarantee and it should be locked in for approximately 90 days. If it is a mortgage renewal then you must wait for 90 days prior to the maturity date before shopping around.

This can work to your benefit when rates are fluctuating and the prime rate is expected to rise. Also, remember that the media normally lets you know at least one week in advance if the prime rate is expected to raise.


RSP Mortgages Explained! Finally!

Jamie Golombek

Putting a mortgage into your client's RRSP can be a good constructive investment.

Joe Black has been a diligent saver since his first year of working full-time. He's thinking of using $100,000 from his RRSP to finance his upcoming home purchase, but he's unsure if this is a sound financial decision.

A self-directed RRSP can hold a mortgage on either commercial or residential Canadian real estate. The rules that govern holding a mortgage in an RRSP differ, however, depending on whether the mortgage is "arm's length" or "non-arm's length."

An arm's length mortgage is any mortgage where the RRSP annuitant deals at arm's length with the owner of the property being mortgaged. If the annuitant is not related to the owner of the property being mortgaged, the mortgage will probably qualify as an arm's length mortgage. The main advantage of holding an arm's length mortgage is that there is no requirement to have the mortgage insured.

A non-arm's length mortgage is a mortgage where the mortgagor (i.e., the borrower who is mortgaging his or her real property) is, in fact, the annuitant or is related to the annuitant. In this case, the mortgage must be administered by an approved lender under the National Housing Act, which includes most financial institutions. The mortgage interest rate and other terms and conditions must reflect normal commercial practice. In addition, the mortgage must be insured either by the Canada Mortgage and Housing Corporation or by a private insurer of mortgages. The mortgage insurance requirement ensures that retirement savings are protected in the event the annuitant defaults on his or the mortgage.

Choice of Rates

When seeking a mortgage, the borrower normally tries to get the lowest possible rate available. However, since Joe is making the payments to himself (through his RRSP, which is the lender) the opposite holds true. Why not simply charge, say, 15%? As noted above, unless Joe can find a mortgage lender loaning funds at 15%, this rate won't fly with the CCRA. Joe can search for the highest available commercial rate and use that rate on his mortgage. A quick scan of the commercially available rates on November 1, 2002, revealed the highest five-year closed mortgage rate to be 7%.

Annual Fees

The costs associated with putting a mortgage into an RRSP is perhaps the biggest drawback. There are the typical one-time mortgage expenses, which include set-up, appraisal and legal fees. However, since Joe will have to get a mortgage (from a financial institution or his own RRSP), these fees would have to be paid anyway.

The biggest upfront cost is the mortgage insurance premium, which can range between 0.5% and 2.5% of the mortgage. The amount depends on the loan-to-value ratio of the mortgage and is calculated on the total amount of the mortgage on the property, regardless of the amount held within the RRSP. There are also annual fees for maintaining a self-directed RRSP and an annual mortgage administration fee that many financial institutions charge.

For Joe, we will assume that the mortgage insurance fee is 1% of the mortgage amount, or $1,000, plus provincial sales tax of 8% in Ontario, which totals $1,080. This fee will be amortized over the 25-year term of the mortgage at the 7% rate. So, Joe's annual fees can be summarized as follows:

Self-directed RRSP fee $125
Annual mortgage administration fee $200
Amortization of $1,080 insurance $90
Total annual fees $415

The Analysis

To determine whether this is a good investment, Joe will need to compare the rate that he is getting on the mortgage (i.e., the 7%) to the rate a similar type of investment inside his RRSP might have earned. Probably the best comparable investment choice would be a five-year GIC. As of November 1, 2002, the typical five-year GIC rate was 4%.
Worth the effort?
Putting a mortgage into an RRSP incurs added costs, so clients and advisors alike need to ensure the returns are satisfactory.
The following chart shows the minimum interest rate a mortgage would have to charge, at varied mortgage amounts and costs for insurance, in order to break even with a GIC rate of 4%.

If we assume a 25-year amortization period, Joe's monthly mortgage payments to his RRSP on a $100,000 mortgage at 7% would be approximately $700 for a total of $8,400 annually. From this amount we deduct the annual fees of $415, paid from within the RRSP, which leaves approximately $8,000, which now needs to be reinvested inside the RRSP each year. If we assume that the money is invested at the end of each year in a GIC yielding 4%, at the end of 25 years, the RRSP would be worth just over $333,000.

If Joe's RRSP simply invested the $100,000 in a five-year GIC at 4%, compounded annually, and renewed at the same rate every five years, after 25 years the RRSP would be worth approximately $267,000. So, given the large spread between the commercially available five-year mortgage rate of 7% and the five-year GIC rate of 4%, the former seems like a good deal for Joe.

In this example, we have made a number of assumptions. First of all, rates do fluctuate. It is unlikely that the five-year mortgage and GIC rates would be the same in five years' time as they are today. However, as long as the spread is similar, the analysis should hold true. Second, for this to work, Joe needs to have $100,000 of liquid investments inside his RRSP to loan to himself. Third, not only is the analysis sensitive to the interest rate spread, it is also dependent on the amount being borrowed and the mortgage insurance premiums being charged.

One final cautionary note is in order. Just because the RRSP is the lender doesn't mean the annuitant can skip the odd payment. If the annuitant is unable to make his or her monthly mortgage payment, the financial institution will place the mortgage into default. It will then attempt to collect the proceeds upon a power-of-sale of the property or, if insufficient, from the mortgage insurance. In other words, holding a mortgage in an RRSP does not get the homeowner off the hook in case of default.

Self Directed RSP


Canada and US subprime mortgages

Harry Koza is senior Canadian markets analyst at Thomson Financial and a columnist for GlobeinvestorGOLD.com.

August 10, 2007

You've got to admire U.S. Federal Reserve Board chairman Ben Bernanke. What a master of the understatement. While his predecessor, Alan Greenspan, used to specialize in impenetrable Delphic utterances that required interpretation by legions of market hierophants, Mr. Bernanke keeps it simple and almost innocuous:

"Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing."

I'll say. I see that foreclosures in Southern California were up 725 per cent in the second quarter: 9,504 houses repossessed by the bank, compared with 1,152 in the same period in 2006. In L.A. County, foreclosures were up 799 per cent in the same period. Okay, so that's not a lot of houses in itself, but multiply that by all the other jurisdictions where subprime mania took hold, and pretty soon, you've got, well, you've got a lot of underwater real estate. I've seen forecasts that as many as half of all subprime mortgages will go bad - that's 1.7 million houses.

That's a much more serious number. I figure it's giving Mr. Bernanke and his Fed minions some sleepless nights. By way of comparison, the foreclosure rate on Canadian residential mortgages is less than a quarter of 1 per cent a year.

Anyway, as Gentle Ben says, the correction is "ongoing." The Online Dictionary's definition of "ongoing" is, "currently taking place, in progress, or evolving." Incidentally, the example the Online Dictionary uses to illustrate that definition is, aptly enough, "an ongoing economic crisis."

There's been a lot of carnage already. So far this year, $240-billion (U.S.) in option-ARM (adjustable rate) mortgages have reset at higher rates, and borrowers have seen their monthly payments go through the roof. That's caused a lot of delinquencies, and is starting to cause all those foreclosures. But the big reset upset is still to come. John Mauldin of Millennium Advisors, in his e-letter this week, had a handy schedule of what's ahead. Option-ARMs really peaked in popularity in 2006, and most of them had low "teaser" rates for the first two years. So while there will be around $50-billion (U.S.) worth of resets this month and a roughly similar amount each month through the rest of this year, in January, 2008, the figure shoots up to $80-billion, peaking next March at $110-billion before starting to taper off again.

In just the first three months of next year, more option-ARMs will reset at higher rates than did in the first seven months of this year. By this time next year, there will have been $1.125-trillion worth of resets since Jan. 1, 2007. Let's assume that half of them do go into foreclosure. Call it an even $500-billion: That's still a serious haircut, even for the $11-trillion U.S. economy.

So, how many more hedge funds, collateralized debt obligations (CDOs), mortgage-backed securities and mortgage lenders will have gone belly up by then? I'd hazard that there will be plenty more before things stabilize.

That's why debt markets are so nervous. The bond market knows that real estate "corrections" take years to unwind. When the United States had its savings and loan crisis in the late eighties, it took until the mid-nineties to work out the bad assets. Mind you, the Savings & Loans had good loan books; they'd just been funding 30-year mortgages at 8 per cent with one-year term deposits at 12 per cent. I guess they'd planned to make it up on the volume.

The fast-money crowd nowadays would call this "negative carry." Actually, that's a phrase that hedgies and CDO investors and leveraged buyout (LBO) geckos are getting unfortunately accustomed to hearing a lot of these days, along with such other time-tested phrases as "margin call," "mark-to-market," and the scariest of them all, "offered without" (trader argot for, "Show you a bid? That CDO is so ugly, if it was your kid you'd have to tie a pork chop around its neck to get the dog to play with it.")

Okay, so let's take a quick and dirty stab at predicting the future. So far this year there have been $240-billion in subprime mortgage resets, which has generated, according to the Mortgage Lender Implode-o-Meter (ml-implode.com), 114 belly-up mortgage lenders and, in just the past two months, 17 big global hedge funds that have halted redemptions, of which 10 have gone blooie.

Based on Mr. Mauldin's schedule of resets, there will be about $840-billion of resets by the end of July, 2008. That's 3.5 times the amount that's reset so far this year. Making the presumptuous assumption that foreclosures, bankruptcies, CDO failures and hedge fund implosions continue at the same rate, we could see another 400 mortgage lenders buy the farm and another 360 hedgies get trimmed by this time next year.

It all reminds me of the old Eagles' tune, Hotel California, as if done by Led Zeppelin: "If there's a bustle in your hedge fund, don't be alarmed now. You can check out any time you like, but you can never leave."

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For today's topic on personal finance we will discuss -- perception. Would you like to buy a 2bdrm condo near the downtown core of a city that is located next to museums, shopping, cafes, and of course convenient city transportation; or would you prefer a 2bdrm condo near an airport, major highway lanes and close to 30 storey office towers?

Without even seeing the prices, images or by learning other details of the units then I'm 100% certain that you would have picked the downtown condo because of its 'perception' of being cleaner, quieter and being more rentable.

Well, let's talk about what our perceptions can actually do to our decisions. Let's take the example that I recently came across while travelling in New England. I was driving for 3 hrs straight up US 1 and I noticed that all of the hotels were saying No Vacancy. Now I know that this is busy tourism season, and I know this is the lobster season for New England, but what was one of the main reasons for seniors being attracted to this area in the summertime? Well, I would have to say the perception that Maine Lobstah are the best Lobstah's in the world. Am I wrong? Hmmmm.

Oddly enough, I found out that the supposed Maine Lobstah's that everyone was drooling over were actually packed on ice and shipped up direct from their northern neighbor Nova Scotia. Perception. Great Lobstah equals Maine. Reality. Great lobster equals being fresh from anywhere dipped in garlic and butter sauce.

Remember kids, when you're making an investment property deal or evaluating a deal be sure to get facts and not perception.

Until next time.



Hello, this is just a quick post to remind you to have your ducks in line while considering getting into the real estate investment property game. Last night I came across a good rental opportunity where there was a positive cash flow. I crunched the numbers and determined that I was comfortable to proceed. So I scheduled a showing of the unit for the next night...and then 3 hours before my showing the realtor phoned saying that the unit was sold.

Would this have been a solid real estate investment property to purchase and would it have provided steady rental income over the next several years?

So get your guaranteed mortgage application rates and keep your eyes peeled for your ideal real estate investment property deal!


30 second real estate evaluation calculation

Disclaimer: Don't bet the farm on this method, however it is a simple approach to weeding out bad real estate investment deals and identifying which deals you should investigate further. We'll tuck this one away in our 'general rule of thumb' category.

Scenario: "lovely 5 bdrm duplex for sale in downtown area. close to all shops, offices, tim horton's, and zellers. act now, before it's gone. asking $150,000 firm. rents are 500 2bdrm, 600 2bdrm, and 350 1bdrm"

Apply 30 second calculation in 3, 2, 1...go!

Step 1. Take asking price and divide by 10
150,000 / 10 = 15,000

Step 2. Take the expected monthly income and multiply by 12
(500 + 600 + 350) * 12 = 17,400

17,400 > 15,000 ; therefore investigate further.

If the expected yearly income from the investment property is less than the expected expense then this should raise a red flag and you should re-evaluate this real estate investment opportunity. Remember, that this does not take into account the potential value of the unit.

1st investment property deal!

Well, here we are. Put up or shut up as they say. Here's the lowdown on our first real estate investment property.

2 bdrm condo located approximately 15 mins from downtown Ottawa, near numerous key amenities such as city transit, schools, daycare, shopping, library, skating rink and even a wave pool. The unit is already rented for a newly signed one year lease at $1000/mos with both first and last month rent paid up. The condo fees cover all utilities. The unit has indoor parking, pool, sauna, hottub, and a games room. Other 2bdrm's in the building are going for $120k - $140k, however they have had some work done to upgrade the units.

Asking price: 112,500
Condo fee: 394/mos
Properyt Tax: approx 100/mos
Insurance: approx 50/mos

As of August 2nd, 2007 a competitive 5 year fixed mortgage rate would be 5.79%, however the unit had a locked in rate of 5.25% for a 5 year fixed.

So, if we offered $105,000 then we'd have to decide between 0%, 5%, 10% or 20% down. Let's break down the numbers.

A. 0% -- I don't really like this scenario because my goal is get more equity in the next 2-3 years to reinvest again, and this would mean that my monthly payments are comprised of interest.

B. 5%
105,000 - 5250 = 99,750

99,750 mgt amt. @ 5.25 % = 594 / mos / 25yr amtz
99,750 mgt amt. @ 5.25 % = 494 / mos / 40yr amtz

$494 /mos
+394 /mos
+100 /mos
+ 50 /mos

That leaves $1000 (rent) - $988 = $12.00 profit (good for 1 foot long club, 2 cookies and large chocolate milk at Subway + tip)

C. 10%
105,000 - 10,500 = 94,500

94,500 mgt amt. @ 5.25 % = 563 / mos / 25yr amtz
94,500 mgt amt. @ 5.25 % = 468 / mos / 40yr amtz

$468 /mos
+394 /mos
+100 /mos
+ 50 /mos

That leaves $1000 (rent) - $962 = $38.00 profit.

Both B. and C. show minimal profit, however they are a profit and the initial price point of the condo is fairly affordable for the Ottawa market. Three key features for me are the locked in rate of 5.25%, the initial price point, and the fact that it is rented and in my opinion a rentable area of town.

Evaluation: This property meets my financial evaluation and I'm also prepared to take a monthly rental loss if required. This would go against my net income and the expected monthly loss is manageable for 2-3 months if some unforseen situation occurs.

I've decided to proceed with my second viewing and continue my evaluation of the area and the building itself.

In our next post I'll introduce a quick calculation to help you evaluate real estate investment deals.

Multiple Egg Baskets. What a dumb name!

Why did I choose that title? Simple. I don't claim to be a financial guru or a wizard with numbers, however I have learned a few simple rules of personal finance that have served me well so far. The first motto of personal finance being -- don't put your eggs all in one basket!

Case in point: Let me take you back to the year 1999. I was drafted into the technology sector on the promise of riches and travel. Everyone was talking about their large signing bonuses to this IT company or that IT company, and the goal was to get in on some tech stocks and set sail. Well, just like an old Batman TV show shown on CBC's Switchback, all that you heard was Bang-Zoom-Biff-Zap-Crash as the market dropped and everyone that invested all their savings in one stock suddenly started to weep.

If Aesop was alive today then we'd be reading a personal finance story about a little bull that put all of it's eggs in one basket and then lost them all to some bear or even some tax man. (Note: did you catch the animal symbolism??? Who needs Animal Farm)

I plan on using this blog to help you learn from my personal finance lessons learned while I strive to make the million before the age of 40. Here's how George from The Hour would break down my bio:

Name: (I'll leave that for later in case I get sued for some reason)
City: Ottawa, Ontario, Canada
Age: 31 (9 years 'til goal, if not sooner!)
Occupation: Federal Civil Servant
Education: Bachelor of Business Administration
Family: Common-law partner, and 1 child
Objective: expand personal level of wealth through diversification and passive income assets

For my initial personal finance entry I just wanted to introduce myself and set the stage. Here's what coming up:

* Learn as I go through the process of acquiring my first real estate investment property.
* What is an RRSP Mortgage?
* Realtors -- Can't live with them and do I really need them?
* What can the Ab Lounge, Magic Bullet, and Jessica Alba teach me?
* Real estate analysis. The 30 second calculation.
* Mortgage + Condo fees + Property Tax + Insurance + Backup Plan Fund = Rental Loss. Did I sign up for that?
* Plus lots more of solid gold material.....minus the solid gold dancers.