This is my last post of 2007. I am taking an early holiday to rest up (I have had a cold all week), enjoy the family, retain water and watch a lot of meaningless college football bowl games. Before I write on 2008 predications, I wanted to thank everyone for reading and commenting this year and wish everyone a safe and relaxing holiday.

Last week, I received a 100 page report from the research department of a investment firm on 2008 predications. Because it clearly has a “do not distribute” sign on it,  I am going to have to keep the issuer of the report on a no-names basis lest the lawyers come a calling but I found some very interesting insights in the report which I will highlight. Please note that the outlook from investment firms are always short to medium term and, as usual, do your due diligence.

1. Stay in cash for 2008

The report indicated that an ideal portfolio for 2008 was 55% equities, 25% bonds and 20% cash. 20% is an unusual high proportion but reflects the fact that no one knows what is happening in the market these these days. Yesterday, I had the following conversation with my investment advisor:

Thicken: “any reason why Power Financial dropped $1.00 today? I don’t see any new press releases?”

Advisor: “No one knows what is happening now. Random stocks are rising and falling.”

Yikes.

2. A tough year for CIBC

This report came out before CIBC announced yesterday that it may take another large charge on subprime loans but it had dropped CIBC from its best picks list. I don’t know if CIBC has a sugar daddy to bail it out like UBS or Citigroup did. There is one rumor making the rounds that if CIBC gets into real trouble, another Canadian bank may buy it with the government’s consent (only a rumor at this point; a lot of things would have to happen for this to occur and to splash cold water on this rumor, CIBC’s financial ratios appear to be healthy even if it had to take some substantial losses). On a similar note, I had lunch with the family on Saturday and a friend of my Dad’s came by and he started complaining about how poor the service was CIBC; so much so, he changed banks to Scotiabank. When you hear things like this happening on the street-level, it should make the suits in CIBC sweat a little. It is one thing to lose a lot of money on bad institutional bets on subprime mortgages or bad commercial paper but when people on main street are leaving, it has to be very worrisome. Banks have a lot of different ways to make money but still rely on taking deposits as bread and butter business.

3. Load up Sin Stocks and Insurance

People drink and smoke in good times and bad- more so in bad times. So there is beginning to be a shift towards sin stocks. I asked my advisor about Rothman’s and he said that a lot of his clients are moving into tobacco. People also invest in financials- usually for high-dividend yield and stability. With the banks near future in uncertainity, the shift in this industry has been to insurance.  This report notes that investor may want to load up on sin stocks and insurance stocks.

That’s it for 2007! Don’t forget to make a donation to a charity this season; it will do your soul good and its tax deductible!

Millionaire Mommy Next Door ran a survey recently in which her readers wanted more topics on entrepreneurship so I thought I would piggy-back on her findings (thanks Millionaire Mommy Next Door) and blog on some aspects of being an entrepreneur from a personal and finance perspective. For 4 years, I ran a business advising businesses on how to grow using my legal background as a spring-board. Thus, I ran my own business and learned a lot from my clients running businesses.

Not to get all “Zen and the Art of Motorcycle Maintenance” on you but being an entrepreneur is both a spiritual and financial commitment and, although I did not know it in the beginning, it is a way of life rather than what you do. It is definitely not like being an employee where you can leave your troubles at the door at closing time.

If you are thinking of starting a business, whether full-time or part-time in 2008, here are a few random factors to consider:

1. Start with the end in mind. It will give you a focus.

Entrepreneurship is the same as personal finance- where do you want to be 2, 5 or 10 years from now? If you have a end goal in mind, it really influences how you should build a business. Those built to sell make different decisions (i.e. don’t run up expenses to create a tax loss since businesses are valued on earnings and not revenue) than those who consider it a life-style pursuit.  Consider what you want out of your business (money? freedom? make the world a better place?) and it will make your business decisions easier since every major decision will be influenced by your proposed ending.

2. It is very lonely. Make sure you get some love.

CEO’s of big companies have subordinates, board of directors, advisory boards and other high-powered friends to talk to. In a small business context, it gets very lonely. Your employees’ primary motivation is to get paid, your clients primary motivation is for you to slash your prices and no one seems to understand you. I use to say that as a sole proprietorship, I was more sole than proprietor.  When you sit at the office on Saturday afternoon doing book-keeping, it sure feels lonely.

The most successful clients I had had great home situations. The clients in trouble had bad home situations. I don’t think it is a coincidence. Successful clients found life balance and a ready made support system. Which bring me on a related point- make sure your family supports your decision- personally and financially because…

3. Entreprenership is French for poverty

I didn’t contribute to my RSP for 18 months after I started my business. I sold various investments to keep pay my bills. I did the undergrad thing for Saturday night- drink at home before you go out to save money. I packed lunch a lot- even when I got tired of P&J sandwiches. There’s two truths to business no matter how big or small the business is- there’s never enough money and there’s never enough time. You have to get use to that fact. You have to sink a lot of time and money before the business takes off- a youtube type of success is 1 in a 100 million occurrence. Most entrepreneurs work the trenches for years before they are successful (hence, having a good support system personally and financially).

But the point was always I was investing in myself; you cannot put a price on experience and personal growth and entrepreneurship gives you a lot of both (some bad but mostly good). I probably learned more about the real world of business- often from my own mistakes- than any MBA would give me.

If you are starting a business- budget your start-up costs and then add at least 15% of that amount.

4. Always pay two people no matter what: you and the taxman

I really made the mistake of not taking a fixed draw in the beginning. You want to keep pumping money into the business so you don’t pay yourself. The problem is that you become cash poor and you begin to resent your business for putting you in that shape. Even if it is a very modest amount, pay yourself sometime.

The other tip was once given to me by a small business banker- most small businesses that run into tax trouble (i.e. they didn’t pay taxes or racked up totally unjustified expenses) don’t survive that long- a tax audit is very distributive and the penalties and interest on unpaid taxes totally cripples a business from a cash flow perspective. Keep in practice of paying your taxes on time from the get go.

5. A few money tips…

• focus on cash in and not sales; sales keeps you happy but cash in keeps you afloat; focus on one number no matter what- the balance in the bank.  If it keeps going up, all things being equal, you’ll be ok
• there’s only two sides to a business: revenue and expense. You only control one side- expenses. Be frugal and only spend money if you know it will make you money
• barter is your friend- I bartered a lot in the beginning; I got a website and a lot of free meals out of it
• every business needs credit; fix your credit score before you begin business if you have a bad one or keep your score high
• arrange your personal affairs so you don’t expose your family to your personal liability: transfer cash and title on the home to your spouse before you begin, purchase credit-proof investments and never let the bank have your partner guarantee any business loans

Let me know if you want to read more about the world of entrepreneurship and I’ll be more than happy to share my highs and lows with you. Thanks.

I wanted to end the week jumping onto the goal planning posts out in the blogsphere. There is even a carnival of financial goals. Obviously, all this goal planning has to do with a new year coming up but why now start now? If you can stick to your goals during the one of the busiest and craziest time of the year then you can achieve these goals any time of the year. This is especially true if they are spending goals since there are so many financial pressures being brought to bear this time of the year. Yesterday, we had a sushi lunch day at work. Great idea and everybody enjoyed it. Not sure why the holiday prompted us to do it but sushi is not cheap. I am sure we all have had our own mini-sushi lunch spending pressures occurring.

I learned 5 things about goal planning that I wanted to share. None of these are remotely my idea and I take absolutely no credit for them. On a good day, I do about 3 of the 5. I hope you can beat me.

1. Know where you are

I work with a bunch of “old guys.” Very senior businessmen who have seen everything. One thing one of them told me something that always stuck to me (and he told us this when all hell had broken loose)- let’s assess the depth of the problem before we come up with a solution.

In order words, know what you have before you goal plan. It is easy to say I want to be financially independent in 2008 but how close are you to that now? Are you totally debt free and flush with cash? Or do you have a hard time rubbing two nickels together?

I use to review a lot of business plans and I noticed a lot of them had these broad mission statements which was totally removed from where the business was the previous year which meant the business had to do a 180 degree turn to get to where it wanted to be. Could it be done? Maybe. But in some cases, the goals were so far removed from where the business was at, you knew it wasn’t going to happen. You need to assess context to goal plan.

2. The SMART goal setting exercise

This is from the human resource world. When you goal planning always keep the SMART acronym in mind.

S is for specific
M is for measurable
A is for achieveable
R is for realistic
T is for time framed

An example of an un-SMART goal would be: “I want to make a lot of money in 2008″ or “I want my house to be worth more next year.”

An example of a SMART goal would be: “I want to increase my net worth by 10% by December 31, 2008 by increasing my savings rate from 7% of take-home pay to 10% of take home pay and reduce my fixed expenses by 5% a month” or “I want to increase the worth of my home by finishing the basement by June and putting a new counter-top in the kitchen by December.”

If you cannot be that specific then go back to #1 and figure out where you were at.

This exercise is hard- it assumes you know where you are at and then it requires a definitiveness of purpose. Three years ago, I finally put together a filing system to figure out my expenses and then looked at yields on stock. This goal does require quite a bit of patience and a good couple of hours of quiet time.

3. The Rule of 3

I never plan more than 3 goals for the year. 3 is bite-sized and manageable. If I set 5-8 goals, there’s too many to track. 3 goals also keeps me focused. Too many goals means I will drop the ball on at least one and be discouraged about the others.

In a personal finance context, one of my goals is always about cash flow (reduce my expenses or increase my income while maintaining my current level of expenses) and another one is always about increasing dividend yield. Thus, one for defensive purposes (save money) and one for offensive purposes (make money tax-free).

4. How?

A goal is a strategy to me. Right under every goal, I added up to three steps to reach my goal- these are the tactics of how I will reach my strategy. For example:

Strategy: Increase dividend income by $500 in 2008

The above is an example. Don’t worry about the math.

5. Find Someone to hold you accountable

Get an”accountability buddy” who you meet periodically to review your goals and to keep you on track and you can do the same for their goal. It is hard to stray from your goals if you know you have to answer to someone every month. The point of an accountability buddy is not to report progress every time you meet- in some periods nothing may happen- but to keep your goal top of mind and keep focused on them. Make sure it is someone who will kick you in the behind every once in a while and challenge you on why you are not keeping up with your goals as opposed to a mere yes person or someone who is a push-over.

Here’s the catch though- the reason why this is last is that your accountability buddy isn’t going to do you much good when you have poorly defined goals. I use to meet with an accountability buddy for a long time who finally said to me: “rework your goals to be more specific and then we can really make progress.” The light bulb went off in my head at that point.

I find this one the toughest to keep- sometimes you have no progress to report but you should meet anyways. Other times, life gets in the way. Sometimes when I am not meeting my goal, its tough to meet and say “I am failing this month.” But, you have to make this part of your routine.

There is a group called TEC which is a group for CEO’s and senior executives of very successful corporations. The members meet to improve the performance of themselves and their companies. They meet once a month for a full day. Imagine CEO’s of multi-million dollar corporations taking one day out of every month to talk about their business instead of working on it! But the primary purpose is to hold each member accountable and focus them on their goals. They are CEO’s for a reason- they don’t just set goals but execute them with peers holding them accountable.

As I said these are hard guidelines to follow, I always have a hard time keeping up with #2 and #5. Truth by told, I have really been neglecting #5 (sorry, accountability buddy!). But when I bear down and do all five, consciously or unconsciously, its really productive. I hope these tips others have taught me work for you.

Have a great weekend.

Gift cards, as opposed to gift certificates, are plastic cards issued by retailers with cash “charged” on the card. Once the cash is used up, you recycle the card; in most cases, the excess value of the card cannot be redeemed for cash unlike the balance of an unused gift certificate (see below for more details). According to American Express, the 2nd most popular gift during the holidays is gift cards (right after clothing) but the value of unused gift cards in 2006 was $8 billion! Depending on what statistic you read, up to 1/3 of all gift cards go unused- most people simply forget about them. This is money in retailers’ pockets!

Once you get past our collective forgetfulness, the system of how retailers also issue gift cards works against the consumer. Some gift cards have expiry dates (sometimes quite short) and some gift cards have terms and conditions attached to them above and beyond the expiry date (the afore-mentioned restriction you cannot cash out the card, the card can only be used to purchase certain items and you cannot use the gift card to buy another gift card comes to mind).

The point being know the terms and conditions of a gift card before you purchase one for your loved ones- you could be buying a lot of headaches for them if you buy a gift card from a non-consumer friendly retailer. Above and beyond that, know the law. Here is a non-exhaustive list of consumer protection legislation that highlights some rules and regulation as it relates to gift cards (please refer to your applicable government for full regulations; ask for the department that regulates the Consumer Protection Act):

1. Ontario

Any gift card purchased after Nov. 1, 2007 falls under the new law which states in part:

• no expiry dates allowed
• no fees, such as inactivity fees, can be charged. The dollar value purchased is the dollar value to be redeemed (the only logical conclusion to this law is that clearly retailers were charged service fees)
• terms and conditions of the gift card must be given to the purchaser at the time of purchaser (do yourself a favor and ask for them before you before; don’t rely on the sales clerk to tell you verbally)
• Mall cards (i.e. gift cards you can use at any store in a mall) are exempt for now
• law does not apply to gift cards some specific services such as spas, massages and restaurants

2. Manitoba

Basically the same rules as Ontario (also effective Nov. 1, 2007) with some notable changes

• inactivity fee can be charged for Mall cards if not used within one year from the date of issue
• retailers are subject to additional disclosure obligations on how the holder may obtain information on cards

3. British Columbia

Not law yet but proposed legislation is similar to Ontario and Manitoba in that expiry dates would be prohibited from gift cards, a prohibition on fees for administrative charges and an entitlement to a refund equal to the difference between the balance on the gift card and the good/service purchased: this is a significantly broader proposed measure than both Ontario and Manitoba which still does not entitle the holder a right to cash on the balance remaining.

The proposal is not law yet. Sorry to all those B.C. shoppers; no protection this holiday season.

4. Alberta

There is a proposal plan to regulate gift cards under a unrelated piece of legislation. Mainly, it appears a holder of a gift card could redeem the cash balance on the card if not used. The emphasis is on “appears” since the legislation was drafted broadly and may need some more work.

5. Nova Scotia

A law was proposed in January 2007 to ban expiry dates on gift cards but it appears this has not moved one way or another since the introduction of the law.

6. United States of America

As usual, the U.S. has enacted consumer protection laws sooner than Canada (as a side-note, the Canadian provinces, which regulate consumer protection, are always behind their American counterparts in looking out for our best interests). The following is a good overview of gift card protection laws in the U.S.

The key with gift cards is KNOW YOUR RIGHTS before you buy.

Yesterday, I wrote on tips on finding a good accountant/lawyer or investment advisor. Today, I wanted to discuss 3 tips on the best way to work with your advisors. Not only will you be able to save money but you may get some great practical advice.

1. Build a relationship. The best way to get poor quality service from a professional advisor is to view them purely as a commodity. See them once a year to file your taxes or review your RSP contribution and never think of them for the rest of the year. If you treat your advisor like a commodity, how good of service do you think you would get? Think of your co-workers who only think of you in terms of what you can do for them and think of how you treat any request they make. Same thing with an advisor if you view them as “just another accountant.” Contrary to popular belief, accountants and lawyers are people too. They desire human inter-action and don’t want to feel that every interaction begins with “can I ask you a question…” and you pump advice out of them and leave as soon as they have answered your question. I have lunch with my accountant every quarter, drinks with my investment advisor every so often and dinner with my lawyer. We talk business but we talk about other things too (if you really want to know how the financial industry works, sit down with your advisor and ask). You’ll be surprised how many professional favors they will do for you if you respect them as people and not a human advice dispensing machine.
2. Delegate and don’t abdicate. This may be the biggest mistake most people make with their professional advisors. Just because you hire an advisor does not mean you hand your whole life to them. If you completely abdicate your decision making to your advisors, who’s interest do you think they will work for? It is only human nature an advisor would work in their own favor. Advisors definitely have specialized knowledge but you still control what you want them to do. Do you want aggressive growth in your portfolio? Do you want to aggressively tax plan? Do you want to credit proof your affairs? Once your advisors know what you want, they can work on how you get there. If you leave the goal to the advisor, they may pick a goal which works for them but not for you.
3. Be clear on your parameters. I give my investment an annual goal every year. It is basically the same thing every single year: 7-9% growth through blue-chip, dividend yield equities, an annual goal of how much dividend income I want, and an asset allocation to bonds and cash. No mutual funds, no principal protected notes, no segregated funds. This annual goal does a couple of different things-my advisor knows what I want, acts as my brake if I get off my goal and serves as a reference point every time we talk. Advisors are also very litigation conscious- if you put something in writing, all advisors tend to take it more seriously than if you say something in passing (and memory does strange things when if comes to verbal instructions). The point is be clear on your parameters with your advisor which not only helps them help you get to your goal but makes your advisor become your sober second thought before you do something crazy.

I hope this list helps you with your advisors. I wanted to finish with one last point; if you are not happy with your advisor, have a conversation with them on how you think the both of you can work together better. Your unhappiness may be due to some miscommunication between the parties rather than any inherent deficiency in your advisor. Good luck.

Far be it for me to think about 2008 already but what are you doing about your taxes, wills and money?  People tend to look for accountants, lawyers and investment advisors too late in the cycle. Accountants have NO time for you come January 15 given they go into tax season and investment advisors are in the same boat since its RSP season. Having once been a lawyer, I find the process of how people look for professionals to be completely random, scattered and, at times, completely wrong. Once they retain them, I also find the process of how most people deal with professionals is well-intentioned but completely open to abuse from the shadier members of any profession which leads to outrageous bills, self-serving advice and frustration.

Today is the first of two parts on professionals. This post addresses finding a good professional for you and tomorrow’s post addresses how to deal with them once you have retained them. I am going to start with the proposition that one is looking for a long-term relationship with their professional. If you want a one-off thing done then please stop reading and hire any old accountant/lawyer/advisor. But I am one of those people that wants to grow old with my professionals so that I get meaningful advice. I also note that in the book the Millionaire Next Dollar, most millionaires profiled in the book spent more than the average person on professional advice so there may be some correlation between good professional advice and net worth (since I no longer practice, I can write this without sounding self-serving!).

If you are looking for a professional or want to replace yours, here are some tips to help you:

1.  Find a really busy one.  Or to put it another way, the professional that advertises may not be the one you want to retain. If someone is good they will eventually be found and hired- a lot.  If they are busy, there will be little need to advertise which is not to say that a professional that advertises is a bad one (they may be just starting out, relocating to a new city etc.) but hiring a busy professional is tantamount to the saying “if you want something done, find a busy person.” Think about the lawyers who advertise- typically personal injury lawyers (aka ambulance chasers) or immigration lawyers- or accountants that advertise- the H& R Blocks of the world- they specialize typically in “one off” transactions and are not really in the business of knowing you that well. They also tend to work on volume business and you’ll be nothing but a file # to them.
2. Ask for a referral but with people in a similar context as you. Word of mouth is by far the best way to find out about anything from a trusted source but I would go one level deeper and suggest that the people you ask a referral for are in a similar life situation as you. My parents and I have different lawyers; my parent’s lawyer is winding up her practice and has more of a real estate/immigration practice than my lawyer who is more of a tax/corporate lawyer and approximately the same age as me. My parents have different needs and wants from their professionals than me so I tend not to ask my parents who they would refer me to for professional advice; they are in a totally different life context than me and their professionals (assuming they are happy with them) tend to give advice with that context in mind. The other tip is to ask for a referral from someone already in the profession but who may not want you as a client (they may work for a huge firm, practice in another city, have a different specialty than what you are looking for etc.)- professionals look at other professionals differently and they may be able to give real insight into whether a professional is right for you.
3. Ask your referral about your experiences with them. “Nice” is the most over-used word in the English dictionary. An investment advisor being “nice” is not the same as an investment advisor being good with your money. I would drill down on the questioning (if its not too much of an invasion of privacy)- is the advisor returning above market? Does he only sell funds or recommend stock?  Does your accountant invest money or does she hide it under her bed (don’t laugh- I knew an accountant who had his entire life savings in a bank account; could not tell you one thing about how to invest all your tax savings)?  Does your accountant have a lot of self-employed clients or are they all employees (entrepreneurs really need an accountant who knows some tax planning, little-used deductions etc.)? Is your lawyer expensive (most bar associations now have “recommended” fees for certain types of transactions posted on their websites- although they tend to always be on the low side)? Is your lawyer give you advice or merely an order-taker?
4. Interview them.  When I practiced, I use to find it strange that people would interview the band or DJ playing at their wedding for a longer period of time than their professionals. People use to hire me after 10 minutes talking to them-even when I suggested they should interview around to make sure I was the best fit! Most professionals give you a free 30 minute consultation. Use the entire time to find out about their clients (do you zig while all their clients zag), their life experiences, hobbies etc. You are entrusting a lot of private information and, perhaps, your life savings with them. Make sure you really trust them as people first and professionals second.
5. The lunch test.  A colleague of mine left a mega-firm to join a really small law firm. They have a test for admitting new lawyers- assuming you have passed all your interviews and the interviewers like you, if you had lunch with all the partners and could carry on a good conversation during this time then you are hired. I think it should be the same thing with professionals. If you cannot have a one hour lunch with a professional that is enjoyable then find one that you can have lunch with. Some of the best advice I get from my professionals are over coffee, drinks, at basketball games, at the gym- the real insight comes when everyone’s guard is down. If your professional is a stiff collar who’s really formal, you may not get good grounded advice (unless you like stiff-collared people…

Best of luck finding a good professional!

If there is one consistent with human nature it is that we like to be right and we construct our world view to confirm to this belief. Now, most of us think “what’s so wrong with being right?” but being right sometimes really works us in the long run. Let me give an examples to show you want I mean.

Last week, I wrote about exploring on a preliminary basis investing in real estate with several other individuals. The one issue is that I have always been more confidence in investing in businesses or stock than businesses. I have this belief that investing in businesses or stock to be safer than real estate- although I have never discounted investing in real estate altogether. In my world view, investing in real estate is not wrong per se but its not right either.

On Friday, I ran some financial analysis on a best and worse case scenario on cash flow on some properties we are looking at. However, what I did was I removed appreciation from the ROI calculation and I ended up with a ROI of a paltry 3.5% which made it easy for me to say “I am right- investing in real estate is not that profitable.” (in most financial analysis of real estate you take annual profits plus some expectation of real estate appreciation, which should be equal to the annual rate of inflation at a minimal, to arrive at annual ROI) . I shared my calculations with my potential partners and one of them pointed out I missed the appreciation calculation. I don’t believe I missed this out of ignorance. I was working through a real estate ROI template that had “appreciation” clearly marked. In hindsight, I just tricked myself and missed it.

My world view that investing in real estate is not right comes from this life experience; my parents bought investment property shortly before the condo crash of the early 1990’s which caused them a great deal of stress (it wasn’t a life or death situation but it didn’t go as well as my parent’s thought in the beginning). Thus, I probably equate real estate investment with stress and I have created a world view that all real estate investing is not right because I connect this type of investing with stress.

I am not saying I will end up investing in real estate; the numbers may not work out or the timing may not be right but I am very conscious of keeping an open mind and not being right. The one thing I am going to do is vet potential investments with people with no vested interest in the investment and have experience in real estate investing as a means to “trick” myself into keeping an open mind and not be so “right/narrow minded.”

I would add this as a final comment- money is highly symbolic. For some, there are experiences of fear, insecurity or unhappiness surrounding money (their parents stressed about money when they were young, family arguments were able one spouse spending more money that another etc.) which means they approach money (making it, keeping it, investing it) with that same spirit of fear, insecurity and unhappiness. Others relate money with happier experiences- parents getting bonuses and using it to go on a family vacation with it, and they connect money with happiness. Beyond the investment products, strategies and numbers, at the end of the day, for many, money is very emotional and being able to become self-aware of the connection with money and the past is much more “profitable” than any product you could buy.

I wanted to end my week of posting with some nuggets of wisdom some people have given me lately and that I wanted to share with you. Thanks to those who provided this to me. I’ll be tied up on Friday so have a great weekend.

1. When buying a house in a desirable neighborhood most real estate agents will recommend that you bring a home inspector since, in a multiple bid situation, some potential purchasers will not even ask for a home inspection as a condition of sale and have that done when they are looking at their house in order to make their offer look better. However, I heard one better- bring a contractor as well; the home inspector will tell you what is wrong but the contractor will tell you how much it is to fix it. The leaky pipes that the home inspector find could cost you $100 or $1,000- but you won’t know until the contractor tells us (the only issue being, find a contractor in a hot housing market…).
2. If you don’t mind buying floor models, ask for the manager of the store and ask them when they clear out their floor models. I am told most chains have some type of regular schedule on when floor models are put out to pasture. Then either butter the manager up to save one for you or make sure you are there the day the floor models hit the clearance bins. A colleague claims he has basically purchased a whole line of Apple products doing this.
3. Year end is traditionally the best time to get deals from financial institutions- bankers need to boast sales for year-end. Now may be a good time to apply for a line of credit or ask a bank to pay the penalty on your existing mortgage company in order to switch to a lower rate mortgage.

Feel free to add other practical tips you may have heard recently. Thanks.

I have begun very preliminary talks with several people to pool our money and purchase an investment property (with the emphasis on preliminary). There are three of us so far with the possibility of a fourth; they are all great people who I have had business dealings first and then becoming friends out of business so we have started with the mentality that this is purely business rather than chums who may take a more laid back approach (here’s a life experience I learned the hard way- it is always better to do business with a business partner and then become friends then a friend who becomes a business partner). One of the parties has experience looking for, acquiring and managing investment properties in the area we are looking at (Waterloo/Cambridge/Kitchener- home of Research in Motion). My role so far is to nit-pick at everything!

Seriously, the fundamental issue when you invest with others is that you have to make sure everyone is on the same page- literally. I have really advocated that we come up with a term sheet outlining the parameters of the investment and have everyone sign off on it as well as a joint venture agreement once we sign off on the term sheet (…you can take the lawyer out of the boy but not the boy out of the lawyer…). If people have other expectations on what they want to do then this is the best time to figure that out and bring in other people with the same vision.

What have we discussed so far?

1. Location, location, location: Why Waterloo/Cambridge/Kitchener? Familiarity. One member has a track record in investment properties in the price range we are looking at. Thus, we have historical analysis to compare apples to apples and to work out pro formas based on real life numbers. Waterloo is also a 45 minute drive from where most of us live and thus we can monitor the property. Finally, Waterloo has all the factors you look for in an investment property (more on that later).
2. What is the exit strategy? We had a long conversation over this. In very preliminary stages, the tendency is to start thinking big right away- let’s buy a duplex/triplex, let’s buy and flip, let’s do lease to owns. I always follow the KISS principle when it comes to investing and I am always looking at downside risk (I am not a big dreams kind of person- I am way too practical for my own good). Here’s the fundamental issue with real estate- what is the easiest type of property to invest in? Most likely a starter home (if you said Condo, I would respectfully disagree. You do not control costs in a condo- the condo board does. You have lost the element of expense control- one of the most important factors in running a successful business). There may be something simpler but a starter home is the entry point for most people looking for a house to live in. What’s one of the worse things that can happen in real estate? You have an empty place and are forced to sell. Short of a major economic downturn, there is always a resale market for entry-level starter homes. Thus, we chose a starter home as our target for easy exit and to mitigate against worse case scenarios. I readily admit this strategy is never going to make us roll in cash flow but you have to start somewhere and its best to walk before you run.
3. Who does what and for how much? This is always the awkward conversation to have- who replaces the broken toilet in the dead of winter and how much do you compensate them for this? Right now, we are still discussing this with several models in mind: (i) the “property manager” (i.e. one of us rather than a real property manager) gets front end compensation by putting in less money upfront but has to do everything; (ii) the property manager gets back end compensation by getting a greater % of sale proceeds; or (iii) property manager is paid out of profits. We are still hammering this one out. Of course, it will be on paper.

If this sounds like an exercise in herding cats, it is in some respects. But it is like being on a third date- at that time, you ask all the awkward questions before you decide to plunge ahead or otherwise you’ll be screaming at one another on who cleans the hair out of the bathroom sink (such a metaphor applying to both dating and investing in real estate).

Anyone invest in real estate with partners? Any advice?

Have you ever wondered why an investment advisor recommends a particular stock? Large investment shops have research departments who crank out mountains of research and advise internally to their sales staff which stocks to push and which to avoid. I use to be on a mailing list which had “for internal use” only notations which gave instructions to advisors on what to push as the next hot stock. We stopped getting those memos after a while (I suspect someone got wise and slapped someone’s wrist and the distribution list became standard external research pieces).

But- here’s the thing that gets me. Research departments are most staffed by commerce majors and MBA’s who have very little experience working in a business; most of their experience is based on providing advice on business whether as analysts or consultants. But if you have never worked for a business how do you really provide any real research value beyond the numbers? I find it odd that the financial industry would rely on a lot of book smarts and not so much real life experience to guide us in our investing decisions.

You don’t have to have two degrees and three designations to know that the GAP was failing 3-4 years ago; you just had to look at all the teeenagers going to Abercombrie & Fitch instead of the GAP to figure out something was wrong (hindsight being 20/20, GAP was in trouble as soon as business causal ended). You also wouldn’t need a $1,000 suits to know that something was going wrong with Loblaws before the analysts picked it up in the numbers: there was no inventory on the shelves, they weren’t pushing their PC Brand anymore and they started selling non-complimentary things like clothes and furniture beside the milk and bread (to this day, I believe Loblaws got some really bad advice on the Walmart “menace” and psyched themselves out).

If you have ever worked in a large company, you know when there is something right or wrong with it. It is just this sense you get without looking at the balance sheet per se.

I have a rule- I only buy stock which sells products or services that I use and have confidence in. I owe two bank stocks which I have great experiences with as either a client or dealing with them on a business basis (TD and RBC) and avoid banks which have poor customer service or the small business bankers I use to meet were terrible to deal with or admitted there was something wrong with the organization.  Analysts always use to be puzzled why BCE stock didn’t go up and what they could do to raise the stock price.  However, the solution wasn’t really found in a share buy-back or selling a business unit was it? Anyone who ever dealt with BCE could give you the answer: it provides terrible customer service and runs the business as if the paying customer was a nuisance. As a  result, clients leave the first opportunity they can- your business treads water that way- your new clients are merely replacing the disgruntled ones leaving.

One last example- two years ago, my friend complained his wife was paying $80 for “track pants” that all her friends were also wearing. Those track pants were, of course, LuluLemon pants.  Now everyone is walking around with these LuluLemon yoga bags (which does look like you are carrying a rifle) with their $80 pants inside.

The point is if you use the product or service you know when things are going well or poorly before the analysts do. Financial statements are backwards looking but if you walk into a store, buy a product or are told by a trusted source about something they bought and how they liked it or hated it, it is an immediate proxy on how the company is doing above and beyond the financial statements. By all means read the financial statements but I am also beginning to place a lot of trust on what I see before I look up the stock price. A MBA cannot tell you what is happening on the street sitting in a glass tower. Investing isn’t that hard- observe what is happening around you.