Another week comes to a close. September felt like a blur to me. I hope it was slower for you. As usual, I am clearing out some odds and ends from the personal finance world.

1. In mergers and acquisitions news,  Four Pillars and Mr. Cheap have merged their blog into a super-blog. Unlike CN’s acquisition of Elgin, Joliet and Eastern Railway Company, no regulatory approval is required! Congratulations and keep on posting.
2. Rumors abound that Microsoft may take a stake in Facebook for $10 billion! When a stodgy tech company (which may be an oxymoron) may buy into a content provider, you know the future of technology is in storage and content provision and no longer hardware/software. Coupled with Google beginning to offer a competing product to the Microsoft office suites, what’s a traditional tech company like Dell to do? If you like investing in tech, make sure you are looking at content providers (such as The Thomson Corporation and Google) rather than the traditional “bricks and mortar” of this industry like hardware/software sales.
3. I have some upcoming posts on the emergency fund debate (is it needed or a financial myth?), credit proofing and more from our guest blogger on buying a new home. If anyone has any suggestions on blog topics, kindly provide a comment.

Have a great weekend.

I beginning to believe that this week is bad customer service week. Canadian Capitalist posted the other day on giving up on Questrade discount brokerage (although in their defense, their “Customer Acquisition Supervisor” seems great based on a response back to the blog).  Professionally, we have been extremely frustrated by our bank who took several weeks to approve our request and finally did this week; what made us frustrated was that we only needed one document signed to get approval! It took 2 weeks for that! Time is money in business and a bank as fast as molasses is certainly not a business friendly bank. To complete the trinity, the guy who was supposed to fix my dishwasher didn’t show up-twice (I am beginning to believe, in the trades business, no one wears watches or has calendars).

But I have begun to wonder if bad customer service = greater profits. If you have terrible customer service, you are either: (a) not in business for long; (b)  are so busy, you don’t care about losing clients; or (c) as an extension of (b), so profitable, you work at your own schedule.  If you have been in business for some years, you probably fall in category (b) or (c). Certainly, the two biggest industries who are leading examples of bad customer service, banks and telephone companies, are very profitable industries. They are also regulated industries with high barriers to entry- its hard to walk across the street to a competitor if there isn’t one or they are just as bad because they also fall under (c).

However, I also believe that my perception that bad customer service is growing has something to do with the “made in China/internet” effect. Made and China and the Internet have one thing in common- get goods/services/information/entertainment out fast and cheap- quality is a distance priority to quantity and cheapness (not surprisingly, having been to China twice this decade, the customer service is utterly terrible even in high-end places) I really believe that this influences how business is being done. Everything is priced cheap in order to entice a quick sale which will boast the quarterly earnings to keep shareholders happy. Since cheaply priced goods also have a low profit margin, spending time post-sales on customer satisfaction or service is frowned upon- it eats into profit margin to handle a client call for more than 5 minutes.  Tim Horton’s times their employees on how quickly they can service a client; the time alloted gets shorter and shorter every year; I have been told by a co-worker’s wife that it is now about 30 seconds/customer. I am sure it happens in other companies too.

Perhaps someone should put together an index fund of companies who have poor customer service but have existed for over 20 years. If my theory is correct, it could be a profitable index fund.

Am I the only one that thinks customer service levels have really gone downhill?

Welcome to Real Estate Wednesday! For the next three Wednesdays, I have the privilege of a guest blogger who we named “New Home Buyer” for privacy reasons who will post of their experience in buying a new house.  This post reminds me of something Wayne Gretzky once said: “you miss 100% of the shots you don’t take.” If you are a regular reader to this blog, you have probably noticed that a lot of my recent real estate blogs are guest posts- this is an attempt to share different experiences with the blogging world and put the personal into personal finance. Without further ado, here is New Home Buyer sharing his tips on how to save money when buying a home:

 How to Save Money when Buying a House – Part 1 of 3

Recently my friend Judi told me that she believed that the term “passive income” is the most over-used and mis-used term in personal investing. From what she told me, a lot of people she meets are working on producing “passive income” streams even if they are not. The fundamental source of her frustration was that people have confused the term passive income with streams of income.  For example, someone who owns a business on the side which requires some time and attention does not have a passive income stream. They have another source of income- it is a big difference.  Her challenge to me (and, by extension, the readers) was to list true sources of passive income.

Passive income, as the term indicates, is income you make without doing anything other than owing the cash flow stream itself.  For example, dividend income is true passive income- you receive a dividend cheque every quarter for evidence of ownership. An inheritance or a trust for your benefit which pays you money on an interim basis for the rest of your life is passive income (if only we were so lucky).  In these examples, you sit back and money comes to you. However, what about the grey zones?

Here is my take on what is and isn’t passive income for streams of income that fall in the grey zones- feel free to add your 2 cents since this list falls in the mushy middle of what is or isn’t passive income:

1. Real Estate Investing:If you own and manage investment real estate, you don’t have a passive income stream. You have an alternative source of income. What part of fixing the toilet, collecting rent cheques, advertising to fill rental vacancies and hiring trades is passive?  However, this is where I will make the distinction. If you own commercial investment properties and/or hire a property manager, depending on how involved you are, it is passive income. Commercial premises and residential rental units with property managers are most likely professional managed. A commercial lease downloads almost all of the responsibility of managing the premise to the tenant other than major repairs and common area maintenance which is carried out by professional property managers. Thus, substantially all of the income flowing from these types of real estate investments are passive in nature. Granted, there are some minor responsibilities the property manager cannot do for you, such as renewing the mortgage, but this is some work spread out over time. What I would suggest is that real estate is an easier way to make income given you don’t have to be there for 9-5 but for most self-managed real estate investments, it is not passive income.
2. Licensing/Franchising: If you sell a license or franchise your business, it is only passive income if you have no obligation to the licensee or franchisee afterwards. For example, you license software with no obligation to provide patches or upgrades. Franchising cannot be considered a passive income stream- the franchise has obligations to provide sales/marketing and administrative support. Franchise is a great revenue source because someone else is paying you for copying your homework (sort of speak) but I would not define it as a passive income source.
3. Infopreneurship/Publishing: “Infopreneurship” is a relative new term to the business lexicon. It refers to the selling of information whether through seminars, training modules or blogs. Its the new economy’s version of traditional publishing. This is where things get really murky. Infopreneurship which involves the constant updating of information from the owner-manager (i.e. a blog) is not passive income. An aggregator site which publishes articles from other sources is passive income only if a program has been devised to find the articles and publish them-but it is only passive income after a lot of work has been putting into setting up the program. Despite the thousands of dollars Google can pay to a site, sites need constant updating so it cannot be strictly defined as passive income.  However, if you develop a training module, seminar, e-book that can be sold many times over via e-commerce, it is passive income because you don’t have to do anything to get a sale- but again, it comes with the same limitation that you had to put a lot of work in beforehand.

These are just my opinions. It is definitive by any stretch of the definition. Let me know what you think what true passive income is.

I didn’t have the possibility of posting this on Friday because of business travel. Nonetheless, here’s a tardy odds and ends from the personal finance world:

• Real Estate Guy who guest-blogged on Tuesday about the pros of real estate investing has a possible opportunity for those who wish to learn more about real estate investing. I am going to cut and paste verbatim his offer. Please note I am just passing along the message and neither for or against the offer. I am not part of this potential group. As with everything in this blog, please conduct your own due diligence and decide accordingly. Thanks.

“For the benefit of many ‘newbies’ who don’t know where to start, and don’t want to be taken advantage of, Real Estate Guy is forming a mentoring group.

Real Estate Guy has actually invited one of his professional real estate investment mentors to lead a group of (newbie) real estate investors in Toronto in the near future. Together, they will put together a group of 3-5 people and lead them through the entire real estate investment process, from A-Z, and show them how it’s done.

Some of the things the group will do are: understand at a glance if a for sale listing is worth pursuing, how to calculate ROI, where to find deals, where to find buyers to flip to quickly, and also teach people how to write effective offers.

If you would like more information, please email DJMI@Rogers.com. Please note that the group is currently being formed.

This offer is for those who are serious about pursuing the benefits of investing in real-estate. Given the generosity of the offer, kindly email for further information only if you are seriously interested. Thanks.”

P.S., the first mentoring group will gather for a 3 day session in Toronto (date t.b.a.). Based on interest from bloggers, mentoring groups in other cities will be arranged!”

• As everyone knows, the Feds cut the interest rates by half a percent which is quite a large cut. Much like Investoid, I am against the rate cut for many of the same reasons cited.
• Canadian Business recently released their “Best Cities for Business” in Canada. Quebec City came in first and Victoria scored dead last. For real estate owners, the survey has two interesting stats- commercial building permit growth expressed as a % and crime rate per 100,000 people; two factors which are important variables in real estate prices as commercial growth and low crime drive up housing prices. Two things that struck me immediately about the survey- Vancouver has a higher crime rate than Toronto, Calgary and Montreal (it appears that crime against property and crime against persons have equal weighing in the survey but so much for the media fixation that Toronto is full of criminals) and, if you believe this survey, Calgary has peaked as a city to do business in- its gotten too expensive for many businesses to move to Calgary and they will find cheaper pastures to set up shop. For years, my real estate investor friends have pointed to Waterloo as the place to invest in investment properties- the Kitchener-Waterloo area came 11th in the survey. Here’s the survey.

Today continues our two part series on the pros and cons of real estate investing. Yesterday’s post dealt with the a pro real estate investor. Today is the con side from someone I will call Anti-Real Estate Guy. Both are friends of mine who have graciously agreed to blog on their positive and/or negative experiences in real estate. Without further delay, here’s a post from Anti-Real Estate Guy on who he is leaving real estate investing:

So often I hear people talking about buying properties with the intent of becoming landlords. It is great to see their excitement, optimistic plans and forecasts of fantastic passive income. As I sit here in the middle of renovating my own final rental property, getting it ready to sell, I can’t help but feel bad for most of them. They have yet to learn the biggest real estate lesson of all - being a landlord sucks.

And, as a small time landlord who once had 5 rental units with dreams of a nice passive income, I can tell you stories. Believe me, getting calls at midnight for toilets backing up, heating issues, floods and every other type of complaint you can (and can’t) imagine really wears thin after a while. So much for passive income. As a matter of fact, if your hope is for any kind of income you had better be in a popular area commanding top dollar rents.

The sad reality is that most people, when doing their cash flows and planning how they are going to build their real estate empire seem to forget the realities of owning property. For example, in a multi unit property who’s responsibility is shoveling the driveway in the winter, planting flowers in the spring, mowing the lawn, cleaning the eaves, repairing decks, keeping the pavement in good condition, painting the common areas, cleaning those same common areas? Who do the neighbours call to complain to? Quick answer - you.

And what about when tenants leave? No matter what kind of lease you sign, when the tenants move out you will most likely need to fill holes from paintings, shelves and hangers, repaint and clean the entire place. There’s nothing passive about any of this - its time consuming and costly. And when tenants leave, and the good ones usually will (the bad ones seem to stay forever), you’ll need to advertise, show the place, do credit checks and sign new leases. Expect at least a month of vacancy each time. Of course you can pay a property manager to do this for you but the cost seldom justifies it.

Hiring a property manger is certainly an alternative to all of this work but it reduces your profitability. My old property manager charged a small monthly fee per unit and anytime that they rented out the unit they charged a fee of one months rent, regardless of whether or not the tenant stayed or paid rent. In addition property managers have established relationships with plumbers, painters, electricians, handymen, etc and although that sounds like a good thing what it really means is that they are not shopping around for the best deals.

Let’s do the math: on a $1500 dollar apartment making an 8% ROI there is little profit if you hire a property manager. Really the rule of thumb I liked to use is 1% of the purchase value of the property being charged in rent each month (on a $300,000 property, you charge $3000/month in rent). At that rate, assuming you put down 25%, you should have enough cash flow, if you are lucky.

$300,000 - 25% down = $225000

Mortgage of around $ 1350 (give or take, depends on the market, interest rates etc.).

Rent of around $3000 (most likely need at least two units to get this)

Monthly gross profit of $1650

Monthly expenses like taxes, insurance, utilities, landscaping, etc - $ 750.00

Property Management Expenses: $ 120.00 per month per unit = $240

This eventually leaves you with a profit of approximately $400 – $500 per month. All it takes is one unit being empty for a couple of months added to the rental fee charged by the property manager and a fresh coat of paint and there is nothing left. This assumes that you can get 1% of the purchase value as rent so my numbers are actually best case scenario.

Just in case you haven’t been kicked around enough, there are the ‘professional tenants’. These guys know the system better than you ever will, they’ll pay the rent for a short time and then suddenly a check bounces. You find out a week or so later when your notice the reversal on bank statement, then it takes a couple of days to contact them, they apologize profusely and offer to give you another check. Being the kind hearted landlord that you are you agree. Then that check bounces, you arrange to get cash, they don’t show up at your scheduled time. You finally decide to evict, download the paperwork, fill it out and serve it to them. By now it is past the end of the month and they owe a second month. You go to the tribunal with them, talk to an arbitrator, a deal is struck giving them a couple of weeks to get caught up and then guess what… they miss that obligation as well. Back to the tribunal, get a date set and serve notice. Before the tribunal date they vacate (if you are lucky) and they don’t show up at the tribunal. The tribunal issues an
order in your favour but since the tenants have moved out and not left forwarding information you can’t collect. And there is not much in going to small claims court - if they had any money they would have paid you in the first place.

By the time you clean, repair, paint and find a new tenant it’s been 4 months since you’ve had any income from that unit. Hopefully the damage deposit you got when they signed the lease covered some of the costs. Depending on your margin this could wipe out your entire budgeted annual profit. Still want to be a landlord?

Obviously rental properties can be a good investment, otherwise there wouldn’t be so many units around. But as a small investor you really need to look at whether the potential hassle is worth the investment. Maybe there are better ways to invest your time and money.

As I mentioned last week, I have two guest bloggers this week who will blog on two different sides of residential real estate investing. One will post on why he is a real estate investor and the other will post on why he is leaving the residential real estate game. Both are friends of mine who are real estate investors. For privacy reasons, they have asked not to be identified by their real name. Today’s post is for the “pro” side who I will call “Real Estate Guy”. Real Estate Guy may be able to suggest a real estate mentorship group. I will give more details on Friday if you wish to know more information about this potential group. Thanks. And now, Real Estate Guy…

As a real estate investor, I am happy to offer some personal experiences/feedback, in response to some recent postings I have read. To begin with, I’m afraid my definition of a professional real estate investor differs slightly from that which was posted on September 11th in the blog. Your posting said: “you do not define buying to flip as being a residential real estate investor; you are more of a mini-developer”.

I ask that we not lose sight of the word “invest” or “investment”. An investment is somewhere/something that you buy with your money, in hopes of getting back more money than you initially paid to buy that product/service. Whether you’ve completed one deal, or thousands, if you’ve finished the deal with more money that when you started, as a result of that deal, then it was an investment.

Prior to real estate investing, I primarily invested in stocks and options. I lost my entire investment and more. Then I trusted a financial advisor to invest in mutual funds. I assumed they know more about investing than I do. I was wrong. They might understand the markets better than I do, but only as far as understanding reports and statements based on prior stock performance. Nobody has a crystal ball and knows where a stock will be tomorrow, much less next week, month, or year.

So I turned to real-estate investing. With a little bit of time and money, I was able to learn the business, understand the trends, and be in total control of (financial) fate.

I want to address two points that most detractors of real estate investing raise:

1. “I don’t want the troubles that come with being a landlord”: Most people who raise this argument are, more often than not, people who do it part-time. In my opinion, if they don’t like being a landlord, then it is usually because they are becoming greedy. I don’t mean to offend, but let’s not forget, you can always hire a property manager to take care of the headaches for you. Yes, a property manager will cost you money, and that expense will eat into your profits. However, I’d rather make a little bit of ‘passive’ revenue, and have more free time and less headaches, than go for the home-run, and have a lot of headaches from being a full-time landlord. If I choose to hire a property manager, I may simply have to carry more properties, to generate the cash-flow I desire. However, it CAN be done, and with less frustration and stress than being your own landlord. TIP: Don’t hand over all control to a property manager or they’ll take advantage of you. But it is a lot easier to “manage-the-manager” than to manage tenants!

2. “I don’t have enough money in the bank to buy multiple properties”: True, in the old sense of buying real estate, you must have a down payment, usually 25% of the purchase price, to avoid mortgage insurance costs. However, if you think outside of the box, and you’re willing to do a bit of work, spend some time researching and planning, you can always find an investor who is willing to help you fund your first deal. When I bought my first income property, I had no money for a down payment. I found someone who did, and offered them 15% ROI for the use of their money which was above what they were getting in mutual funds. The cash-flow of the property covered the mortgage, the expenses, and instead of me taking a profit the first 2 years, I paid back my investor. Two years later, my property was putting money in my pocket with equity in the property. I used the equity to buy my second property. Yes, this did take time, but I didn’t get into real estate investing because it is a get-rich-quick scheme (and neither should anybody else). One of the many reasons I love what I do, is that if you follow the proven processes and systems, you simply continue to duplicate it, over and over again.

I also recommend that you don’t get scared by the suggestion to leverage money in one property against another. People get stuck in debt when they leverage a credit card against another. But that is ‘BAD’ debt. There is a huge difference between good debt and bad debt. To learn more about this subject, I suggest you read one of Robert Kiyosoki’s books. I don’t agree with everything he talks about, but I do believe in good debt versus bad debt.

Through assignments (assigning a real-estate purchase agreement), rehabs (purchasing a fixer-upper to fix and sell at profit), and income property acquisitions (properties you rent out to tenants to pay your mortgage and expenses), I am able to make small money in a short period of time, larger amounts of money over longer periods of time, and regular passive revenue over the long term, which provides consistency.

Being a real estate investor has three primary advantages:

1. I am in control: Yes, the stock market, and other financial products will always prove to go up over time, aside from the varying levels of volatility. But real estate allows me to be in control.
2. Someone else is paying my principle: In real estate (income properties), the tenant is paying for your principle, but in stocks, you have to come up with the principle investment.
3. You don’t lose your money overnight: In real estate, if you are rehabbing or wholesaling or assigning a property, it can be done before a HUGE drop in the market. We all know someone who lost a ton of money in the stock market on a moments notice. By the time the stock market shows signs of plummeting, it’s too late, and you can’t dump the stock you have for a reasonable price.

When I started focusing on real-estate investing as a career, I still maintained my full time job. In fact I owned a company for 14 years, and couldn’t walk away from it so easily. But I invested some money and time towards learning the real estate investing game from the best of the best, so that I didn’t get burned from those late night info-mercials. Real-estate now provides me with more money, more satisfaction, less stress, and more free time and flexibility in my life than my consulting company ever did.

P.S. Everything I’ve bought, assigned, flipped and sold has been without using ANY money of my own. So the final reason I suggest that anybody can thicken their wallet through investing in real-estate, is they can’t use the excuse that they don’t have enough money to start.

I was looking at my financial account statements on Friday to see what my asset allocation is and I started tracking back to much older statements. I went back to the 90’s and things looked quite ugly. Hindsight being 20/20, I must have made almost every investing mistake you could make. Thankfully, I made them while I was still young and with modest amounts of money and to paraphrase a business quote- make your mistakes young, fast and cheap (the actual quote is “fail often, fast and cheap” by Jim Estill but I want to avoid failing often). This applies as well to personal finance (which is really the business of “Me Inc.”). If you are a younger reader or simply like to read some carnage, I would rank these as my top 5 investing mistakes (in no particular order):

1. Not buying in volume or enroll in a share subscription plan: I use to buy stock in small allotments which is extremely inefficient from a cost-perspective given you have to pay a sales commission each time you buy (this was in the mid-90’s when on-line trading was more expensive than now). This raised the break-even point on my stock; this was especially painful since I had a penny stock phase and your cost could be as much as 5-10% of your purchase price  in penny stocks. To paraphrase Buffet, buy in volume to minimize your cost of purchase or, if you cannot, enroll in a share subscription plan. A share subscription plan is not available for all stock but, where available, it allows you to purchase stock on a monthly payment plan for a small fee; most banks and insurance companies will offer share subscription plans. Most companies who offer a share subscription plan will state this on their website.
2. Not watching the cost of an investment. This is related to the first point. Like most people, I first started investing in mutual funds. Mutual funds can be good investments depending on the person but I never thought much about the fees on mutual funds back then. Remember fees are paid regardless of whether the fund makes money or not and there are more than enough funds available that a fund you are interested in probably has a competitor with cheaper fees.
3. Too much activity. I got caught up in the day-trading trend. I use to think I needed to do something, anything every so often. What I learned the hard way is to buy, hold and stop looking at the stock market ticker 6 times a day. I noticed something curious when I was on vacation; I was so busy moving and taking time off that I didn’t really watch the subprime meltdown that closely and I didn’t press the panic button and sell or buy anything.
4. Not buying on quantitative analysis. I use to buy the “cool” companies and avoid the old stodgy institutions. There’s a reason why they are old and stodgy- they make a lot of money and they don’t need to rely on the coolness facgtor. I learned to read financial statements and now I don’t buy anything without reading two years of annual statements- no matter how cool the ad campaign is (I do not own Apple, Research in Motion or Lululemon- too over-priced, not enough pricing power going forward and not recession proof respectively).
5. No plan/no focus= no profit. The point of investing is to make money but how? I just did thing willy-nilly without looking at the larger picture. The larger picture may change from time to time but I never asked myself how this investment fit into my larger plan (I am on the Derek Foster plan btw).

But here’s my saving grace- my parents taught me a lot of useful things in life and one of them was don’t get into debt (as a general observation, ever notice how anyone who lived in a country that was invaded during a war has a real good grasp of money management?). Pay cash or don’t buy it. As a result, despite my many investment failings, I am fortunate to report I never dug myself into a hole I couldn’t get out of. What I have noticed is that some blogs have readers who have just graduated from school or started making decent money and they ask the blogger what they should do now- my answer would be manage debt before you starting investing. Its a boring answer but boring does pay the bills and helps me sleep at night.

As a programming note, I have two guest bloggers this week writing on the pros and cons of being a real estate investor. The pro camp will be posted tomorrow. Thanks.

Whether its my house, my parent’s house or a friend’s, I noticed that everyone seems to have a spare drawer- usually in the kitchen- where they keep “stuff”. I called it the junk drawer growing up and it is the misc. drawer in my condo. The drawer has a hodge-podge of everything-from old coupons to seldom used tools to unopened shot-sized bottles of booze someone gave me for my birthday three years ago. Friday’s in personal finance blogging world is like the junk drawer of blogs- you empty out your half-thoughts, random musings and say hello to friends via links. Thus, I wanted to clear out some odds and ends before the weekend:

• Its getting cold in the morning again. A friend from Edmonton emailed me to say it was 1 degree yesterday morning. Hope you have loaded up on your natural gas stocks when it was cheaper in the summer. It may still be a good time to do so before the leaves turn color and with the market so focused on financial and real estate stocks. Transcanada Corporation (TSX: TRP) and Enbridge Inc (TSX: ENB) are well off their year highs and are great dividend paying stocks. Please note I own TRP and please do your own research and due diligence before buying anything.
• Speaking of dividends, Derek Foster, someone who retired in his 30’s on the proceeds of dividends, has a new book out called the Lazy Investor. Canadian Dream: Free at 45 has a review on the book.
• Charlie asked me yesterday about the tax treatment of non-Canadian dividend paying stock. Assuming you file a U.S. Form 8, there is a 15% withholding tax on the dividend declaration; I do not believe you are taxed as income. U.S. dividends within a RSP are not subject to any withholding tax.
• I have been wondering lately what effect the upcoming U.S. Presidential election will have on the current credit bubble. The Republicans are in trouble in both the White House and in the Senate and no ruling party wants to go into the election during an economic down-turn or recession. There’s also a lot of political banter about a fully funded health care system which could cut into the pharma industry. Will the Republicans pass enough economic incentives to keep the economy going? If the Democrats win, what does this mean for big pharma? Anyone care to predict?
• Don’t forget next week features two competing posts from residential real estate investors on why you should or shouldn’t become a real estate investor. The week after, I’ll have a guest blogger on tips on buying a brand new house. To take a page out of HGTV, Wednesdays will become real estate Wednesday’s from now on.

Have a great weekend.

For most of us who live in large cities, buying real estate in established neighborhoods is either not possible or requires a massive amount of leveraging. It is becoming especially difficult for first-time home buyers to purchase anything not in the suburbs. For most of us who want to live in the city proper, our choice typically is to try to find a home in a less than desirable neighborhood and hope the neighborhood becomes hot and the property values rise accordingly. A good local example would be Leslieville 5-6 years ago. Leslieville is a neighborhood between the downtown core and the Beaches- an upscale community. It use to be a blue-collar neighborhood inhabited by workers who worked in the local factories; it still maintains some of its rough and tumble roots as the Hells Angels have a club-house there. Today, Leslieville is being gentrified; the yuppies have moved to Leslieville in search for affordable housing and are turning it into an upper-middle class neighborhood- a BMW dealership now marks the south-western border of the neighborhood.

How do we find the next Leslieville? I asked my real estate agent and friend’s wife who is a real estate agent and their advice is below in quotes. My comments are where indicated:

• “Ask a real estate agent”

Although this may sound self-serving, the reasons are pretty logical. To paraphrase both agents- real estate agents have access to data such as average days houses are on market, average price increase, historical price data and other information that tells a buyer if a neighborhood is beginning to increase greater than its usually does.

• “Look for a Starbucks”

“Once a Starbucks goes in, its the universal sign the neighborhood has arrived.”  I would also look for chain stores moving into a neighborhood that would be considered consumer discretionary stores rather than consumer staples retailers as a sign that the neighborhood is on its way up.  A lululemon would be a good sign.   Leslieville has a store that sells Apple computers. The only issue with a Starbucks moving into the neighborhood is that big business has figured out money is moving into the neighborhood and you are at least halfway up the price escalation curve. For the true ground-breakers, you have to get in before Starbucks does.

• “Look for the art galleries”

In my simple mind, there are two type of artists- the starving ones and the ones who sell to rich people (I write this tongue in cheek). Art galleries typically sell to people with lots of disposable income.  Artists also tend to be good at either leading or finding trends. When an adventurous artist opens the first art gallery in the neighborhood, he/she is really saying “I believe this neighborhood is both cheap and has good upside to grow.”  When the 2nd and 3rd galleries move in, you know the 1st one was right and things are on the up and up.

• The neighborhood becomes very young

This one is my own. I remember a lot of friends moving to New York City when we were all in our mid-20’s and they kept living in Red Hook- a neighborhood in Brooklyn.  They couldn’t afford to live on Manhattan island. A lot of young professionals began to cluster there and the neighborhood began to shape up. Well sure enough, Red Hook became “hot” and the prices began to increase; 10-15 years ago, people who were young and had just arrived in New York City didn’t want to live in Brooklyn. Now? Red Hook has an Ikea which is the Starbucks of furniture retailers.

• Look towards the fringe of established neighborhoods

This one is also my own. Gentrification pushes those who cannot afford to live in neighborhoods with increasing cost of living to the fringes of those neighborhoods. As those neighborhoods become established, they begin to expand and absorb typically the poorer fringe.  As a good example, take any established neighborhood in your city and think about how developers who build on the fringe of those areas brand that development as being part of the established neighborhood. The Beaches in Toronto now pushes Gerrard to the north accordingly to developers- for those who do not live in Toronto, Gerrard is nowhere near the Beach (its easily a 20 minute walk to the boardwalk).   Think about moving into the fringe of an established neighborhood and becoming the poor cousin of the community for a while. It may be a good move.

If anyone has any other tips, please feel free to share.