As with so much else in system administration, a bit of planning can save a lot of trouble. Figure out beforehand where you're going to store pristine filesystem images, where configuration files go, and where customer data will live.
For pristine images, there are a lot of conventions—some people use /diskimages, some use /opt/xen, /var/xen or similar, some use a subdirectory of /home. Pick one and stick with it.
Configuration files should, without exception, go in /etc/xen. If you don't give xm create a full path, it'll look for the file in /etc/xen. Don't disappoint it.
As for customer data, we recommend that serious hosting providers use LVM. This allows greater flexibility and manageability than blktap-mapped ...