SHOULD MY FIRST HOME BE A MULTI-FAMILY OR SINGLE FAMILY?

SHOULD MY FIRST HOME BE A MULTI-FAMILY OR SINGLE FAMILY?

More than three decades ago, my mentor suggested I purchase a multi-family home as my first home. He had purchased two multi families before he bought himself the home in a neighbourhood he wanted to live in. Needless to say, I didn’t follow his advice. Over the years as a mortgage professional, I have suggested the same approach to owning real estate to most of my clients. Some took the advice – and those who did have networths that are possibly 4 times as much as those who did not.

Pros To Owning A Multi-Family Home

  • You could qualify for a larger mortgage, because lenders may take the potential income from the rental unit into consideration. You’ll need to research rental rates in the area. And as long as you are an owner-occupant, you can qualify for low-down-payment options as you would with a single-family home.
  • Build equity faster. If you cannot afford a home now in your dream neighborhood, buying a duplex in a more affordable neighborhood can help you build equity faster and move up to your dream house later – at a faster rate than building your savings while renting.
  • Rental income may cover half the mortgage. Depending on your location, the rental income may cover all or most of the monthly mortgage payment.
  • Tax benefits. If you itemize deductions on your tax return, you can write off various expenses related to the rental portion of the property, like repairs and utility costs.
  • Vacation rental potential. If your municipal bylaws allow it, you could make even more money renting out your units on the vacation.
  • Real estate experience. If you think you might be interested in real estate investment in the long term, a multi-family can be a great crash course in how to be a landlord.

Cons to owning a multi-family:

  • Being a landlord is not for everyone. You must learn the landlord-tenant laws in your province/state as well as the intricacies of leases and screening potential tenants. You must be available to your tenants 24 hours a day in case of emergency.
  • You’re responsible for all repairs to the rental units as well as your own. You can save money by handling repairs yourself – but if you are not handy and need to hire someone, this can eat into your savings. Make sure you have enough room in your budget to afford repairs and appliance replacements.
  • Limited locations. Looking for a duplex may limit your location options. Not all neighborhoods in every city offers a mix of single-family, duplex and multi-family units for sale.
  • Resale issues. Generally, there is less demand for duplexes than single-family homes, so reselling may take longer.
  • Property insurance rates are higher.
  • Appreciation is generally lower for duplexes.
  • Higher up-front cost. While you can qualify for low-down-payment options as mentioned above, you will likely spend more on the duplex than you would on a single-family home. So even if you only put 10% down, you may face higher up-front costs.
  • Rental income is not guaranteed. Just because you have a space to rent does not mean you will see that rental income each month.

All advice aside, the only person who can determine whether a mult-family or a single-family home is right for you – is you. So, do some soul-searching to see if it is a good option for you as a first-time home buyer.

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Ontario gov’t releases new guide to protect, educate condo buyers

The Ontario government has introduced a new measure to protect condominium buyers, a lot of whom have felt short-shifted in past purchases.

“Realtors in Ontario have been very frustrated that purchasers of preconstruction condos have been misled or ripped off with far too many projects that got delayed, or where the final product was not what they were promised,” Tim Hudak, CEO of the Ontario Real Estate Association, which lobbied the provincial government for mandate, told CREW.

“There are too many stories of people who purchased condos that are either badly delayed, never developed, or not what they were promised. OREA went to bat to raise consumer protection with preconstruction condos. We need a level playing field when it comes to protecting consumers from buying homes.”

Beginning this year, developers operating in Ontario must provide purchasers of new or preconstruction condos with a copy of the Ontario’s Residential Condominium Buyers’ Guide, which was prepared by the Condominium Authority of Ontario, and failure to do so could nullify the purchase agreement.

The 37-page guide will cover everything from the purchasing process to condo corporations and any issues that may arise while the resident is living in their unit.

Moreover, effective Feb. 1, as per the New Home and Construction Licensing Act, Tarion will no longer be responsible for regulating new home builders and vendors, ceding the authority to the Home Construction Regulatory Authority.

Led by Hudak, the former leader of the Progressive Conservative Party of Ontario, OREA had been lobbying the provincial government to expand protections for consumers in the real estate sector because many of them enter purchase agreements at sales presentation centres without fully understanding the terms of the agreements, which can be costly. Hudak says sales centre representatives should adhere to stringent professional standards and ethics like real estate sales agents do.

“It’s a great document that OREA had input on, with clear language about the process, the rights consumers have, and their options if they feel they’re not being provided what they contracted for,” said Hudak.

Erica Mary Smith, broker of record at Stomp Realty, says that, unfortunately, not many consumers who visit presentation centres know what they’re walking into, and seemingly small clauses that can carry hefty price tags can be averted with the guidance of a sales agent.

“My business partner and I worked in sales offices for five or six years, and a lot of people don’t know you can bring a realtor into a preconstruction office and the sales office rep will know they can’t get away with anything,” she said. “Your closing costs for preconstruction are typically 16-20% if you don’t know how to negotiate, whereas a realtor can keep it down to 5%.”

Alex Balikoev, senior vice president of sales at Sotheby’s International Realty Canada, welcomes the government-mandated condo guide because, he says, the majority of condo purchasers grew up in ground-related homes and aren’t familiar with the ins and outs of condominium ownership, often to a surprising degree.

“Even current owners don’t know how condo corporations are run,” he said. “That’s why some buildings have higher condo fees—because owners are not involved, not because they’re lazy, but simply because they’re not aware of how much involvement they can have. A condo corp might interview three or four contractors for repair work, but an active board will interview 10 to 20 and find the best and cheapest ones. It’s all about how active and involved the condo corp is.”

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. 

Source: Canadian Real Estate Magazine – Neil Sharma 11 Jan 2021

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New Real Estate Investors: Essential Tips for How to Start and Be Successful

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New real estate investors have a lot to think about before embarking on their journey. Canada enjoys one of the hottest housing markets in the world, even in the aftermath of the Coronavirus pandemic. What’s more, the Canadian real estate market is not only heating up in major urban centres such as Toronto, Vancouver, Montreal and Ottawa. Small cities in the Prairies and Maritimes, and rural communities country-wide are generating a big buzz in today’s economy, which means the potential for a windfall.

But smart investing involves more than shelling out a down payment on a house or a condominium. It requires industry know-how, investing prowess, patience and initial capital. When you are beginning, it can be an overwhelming experience.

Don’t know where to start? Here are eight essential tips for new real estate investors:

#1. Ask Yourself These Questions

Real estate investing requires a heavy commitment. It is not something you can decide overnight. From upfront capital costs to taxes to various expenses associated with owning a property, real estate investors are forced to take on a lot of responsibility.

Therefore, before you initiate the process of investing in the housing market, ask yourself these questions:

  • How much money are you planning to invest in real estate?
  • Do you have good credit?
  • What is your personal financial situation like?
  • What funds will you use for a down payment (retirement, savings, investments)?
  • How much debt do you plan to take on (if any) in order to finance your investment?
  • Do you have any experience in real estate investing?

Real estate investing is not easy, and it will occupy some time. Make sure you’ve thought through the hard questions before you begin, to ensure that you’re starting your journey with enough foresight and the necessary resources at hand.

#2. Know How You’ll Be Generating Your Income

When you are investing in real estate, there are several different ways of generating an income. Here are the four primary methods:

  • Appreciation: A property increases in value amid changing real estate conditions.
  • Ancillary: This is when you have a mini business within a larger real estate investment, such as a vending machine in a laundry room in the apartment building.
  • Cash Flow: You collect a stream of cash from a tenant.
  • Commission Income: Real estate specialists earn a commission on properties they helped a client buy or sell.

When selecting a market to purchase in, or a property to buy, consider the amount of income that you’ll potentially receive through each of these streams. Is it worth the initial investment?

#3 Order Home Inspections Before Buying

Home inspections are a critical component of buying a property. In a red-hot real estate market, a growing number of potential homebuyers are foregoing this essential step so they can and the home almost immediately. This could be bad news.

Home inspections are crucial because they raise any red flags, such as repairs and renovations, that could cost you a lot of money once you receive the deed to the property.

How devastating would it be if you learned that the foundation needs to be fixed? This would set you back as much as $10,000, which is nothing to sneeze at – especially when you’re a beginner investor.

#4 Get an Appraisal

Property appraisals are just as important as home inspections because they inform you what the home is worth, using analysis from past, current and predicted future valuations. Moreover, if you are renting out the property, an appraisal can provide you with a ballpark figure of how much to charge per month.

#5 Focus on One Property

In the world of investing, it is recommended that diversification is the key to success. But while this is sound advice, it does not apply to real estate investors when they are starting out.

When you are beginning your real estate investment journey, it might be prudent to concentrate on one property at a time. Allocating your time and energy to more than one house or unit may prove challenging when you’re just starting out, and increases the risk of making costly mistakes.

#6 Consider Exit Strategies

Like shares in a stock or units in a mutual fund, you need to have an exit point. Once an investment reaches a certain point, you can hit the ‘sell’ button and enjoy the profits.

What is your exit strategy with your real estate investment? This is a pertinent question to put forward when you are just starting out, because you do not want to risk losing when you are on top. From a market crash to a new tax, there are many different ways someone can lose their investment, even when it seems like you’re set to experience a big win.

Most savvy real estate investors will advise you to define your exist strategy before you’ve even purchased the property. Some of the most common real estate investment exist strategies include:

  • Fix & Flip
  • Buy & Hold
  • Wholesaling
  • Seller Financing
  • Rent to Own

Learn about your options and based on your timeline and resources, consider which strategy will bring you close to your financial goal.

#7 Know Your Tax Laws

Taxes on real estate investing are complicated. Hiring a tax attorney, real estate lawyer, or accountant for your property is an investment that will pay dividends in the future.

Should you choose to go solo, it would be prudent to have a fundamental understanding of the tax laws in place regarding real estate investments.

Here are some basic elements of real estate tax law in Canada. This should not be taken as legal advice, and it is always recommended that investors consult a lawyer, but this list should give you some things to think about:

  • When you purchase a property, you pay a provincial transfer tax, which varies from province to province.
  • New home acquisitions are subject to the GST.
  • The Canadian Income Tax Act slaps a 25 per cent penalty of the gross property rental income per year.
  • Investors can usually deduct two kinds of incurred expenses: capital expenses and operating expenses.
  • Non-residents selling a Canadian property are mandated to give the federal government 50 per cent of the sale.

#8 Have Six Months of Money Reserves

One of the best pieces of advice anyone will ever give you when it comes to real estate investing is to have a minimum of six months of money reserves per property.

Even if the housing market is soaring or your investment has been reliable for the last 18 months, it is always fiscally responsible to have reserves at hand. The market could slump at any time, it could take time to find a tenant, or an emergency repair may crop up. With an adequate reserve fund, you’ll have enough cash to ride it out through any of these scenarios.

This cash, which could also be placed in a yield-bearing account, will prevent you from accessing credit markets, too.

Real estate investing has become a popular method of making money in a zero-interest-rate economy. Because the cost of borrowing is so cheap and the Canadian real estate market is booming, there is a great deal of interest in buying and selling properties, from semi-detached houses to one-bedroom condominiums. It can be a challenging experience when you are starting, but it can also be highly rewarding and profitable.

For more information on smart real estate investing tips, or for advice on which markets are ripe for investors, reach out to your local RE/MAX agent today!

Source; GlobalRemax.com – January 5th, 2021

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Home renovations: a primer on how to do them right

The bigger the home renovation, the bigger the risk something goes wrong. Fortunately, that can be avoided.

Niran Kulathungam, a financial life professional, real estate advisor and master coach with Legacy Global Inc., and owner of The Ascension Principle, has about 57 doors to his name. Moreover, as recipient of the REIN Multifamily Investor of the Year Award and Renovator of the Year Award in 2017, and winner of the Michael Millenaar Leadership Award in 2018, he’s far from a neophyte. Kulathungam says that whether renovations are undertaken for a fix and flip or because the owner intends to live in the home, a checklist is required at the outset.

“When you walk into a property, the first thing you do that most people don’t is detail the scope of the work. You might realize you need a new kitchen, but you should ask yourself a more important question: ‘How can I make this the most amazing, top-notch house on the street?’ I create a detailed budget and I figure out where the electrical outlets and lighting fixtures are going, and then I budget the cost for each of them. I budget for tiles and countertops, and I budget what it would cost to move stuff around. I budget for every single thing I’m going to do in that house.”

Kulathungam adheres to the ‘80:20 rule,’ which stipulates that, upon detailing the renovation plan, 20% of the improvements will comprise 80% of the value enhancement. Those improvements include renovations to the home’s exterior because of how important curb appeal is.

“Decisions to buy or rent a property are often made when the person drives by,” he said. “Would you be happy bringing your mother-in-law over to this house? Is it something you’d be proud of showing her or anybody else?”

Kitchen

Having a beautiful kitchen is a bare minimum requirement for any home that has a chance of selling in today’s housing market, but that often isn’t enough.

Just as Kulathungam asks himself how his renovated house will be the most beautiful on the street, he asks how his kitchen can exist in a class of its own?

“What about your kitchen says, ‘Wow!’ That’s where I tend to spend a little extra money. People still use cheap countertops in their kitchens, but in this day and age I always put in stone and quartz, and hardly ever any granite.”

Don’t think kitchen renovations begin and end with a nice countertop, added Kulathungam. The backsplash is a relatively inexpensive way to beautify, and differentiate, a kitchen.

“The proof is in the pudding on this one; I get good results with it. Standard practice right now is to do white subway tile for the backsplash. My question is: if every renovation has that, what can I do to stand apart? I will spend extra money on really nice backsplash because it will give me a return.”

Lighting

When it comes to lighting, don’t be miserly. Unlike most real estate investors, Kulathungam doesn’t mind spending more money on lighting if a high-end fixture or chandelier greets prospective buyers and renters upon their entry into the home, because it augurs yet more outstanding features to come.

“I want my kitchen and living room to rock,” said Kulathungam. “We renovated a bungalow in Stoney Creek and ended up vaulting the ceiling. By doing that, I dropped down three really nice lights, and to this day when anybody walks in, they go, ‘Wow!’ Lighting is crucial.”

Bathroom

To say the bathroom needs to look nice is an understatement — “you want to go for a spa-like feeling,” said Kulathungam.

That doesn’t just mean making good use of open space, especially if the home is a fix and flip; it means optimizing the things you cannot see. And what a wonderful surprise that could be for house hunters.

“Put in subfloor heating because it feels amazing and people absolutely love it. Lighting is, of course, important, and in some bathrooms I’ve done walk-in showers with glass walls and a sloped floor at the bottom leading into the drain. It’s more costly to do, but in a smaller bathroom it gives the appearance of space. If you renovate in an area where you attract families with young kids, you want bathtubs. If there aren’t young kids, then go with the walk-in.

“Put in nice taps, not cheap ones. If you renovate in Toronto, I would look at adding a towel warming rack. Although it isn’t that functional, it has that wow factor.”

Bedroom

According to Kulathungam, not much is needed to upgrade a master bedroom, however, because clutter is seldom spoken about in positive terms, and because bedrooms are proverbial sanctuaries, this room should feel commodious. Additionally, extensive closet space will make a believer out of even the most fastidious buyer.

“In downtown Toronto, closet space can be limiting. Put in barn sliding doors, with the slider outside the closet so that the entire door slides on the outside, instead of regular doors.”

Lighting inside closets, especially if you enlarge the space, is a great idea. Kulathungam recommends lighting that turns on when the door opens, and shuts when it closes. He also recommends figuring out where the television set will go and putting wiring in early on, as well as adding a modernizing feature.

“In the master bedroom and kitchen, put in some USB ports so that you can plug your cell phone directly into it,” said Kulathungam. “Little things like that go a long way towards doing a really nice renovation.”

Water issues

Identifying potential water issues is crucial because the house’s foundation, not to mention the costly renovations, could be compromised. Kulathungam begins his inspection of the house on its roof and works his way down each storey to the basement.

“Make sure downspouts are directed away from the foundation of the house,” he said, “and figure out what the issues are before you put flooring in.”

Condo renovations

These renovations are a little trickier than house renos, but many potential complications can be nipped in the bud early on in the process by simply being a good neighbour. For one, speak to the condo board right away and give them a heads up about what you’re planning to do in the unit, even though they can’t technically stop you, because certain things are allowed while others are prohibited. The structure falls under the purview of the condo board.

“I knock on the neighbours’ doors and give them my private cell phone number so that they can call me if they have any concerns,” Kulathungam. “I also offer to help them with their renovations by putting them in touch with my guys.”

Being a good neighbour doesn’t just stop there, though.

“In a condo, be respectful of your neighbours with respect to noise,” he added. “Make sure your guys renovate during normal work hours. I tell crews to keep music low and I tell them not to swear because noise carries in a condo.”

The cardinal rule of fix and flips

Plan ahead and always have a reserve budget, advises Kulathungam, because you may miss something lurking behind a wall. Most importantly, your name—your brand—is all over the property, so make sure you renovate it as if you’re its end user.

“Budget for things you did not initially budget for, and when you find a problem, don’t cover it up. Fix it. Your name is on the line. In this space, once you get a reputation as someone who can produce a great product—one where you don’t cut corners, one where you finish on budget and treat trades well, which helps you attract the best tradespeople on your subsequent projects—you also attract joint venture capital. If these lessons mean that you won’t make as much money on your first flip, rest assured that you will over the long haul, and you will create a name for yourself.”

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. 

Source: Canadian Real Estate Magazine – Neil Sharma 06 Jan 2021

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Micro unit financing made easy

Securing financing from A institutions for micro condos—categorized as anything below about 500 sq ft—has always been thorny, and with the COVID-19 pandemic taking a bite out of many downtown condo markets, it’s certain to remain so. However, it can still be done.

The big banks are chary about financing these units because they’re rarely end user-occupied, and nearly always purchased as income properties.

“They’re typically investor units or short-term rentals, essentially serving as hotel substitutes, and there are issues around financing,” said Toronto-based Simeon Papailias, co-founder and managing partner of REC Canada. “The bank always mitigates risk on a default scenario, and it’s not a very marketable property. They look at the heavier risk they take by lending on a micro-unit as opposed to a regular unit.

“There are special programs the five major banks rotate between themselves, depending on what the banks’ goals are for the year. CIBC can do it one year, then TD could the next. There are special programs made for this, and it’s something a prudent investor should know.” 

Alternatively, the B channel is a much less knotty way to secure micro condo financing, although the rate will be higher.

 “I had private financing with Home Trust, at the time, on a 380 sq ft micro-unit investment property in Yorkville back in 2011, when those units just started becoming more common in the marketplace,” continued Papailias. “Today, around 30% of most condo buildings are under 500 square feet, and the reason has everything to do with affordability.”

Locale is another variable, says Dustan Woodhouse, president of Mortgage Architects. A micro-unit in a building near a university or college, for example, is far more likely to receive funding than a similar-sized condo situated around fewer amenities.

Securing financing for a resale micro-unit is a little easier, he added.

“Pull title on the property,” said Woodhouse. “Pull title on that unit and pull title on four more units in the building and see who the lender is on the title. Then you’ll know who to call.”

The pandemic has left downtown condo markets reeling, but as any savvy investor knows, that’s when opportunity comes knocking.

“Prices on micro condos are dropping the furthest and the fastest over any other type of properties. On the one end of the spectrum, detached houses are rocketing upward, and at the other end of the spectrum you have micro condos dropping in price.”

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. 

Source: Canadian Real Estate Wealth – Neil Sharma 16 Dec 2020

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Welcome to Canada’s new real estate hotspot

A Southwestern Ontario city has emerged as one of the country’s next real estate investment hotspots.

Windsor has spent the last decade rebuilding its economy after languishing through the Great Recession. Although the city doesn’t receive much fanfare, savvy Toronto investors have had their sights set on the city for a while.

According to the Windsor-Essex County Association of Realtors, sales in the city increased by 6.31% year-over-year in November, while the average sale price rose by 24.14% to $420,007. New listings also grew by 9.74%.

Windsor’s rental vacancy rate was 2.9% in October and its rental supply has gone up 7.5%, according to Anna Vozza, a sales agent with Bob Pedler Real Estate Ltd., who noted that multi-family residences have become popular purchases.

“We had a well done duplex in the middle of the city, which would usually go for no more than $250,000, but it sold for $502,000 last month,” she said. “It was a basic duplex.”

Given that the average sale price of a Windsor home in November was less than half of what it was in Toronto—according to the Toronto Regional Real Estate Board, the average selling price was $955,615 last month, up 13% from November 2019—it’s no surprise that Torontonians see the potential in the border city.

“For retirees, it’s a great place because if you’re in Toronto selling your home, you can buy something here in Windsor and still put money away in the bank,” said Vozza. “I see Toronto buyers here, on average, twice a month because you can get an income property with an 8-9% cap rate. I don’t think you can get that in Toronto. We have a university, a college, and we’re a border city, so there’s never an issue with renting.”

A recent analysis by Money Sense identified Windsor as the top Canadian city in which to buy real estate. The average house price is $313,146 and the five-year average rent increase is 11.14%.

The 2008 financial crash was particularly damaging for Windsor because many of its residents worked in Detroit, located just across the border, and when General Motors closed its North American auto plants and parts manufacturers, as well as the transmission plant in Windsor, the city’s unemployment and vacancy rates soared—the latter even reaching 15%.

The rebuilding process was long and arduous, and the Trump administration’s steel and aluminum tariffs certainly didn’t help, but Windsor has gradually emerged as a hotspot.

“But the rule of investing—buy low and sell high—meant that a few risk takers were willing to buy into Windsor’s real estate market, and by 2015 their calculated risk had begun to take off,” stated the Money Sense analysis. “ The city’s vacancy rate had dropped to just 4% while year-over-year sales activity increased by 22%. Fast-forward to 2018, and the city’s vacancy rate dropped again to 3%.”

In April, FCA Canada, which is owned by Fiat Chrysler, announced a $355 million investment in the Windsor assembly plant, and while it will eliminate the plant’s “third shift,” it also saved upwards of 7,500 jobs, according to the analysis. Moreover, the company’s Q3-2020 earnings results indicated that while sales declined by 11% year-over-year, they improved on a monthly basis—including annual retail growth in September. It also revealed that sales for its Jeep Gladiator increased by 94% during the quarter, and by 179% through the first three quarters of 2020.

“We’re a snowball effect of the auto industry,” said Vozza. “If you see that do well, people will buy houses because they start feeling secure. We lost one shift with FCA, but they’re hiring and coming up with another product.”

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. 

Source: Canadian Real Estate Wealth – News by Neil Sharma 14 Dec 2020

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5 things to consider before buying an investment property

series of tiny houses sitting on top of stacks of coins

Are you thinking about investing in your first rental property? It’s a big step. But with careful research and some time and effort, it can be a great way to generate a passive income.

There’s a lot to consider before you start your journey to becoming a real estate mogul. In this article, we’ve put together a list of some important information that can help you on your road to building your real estate empire.

  1. Is a real estate investment the right fit for you? 

Great risks can yield great rewards. But consider the risks of an investment property: securing a mortgage, maintaining a budget for operating costs, securing reliable tenants who will pay their rent on time and securing a maintenance fund— just a few of the important issues to think about.

Many aspiring investors think that they will begin making a profit from their investment right away. That rarely happens. Operating costs that are too high, a heavy mortgage, vacancies that you have to cover— these can seriously eat away at your profits and leave you with next to nothing— and that’s before you deal with marketing, property taxes and other bills. All of these issues can seriously derail you if you fail to plan for them in advance. But if managed carefully, an investment property can net considerable financial rewards over time.

  1. Your Financial Situation

Can you secure the mortgage necessary to purchase an investment property? Do you carry a high debt load? Both of these questions need careful consideration before proceeding.

Lenders typically like to see a debt-to-income ratio of less than 36%. An investment property does not qualify for mortgage insurance so the amount needed for a down payment is higher than when purchasing a family home (20% for investment properties vs 5-10% for family homes). You also need to consider closing costs and emergency funds.

  1. Property Management

Are you prepared to manage your investment property on a day-to-day basis? If your goal is to buy it and forget it, you need to consider a property management company. They will deal with the daily management of your property including finding and vetting potential tenants, collecting the rent, and handling any maintenance issues that come up.

One additional benefit of using a property management company is the freedom to purchase a property anywhere the law allows and take advantage of markets where the financial rewards are greatest.

  1. Location, Location, Location

In the case of an investment property, “where” is often more important than “what”. For example, the hottest place to purchase an investment property in Canada right now is in Guelph, Ontario. You want your property to be where the people are. A beautiful vacation home, in a place no one visits, will not be a successful investment but a fixer-upper in an urban center will probably recoup your renovation costs and make you a tidy profit. Do your research before you settle on a location.

  1. The 1% Rule

What Is the One Percent Rule?

Simply put, it means that the monthly rent earned from an investment property should be no less than 1% of the price of the property. This will ensure that you at least break even. A good rule of thumb is to never get a mortgage where the monthly payment is more than the amount received from your monthly rent. It’s best if the mortgage is less than that one-percent.

There are lots of other things to think about before purchasing an investment property. Research is key to success, and hopefully, this list will provide you with a good starting point.

Source: First canadian Title – Nov 19th, 2020 | By FCT

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Invest in multifamily, industrial in 2021: PwC

Uncertainty is a dominant theme going into 2021, according to a new report from PwC, but there are some sure bets.

According to PwC’s Emerging Trends in Real Estate 2021 report, which studied residential and commercial property markets in the U.S. and Canada, the COVID-19 crisis has created a scenario in which so-called “alternative assets,” or niche sectors, have emerged as robust income-producing vehicles. Single-family rental housing, suggests the PwC report, is a safe asset class going into 2021 because, as more people work from home, they will desire more space.

That partially explains why condo markets in major Canadian cities are feeling the pandemic’s squeeze. Although single-family detached houses on the peripheries of Toronto and Vancouver are selling quickly, the laws of supply and demand dictate that most people who live in them will need to rent, as the PwC report believes they will.

Moreover, multifamily housing in Canada’s expensive cities will always be in demand, and PwC advises that it’s a safe asset in which to invest in 2021.

“Although some pandemic impacts—notably, reduced immigration, the desire for more size, and unemployment—may put a damper on demand for very dense housing types, interviewees emphasized that shelter remains a core need and noted the stability that the multifamily category can offer right now,” the report read. “But demand may shift, with renters and homebuyers looking to live in townhouses and mid-rise buildings rather than larger towers that have been the trend in urban centers in recent years. Interviewees also emphasized that the best prospects are for more affordable multifamily housing options, especially in light of uncertainty about jobs and the economy.”

Outside the residential market, investors would be wise putting their money into the industrial sector, particularly warehousing and fulfilment facilities, which can’t be built fast enough as e-commerce continues supplanting brick and mortar retail. Although the trend began before the pandemic, it has certainly become exacerbated by it.

“This category topped the list of both investment and development prospects in our survey this year,” read the report. “The growth of e-commerce is a significant factor, but interviewees also cite supply chain disruptions during the pandemic as a key contributor, since some companies respond to these challenges by holding more inventory.”

Facilities that offer last-mile delivery in urban areas, the report cited interviewees as extoling, offer value because they’re rapid delivery solutions.

“The interest in warehousing and fulfillment is consistent with interviewees across the country, although certain centers—notably, Calgary, Ottawa, and port cities in Atlantic Canada like Halifax—have particularly strong sentiment. The biggest challenge is finding available space, although some interviewees mentioned opportunities in adapting mixed-use properties to incorporate fulfilment.”

Source: Canadian Real Estate Magazine – Neil Sharma 24 Nov 2020

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The Best Ways to Invest in Real Estate

Young adult welcoming older man into home

When it comes to investing in real estate, most people look at owning their primary residence with the hope and confidence the value of the property will rise in time as they build equity in their investment.

It’s a sound and fairly safe way to grow your investment if you keep your eye on the long-term. But for many novices they’re likely not aware growing an investment in real estate can take many other forms-everything from renting out a property or a vacation home to buying a home, fixing it up and selling it for a higher price to investing in a Real Estate Investment Trust (REIT).

A professional women and man walking down the sidewalk of a soon to be residential area.

As with any investment, each approach carries with it different risks–so you’ll want to thoroughly research your options to ensure you’re investing your money responsibly and strategically. 

“Realizing the dream of homeownership has proven over the years, decades and decades, to be one of the best investments available to Canadians. If you look historically and you had X number of dollars to put in a downpayment . . . what you put down and what you paid, your investment has outperformed most other vehicles that are available to Canadians,” said Costa Poulopoulos, Chair of the Canadian Real Estate Association, adding people are paying down their mortgage while the property value rises so they’re winning on both ways.

A middle aged couple looking at financial statements in a modern dinning room

“Another key point is you hear people talk about the stock market and mutual funds and RRSPs as go-to things. And sure there’s returns there and yields. But you can’t live in a mutual fund. So not only are you getting appreciation and a tremendous return on your initial investment but it’s actually serving two purposes-it’s a secure investment and it’s housing.

“There are many vehicles available for investing from the novice first time trying to figure out a secondary home and starting small to sophisticated investors, conglomerates, REITs, whatever the case may be.”

For example, Poulopoulos said many people buy properties to rent out. In this regard, the property value can appreciate over time but also you’re generating revenue.  

One of the key things to consider when buying rental properties is the financial costs including mortgage payment and paying for utilities to taxes. And of course, unless you’re hiring someone to take care of the property you do have responsibilities as a landlord you might personally have to handle.

A row of multi material town homes.

Romana King, a personal finance columnist and real estate expert, said it’s relatively simple to make money using real estate as the investment asset whether it’s speculation buying and flipping a home or investing sweat equity and flipping.

“Simple in that you don’t require a lot of specialized knowledge so you don’t have to go to school for anything. You don’t need a qualification. But with that said it’s not easy in that you do still have to treat it like a business so you really need to be aware of the numbers involved,” she said.

Young adult welcoming older man into home

That’s really important when it comes to real estate flipping. The homework required here is to make sure you understand what exactly is selling in that neighbourhood, what the current trends are in that neighbourhood and whether or not what you propose fits in with those two current snapshots.

Timing is also important. It can make the difference in achieving a great return or losing on your investment.

King said she is a big fan of investing in a rental property. 

“You can make money on rental purchases as long as you have a cash flow positive budget sheet. If you don’t and if there isn’t enough wiggle room in that budget then you’re buying a property that’s priced too high for you and you need to actually rethink your strategy. It’s still a good strategy but consider a lower price point. Even if you get lower rent all of those numbers have to make sense,” she added.

King advises people to save up a larger down payment and look for a multi-unit property to buy whether it’s a house that can be divided into two units or a triplex. That spreads your risk with more rental revenue.

She said REITs are incredible vehicles and they can be a great gateway into real estate investment. 

“It does give you a better idea of how extraordinary real estate investments can be. They can be fantastic holdings. It also helps you diversify a little bit,” added King. “I really love REITs. I love REITs for anyone who really wants to get into real estate investing but doesn’t want to do the work. That’s not a negative. Not everyone has time to do all the investigation and crunch the math and make sure you have cash flow positive. If you don’t want to do that, and you want to get the upside of real estate investment, REITs are awesome. They’re excellent.”

Young couple talking to an investor

Whether you’re a novice or a sophisticated and experienced investor, the real estate industry presents a golden opportunity to invest your money and grow that investment if one takes the time to research the many vehicles available. 

Source: The article above is for information purposes and is not legal or financial advice or a substitute for legal counsel.  Mario ToneguzziMario Toneguzzi, based in Calgary has 37 years of experience as a daily newspaper writer, columnist and editor. He worked for 35 years at the Calgary Herald

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CRA cracking down on abuse of principal residence exemptions, but their assessments aren’t written in stone

The sale of one's home offers Canadians the best opportunity for a major tax-free gain.
The sale of one’s home offers Canadians the best opportunity for a major tax-free gain. PHOTO BY DAVID ZALUBOWSKI/AP PHOTO FILES

There are very few things that are tax-free: investment income in your TFSA, lottery and casino winnings, purchasing six or more doughnuts (see what happens to the GST/HST next time you try it) and the gain from the sale of your principal residence are among the limited exceptions. With the odds of winning the lottery being slim at best, it’s the sale of one’s home that offers Canadians the best opportunity for a major tax-free gain.

In recent years, however, the Canada Revenue Agency has been cracking down on taxpayers who, in its view, are inappropriately claiming the principal residence exemption (PRE), particularly as it relates to flipping houses. If it’s determined that you’re regularly buying and selling homes, you can be denied the PRE, and be taxed on any profits as 100 per cent taxable business income, versus 50 per cent taxable capital gains. Take the recent case, decided in September, of an Ontario couple who bought and sold multiple homes between 2007 and 2012.

The couple, who live in the Ottawa area, bought and sold houses in each of 2007, 2008, 2009, 2011 and 2012 and claimed the PRE to shelter the gain on each sale from tax. The CRA disagreed and sought to tax the income from the disposition of each of the five houses as business income. The CRA also levied gross negligence penalties.

Homes #1, #2 and #3

The taxpayer operated a concrete pouring business, and later, a foundation repair business.

In August 2006, the couple bought House #1. After moving in and doing some renovations and painting, they soon became dissatisfied with the house — it was located close to an industrial site and large trucks passed the house from 6 a.m. until late at night. The noise from the trucks was loud and the vibrations made the house shake. As a result, the couple, having only lived there for approximately ten months, decided to move, selling the home for a gain of $69,801 in 2007.

They then constructed House #2, their “dream home,” with substantial upgrades, and moved in September of 2007; however, the couple “quickly became unhappy with the neighbourhood…(and)…became concerned for (their twin) girls’ security, due to a ‘coyote invasion.’” The couple sold the home, moving out in Aug. 2008 having lived there for eleven months. The profit from the 2008 sale was $273,434.

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The following month, the couple moved into House #3, which they had constructed. Soon after they moved in, the real estate agent who had sold them their prior home approached them and asked if he could show their new house to his clients who apparently made an offer that the taxpayer couldn’t refuse. It was sold in Sept. 2009 for a substantial profit of $403,776 above the cost of the land and construction.

Houses #4 and #5

In Dec. 2009, the couple moved into newly purchased House #4, a townhouse on which they had made improvements. It turned out that the townhouse “was not a good buy” for the couple: the taxpayer’s truck was too large to be parked properly in the laneway and the neighbours complained about the couple “having loud social gatherings.” In Jan. 2011, they sold the home for a profit of $54,913.

They then moved into Home #5, making some improvements and doing some landscaping. But, in the end, this home, too, was “not their dream home,” and they sold it and moved out in July 2012, making a profit of $187,574. After selling it, they moved into a sixth home, where they still resided at the time of the trial.

The decision

In determining whether the sale of real estate is considered business income, the courts have traditionally considered the following factors: the nature of the property sold and how the taxpayer used it; the length of the ownership period; the frequency or number of other similar transactions by the taxpayer; the work expended on or in connection with the property; the circumstances giving rise to the sale of the property; and the taxpayer’s motive regarding the sale of the property at the time of purchase.

At the time of each purchase, the couple argued that it was clear that their motivation was not to sell the houses, testifying that “if their motivations had been to sell the houses at a profit, they would have not customized the houses and added the many upgrades.”

With respect to the sales in 2007, 2008 and 2009, the taxpayer also argued that it was too late for the CRA to reassess those tax years as they should be considered “statute barred.” The CRA is generally prohibited from reassessing an individual taxpayer more than three years after the original reassessment unless it can be shown that the taxpayer made “a false statement attributable to misrepresentation arising from carelessness, neglect or wilful default.”

Each year, the taxpayer consulted his accountant to obtain professional advice at the time of filing his tax returns. He explained to his CPA that his intentions were to stay in the houses, but “for legitimate reasons and circumstances beyond his control, he and his spouse had decided to sell the houses.”

The judge agreed that there was no misrepresentation attributable to neglect, carelessness or willful default. “It is clear … that simply because a taxpayer has adopted a position that contradicts the (CRA’s) position does not in itself mean a taxpayer has made a misrepresentation that would allow the (CRA) to reassess after the normal period.” Thus, the CRA was precluded from reassessing the taxpayer on the sales of Home #1, #2 and #3 in the three statute-barred years.

The judge, however, was of the view that the taxpayer’s “primary intention at the time of purchase of both (House #4 and #5) was to resell them at a profit. If it was not his primary intention, then the possibility of reselling them at profit was certainly a secondary intention motivating him to purchase both houses.” She thus ruled that the PREs did not apply to the gains on the sales of Houses #4 and #5 and they were properly taxable as business income.

Finally, the judge dismissed all gross negligence penalties assessed by the CRA since the taxpayer, based on the advice of his accountant, was under the impression that he could claim the PRE each year. As she wrote, “In my view, the (CRA) did not establish that (the taxpayer) knowingly make a false statement or omission when filing his income tax returns for the 2011 and 2012 taxation years.”

Note that since 2016, you are required to report all dispositions of a principal residence on Schedule 3 of your tax return, making it much easier for the CRA to review your PRE claim.

Source: Financial Post November 6, 2020: Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

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