How do you know when the time is ripe? Rather than relying upon gut feel, we decided to take a more scientific approach to the question. We compiled data on the 35 major markets tracked by Canada Mortgage and Housing Corp. We analyzed each market in three different ways — by Value, by Momentum, and by Economic Strength. We assigned each market a letter grade in each of the three categories, then combined all that info into one overall grade. We awarded an A to the top 20% of cities. Average prospects had to make do with a B, while lacklustre prospects were handed a C or worse.

Many individual factors went into each grade. To calculate Value, for instance, we began by comparing average rents to average home prices, since we figured that the most basic indicator of a home’s value is how much rent it can put in your pocket. High rents indicate that, if you were hit by a financial crisis, you could rent out your home for a reasonable sum. Even if you never plan to rent out your home that is still a comforting thought.

To help us gain an even better sense of a city’s Value, we looked at local wages and figured out the number of years of average household income that it would take to purchase the typical local home. We downgraded communities where local residents couldn’t afford to buy homes easily; we gave highest marks to cities where they could. Our reasoning was that places where homes are affordable are places where real estate prices are solidly rooted in economic fundamentals and are therefore unlikely to plunge. The differences between communities can be huge. In Regina, a typical family needs two-and-a-half years of income to buy a home; in Vancouver, a typical family needs nearly eight years of income. Talking strictly in terms of bang for buck, Regina is a much better place to buy.

But, of course, Value isn’t everything. Some cities have enjoyed surging real estate markets for reasons that have little to do with local rents or typical wages. Some of these red-hot markets are cities that have lured outsiders with their natural beauty (think Vancouver); others are communities that have enjoyed bonanzas because of skyrocketing oil prices (that’s you, Calgary).

To give these cities their due we rated each of our 35 cities on Momentum, a measure of how hot each market is. To gauge Momentum, we looked at home sales in comparison to new real estate listings — a high number of sales-to-listings indicates that homes are selling relatively quickly and market momentum is therefore high. We also looked at how much home prices in each city have gone up over the last year and over the last four years. To top things off, we considered how much rents have gone up over the past four years, since rapidly rising rents indicate a community with pentup demand for housing. If you’ve been following the real estate news, it probably won’t surprise you to learn that the runaway winners in our Momentum survey are Regina and Saskatoon.

The problem is that the same forces that conspire to drive up prices in a city can also turn in the opposite direction. To avoid being taken in by cities with weakening economies, we devoted our final grade to Economic Strength. We looked at how fast each community grew between 2001 and 2006 (the most recent year for which figures are available). We also factored in unemployment rates (based on 2007 data) and discretionary income levels, as well as a forecast from Canada Mortgage and Housing for unemployment in each city in 2008. The Economic Strength grades that resulted from all this number crunching held some surprises: it turns out that mighty Toronto and bustling Calgary have weaker economic outlooks than Fredericton and Barrie, Ont.

Finally, we rolled our grades for Value, Momentum and Economic Outlook into one overall grade for each community. We had no runaway winners, but we did find seven cities that deserve an A-. They’re a diverse lot. At the top are three Prairie cities — Regina, Saskatoon and Winnipeg — with relatively low home prices, strong momentum and good economic prospects. Just behind is Barrie, where home prices are higher and momentum is weaker, but the economic outlook is outstanding. By comparison, Sudbury, another mid-sized Ontario city, offers better home prices and stronger momentum, but dimmer economic prospects. Finally, Fredericton and Moncton demonstrate that New Brunswick has a lot to offer bargain hunters, especially as the province’s economy shows signs of life.

Our analysis suggests you can find
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decent prospects in each part of Canada. We caution you, though, to use our results with care. Nobody can gauge what a city’s economy will be like in 10 years. Our research, though, can help you analyze each city’s current strengths. And that’s a good starting point for any investor.

Go West, Young Investor
Three Prairie cities top our list of best places to buy now

Believe it or not, there is a right answer and a wrong answer to each of these dilemmas — at least when you factor in payback and all-round practicality. To help you separate the dandy renos from the dud fi xes, we spoke to renovators, designers and real estate agents, as well as the Appraisal Institute of Canada, an organization that tracks the payback on home improvement projects. They offered us frank wisdom on choosing between some of the most common home renos.

GOURMET KITCHEN

What does it cost?

A $20,000 budget will get you a 2.5 m by 3 m (10 ft. by 12 ft.) kitchen full of neat gear: a 48-inch dual-oven gourmet stove (Wolf, $5,000), a 21-cubic-ft. refrigerator (Sub-Zero, $6,500), a counter of natural stone such as granite ($70 per sq. ft.), a hardwood floor ($8 per sq. ft.) and a built-in island.

If you have $40,000 or more to spend, you can add speciality appliances such as a wine fridge (Sub-Zero, $2,500), a built-in cappuccino maker (Miele, $2,000), a couple of built-in refrigerator drawers for overflow of food from the main fridge (Sub-Zero, $3,500 each) as well as an extra-large stainless steel double sink (Blanco, $1,000), a snazzy wall-mounted pot-filler (Moen, $865) and an ultra-modern faucet (KWC, $800).

What can go wrong?

“The biggest mistake I see is people buying the highest priced of everything and throwing it all together,” says Francesco Di Sarra, owner of Capoferro Design Build Group in Toronto. Far better, he says, to pay $400 or so for half a day of a designer’s time. A good designer should be able to present you with intelligent options that will look good together and can actually save you money.

Among other things, a good designer can point out the downside of some trendy products. Shiny ceramic sinks scratch easily (stainless steel is much more practical). Granite countertops stain easily (if you’re looking for low maintenance, go for Corian, which costs about 10% more than granite, but doesn’t stain). Light-colored grout between heavy ceramic tiles looks great in the showroom, but needs to be cleaned (preferably with a toothbrush and lots of elbow grease) to keep looking fresh.

What to watch for

Be on the lookout for sleek kitchen islands featuring built-in stainless steel countertops that slide over an enclosed sink and stove (Norbert Wangen Designs, $38,000 and up). “They’re gorgeous,” says Jerilyn Wright, an interior designer with Jerilyn Wright and Associates in Calgary. “And they instantly double your counter space.”

Payback

If you sell within three years of renovating, expect to get back 75% to 100% of your money, says Joanne Charlebois, director of marketing and communications at the Appraisal Institute of Canada. However, your payback falls quickly after three years as appliances start to look dated. And don’t expect much payback at all if the renovation wasn’t done professionally or used lower-quality materials.

SPA BATHROOM

What does it cost?

A spa bathroom is about more than personal hygiene; it’s about relaxation. The price of that relaxation? About $30,000 for an area 3 m by 3.5 m (10 ft. by 12 ft.). You’ll spend more if you have to reroute plumbing or expand the room.

Most spa bathrooms include an extra-deep airjet therapeutic tub (Jacuzzi, $2,000) and a glass-enclosed shower stall, complete with massaging shower heads that blast you from all angles (Kohler, $4,000). True spa aficionados will want to make room for his-andher sinks (Kohler, $2,500), heated floors (Nuheat, $2,000), and built-in benches for the shower ($500 each). Also popular are high-tech touches like the new programmable electronic thermostats (Kohler, $3,000). Key in your name and the shower remembers your ideal water temperature and pressure.

What can go wrong?

Some high-end showers have so many massaging shower heads that they splash water everywhere. “I’ve had potential buyers of million-dollar homes put on their bathing suits and try out all the sprayers and rain heads,” says Gina Burgio, a real estate agent with Royal LePage State Realty in Burlington, Ont. “They want to make sure the shower heads don’t spray out the shower door or curtain.”

You can also get soaked if you create the bathroom that’s perfect for you, but not for anyone else. Burgio remembers one client who had installed a beautiful high-end spa bathroom — but all in black, with a motif centred around Kiss, the classic rock band. It was perfect for Gene Simmons fans, but horribly out of tune when it came time to sell the house.

What to watch for

Fireplaces built into bathroom walls and sauna closets that bathe you in infrared light are gaining fans. There’s also a welcome trend to much bigger bathroom windows that let in more natural light.

Payback

Sell within three years and you might get back 75% to 100% of your investment, says Charlebois, the appraiser. But that’s assuming that you live in an affluent neighborhood of $600,000-plus homes. The payback falls quickly if the room is perceived to be dated, and it falls to zero if you live in many middle-class neighborhoods. “If you’re living in a more modest neighborhood, you’re wasting your money if you expect big payback on a spa bathroom,” says Bob Beal, owner of Artisan Bathrooms in Toronto, Ont.

Bottom line: If you want payback, put your money into your kitchen, says appraiser Joanne Charlebois. Spa bathrooms are an indulgence, not a moneymaker. “People who put one in aren’t interested in huge payback,” says Bob Beal of Artisan Bathrooms. “Unless you’re doing it for yourself, you’re wasting money.”

SWIMMING POOL

What does it cost?

Prices vary widely, but for $30,000, you can excavate your backyard and install a basic 5 m x 10 m (16 ft. by 32 ft.) vinyl-lined pool with pump, filter, heater and decking. The cost climbs quickly if you add on features such as automated pool cover or a small out-building with shower and change room.

What can go wrong?

It’s easy to install too big a pool for your yard. And huge pools that leave no room for kids to play on the grass make a home hard to sell, says Burgio, the real estate agent.

What to watch for

Consider salt water chlorination systems. These systems add about $1,500 to $4,000 to the cost of your pool, but make maintenance a snap. Unlike conventional disinfectant systems that require you to dissolve chlorine in the water, saltwater systems require only that you put in a small amount of common salt. A special chlorine generator breaks down the dissolved salt into chlorine, which eventually gets transformed back into salt, starting the whole cycle over again. The result is no red eyes and no chlorine taste, as well as lower maintenance costs. “A year’s supply of salt will cost you $50 while a bucket of chlorine for a year will set you back $200,” says John Sulentich, owner of Maui Pools in Vancouver. “You pay more up front for the saltwater system but you’ll save over the years.”

Payback

Don’t count on getting back more than 40% of your pool’s cost, say appraisers. Even that is optimistic. “Pools may even have a negative impact,” says Burgio, the real estate agent. “Families with small kids don’t like them because of the danger of a child drowning.”

LANDSCAPING

What does it cost?

Expect to spend $20,000 to make over your front and backyard including a flagstone pathway to your front door ($2,000 and up), an interlocking stone driveway ($8,000 and up), a cedar deck ($4,000 and up), perennial beds ($2,000 each), a stone patio ($4,000 and up), outdoor lighting with sensors ($1,000) and two Japanese maple trees ($1,000).

What can go wrong?

Many people let their garden fantasies overwhelm them. Remember that landscaping is subjective. “I had a neighbor who planted three huge trees in the front yard,” says Charlebois, the appraiser. “They must have cost him $1,000 or more each. When he sold the house three years later, the first thing the new neighbor did was cut them down. She wanted sunlight coming in through her front windows, not shade.”

Real estate agents say that busy families are increasingly shunning anything that requires time to maintain — extensive flowerbeds and manicured hedges, for instance. “Even big trees like pines and maples just aren’t very popular these days,” says Burgio, the real estate agent. “Who has the time to rake a yard full of leaves anymore?”

What to watch for

Lots of new lighting ideas. “Safety and security have become a big issue for homeowners, more so than trees and shrubs,” says Charlebois, the appraiser.

Payback

Look for a 25% to 50% payback — but only if you stick to mainstream tastes. “Some people put in pebbled walkways, gazebos and waterfalls,” says Charlebois, the appraiser. “You can see they’ve spent a lot of money on the landscaping, but a lot of buyers simply prefer grass.”

Bottom line: Spend your money on some nice landscaping. “Keep it modest, well-lit and low maintenance and you’ll get back close to half of your investment,” says appraiser Joanne Charlebois. Swimming pools are worth the money only if you’re installing them for your own enjoyment and don’t plan to move soon.

FINISHED BASEMENT

What does it cost?

You’ll spend $20,000 to convert an unfi nished basement of 75 sq m (800 sq. ft.) into a bright, handsome family room. That covers the cost of digging down a half-metre or so to give you a minimum of two-and-a-half metres headroom, plus installing new windows, a powder room, wiring for computers and TVs and a 52-inch plasma TV (Sony, $2,800).

What can go wrong?

Don’t try to stuff too much into the basement. A family room is fine; so is a three-piece bathroom and perhaps a small home office; but unless you’ve got a huge basement, you should forget about putting in a couple of spare bedrooms as well. “A basement is generally dark and if it’s separated into six tiny rooms, it feels like you’re in jail,” says Burgio, the real estate agent.

Many people go wrong by scrimping on the quality of the work, because, after all, it’s only the basement. “I’ve seen a lot of work poorly done by fl y-by-night contractors,” says Colin Hine, a general contractor in Ottawa. “I know one person who didn’t like the look of a structural post, so he took it out. Then the first floor began to sag.”

Payback

A well-done family room is one of the most lucrative renos. Expect a payback of 50% to 75% of your costs — much more if the renovation is professionally done. “I’ve seen people put in $20,000 and get back $30,000 or more when they go to sell their home,” says Jim Parthenis, an appraiser with Carrington Appraisal Services in Toronto.

MAIN-FLOOR ADDITION

What does it cost?

You’ll typically spend $30,000 and up for a 3 m by 4 m (10 ft. by 13 ft.) addition, complete with a pair of skylights, electric fi replace, casement windows with movable shades, patio doors and a hardwood floor.

What can go wrong?

The process of putting on an addition can disrupt your life. Count on several weeks of dust and noise right around where your family will be eating meals and doing homework. You may want to tack on the cost of moving out of the house while the renovation is being done.

Local by-laws can also be an issue. Municipal regulations often lay down restrictions on how big an addition you can add on to your house and even the style of addition that’s permissible in your particular neighborhood. An experienced contractor can guide you through the bylaw issues, but make sure to ask if he’s got all the necessary approvals before the first brick comes down.

Payback

You may get 50% to 75% payback on your costs, but that’s only in a best possible case, says Parthenis, the appraiser. A lot can go wrong. If your new addition swallows up too much of your backyard, or is out of scale with the rest of the neighborhood or your existing house, it can actually detract from resale value.

Bottom line: A fi nished basement is the runaway winner — if it’s done properly and the finished product looks airy and bright. “Sure, main fl oor additions can be nice,” says real estate agent Gina Burgio, “but people don’t want to mess them up — it’s the ‘somebody might come over’ attitude. Family rooms in the basement are a different matter entirely. People see them as a place where the whole family can play and relax. Everybody loves them.”

ENSUITE BATHROOM

What does it cost?

Expect to pay $15,000 or more for a 1.8 m by 2.5 m (6 ft. by 8 ft.) bathroom that includes his-and-her sinks ($3,000), a wooden towel cabinet ($1,000), ceramic tiles ($3,000), a small tub (Kohler, $800) and a designer shower head and faucets (Moen, $1,600). And don’t forget indulgences, such as a towel warmer (Aqva, $250).

What can go wrong?

Your costs will soar if you have to install lots of new plumbing and electrical circuits. And don’t get too out-there in terms of design or decor — most people want a soothing, neutral environment in their ensuite, not mirrored walls or fire-engine-red tiles.

One tip: make sure to include an oversized “soaker” tub. “Women especially look at that big soaker tub in that cozy spot and they see themselves in it and immediately fall in love,” says Burgio, the real estate agent.

What to watch for

Double steam showers are an emerging trend; so are two-sided fireplaces separating the ensuite bath and master bedroom.

Payback

Expect a 75% to 100% payback. Also expect to sell your home more quickly. Real estate agents say a nice ensuite is a must if you’re looking to move a higher-priced home in speedy fashion. “All the new homes have one and most buyers have come to expect it,” says DiSarra, the builder.

WALK-IN CLOSET

What does it cost?

You’ll spend $10,000 to $15,000 for a woodpanelled room with mirrors, lighting and specially designed drawers and cupboards for storing jewelry and shoes.

What can go wrong?

Many people don’t put in enough shelves, hooks and drawers. The more you can organize the space, and give people special spots for all the individual elements of their wardrobe, the better. “People aren’t buying armoires anymore, so they want to see a well-organized space in their walk-in,” says Wright, the interior designer. “It can’t just be a few rods. Think stacks of custom-built drawers as well as comfortable benches and large mirrors for easy dressing.”

Don’t scrimp on lighting, either. Walk-in closets often have only one light, way up high — and that light can cast shadows and make it difficult to see how colors will look together. To do things right, install small windows or even track lighting that allows you to aim direct light at each corner of the closet.

What to watch for

A closet within the closet. “Especially in condos, people have started to put small closets within the walk-in to hold skis, tennis racquets and things other than just clothes,” says Wright.

Payback

No payback figures are available, says Charlebois, the appraiser. But she’s hearing anecdotes that suggests a walk-in closet is becoming a real selling point to working couples who want to leave the house quickly in the morning.

Bottom line: Put in the ensuite bath. “Women especially love them,” says home builder Francesco DiSarra, who has put an ensuite into every home he’s constructed over the past five years. Karen Boyle, a real estate agent with RE MAX Chay Realty Inc., of Barrie, Ont., concurs: “Home buyers love cozy and private. A master bedroom with even a small ensuite gives them that.”

If the housing market cools, the old way of real estate investing will stop working, and investors who rely on rising home prices for their profits will start losing money. Luckily, there’s another way to invest in real estate, and it works no matter what the market does.

Using this method, Dan Young made his first million by the time he was 34. He started investing in properties in his home town of Midland, Ont., when he was just 24, and made most of his money on a four-plex, a six-plex, and a 12-plex.

His secret was nothing more than a systematic method for evaluating potential investments. Rather than betting on possible gains in real estate prices, he made sure that the rent he received from a property put cash into his pocket each and every month, from the very first day he bought a property. “When things are going well, when interest rates are declining and property values are going up, then it’s really easy to look like you’re smart,” he says. “But when things go the other way, it’s really easy to lose money too. That’s why you need a long-term strategy based on some realistic expectations.”

To be honest, Young’s way of investing isn’t really all that new at all — it has just fallen out of favor over the past decade. David Southen has been using it for 24 years. He’s now 48 and he and his partners own 125 residential units in Southern Ontario worth about $7 million. He can sum up his secret in just three words: positive cash flow. “You need to be making enough from renting your property out so that after all of your expenses are paid and your contingencies are allowed for, you can pay the mortgage and still put a few shekels in your jeans,” says Southen from his London, Ont., home. “If you’re not, then it’s not a viable investment.”

If you want to generate a reliable stream of cash from your real estate investment, rather than just gamble that prices will go up in the future, Southen says you need to carefully assess each property before you buy it. Your fate as a landlord will be largely determined at the moment of purchase—pay too much and your mortgage and expenses will eat up all of your profits. Southen says there’s a simple three-step way to calculate the right price to pay for an investment property:

- First, get an honest estimate of the total income you can expect from renting it out each month

- Second, get an honest estimate of the expenses involved in running the property

- Third, figure out how much money your property will have to spin off after expenses to pay the mortgage and provide you with a profit

Once you know those three numbers, evaluating how much to pay for potential real estate investments is easy. Of course you’ll only get a trustworthy result if you use trustworthy numbers to begin with, and that’s the catch. Getting a grip on the true rental income you can expect and the true expenses associated with a property can be tough — mainly because the seller will supply you with a long list of bogus numbers. “There’s a well-known saying in real estate investing,” says Southen. “Trust — but verify. Getting a handle on the property taxes and insurance is easy. But people will lie to you about everything else.”

Sleuth out the real rents

If you want to get past the lies and figure out how much your potential investment is really worth, start by estimating the total rental income that the property can generate. Ask the seller for the “rent roll,” which tells you how much rent is being collected from each unit. Then scan the local papers to find out the typical rents being charged in your area. As a double-check, look for the rental market reports published by the Canadian Mortgage and Housing Corporation (see www.cmhc-schl.gc.ca) and find out the typical rents in your area. If the rents charged to the tenants in your building are lower than the local average, that’s good. It means there’s room to raise rents in the future.”However if the average two-bedroom is renting out for $850, and the units in your potential investment are renting out for $1,000, watch out,” says Southen. “They might be filled with the seller’s relatives, who will leave the second you close on the property. That’s an old favorite.”

Don’t forget vacancies

“The vendors will tell you the property is fully rented with a waiting list, so they don’t have any vacancy or bad debt,” says Southen. “But it’s not true. Every landlord has vacancy and tenants who skip out without paying.” When calculating your expected rental income, subtract 5% from the total income the building will generate at full occupancy to offset your expected losses from vacancy and bad debt. Then add in any additional income from laundry or parking. That will give you your “gross effective income.”

Add up the small stuff

The next step is to estimate expenses. Your first big cost is property management. If you’re buying a larger property, you’ll probably want to hire a professional property manager to rent out the units, keep the books, and oversee basic maintenance. If you’re buying a smaller property, you may want to do all that yourself” but you should still subtract your time as an expense because you may not want to do the chores forever. Southen suggests you count on paying 6% of your rental income for management in larger buildings and more in smaller ones.

Then there are maintenance and repair costs. “That’s where you’ll run into the biggest fudge factors,” says Southen. “The landlord will tell you: ‘I do all the repairs myself, so there’s no cost.’” Don’t believe it. You can count on spending at least $800 a year on maintenance for each apartment or townhouse. On top of that, you should budget separately for any major capital expenses, such as replacing the roof or upgrading an elevator. Have the property professionally inspected and do an environmental audit before buying to avoid nasty surprises.

Utilities, your next expense, can be an opportunity. “If I go into a building and see that it’s stuffed full of old incandescent light bulbs, then I know right away that I can peel 10% to 20% a year off the bill just by changing the bulbs,” Southen says. Similarly, old furnaces and boilers, old toilets and leaky showerheads offer you the chance to improve your annual income from the property with a few lost-cost upgrades.

To get a good idea of what you’ll be paying for heating, water and electricity, ask for at least one year’s worth of bills.”A lot of people will say they don’t have them,” says Southen, “but utility companies will provide a summary of the previous year’s charges if the owner asks for it.”

Don’t forget the cost of advertising for new tenants. If you have a lot of units like Southen has, you can count on paying about $400 a month for newspaper ads and the like. If you have a single triplex, the expense can be negligible.

Your final three expenses—property taxes, insurance and bank charges—are usually straightforward, but Southen offers a couple of tips. With property taxes, watch out if you’re paying a lot more for the building than it was last assessed for, because the very act of purchasing it could trigger a new assessment and higher taxes. With insurance, make sure the building isn’t underinsured. If it is, be prepared to pay more for a better policy.

By now, you’re probably starting to see why inexperienced real estate investors would rather just focus on rising house prices. Getting a good grip on your true income and expenses is a lot of work, and you may feel like you’re worrying about nickels and dimes when there’s big money to be made from rising property values. But remember that you want an investment that doesn’t depend on rising home prices to make you money.

If you diligently tote up all your various costs, you’ll be astonished by what you find. Almost always, vacancies and expenses eat up a full 50% of your gross rental income, though many sellers will deny it. “Underestimating how much it’s going to cost to run a building is the No. 1 mistake made by inexperienced investors,” says Southen. And it’s the No. 1 reason why investments that look good on paper can end up costing you tens of thousands of dollars in the long run.

So what’s your return?

You’re now on the home stretch to determining what your building is worth. Subtracting vacancies and expenses from your rental income will give you what’s called your “net operating income” for the property. You use that to determine the return from your property, commonly referred to as your “cap rate.” The cap rate is simply the cash yield you get from your property, after accounting for all expenses but before mortgage payments. In other words, it’s your net operating income divided by the price of the property. It has to be higher than the interest you’re paying on the mortgage or you won’t make any money. These days, Southen says he looks for cap rates between 7% and 8%. “If someone came to me with an honest 8%, I’d buy all day,” he says. “A 7.5% would be okay, but a 7% —well, I’d have to think long and hard about it if it were a 7%.”

And the true market value is?

Now that you have your cap rate, you can calculate what you should pay for your building. Just subtract the expenses from the annual rental income, then divide by the cap rate. For instance, if the building has four units renting for $900 a month each, expenses that eat up 50% of your gross income, and a cap rate of 7.5%, you can quickly calculate that you should pay about $290,000 for the building, tops. If you pay more, it’s probably not a good long-term investment.

We know what you’re thinking: “Where on earth am I going to find a four-plex that’s going for less than $300,000?” Certainly not in Vancouver, where the average detached house is now selling for north of half a million. Probably not in Toronto, Calgary or Edmonton either.

But that doesn’t mean the calculations are wrong. What it means is that now may not be a great time to buy. Your annual return is essentially the spread between market rent and the cost of buying and owning a property. In many cities, property prices have been climbing by as much as 10% a year. Rents have been edging up far less. Thus, the rising prices have squeezed the profit potential right out of the buildings.

If you’ve read books or attended seminars on buying real estate, this may surprise you. Many gurus talk up how easy it is to succeed in real estate and offer up tricks that are guaranteed to make money. They chatter about the power of leverage, the secrets of bargain basement financing, and how to identify up-and-coming neighborhoods. All of those tactics can help you get more out of a decent investment. But none of them will help you if you pay too much for your property. It’s almost impossible to turn around a true money-loser” which is why positive cash flow is king, and all other considerations are secondary.

David Southen and Dan Young made a killing in years past because they bought when prices were lower. Southen says that since then, prices have surged too high. “I’d like to buy right now,” he says. “I’ve got lots of money available to buy with. But I’ve found that there’s really nothing to buy that’s reasonable.”

Young largely concurs. His first investment was a four-plex in the Midland area that he bought back in 1998 for just $135,000. His second investment was a six-plex that he bought in 1999 for $190,000. He’s not seeing many prices like that today. In fact, he’s been looking to buy a new property for seven years.

He thinks he may have finally found a prospect. It’s a nine-plex in Midland that he’s had his eye on for some time, although it wasn’t officially for sale. He liked it because he knew that the landlord was charging lower-than-market rents, which meant that Young could raise the rents as the tenants rolled over. Not only that, but the landlord had been paying for the utilities. Young knew that the units were separately metered, so he figured he could also download the utility expense to new tenants, who could pay their utilities directly. On the off chance he could persuade the owner to sell, Young asked his real estate agent to inquire. “The owner was interested, so I moved in fast,”he says. “Really fast.”

Young’s latest adventure shows the challenges of investing in this market. At first, the price for the property looked too high, but once Young factored in the artificially low rents and the effect of downloading the utilities, he found that the building could carry itself at a decent cap rate. “It’s really hard to find investments that make any sense right now,” he says. “But there are some. You just have to wait and persevere.”

We hope that the greatest investor of all time has many, many good quotes left. But we also have to acknowledge reality. Buffett is 77 and even his steady diet of Cherry Coke and hamburgers can’t keep a guy going forever. Investors who would like to put their money into Berkshire Hathaway, Buffett’s flagship company, have to deal with the unpleasant fact that Buffett may be on his last lap or two as champion of the stock market marathon.

That raises a fascinating question: who is the next great Buffett-like investor going to be? He or she must be a great stock picker, of course. But that’s just the beginning. What distinguishes Buffett is not only his stock market acumen. It’s also his willingness to state his opinions in plain English, his independent turn of mind, and his willingness to treat investors as if they were his partners.

With that in mind, we went in search of younger investors with some of those same characteristics. We found four people in Canada and the U.S. who, in our admittedly subjective estimation, remind us of the master. One runs a hedge fund, one heads an investment trust, and the remaining two lead public companies. Each has demonstrated an ability to invest well. Each has been willing to go against the crowd and make courageous investing decisions. Each writes a Buffett-style letter to investors.

While we can’t guarantee that these investors will do anywhere near as well over the next decade as Buffett has done in the past, each of them has already displayed some moves that remind us of the great man. Whether you’re looking for a place to park your money or simply some smart investing commentary, we think they deserve your attention.

Prem Watsa
Fairfax Financial
Toronto

Who is he?: The 56-year-old CEO of Fairfax Financial Holdings has often been called the Buffett of the North. He’s run his insurance holding company since 1985 and has grown its share price by an average of 26% a year during that time.

Best call: Watsa and his investment team realized way back in 2003 that the U.S. housing boom was built on a shaky foundation of debt. They bet on a collapse in the mortgage market by buying what are called credit default swaps (CDS), a form of insurance against bad loans. Last year, Watsa’s CDS position soared in value as U.S. home loans soured. He turned a $341-million investment into a $2-billion-and-counting payoff.

Worst call: In 1998, Watsa acquired two U.S. insurers — TIG and Crum & Forster. Both were disasters and led to seven long years of dismal results for Fairfax.

Why he’s like Buffett: Watsa, too, is a value investor. And just as Buffett has built his empire around Berkshire, which is primarily an insurance company, Watsa has built his empire around Fairfax, which is also an insurance company.

Why he’s NOT like Buffett: Watsa is comfortable with far more debt and much higher risk levels than Buffett has been. Case in point: Watsa’s ill-advised U.S. acquisitions. From 2004 through 2006 some investors questioned whether Fairfax could survive.

What he’s doing now: Watsa believes we are in the early stages of a massive unwinding of debt. He is preparing his company for a once-in-a-century financial storm. He has 80% of Fairfax’s portfolio invested in ultra-safe treasury bills and government bonds. “Prolonged periods of prosperity lead to leveraged financial structures that cause instability,” writes Watsa. “We are witnessing the after effects of the longest economic recovery (more than 20 years) in the U.S. with the shortest recession (2001). Regression to the mean has begun — but only just begun!”

How to invest: Fairfax trades on the Toronto and New York exchanges under the ticker FFH. To learn more, read Watsa’s annual letters to shareholders at www.fairfax.ca. They’re informative, plain-spoken and always interesting.

Tim McElvaine
McElvaine Investment Trust

Vancouver

Who is he?: McElvaine, 44, is a native of Kingston, Ont., and a graduate of Queen’s University. He qualified as a chartered accountant and earned his Chartered Financial Analyst designation before going to work for Peter Cundill, the famed value investor and fund manager, in 1991. Five years later, McElvaine set up the McElvaine Investment Trust.

Best call: The McElvaine Investment Trust has produced 14% average annual returns for investors since 1997, more than doubling the results of a typical Canadian equity fund. It has never lost money over the course of a year.

Worst call: The Trust has produced decent returns over the past four years, but it has lagged behind the Canadian stock index during that period. Last year it managed to produce only a meagre 0.6% gain. McElvaine’s big sin? He’s decided to sit out the mad rush for commodity stocks. “I’m the only money manager I can think of to have entirely missed the oil and gas boom,” he says.

Why he’s like Buffett: McElvaine is funny, self-deprecating and likeable. He also makes a point of eating his own cooking — 98% of his personal portfolio is invested in his fund. Like Buffett, he regards buying a stock as buying a piece of the company. Consequently, he looks for stable, undervalued companies that can withstand economic storms and that aren’t tied to cyclical industries. He particularly likes companies that are headed by owners who have their personal fortunes tied up in their enterprises. At the end of 2007, his holdings included Glacier Ventures, a publisher of small-town newspapers in Western Canada; Maple Leaf Foods, the Toronto meat packager; and Citadel Broadcasting, a U.S. radio broadcaster.

Why he’s NOT like Buffett: McElvaine is a fund manager, not a CEO. That means he charges annual fees: 1% of your investment, plus 20% of any gains over 6%. Also, in contrast to Buffett’s sprawling empire, McElvaine runs a highly concentrated portfolio focused on a handful of what he considers outstanding values. At the end of 2007, a mere eight stocks made up 85% of his holdings.

What he’s doing now: Not much, according to McElvaine. “I make Homer Simpson look active,” he insists. But all jokes aside, he’s always on the lookout for undervalued stocks and special situations. The classic McElvaine holding is a firm of significant size in its own industry, with a reasonable debt load, headed by an owner-CEO who is in the middle of restructuring the company. “Take Michael McCain at Maple Leaf Foods,” says McElvaine. “He’s very focused on taking his company out of commodity products and into branded lines. If he can get it done the stock is worth significantly more than it is now.”

How to invest: The McElvaine Investment Trust is open only to qualified investors, which means that the minimum investment is anywhere from $10,000 to $150,000, depending upon your province of residence. For more info, visit www.mcelvaine.com — and, while you’re there, make a point of reading McElvaine’s annual letters. They’re both fun and illuminating.

Dr. Michael Burry
Scion Capital

Cupertino, Calif.

Who is he?: Burry, 36, studied economics at UCLA, but despite a long-standing fascination with the stock market, stuck to his original plan of becoming a doctor. In 1995, as he was finishing his training at Vanderbilt Medical School, his father died and Burry began investing a small amount of trust money. Two years later, he launched his own website and began to write about stocks in the only time he had free — between midnight and three in the morning. His dissections of value stocks attracted a following and in 2000, Forbes magazine named his hobby site as one of the top investing destinations on the web. By then Burry was in the third year of a residency in neurology at Stanford University Medical Center and he figured it was time to choose between medicine and money management. He set up a hedge fund, named it Scion Capital, and became a full-time investor.

Best call: Burry’s flagship fund has achieved a cumulative net return of about 455% after fees, or more than 20% a year, since 2000. Last year the fund soared 138% in value thanks to a huge bet that Burry had made on the subprime mortgage market. In similar fashion to Watsa, he had invested in credit default swaps and saw them nearly quadruple in value as the underlying loans started to default.

Worst call: After a string of big early victories, Burry hit a rough patch. In 2004 and 2005, the Scion Value Fund generated only single-digit returns. In 2006, it lost 18% of its value, largely as a result of Burry’s bet against the subprime mortgage market.

Why he’s like Buffett: Burry works largely by himself and offers only limited disclosure about what he’s up to. He describes himself as a “contrary-minded individual” who profits by working far away from the “groupthink capital of the world” — New York. He made a killing in 2002 by buying up the distressed debt of WorldCom, the failing telecom firm. He cashed in again a year later by moving into South Korean stocks, which after a decade of inactivity had finally started to chug ahead.

Why he’s NOT like Buffett: Burry’s willing to run bigger risks than Buffett — at least the current Buffett, that is. He’s more comparable to the young Buffett of the 1950s and 1960s, who ran a free-wheeling investment partnership before settling down to manage Berkshire Hathaway.

What he’s doing now: Waiting. Burry believes U.S. home prices still have lots of room to fall. His flagship funds are about half in cash, waiting for opportunities to emerge from the chaos he sees ahead. “I see the virtuous circle of the past few years turning into a vicious spiral,” he says. “All the good things that came with rising home prices are now going to occur in reverse.”

How to invest: That can be a challenge. Burry won’t discuss minimums or fees; would-be investors have to go to his website (www.scioncapital.com) and request info.

Ian Cumming
Leucadia National

New York

Who is he?: Cumming is a decade younger than Buffett, which puts him at a sprightly 67. He’s a Harvard MBA who has been chairman of Leucadia since 1978. Together with partner Joe Steinberg, who serves as Leucadia’s president, Cumming has built a long-term track record of investor returns that is actually slightly better than Buffett’s. He does it primarily by looking for broken down, unwanted companies that he can fix and sell for a profit.

Best call: One of his best deals came in 1991, when he bought Colonial Penn, a troubled insurance company, for $128 million. He sold it six years later for $1.3 billion.

Worst call: Cumming hasn’t made a lot of missteps, but his forays into developing medical products are a money-losing disappointment, at least for now.

Why he’s like Buffett: Cumming looks for deeply undervalued companies and is willing to invest in a myriad of industries. He owns a timber producer, a plastics maker, an iron ore miner, a casino, real estate, wineries — and the list goes on.

Why he’s NOT like Buffett: While Buffett rarely sells a company that he’s acquired, Cumming is happy to flip his investments. And while Buffett likes companies that make branded consumer products, Cumming has much of his money invested in low-cost producers of commodities. He’s particularly fond of buying companies with tax loss carryforwards and using those losses to help shelter Leucadia’s earnings. Unlike Buffett, Cumming has no public profile and never gives interviews.

What he’s doing now: He’s buying into AmeriCredit, a U.S. auto finance firm, and pouring money into an Australian iron ore project as well as into a company developing synthetic hemoglobin. But his outlook is definitely mixed. Consider this nugget from his 2006 report, in which he discusses the creative tension between his outlook and that of his partner Steinberg: “One of us thinks the sky is falling and the dollar on the edge of debasement. One of us thinks the efforts of half the global population who struggle toward a western standard of life and liberty will cause a global bull market that could last a long, long time.”

How to invest: Leucadia trades on the New York Stock Exchange under the ticker LUK. Before making any investment, go to www.leucadia.com and read Cumming’s annual letters to gain a sense of Leucadia’s far-flung operations.

Yes, yes, I know you think I’m crazy. Timeshares have a bad reputation. But that’s entirely because of the dubious ways they’re sold. Developers entice you to presentations with come-ons such as ski-lift tickets, cheap accommodation, even cash — and once you’re seated, the developer’s sales staff put the hard sell on you. Some of you may have been to one of these presentations. Perhaps you paid $10,000 or more for a week’s use of a vacation property each year. Heck, I’ve heard of people paying over $100,000.

Too bad they didn’t read this fi rst. That’s because there’s a simple way for you to get timeshares much, much cheaper. All you have to do is to cut the developers out completely and buy your timeshares on the resale market. That’s what I do. Instead of paying thousands for the rights to spend a week once a year in a resort condo, I’ve paid as little as $150. I have an annual March Break reservation in Grand Cayman where I bought into a gorgeous 110 sq m (1,200 sq. ft.), two-storey unit with full eat-in kitchen, three full baths, two bedrooms and a full balcony overlooking the ocean. I paid less than $2,000 for it — and I can use it every year for the rest of my life.

Bargains like this are hiding in plain sight. Visit eBay and you’ll fi nd thousands of timeshares up for sale. The discounts can be staggering. My wife and I were once lured into a presentation at a ski resort where the salesperson offered us an every-other-year off-peak week for $8,000. I declined. Shortly thereafter I bought the same package on eBay for $865.

Don’t be intimidated if you have never bought anything on eBay before. Signing up is fast and easy. You should know a few ins and outs pertaining specifi cally to timeshares, though. First, I recommend that you buy from a timeshare specialist, at least for your first purchase. You can recognize the specialists because they tend to have several timeshares for sale at any one time.

Second, you should expect closing costs ranging from $300 to $500; in addition many resorts charge a transfer fee of $50 to $300. Most timeshares also charge an annual maintenance fee, which varies from under $300 to over $2,000 a year. These fees are much like condo fees, and you pay them every year to cover the operation of the resort.

Finally, closing takes a while, perhaps as long as three months. Do not be dismayed if you haven’t heard from the vendor for a while.

I love my timeshares, but I’ve made my share of mistakes, and this is what I learned from them:

• One of the beauties of a timeshare is your ability to trade a week at the residence you own for a week somewhere else. However, if you always want to go to the same place, don’t buy elsewhere with the idea of trading to your preferred destination each year. It’s far simpler to buy where you want to go and be done with it.

• If you like the idea of mixing it up, buy into a resort system that has multiple resorts. You’ll find certain systems cater to specific areas. Shell Vacations Club is strong in the West, especially Hawaii and California. It recently formed an alliance with Bluegreen Resorts, which is strong in the East. Divi Resorts has several resorts in the Caribbean. Diamond Resorts (now including Sunterra is strong in Europe. Some of these chains are better than others, so read the online reviews (see "And the critics say…" below for tips).

• Once you’ve narrowed down your selection, watch a few auctions on eBay to see how much things sell for. No matter how tempting a deal looks, don’t start bidding too soon. Trust me, you won’t miss out on the deal of a lifetime. There’s always another one coming along.

• Most resorts have some sort of rental program, so you can try before you buy. But don’t get sucked in by the sales presentation once you get there. The sales staff will do everything to convince you to buy at full retail rather than on the secondary market.

• Like a condo, resorts can be subject to a special assessment for repairs, maintenance, whatever. I’ve been dinged a few times. I recommend that you call the management company and ask when the last special assessment was, and whether a new one is being contemplated. If a special assessment occurred recently, you’re probably good for a while.

• Off-season weeks are worthless. Never buy one. This is one of the mistakes that I made early on. The only time one of these off-season weeks makes sense is if you intend to use it in the season that is available to you. It will be useless as a trade vehicle to get you to another resort.

• Pay attention to the maintenance fees. Too low a fee and the resort may be poorly maintained.

Ready to join me on the slopes? I’ll be in Whistler ($750 cost versus a $2,500 rental value) and in Tahoe ($750 instead of $1,500). Beach more your style? Meet me in Cayman ($1,000 instead of $3,300) or Cabo ($1,150 versus $5,500). You’ll know who I am: the guy on the beach singing “I’ve been everywhere.”

And the critics say…

Want to get a second (or third) opinion on a timeshare before buying? These resources can ensure you don’t run into nasty surprises:

• Timeshare User’s Group (www.tug2.net): This site’s users are opinionated and scrappy — and they’ll give you the unvarnished truth about the timeshare you’re thinking of buying. They also maintain for sale and for rent boards. The site charges $15 for a year’s membership, which gives you full access to their review database.

• Resort Condominiums International (www.rci.com): This site’s primary function is to arrange timeshare exchanges for a fee. However, with more than 3,700 resorts listed, it’s also a great way to get an idea of what’s out there.

• Interval International (www.intervalworld.com): Another timeshare exchange site, this one with about 2,200 listings.

But there’s a new solution, and for now, it’s free. Livemocha.com, a website that launched last September, combines interactive computer tutorials with social networking. You can learn online at your own pace, and when you’re ready, you can chat live with the site’s 200,000 users, who represent more than 200 countries from every corner of the world.

It’s a good idea, but many websites fail to deliver on good concepts, so I signed up to test it out. I wanted to shake the rust off my high school French, plus see if I could pick up a little Mandarin.

On the lesson side, I found 160-hour courses in Spanish, German, English, Hindi, Mandarin and French. The lessons were thorough, relevant and fun. The advanced French and beginner Mandarin courses I enrolled in included games that tested my listening, reading, writing and speaking abilities.

On the technology side, the site was robust. Chatroom audio was clear and didn’t lag, allowing me to hear the tiny nuances in similarly-pronounced Mandarin words, such as “four” and “death,” which are both pronounced as “si.” The video wasn’t DVD-quality, but its resolution was acceptable, and frames didn’t skip.

But ultimately it was the other users on Livemocha who made the site worth visiting. Livemocha is a bit like a Facebook for language learners: you can write a personal profile, upload and view photos, plus create buddy lists filled with friends. Users were respectful and friendly for the most part — although there was the occasional odd encounter. At one point I received a message from a woman in China soliciting my interest in beginning a “love relationship” (her words), and I also got a chat request from a Senegalese user who turned out to be more interested in learning about the two female friends standing beside me in my profile picture.

Despite such distractions, I generally found that having a large community of like-minded people to ask for advice kept me focused and motivated. By the end of my French course, I had refreshed my vocabulary and I could write sentences that didn’t read like they came out of a fifth grader’s notebook. I just wish this site was around when I was struggling to pass Mme. Coustemont’s French class in high school.

At first glance the math is discouraging. Conventional financial planning research says someone retiring at 65 should withdraw no more than 4% a year of his or her original portfolio, with subsequent increases in the dollar amount to cover inflation. Based upon that assumption, you need to build a retirement nest egg that is 25 times the amount of income you require from your investments. So if you want to generate the inflation-adjusted equivalent of $20,000 a year from your portfolio, you need to put away half a million bucks.

Most people are shocked when they learn this, especially if they’ve been counting on their portfolio to produce 5% to 10% payouts in retirement. To most people, a 4% withdrawal rate seems like a piddling amount — especially when you consider that your investment returns are usually much better than 4% a year. But before you scoff, it’s important to understand what lies behind the magic number four.

It’s predicated on the notion that a stock market slump, especially early in your retirement, can devastate your retirement. Stocks have lost 45% or more of their purchasing power on four occasions since 1926 — the most recent time occurring between 2000 and 2002. If you’re unlucky enough to retire just before one of these “super” bear markets, the slump can demolish your carefully laid-out retirement plans. Even if you only get sideswiped by several years of unusually low returns early in your retirement, you can wind up with far less than you had bargained on.

That’s where the 4% withdrawal rate comes in. If history is any guide, a 4% withdrawal rate means your portfolio will be able to withstand a market meltdown of the worst magnitude we’ve experienced in the last 80 years as well as support you for an exceptionally long life. William Bengen, a U.S. researcher, has back-tested a 4% withdrawal rate with a balanced portfolio of U.S. stocks and government bonds earning overall market returns and found that you would have been able to safely withdraw 4% of your portfolio over any 30-year period since 1926. (Of course you might live longer than 30 years in retirement, so there’s still a tiny chance of running out of money. Some researchers put those odds of ruin at about one in 20, which most people find tolerable.)

What happens if you withdraw just a little bit more — say 5% a year — without any other adjustments? Your risk of failure more than doubles. At 5%, researchers put the odds of you ending up penniless at about one in nine. That’s a lot dicier. So what can you safely do if a 4% withdrawal rate isn’t enough to cover your needs? Consider these three simple strategies:

Take out 5% a year, but cut back if your portfolio shrinks. Let’s say you start with half a million dollars. Under this plan, you would initially take out 5% a year, or $25,000. A year later, if inflation has been running at, say, 2%, you would bump up your annual withdrawal to compensate. So you would withdraw $25,500. (The initial dollar amount plus 2% inflation.) Each subsequent year you would proceed in the same fashion, taking out the inflation-adjusted equivalent of 5% of your original portfolio.

So what happens if your returns aren’t big enough to offset the 5% withdrawal rate? You immediately cut back to withdrawing only 4% a year.

While there are no precise estimates of the risk of running out of money under this strategy, it shouldn’t be much greater than that of a constant 4% withdrawal rate. That’s because a great part of the risk of running out of savings comes from being hit with a super bear market right after retirement starts. If such a disaster happens, you would be knocked back to the 4% rate right off the bat and this strategy would work pretty much the same as the constant 4% approach. But at least this approach gives you the benefit of increased income if your portfolio prospers.

Use life annuities. A life annuity is an arrangement in which you hand an insurance company a lump sum of money and the company guarantees to pay you a given amount for as long as you live. The most straightforward type of annuity is very much like an old-style company pension — it guarantees to pay you a “defined benefit” of so many dollars a month for the rest of your life.

A life annuity ensures that you will never run out of money, even if you live to 100 or beyond. Properly used, an annuity can allow you to increase your safe withdrawal rate by one or two percentage points a year without increasing the risk of ruin, says Moshe Milevsky, a professor at York University’s Schulich School of Business. Thus you should be able to achieve an overall safe withdrawal rate of at least 5%.

Before you buy any annuity, it’s important to do your research and compare products. Fixed payment life annuities give you a set dollar amount (generally not adjusted for inflation) for as long as you live. A more complicated arrangement is what is known as a variable annuity with guaranteed minimum withdrawal benefits for life. These products typically incorporate stock and bond investments, so you benefit, to some degree, from a rising market. But they also guarantee you a minimum withdrawal for life, so you don’t have to worry about running out of money if the market crashes.

Annuities make most sense for healthy retirees who don’t already have a defined-benefit pension plan from their employer. If you fall into that pension-deprived group, Milevsky suggests you consider gradually adding fixed and variable life annuities to your portfolio in the first few years after you turn 65 until they comprise roughly one-third of your portfolio at 75. The drawback? While life annuities are a great way to increase your safe withdrawals, they tend to do so at the cost of reducing the amount of money that you are able to leave to your heirs. These often complex products have many other pros and cons, so look closely before buying anything and if in doubt seek professional counsel from a fee-only planner or other unbiased professional.

Own your own home. If you’re tempted to withdraw more than 4% a year, you can reduce your risk of disaster by first paying off your mortgage. Owning your own home allows you to live on less than you would need if you were paying rent; in addition, you can borrow against the equity in your home if you’re hit by an emergency. If the time comes when you want to move into an assisted-living home or long-term care facility, you can sell your home to help pay the bill.

What happens if you simply can’t make ends meet on 4% of your portfolio a year, or anywhere close to it? You may have to consider reducing your income expectations or looking for other sources of income. If in doubt, talk to a financial adviser about developing a detailed plan that works for you. A good source of further information about conventional stockand- bond safe withdrawal strategies is William Bengen’s Conserving Client Portfolios During Retirement, which is available from Amazon.com.

Luckily there’s help. Surf over to GetHuman.com and you’ll find codes that crack the computerized phone systems at many U.S. and Canadian companies, allowing you to reach a live human being fast. It used to be that you had to do was hit “0” — but as you can see in the chart below, those were simpler times.