The small business sector is a dynamic, innovative, and growing force that provides challenge, fulfillment, and financial security to millions of Canadians. Studies show that over 75% of these small businesses have under five employees, and various studies estimate that there are approximately 2.2 – 2.5 million Canadians working from home. This would include part-time or full-time self-employed people, as well as moonlighters.

Some of the trends which have encouraged the start-up of home businesses are:

Cocooning. Many people are preferring to centre their leisure time around the home. This lifestyle trend has been labelled “cocooning” and comes from the desire to eliminate a lot of outside stresses. This is reflected throughout the economy in an increase in the number and variety of goods and services available, such as home improvements, gardening equipment and supplies, delivery services, home electronics, home gymnasiums, and home entertainment.

Computerization. This trend has had a profound impact on home-based businesses. Equipment such as fax machines, photocopiers, personal computers, modems, and specialized software is not only smaller and more compact but affordably priced. Cellular phones, voice mail, memory pagers, and answering machines also make it possible to provide accessibility to the business world. A home office can have all the technical sophistication and professional image of a traditional business office outside the home.

Combining roles of career and raising a family. Many parents prefer to raise a family and operate a part-time or full-time business from home at the same time. There are many examples of both spouses operating businesses at home, either the same business or separate businesses.

Growth of the service industry. Many home businesses are ideally suited for this industry. They generally require less start-up capital, have lower ongoing operational expenses, and have minimal equipment cost.

But though there are many benefits, there are also risks and frustrations. Many people have an idealized picture of the rewards and pleasures of running their own business. It is important to objectively look at both sides of the issue of small business ownership in order to make a realistic decision.

Home-office benefits
Home-based business ownership offers some distinct advantages:

Start-up and operating costs are much lower, and therefore the business is easier to get established and less risky.
Commuting time and expense are reduced or eliminated
There are more opportunities for your business to grow because of fewer financial constraints. Therefore, you can expect to turn a profit sooner and increase your chances of success.
Such a business provides an atmosphere where commitment to a family and a career can be combined for the benefit of both.
Spouse and family members can be employed by the business.
There are tax write-offs that you can take for expenses you are already incurring relating to your home.

Home-office drawbacks
Operating your business from home has some disadvantages. However, many of these can be anticipated and thereby avoided.

There may be isolation from the companionship of and interaction with colleagues or fellow workers.
There is a risk of working too hard because of a lack of separation between the work and home environments.
Space may be cramped or inappropriate for an ideal working environment or for growth purposes. Your inventory storage and work area may spill over into your living space.
Personal or family lifestyle patterns or priorities may be disrupted or have to be set aside.
Distractions and disruptions due to the nearness of family or friends may interfere with concentration.
Tensions and frustrations may develop because of work blending into the family relationship.
It may be difficult to hire employees due to limited or inappropriate space.

Running a home-based business is not for everyone. What may be an advantage to one person may be a disadvantage to another. You will need to carefully assess your personal situation to decide whether the disadvantages are major or minor obstacles for you.

Many Canadians own U.S. recreational property near border states. Retired Canadians who are seasonal residents of the U.S., or “Snowbirds” frequently own property in the U.S.

If either of the above situations applies to you, you may be renting out your U.S. property on a part-time or full-time basis when you are not using it. If so, you are considered a “non-resident alien” by the IRS (the U.S. Internal Revenue Service) and you are subject to U.S. income tax on the rental income.

Tax on gross rental income
The rent you receive is subject to a 30 per cent withholding tax, which your tenant or property management agent is required to deduct and remit to the IRS. It doesn’t matter if the tenants are Canadians or other non-residents of the U.S., or if it was paid to you while you were in Canada. The Canada-U.S. tax treaty allows the U.S. to tax income from real estate with no reduction in the general withholding rate. As rental income is not considered to be effectively connected, it is subject to a flat 30 per cent tax on gross income, with no expenses or deductions allowed. The 30 per cent withholding tax would therefore equal the flat tax rate.

Tax on net rental income
Since a tax rate of 30 per cent of gross income is high, you may prefer to elect to pay tax on net income, after all deductible expenses. This would result in reduced–and possibly no–tax. The Internal Revenue Code permits this option, if you choose to permanently treat rental income as income that is effectively connected with the conduct of a U.S. trade or business. You would then be able to claim expenses related to owning and operating a rental property during the rental period, such as mortgage interest, property tax, utilities, insurance and maintenance.

You can also deduct an amount for depreciation on the building. However, the IRS only permits individuals (rather than corporations) to deduct the mortgage or loan interest relating to the rental property if the debt is secured by the rental property or other business property. If you borrow the funds in Canada, secured by your Canadian assets, you would not technically be able to deduct that interest on your U.S. tax return. Obtain strategic tax planning advice on this issue.

Once you have made the election, it is valid for all subsequent years, unless approval to revoke it is requested and received from the IRS. However, you do need to file an annual return.

If you want to be exempt from the non-resident withholding tax and are making that election, you have to give your tenant or property management agent a Form 4224, Exemption from Withholding Tax on Income Effectively Connected with the Conduct of a Trade or Business in the U.S. Contact the IRS for further information.

When you file your annual return, show the income and expenses, as well as the tax withheld. If you end up with a loss after deducting expenses from income, you are entitled to a refund of the taxes withheld. The due date of your return is June 15th of the following year.

It is important to file on a timely basis. If you fail to file on the due date, you have 16 months thereafter to do so. If you don’t do so, you will be subject to tax on the gross income basis for that year, that is, 30 per cent of gross rents with no deduction for any expenses incurred, even if you made the net income election in a previous year. This is an important caution to keep in mind. Many people don’t arrange to have tax withheld at source, or file any U.S. tax forms, on the premise that their expenses exceed the rental income and the net income election is always available.

Filing requirements
You are required to report the gain or loss on sale by filing Form 1040 NR, U.S. Non-Resident Alien Income Tax Return. You would have to pay U.S. federal tax on any gain (capital gain), and if you own the real estate jointly with another person, such as your spouse, each of you have to file the above form. For more information, contact the IRS.

In addition, you would have to report any capital gain on the sale of your U.S. property in your next annual personal tax return filing with Revenue Canada. Remember, you have to report your worldwide income and gains and pay tax on 75 per cent of any capital gain, converted to the equivalent in Canadian dollars, at the time of sale.

Since tax laws, regulations and filing forms can change at any time, make sure you speak to a professional accountant who is skilled in U.S. tax matters.

There is a tremendous amount of competition and money available at present in the mortgage lending market. Lenders want your business, and will offer you many incentives to entice you, especially if you are willing to transfer your existing mortgage financing. For example, some lenders are willing to absorb your legal, appraisal and/or transfer fees, up to a certain limit.

When your mortgage term expires, the full amount of the outstanding mortgage principal, as well as any accrued interest, is deemed to be immediately due and payable. Various options will be open to you, including renewal for a further term with the same lender or refinancing with a different lender. By having a better understanding of the process, you can make the right strategic decisions for your needs, and negotiate the best deal.

Here are the key strategies to consider:

• refer to weekly mortgage interest tables in your local paper as a starting point for comparison.
• compare and contrast the features and benefits of a minimum of three competitive offerings. The interest rate is only one factor. Other factors include: fixed or variable rate, open or closed mortgages, penalties or portability (i.e., the ability to transfer your existing mortgage to another property when you sell your home). Make sure you fully understand the implications of the mortgage features that you select.
• if you are arranging for an accelerated mortgage, ask the lender to provide you with a chart so that you can see how quickly the extra payments (weekly payments, for example) will speed up the payment of the mortgage. Some “quick pay” types of mortgages are paid out faster than others, depending on how the lender calculates the reduction of principal, and the amount of your payment.
• consider the benefits of using a “no-fee” mortgage broker. You don’t pay a commission if they arrange financing for you. Look in the Yellow Pages.
• attempt to negotiate a better deal than the official rate. Many lenders have the discretion to offer you a lower rate to get or keep your business, based on various factors. Success in renegotiating a deal can depend on your “leverage”, your negotiating skills, and on how much the lender wants your business. For example, if you have been a customer for a long period of time and use other services offered by the lender such as bank accounts (personal and business), loans, or RRSPs, the lender may be more willing to budge on the rate.
• if you are a new customer and would be prepared to use other services, that is also a factor. Depending on the banker and the circumstances, you might be able to negotiate a reduced interest rate of one-half per cent or more.

If you decide to accept the renewal from your current lender, select the term, interest rate and payment frequency from the options set out by the lender. If the interest rate you select drops or increases between the date of signing and the actual renewal date, the lower rate shall prevail. Make sure that the rate is in writing, along with any other features you want modified, such as the amortization period, interest rate, obtaining more funds or waiving of certain charges.

Overall, remember to determine your needs, understand your options and their implications and comparison shop.

Have you thought about the idea of remaining in your home, getting some cash out of the equity to enhance your lifestyle needs, and not having to make any payments on the loan or repay the loan until your surviving spouse dies? If you or your parents are 62 years of age or older, this is an option you may wish to explore. The concept is referred to as a “reverse mortgage”.

Reverse mortgages are becoming more popular, and are available to many people across Canada, particularly in the major cities. Many retirees have built up considerable equity in their homes, and may prefer to turn their largest asset into immediate cash and/or ongoing revenue and still remain in the home. People frequently prefer to remain in their own home, because it is in an established and familiar neighborhood, or close to family and friends. At the same time, they may also need cash or additional monthly income to meet personal needs such as travel, renovations, a new car or helping their children, but they don’t want to make monthly loan payments or pay tax on additional income.

The basic concept behind a reverse mortgage is simple. You take out a mortgage on part of the equity of your home, and in exchange, receive a lump sum of money and/or a monthly income for a fixed period or for life. If you are married, this would be for the life of the surviving spouse. This latter example is sometimes referred to as a “reverse annuity mortgage” or RAM, as part of the money obtained from the mortgage is used to purchase an annuity.

When you die (or if you are married, when your surviving spouse dies), the mortgage plus accrued interest must be repaid. You do not have to make any payments in the meantime. If there is any balance left in terms of residual equity in the home after the sale, it would belong to the senior’s estate. If there is a shortfall, you want to make sure the company absorbs that loss, not your estate.

Make sure that the reverse mortgage company has obtained an opinion from Revenue Canada that the lump sum payment and monthly annuity payments are tax-free, as long as you live in your home. You want to be assured in writing that the current ruling on the various means-tested programs, such as the federal Guaranteed Income Supplement (GIS), is that receiving the annuity will not interfere with your eligibility for, or reduction in, the GIS.

Since you still retain home ownership, you benefit from any appreciation in value of the home over time–that is, you get an increase in equity. For example, if your property goes up 10 per cent a year in value, and you locked in the mortgage on your property for the reverse mortgage or RAM at eight per cent, then you are technically ahead in terms of the interest differential.

In reality, however, because you are not making regular payments on your mortgage, the accumulating interest is being compounded, eroding away from the increasing equity. The reduction could be offset substantially by an attractive average annual appreciation in property value. Conversely, a low or zero property appreciation could result in the equity being eroded away rather quickly.

The good news, given today’s low-interest environment, is that you are paying less interest on the money that you are borrowing. The bad news is that if you obtain an annuity, you are receiving less return on that annuity investment. There are variables between reverse mortgages and RAMs on the issue of interest rates and other specific conditions.

Here are some points to consider and questions to ask:

What are the age requirements for the lump sum or annuity plan?
• Do you need to have clear title on your home?
• Can you transfer the mortgage to another property if you move? Are there any tax or financial issues involved?
  What percentage of your home equity is used to determine the reverse mortgage or RAM, and what percentage of that is available for a lump sum payment and annuity?
• Is the interest rate on the mortgage fixed for the duration of the annuity, or is it adjusted? And if adjusted, how regularly, and using what criteria?
• If the reverse mortgage and lump sum are for a fixed term, what are the various terms available (l5, 20, 25 years)?
  

Over time, you have probably heard about various financial institutions in Canada having problems or even going under. How do you find out what protections you have for savings or chequing account deposits in a bank, trust company or credit union?

You should be cautious about where you put your money. Many people assume that their deposit funds are safe and protected, and they may well be, up to a certain amount. With foreknowledge and proper planning, you can protect all of your deposit money. Here is an overview of deposit money protection in Canada and where you can get further information.

Deposits in a Canadian bank or trust company
These are protected by the Canada Deposit Insurance Corporation (CDIC), up to a certain amount. In Quebec, it is referred to as the Quebec Deposit Insurance Board. Funds are automatically insured for up to $60,000 for each separate account. If you have more than $60,000 deposited, you can divide your funds among several CDIC members who are separate financial institutions. Some banks and trust companies have subsidiaries that are separate CDIC members, resulting in a ceiling of $60,000 each. For information, brochures and confirmation that your deposits are covered, contact CDIC at 1-800-461-2342 (Canada only) or at (613)996-2081.

Deposits in a Canadian credit union
These are protected by a deposit insurance plan that is specific to each province. Each province can vary in its protection for savings or chequing deposits. Depending on the province, the protection could be from $60,000 up to unlimited protection–that is, 100 per cent. Contact a credit union in your province to enquire, or phone the CDIC number to obtain contact numbers for the credit union deposit insurance head office in your province. Ask your credit union for an informational brochure and protection confirmation.

This is a very important feature to have in your mortgage if it is a closed mortgage. If your mortgage is open you can pay in part, or in full the balance outstanding on the mortgage at any time without penalty. If, on the other hand, you have a closed mortgage that does not have any prepayment privileges, you are locked in for the term of the mortgage (three years, for example) without the privilege of prepaying without penalty.

You may therefore wish to have a mortgage that, although it is called a “closed” mortgage, is in fact partly open and partly closed. It permits prepayment at certain stages and in a certain manner, but not at other times. For example, you may be permitted to make a prepayment of between 10 and 20 per cent annually on the principal or original amount outstanding, depending on the terms of your mortgage. This could be made once a year on the anniversary date of the mortgage, or at any time during that year, depending on the terms of your mortgage.

Another variation would also give you the option of increasing the amount of your monthly payment by 10 to 20 per cent or more once a year, or at any time in the year. You can see the incredible difference this would make in terms of saving on interest and reducing the amortization period. Every time a prepayment is made or you increase your monthly payments, the balance owing, and thus the monthly cost of interest, is reduced.

The net effect is that a larger portion of each payment will be applied toward the principal, since monthly (or otherwise agreed-upon) payments usually remain the same. Make sure that you completely understand your prepayment options, as they could save you a lot of money. There is a considerable variance between lenders with regard to mortgage terms, so make sure you “comparison shop”.

For example, you may want to have these options: to pay up to 20 per cent any time in that year rather than waiting for the anniversary date of the mortgage, to have the pre-payment amount based on the original amount of the mortgage rather than on the outstanding principal at the time, and to increase your monthly payments by up to 20 per cent at any time in the year rather than only on the anniversary date. In other words, you may want to have it all! Make sure that the mortgage commitment letter you receive from the lender clearly spells out the options that you want.

A lender may be prepared to give you a “side letter” which confirms a modified term arrangement. For example, the lender may have pre-printed mortgage documents and a standard policy that is not as attractive an arrangement for you. The form might say “10 per cent pre-payment annually”, but the side letter could say you are permitted to pay up to 15 or 20 per cent. If you negotiate effectively, you may be able to get them to modify the terms in order to remain competitive and get your business. On the other hand, their policy may not permit a modification of the standard terms.

If you are buying a home to live in, you probably want to have as many pre-payment options as possible, especially if you know you will have extra money available from various sources. This will save you a lot of interest over time.

On the other hand, if you are buying real estate strictly for investment purposes, you may have a policy of not paying down the principal outside of the normal payments. Presumably you would be debt-servicing all expenses, including mortgage-related costs from your rental revenue. This would preserve your cash and make it available for other purposes such as other real estate investments, for example. In this scenario, you would presumably be counting on equity appreciation over time.

When the time comes to sell your home, you may be tempted to sell it yourself. There is only one reason for doing so, and that is saving on a real estate commission. Other motivation could be a personal challenge or learning experience, but basically the desire to save money is the main motivator. You may indeed save money, but on the other hand, the saving could be an expensive illusion.

Based on my personal and professional experience, there are some general disadvantages of selling a home yourself, as opposed to using a carefully selected and experienced realtor. The following remarks are not intended to dissuade you from attempting to sell your own home, but rather to place the process in a realistic perspective. These comments apply whether you are selling your own home or an investment property. In the end, you will have to balance the benefits and disadvantages of course, and decide what is best for you.

Inexperience
If you don’t know all the steps involved, from the pre-sale procedures and strategies to completing the deal and receiving the money, you could, and probably would make potentially costly mistakes.

Emotional roller coaster
Many people, especially with their own home, tend to get emotionally involved in the sale process because of the direct interaction with the prospective purchasers. For example, frustration can be experienced due to rejection of the house, negative comments or fault-finding, people whose personality you don’t like, or people who negotiate toughly on the price. These one-on-one direct dynamics or comments can sometimes be taken personally, and therefore be a cause of stress.

Time commitment
You have to hold open houses, as well as show your property at times that may not necessarily be convenient to you. In addition, you will have to spend time preparing the ad copy and staying at home to respond to telephone calls or people knocking on the door.

Expense, nature and content of advertising
Costs include all the daily or weekly newspaper classified and/or box ads, as well as a lawn sign. You would pay for these yourself. In addition, you may not know what types of advertising would be appropriate for your type of property, how to write ad copy that would grab the attention of a reader and prospective purchaser or how to identify and emphasize the key selling features of your property.

Limited market exposure
There are considerable differences in market exposure between advertising by yourself and the types of advertising and promotion a realtor could provide. There is obviously a direct correlation between the nature and degree of market exposure and the end price. Clearly, limited market exposure means limited prospective buyers.

Potential legal problems
The prospective purchaser may supply you with his own agreement of purchase and sale. This contract may have clauses and other terms in it that could be legally risky, unenforceable, unfair or otherwise not beneficial to you. You may not recognize these potential problems or risks. In addition, you could end up agreeing to take back a mortgage (vendor-back mortgage) when it would not be necessary or wise, or accept a long-term option or other legal arrangement that could be risky.

Lack of familiarity with market
You may not have a clear or objective idea of exactly what a similar property in your market is selling for, or the state of the real estate market at that point in time. This can place you at a distinct disadvantage. For example, if you are being unrealistic in your pricing, along with limited advertising exposure, you could literally price yourself out of the market. Prospective purchasers may not even look, let alone make an offer. You may eventually sell your property, but only after several price reductions and a long period of time.

Of course, this depends on the market and the nature of your property. You could have a property with unique features or potential that could justify a higher sale price than you might realize.

No screening of prospective purchasers
You would not generally know the art of screening prospects over the phone. The end result could be that you waste your time talking to people over the phone or showing them through the house, when they are not and never will be serious prospects. You could also end up accepting an offer from someone who does not realistically have a chance of financing the house, or who asks for unrealistic time periods for removing purchaser conditions, which effectively would tie up your property during that time.

Offer price not necessarily the best
You may think the offer given is the best offer from that (or any) prospective purchaser, and therefore accept it. Unfortunately, that price may not be the best price at all. You may have started too low or too high for your initial asking price, based on emotion or needs rather than reality. You may have received a “low-ball” offer from a prospective purchaser that was never intended to be accepted but was designed to reduce your expectations. You may be inexperienced in applying real estate negotiating skills, or you may be subjected to effective closing skills on the part of the prospective purchaser.

Lack of negotiating skills
This problem was referred to in the previous point. You may lack any negotiating or sales skills and feel very uncomfortable or anxious in a negotiating context. As a consequence, the price and terms you eventually settle on may not be as attractive as they otherwise could be.

Mortgage lending has become very complex, with constantly changing rates, terms and conditions. Each lending institution has its own criteria that apply to potential borrowers. Some insist on a particular type of property as security, while others require a certain type of applicant. In this latter case, factors such as type of employment, job stability, income and credit background are weighed. There is a broad range of philosophies and policies held by the various lending institutions on the issue of security and applicant qualifications in order for a lender to advance mortgage funds. These are subject to change from time to time.

Other factors such as the availability or shortage of funds, past experience in a specific area and perceived resale market for a particular property could also affect mortgage approval.

Mortgage brokers make it their business to know all the various plans and lending policies, as well as the lender’s attitude on various aspects of mortgage security and covenants. For this reason, a mortgage broker performs an invaluable service in the real estate financing process. Their role is that of matchmaker; attempting to introduce the appropriate lender to the purchaser. Mortgage brokers are governed by provincial legislation.

Mortgage brokers have access to numerous sources of funds, including the following:

• Conventional lenders such as banks, trust companies and credit unions;
• Canada Mortgage and Housing Corporation (CMHC);
• Private pension funds;
• Union pension funds;
• Real estate syndication funds;
  nsurance companies;
• Private lenders.

Knowing all the lender’s objectives, the broker is capable of matching the applicant and his or her property with the appropriate plan and lender. Alternatively, the broker can provide a series of mortgage plans from which the borrower may select the one that best suits his or her needs.

Basically, here is how the process works. The normal procedure is for you to complete an application form supplied by the mortgage broker, provide a copy of the agreement of purchase and sale, as well as provide proof of employment, the length of time employed and your annual salary. A letter from your employer is often also required. If you are self-employed, you are normally required to provide the last three years of financial statements of your business and/or copies of the last three income tax returns for your business.

In addition, you normally pay the mortgage broker the cost of obtaining an appraisal of your property. The broker also does a credit bureau search. The broker attempts to get you a good deal, by matching you up with a lender who will loan you money based on your financial needs, the terms you require and the information that you have supplied. Since brokers operate exclusively in the money market, they know at any point in time who is giving the best rates and most favorable terms. Tentative approvals are generally given within one to two business days from application.

Mortgage brokers basically offer two types of services:

• a simple mortgage that will get automatic approval in your particular circumstance, especially when the buyer is living in the home. Consequently, this saves you a lot of time and frustration spent searching. The broker generally receives a commission directly from the lender–a “finder” or “referral” fee. You don’t pay any extra money or higher interest. Lenders do this because the mortgage market is so competitive.
• a more complex mortgage that would not be automatically approved, or possibly was initially declined by prospective lenders. This takes more time, skill, and persuasion on the part of the broker to source out a lender or number of lenders who will provide the funds you need. For example, if you did not have the normal amount of money required for a down payment, had a negative credit rating, were highly leveraged already, did not have the normal income required or were recently self-employed, you would probably be turned down by a conventional lender such as a bank, credit union or trust company. Mortgage brokers also provide other services such as the financing of construction, recreational or revenue properties, debt consolidation and financing of equity.

If a mortgage broker succeeds in arranging your financing, given the above types of more difficult factors, you would pay a commission. The amount of the commission is based on the degree of difficulty in arranging financing and other related factors.

To find a mortgage broker, look in the Yellow Pages of your telephone directory, ask your real estate lawyer, or your realtor. Remember to “comparison shop” before deciding who to deal with. Most mortgage brokers are available by phone or pager seven days a week and will arrange to meet you at your home or office in the day or evening, depending on your needs. You can also use a mortgage broker to obtain a pre-approved mortgage commitment and mortgage term guarantee, generally good for 60 days, depending on the market. If the mortgage rates go down by the time you need the funds, you get the lower rate, and if the rate goes up, you are guaranteed the original commitment rate.

Some people wish to invest in real estate as part of their financial investment plans. It could end up being a profitable long-term investment or a losing one, depending on the strategies you apply.

Take the time to develop your investment program thoroughly. As with any plan, you will need to monitor and possibly modify it on a regular basis due to changing circumstances. The safest way to make money in real estate is through prudent and cautious investment.

Don’t look upon real estate as a get-rich-quick scheme. There are many who adopted that attitude–to their misfortune. Be wary of U.S.-oriented real estate investment programs. In many cases, they may not be directly applicable to the Canadian context, due to differences in legal and tax matters. Some others may be borderline on their ethics. Some real estate seminars and books promote the concept of becoming rich through property tax sales, foreclosure sales, quick property flips, and the selling (assigning) of the agreement of purchase and sale before closing. In Canada, extreme caution is advised, as these options are not always applicable, or they are applicable only with considerable difficulty and risk. Money can be made in real estate through informed and cautious application of basic principles, formulas, and systems.

The following is an outline of some key real estate investment strategies.

• Thoroughly research the market before any decision is made. Have at least three potential properties if possible.
• Give yourself a realistic timeframe in which to realize your investment objectives. For example, normal real estate cycles are five to eight years, and in some cases 10 to 12 years.
• Buy specific types of revenue property that are in demand and are easy to maintain and/or manage (for example, a single-family house–ideally with a basement suite for separate revenue, a condominium, duplex, triplex, or fourplex. Don’t buy an apartment building until you have experience as a landlord with several smaller properties, unless you are going in with experienced investors.
• Attempt to put down a low down payment (for example, 10 to 15 per cent). An exception of course would be if your comfort level was a maximum of 75 per cent financing. If you have a low down payment it frees up your available cash for other properties. Compensate for the low down payment by having a vendor take-back mortgage, high ratio of financing, or second mortgage.
• Strive to have a break-even cash flow. In other words, try to avoid debt-servicing the property because of a shortfall of rental income. Make sure you cover all expenses from cash flow such as mortgage payments, taxes, property management, condominium fees, insurance, repairs and maintenance and allowance for vacancies.
• Ensure you have competent management, whether you do it yourself or hire an expert.
• Be very cautious about going into group investments. If you do, get objective advice from a real estate lawyer and professional tax accountant before you commit any money. Ask about the risks and protections.
• Use professionals at all times. Tap into their expertise for your peace of mind, enhanced revenue potential, and reduced risk. This includes carefully selecting a lawyer, accountant, building inspector, appraiser, contractor, realtor and property manager. Professionals will also help you in establishing realistic projections.
• Never pay more than “fair market value”.
• Use tax laws to the maximum.
• Keep rents at market maximums and manage expenses to keep them at market minimum.
• Buy when no one else is buying, and sell when everyone else is buying. This is the so-called contrarian view of investment. It does the opposite of conventional wisdom or the “actions of the masses”.
• Always view and inspect before you buy. Verify all financial information. Obtain your advisors’ guidance.
• Have a minimum three-month contingency reserve fund for unexpected expenses such as repairs or a reduction in cash flow (vacancies).
• Consider applying the principle of “pyramiding”, or purchasing selected real estate on a systematic basis. For example, you may purchase one or two properties a year when the cycle is in your favor.

There are many risk areas that could affect your financial net worth, cash flow, quality of retirement, and lifestyle. In many cases, you can eliminate, minimize, or control each of these risk areas by knowing about them, doing research, and making prudent decisions. Statistically, if you retire at 55 years of age, you can expect to live to 85 and have 30 years of retirement–almost as long as your working life. Planning to have enough funds to meet your lifestyle needs is obviously very important. Some of the following potential risk areas are interrelated, but they are considered separately because they should be specifically identified as risks. They all have financial implications, directly or indirectly. By obtaining customized financial planning advice from objective and qualified tax professionals, you should be able to anticipate and neutralize many of the following risks.

Currency risk
This is a particularly important issue if you are a Snowbird or travel a lot. If the Canadian dollar drops in value relative to the U.S. dollar, you will obviously notice an increase in the cost of living due to the reduced purchasing power of your Canadian money when you convert it to U.S. currency. The value of the Canadian dollar is dependent on many variables, both national and international. If it goes down five per cent, you have lost five per cent of your purchasing power in the United States.

Inflation risk
This is one of the most serious financial risks to those in retirement. Although both Canada and the United States currently enjoy very low inflation rates, that can quickly change. As you are probably aware, inflation eats away at your purchasing power. Inflation at five per cent will reduce your purchasing power by 50 per cent in less than 15 years. If you have investments that have interest rates or value that changes with the rate of inflation, or if you have annuities or RRIFs indexed for inflation, then your purchasing power would at least remain constant. If you have a fixed income, the inflation issue is especially critical.