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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Funding available in Brampton, Caledon and Mississauga to create affordable rental housing

The Region of Peel has launched a new program to help eligible homeowners in Brampton, Caledon and Mississauga create more affordable rental housing.

The My Home Second Unit Renovation program provides up to $30,000 in forgivable, interest-free loans to homeowners who want to upgrade existing second units and rent them out at affordable rates.

Up to $20,000 in interest-free, forgivable loans is available for eligible homeowners with an existing second unit. The loan supports renovations and repairs needed to bring their unit in compliance with the Ontario Building Code. Recipients must register the renovated unit with their municipality and rent it out at an affordable rate to have the loan forgiven.

Up to $30,000 in interest-free forgivable loans is available for homeowners who meet the above criteria and rent their renovated unit to a tenant referred to them by the Region of Peel Housing Services.

Up to 10 per cent of funding is available upfront as a grant to secure a contractor. The region also provides support to help homeowners and tenants maintain successful rentals.

The program, which is one of several initiatives the region is creating to address the chronic shortage of affordable rental units in Peel, is currently funded to create 57 new affordable units in Peel each year while making home ownership more affordable for loan recipients. Optimizing existing housing stock in the community is one of five strategies to address housing affordability in the region’s long-term Peel Housing and Homelessness Plan.

“The market rate for housing in Peel today is unaffordable for 80 per cent of our residents,” said Aileen Baird, director of housing services, in a statement. “This pressure will only increase as Peel’s population continues to grow, while only 0.03 per cent of new units built each year are affordable.”

More information is available at peelregion.ca/housing/second-unit-renovation-program.asp.

Source: Marta Marychuk Caledon Enterprise Thursday, October 22, 2020

What happens to a home or mortgage when someone dies? Many Canadians don’t know

What happens to a home or mortgage when someone dies? Many Canadians don

Despite our best efforts to distract ourselves from the inevitable – a cultural landscape built on invincible superheroes and the glorification of youth, a willingness to ignore the slow-motion destruction of the planet, the power wielded by religions that promise eternal life in exchange for free will – death, folks, is coming for us all.

Canadians who think their properties will automatically pass to their descendants when they die could be in for an unpleasant surprise if they come back to haunt them. As Bury explains, if a homeowner dies without a will, or with a will that somehow fails to specify who the deceased’s property is meant for, what happens to the home becomes a provincial decision. Each province has its own formula for distributing the deceased’s assets that takes priority over the dead person’s wishes.

Many readers, particularly those who help Canadians purchase homes, may have the impression that homeowners instinctively recognize the necessity of including their properties in their wills long before the reaper gives them a lift to the other side. But new data from Angus Reid and online estate planning platform Willful shows an alarming lack of knowledge among Canadians when it comes to what happens to their properties and their mortgages after they die.

When asked “Do you know what happens to your home if you pass away without a will?” only 21 percent of respondents provided the correct answer, that it will be distributed to an individual’s dependents according to a provincial formula. The remaining 79 percent included people who mistakenly think their properties will automatically go to their spouse or children (48 percent) or to the government (6 percent), while 24 percent admitted they don’t know.

That lack of understanding is undoubtedly related to the fact that only 51 percent of homeowners surveyed reported having up-to-date wills. Thirty-six percent reported not having a will at all.

Willful CEO Erin Bury found the latter figure shocking.

“I expected that that number would be much better once they owned a home because as soon as you accumulate a large asset or you get married or you have kids, those are the inflection points that cause you to think about getting a will,” Bury says.

The fact that Canadians are in the dark about after-death planning with regard to real estate is somewhat less surprising. There are always barriers preventing people from putting a will together, from an unwillingness to confront one’s own mortality, to the costs involved, to the one thing that is almost as common as death itself: the human propensity to procrastinate.

“It seems like one of those things you can put off until tomorrow,” Bury says. “I’m a journalism grad – I don’t do anything without a deadline – and you don’t have a deadline for creating your will.”

At least not one anyone can truly be aware of.

Implications of ignorance

A misunderstanding of what happens to a person’s property once they’ve died can cause extreme distress, both financial and emotional, for her surviving family members.

Canadians who think their properties will automatically pass to their descendants could be in for an unpleasant surprise if they come back to haunt them. As Bury explains, even when a will lists a spouse or child as a beneficiary, each province has its own formula for distributing the deceased’s assets that takes priority over the dead person’s wishes.

“It may not actually be divided the way that you would want,” she says. “And if you have a common law spouse, unless they’re a joint owner of the home, they are not accounted for under that provincial formula.”

In most cases, the executor identified in a person’s will will be instructed to sell the deceased’s assets, although the executor has the power to do what they feel is in the surviving family members’ best interest. If Bury dies – her example! – and leaves the home to her husband, it’s unlikely that her executor would do anything beyond transferring the title and mortgage.

If a person dies and names no executor, things slow down considerably. In this case, the court will appoint an administrator to the deceased’s case. The administrator plays the same role as an executor, but because they don’t have the power to act until the court appoints them, descendants hoping to sell the deceased’s home could be waiting weeks or months until an administrator is in place.

Having an executor in place is a far better course of action. Administrators, Bury says, will seek guidance from a person’s beneficiaries, “but they do not have to listen to them.”

The survey also found that a majority of Canadian homeowners don’t know what happens to their mortgages when they die. Only 28 percent of respondents realize that their mortgage needs to be paid by the beneficiary who receives their properties.

“It does not disappear, unfortunately,” says Bury, although that’s exactly what 12 percent of survey respondents think happens to a mortgage when a borrower dies.

Property owners, particularly investors, must also keep in mind the tax bills awaiting their surviving family members. The CRA treats a dead individual’s assets as if they were all sold on the day prior to his death, meaning capital gains taxes on non-primary residents need to be paid – even if the home is left to a beneficiary. Joint ownership of a property with a spouse can provide a clean and legal work-around; otherwise, those left behind will need to foot the bill.

“Everyone works their entire life to leave this meaningful legacy for their beneficiaries,” Bury says, “and I’m not sure that Canadians really understand what’s going to end up in their beneficiaries’ pockets at the end of the day.”

It’s the unknowns that make death so scary. Having a will in place might not alleviate all of a person’s fears about the infinite void we’re all inching toward, but it can reduce the greatest one of all: Will my family be taken care of when I’m no longer around to protect them? 

Source: Mortgage Broker News by Clayton Jarvis 09 Oct 2020

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Your mortgage payment deferral is over. Now what?

A home with a for sale sign, which is what many people might consider with the mortgage payment deferral deadline looming.

Photo by Pixabay from Pexels

Mortgage payment deferral, swiftly implemented in wake of the COIVID-19 pandemic, is done September 30. If you still can’t pay, here’s what to do

Mortgage payment deferral, a six-month measure offered to Canadians this spring in response to the coronavirus pandemic, is coming to an end on September 30, 2020. 

The relief was offered to Canadians to help them stay in their homes while the job market recovered. And, according to the Canadian Bankers Association (CBA), as of July 2020, a whopping 775,000 Canadians took advantage of this program. (To put that number in context, there are currently 6 million homeowners with mortgages in Canada.) The result? A total of $180 billion worth of mortgage deferrals.

Experts fear a payment drop-off may be looming. Despite the mortgage deferrals, people will still be unable to make mortgage payments these next few months. While you can still apply for the program up until the end of the month, the vast majority of deferrals will be ending in October—more than 500,000 actually. That’s from the CBA, too.

So, what can you do if mortgage payments are starting back up and you’re not ready? That depends on your situation. Here are some options for tackling the upcoming mortgage payment deferral deadline.

If you can’t pay in the short term

If you’re looking to bridge a three- to six-month gap where you can’t pay:

Reach out to your lender, ASAP

First order of business: Contact your bank or your mortgage broker as soon as you realize there could be a hiccup and explain your situation. Lenders are often open to bringing on a co-signer for your mortgage, says Joe Pinheiro, treasurer on the executive committee of Mortgage Professionals Canada, and a 30-year mortgage veteran. Adding a co-signer with equity (assets that could be used as a lien against the mortgage) can help you keep your mortgage if you recently lost your job or have a reduced income. “The one thing banks don’t want is people ignoring them—they really want to keep Canadians in their homes.”

Ask for an extension

The bank may be able to extend your deferral, but it won’t be quite as easy as before the mortgage payment deferral deadline. It is no longer a matter of signing up; you’ll have to prove that you need the extension and that you have a plan to keep paying your mortgage in the near future, says Wes Pauls, co-owner and lead mortgage agent with Mortgage Teacher in Hamilton. “Some lenders will consider extending deferrals on a case-by-case basis for people who absolutely require it.” 

Seek additional financing

If a further deferral isn’t an option, borrowing might be your best bet. Pauls suggests using an existing line of credit or borrowing money from family to make your payments for a few months. Once you’re financially stable again, you can attempt to refinance your mortgage, perhaps pulling out some equity, to pay off that debt. You could also consider applying for a home equity line of credit (HELOC), too. Like a regular line of credit, the payment schedule is flexible. But unlike a regular line of credit, the interest rate tends to be lower and uses home equity to secure the loan. (That’s the difference between the current value of your home and the unpaid balance of your mortgage.) If you need to use a credit card in the meantime, just be aware of the interest you will be paying. For example, it may not be worth using a high-interest credit card to pay off short-term debt; seek a low-interest option instead. 

If there’s no end in sight

Let’s say you can’t make your mortgage payments, and you won’t be able to for the foreseeable future. Even if you’ve exhausted your savings and lines of credit, there are still options to keep your home. 

Consider refinancing

Consulting a mortgage broker or financial expert to discuss refinancing could help to pinpoint the best solution for you. “They can look at your overall cash-flow situation. Maybe it’s actually your debt obligations that are causing the problem, not your mortgage payment,” says Pinheiro. “For example, your mortgage payment could be $1,000 but your minimum credit card payment has risen to $800 during this time. They could then find a way to get that credit card payment down and see if you can now afford your mortgage.”

He adds: “Depending on the situation, you could refinance the home and extend the amortization.” (To extend the amortization is to lengthen the time over which the payments are spread so that individual payments are smaller and more affordable.) “If it’s not an insured mortgage, you could increase [the amortization] up to 30 years. And so it would give you some time, and help manage the payments.”

Consider private lending

If you don’t want to sell, and you have a decent amount of home equity but don’t qualify for a HELOC, you can consider a private mortgage to hold you over. 

A private mortgage is typically an arrangement with an individual or through a mortgage investment corporation. Equity is their main criteria, and they’re less concerned with your income and credit than your bank would be. (Yes, this would be considered a “second mortgage,” which just refers to the order in which debts secured by a property are subsequently paid out in the event of a sale.) “Basically if you have enough equity, you could borrow $50,000 from a private lender at 10% to 12% interest,” says Pauls. “You can then use that money to pay off your high-interest credit cards and [continue paying] your mortgage.” 

This strategy could keep you in your home a little longer, but there are caveats. Private mortgages typically have higher rates, as they will be measured on the title behind the first mortgage and would be paid after the current mortgage lender in the event of a sale. And since these rates are higher, a private mortgage is not a permanent or long-term fix. 

“It is a Band-Aid solution to get through tough times,” Pauls advises. “You need to make sure you have an exit strategy.” When you’re back to work or life stresses ease up, that strategy could include remortgaging the home with the current lender to pay out the private mortgage—an option that wouldn’t be available initially, since you might be out of work and private lenders aren’t as concerned with your income. 

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Pauls advises looking at this option before you consider trying to sell your home in a potentially saturated market or sacrificing your credit. “In a year’s time, when you have a new job, you now have no debt, good credit and can refinance that loan to one normal mortgage. No harm, no foul.”

When to consider selling

In some cases, staying in your home isn’t possible, or even wise. How do you know when you’re at that point? The first step is to take long-term, realistic stock of the situation.  “Look at your finances three to six months out,” says Pauls. “Ask yourself: How many months do I have to keep going? What’s on the horizon for me, employment-wise?” 

For people who don’t have a lot of time, and you’ve spoken to your bank and exhausted resources like lines of credit, he encourages them to sell before they touch their retirement savings. “You’ve been dealt a poor hand, but you don’t have to drain yourself,” says Pauls. “Sell your house, find a nice place to rent, and start again when you get a new job, with some money in your pocket and your retirement savings intact.”

If you end up with some cash in your pocket from the sale, don’t risk it getting drained before you buy again. Consider some short-term investments or a high-interest savings account.

If you must sell

While this is a reality for some, Pinheiro says there are likely very few people who’ll need to sell their home. “There’s a lot of resiliency in the Canadian economy and with Canadian homeowners.” 

If you do have to sell, the important thing is to do minimum damage to your credit, and get as much money as possible for your home.  That means getting ahead of the bank, and selling before they decide to foreclose. The worst scenario is to have the bank come and take your home, because now you’re in a power of sale situation and that’s going to affect your credit,” says Pinheiro. 

Not only that, but you’ll earn less for your home that way. “The second they start power of sale default proceedings, you’re now incurring costs and equity is being ripped away from you,” says Pauls. “And if you’re going to rent, you’re going to want as much cash available” from the proceeds of your home sale.

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Even if you feel hopeless, hang in there. “Don’t just let your house go [into foreclosure] because you’re tired and frustrated,” says Pauls. “If you manage this process well, you could be a homeowner again in a few years when things turn around.”

No matter what your status: plan, plan, plan

You’ve probably heard finance professionals tout the importance of having three to six months of living expenses saved, and they’ve never been more vindicated than during this pandemic.

“If you’re in an industry that could be problematic [like service or hospitality], you need to be ready for a possible second wave,” says Pauls. He suggests that banks might not offer so much leniency the second time around.

If you can’t seem to get a handle on savings, he recommends automatically depositing some funds into a separate account that’s not accessible by bank card. “Set it up like a bill payment,” says Pauls. “It becomes habitual and that money is elsewhere“ so you are less likely to dip into it.

All in all, this has been a financial wake-up call for many. “It’s really important to talk to a mortgage broker about the overall financial picture, not just the mortgage,” says Pinheiro. “They can [help you] figure out how to get you back on track and probably put you in an even better situation than you were prior to the pandemic.” 

Source: MoneySense.ca

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Canadian Cities Where It’s Cheaper to Buy a Home Today Vs. 5 Years Ago: REPORT

Canadian Cities Where It’s Cheaper to Buy a Home Today Vs. 5 Years Ago: REPORT

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National home sales and listings continued to climb in housing markets across the country this August, as some of the pressure from pent-up demand was released this summer when pandemic restrictions eased. Buyers returning to the market did so with refocused housing priorities; a growing number began looking to suburban and rural markets in search of greater square footage relative to what’s available in denser urban centres.

Despite the surge in demand, the Canada Housing and Mortgage Corporation (CMHC) recently reiterated their forecast that home prices are likely to dip in the coming months; citing pandemic-induced unemployment and slower in-bound migration weighing on demand, particularly in metropolitan cities like Toronto and Vancouver. 

To understand how current home prices compare to the past, Zoocasa used data from the Canadian Real Estate Association (CREA) to highlight trends in benchmark home prices for apartments and single-family houses in 15 Canadian regions over the past 5 years. We highlight the extent to which benchmark home prices grew or contracted in each region, offering a glimpse at regions where housing is more or less affordable today than it was 5 years ago. 

Overall, the Canadian benchmark apartment price rose a staggering 52% in 5 years, from $315,600 in August 2015 to $478,700 in August 2020. The benchmark price for single-family houses across Canada rose 40% from $486,800 to $683,400. That being said, a closer look at each area included in our analysis reveals that certain housing markets faced a much higher pace of price growth than others, with others noting benchmark price declines that resulted in housing becoming more affordable today than it was 5 years ago. 

Prairie Markets Including Calgary and Edmonton More Affordable Today Than 5 Years Ago

Overall, Prairie cities offer first-time home buyers some of the best affordability in the country, with benchmark prices under $250,000 for apartments and under $500,000 for single-family houses this August. In fact, the Prairies are one of the few regions where a benchmark apartment and single-family house is more affordable today than it was 5 years ago. 

In Calgary, Canada’s third most populous city, the benchmark apartment price was $248,500 in August 2020, dropping 14% or $41,900 since 2015. The benchmark single-family house in Calgary is now $466,000, which is 6% or $30,800 cheaper than the price 5 years ago. Similarly, in Edmonton, the benchmark apartment is 17%, or $37,300, cheaper than it was 5 years ago at $183,900 and the benchmark single-family house cost $377,300 in August this year, vs. $396,800 in August 2015, a drop of 5% or $19,500. 

Given their proximity to the Canadian Rockies, both Calgary and Edmonton offer good opportunities for buyers with remote-working flexibility seeking greater square footage and green space. Comparatively, the benchmark apartment price in Toronto is nearly double the price of the benchmark apartment in Calgary, and the benchmark single-family house in Toronto is more than double Calgary. Additionally, both Calgary and Edmonton have a much lower population density at approx. 1,900 people per square kilometer in Calgary and 1,400 people per square kilometer in Edmonton versus 4,700 people per square kilometer in Toronto.  

Elsewhere in the Prairies, compared to 5 years ago, the benchmark apartment price is 21% lower in Regina ($174,800), 13% lower in Saskatoon ($180,200), and 3% lower in Winnipeg ($196,800). Compared to 5 years ago, single-family house prices are 3% lower in Regina ($286,900) and Saskatoon ($319,400), but up 17% in Winnipeg to $300,500.

Benchmark Apartment Prices Rose Over 50% in 7 Markets Over the Past 5 Years 

Of the 15 markets included in our analysis, the benchmark price for apartments rose by more than 50% in 7 markets. Fraser Valley, BC, where the benchmark price increased 104% to $437,300, led the country in terms of the increase in benchmark prices for apartments over the past 5 years. 

Fraser Valley  was followed by a number of markets in Southern Ontario. Niagara Region led price growth in the area, with the benchmark price growing 87% to $354,400. This was followed by Greater Toronto where the benchmark price rose 78% to $592,900, Hamilton-Burlington where the price rose 74% to $471,100 and Guelph where there was a 73% increase in the benchmark apartment price to $379,000. 

This was followed by Victoria, where the benchmark apartment price grew 65% to $504,900 and Greater Vancouver where it rose 63% to $685,800. Although Greater Vancouver didn’t see the highest percentage growth in benchmark apartment price, it experienced the largest increase in dollar amount at +$265,100. 

Ottawa and Montreal also saw gains in the benchmark apartment price since five years ago, but at 46% and 35%, respectively.

Benchmark Prices for Single-Family Houses Grew 50% or more in 7 Regions Over the Past 5 Years 

7 out of 15 markets included in our analysis also noted a 50% or higher increase in the benchmark price for single-family houses. 

Niagara Region experienced the highest growth, with the benchmark price for single-family houses almost doubling, with a staggering 95% increase in 5 years to $490,500. This was followed by Hamilton-Burligton (71%), Guelph (63%), Fraser Valley (62%), Ottawa (53%), Greater Toronto (51%), and Victoria (50%). 

Montreal, Greater Vancouver and Winnipeg single-family benchmark prices also rose, but at 46%, 28% and 17% respectively. 

Our infographic below maps and compares benchmark prices for apartments and single-family houses for each region included in our analysis in August 2020 and August 2015, noting the extent to which prices changed in each region. Further below, find a list of the top regions where it is cheaper to buy an apartment and a single-family house today than it was 5 years ago, and a list of the regions where benchmark prices for apartments and single-family houses have risen the most since August 2015.

Top 3 Regions Where it’s Cheaper to Purchase the Benchmark Apartment Today vs. 5 Years Ago (Based on %)

1. Regina 

Benchmark Apartment Price, August 2020: $174,800

5-Year % Difference: -21%

5-Year $ Difference: -$46,900

2. Edmonton

Benchmark Apartment Price, August 2020: $183,900

5-Year % Difference: -17%

5-Year $ Difference: -$37,300

3. St. John’s 

Benchmark Apartment Price, August 2020: $236,200

5-Year % Difference: -16%

5-Year $ Difference: -$43,700

Top 3 Regions Where it’s Cheaper to Purchase the Benchmark Single-Family House Today vs. 5 Years Ago (Based on %)

1. Calgary 

Benchmark Single-Family House Price, August 2020: $466,000

5-Year % Difference: -6%

5-Year $ Difference: -$30,800

2. St John’s

Benchmark Single-Family House Price, August 2020: $271,600

5-Year % Difference: -6%

5-Year $ Difference: -$17,600

3. Edmonton

Benchmark Single-Family House Price, August 2020: $377,300

5-Year % Difference: -5%

5-Year $ Difference: -$19,500

Top 3 Regions Where it’s More Expensive to Purchase the Benchmark Apartment Today vs. 5 Years Ago (Based on %) 

1. Fraser Valley

Benchmark Apartment Price, August 2020: $437,300

5-Year % Difference: +104%

5-Year $ Difference: +$223,400

2. Niagara Region

Benchmark Apartment Price, August 2020: $354,400

5-Year % Difference: +87%

5-Year $ Difference: +$165,100

3. Greater Toronto

Benchmark Apartment Price, August 2020: $592,900

5-Year % Difference: +78%

5-Year $ Difference: +$259,800

Top 3 Regions Where it’s More Expensive to Purchase the Benchmark Single-Family House Today vs. 5 Years Ago (Based on %) 

1. Niagara Region

Benchmark Single-Family House Price, August 2020: $490,500

5-Year % Difference: +95%

5-Year $ Difference: +$239,300

2. Hamilton-Burlington

Benchmark Single-Family House Price, August 2020: $751,300

5-Year % Difference: +71%

5-Year $ Difference: +$311,300

3. Guelph

Benchmark Single-Family House Price, August 2020: $651,600

5-Year % Difference: +63%

5-Year $ Difference: +$251,000

Sources

Benchmark apartment and benchmark single-family house prices were sourced from the Canadian Real Estate Association. 

Data use to calculate population density was sourced from Calgary Economic Development, City of Edmonton and City of Toronto.  

Source: Zoocasa – BY JANNINE RANE September 29, 2020

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Understanding The Loss To Lease Calculation

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When reviewing a multifamily property’s income statement, one of the first things to look for is a line item called “loss to lease.” Although widely used, the loss to lease concept is often a source of confusion. It can be counterintuitive because the word “loss” is in the name, but the presence of this line item should be viewed as a positive.

What Is Loss To Lease?

Loss to lease is a term used to describe the difference between a unit’s market rental rate and the actual rent per the lease. The loss isn’t realized in the traditional sense. Rather, it is an on-paper loss that represents an amount of money that the property owner is losing by not charging market rents on the unit.

The loss to lease calculation is simply the market rent of a unit minus the actual rent. For example, if the market rent for a given unit is $1,000 per month and the actual rent is $900 per month, the loss to lease is $100 per month. This calculation is performed at the individual unit level and summed up to the line item that appears on the income statements. For properties with a large number of units with below-market rents, the result can be a significant sum.

Why Is Loss To Lease Important?

Loss to lease is important from two different perspectives: the investor considering a potential purchase, and the owner currently managing the property.

From an investor standpoint, the presence of the loss to lease line item on the operating statement can be an immediate tip-off that there is an opportunity to raise rents, which is why it may be considered a positive thing. Usually, loss to lease is a result of market rents rising faster than actual rents, which is a sign of a strong market and/or inefficient management. Either way, it is an opportunity because commercial multifamily properties are valued on cash flow, and closing the loss to lease gap can add value quickly and result in a quick win for an investor.

From an owner standpoint, loss to lease can be a metric that is a leading indicator of a property manager who isn’t paying close enough attention to the surrounding market. By failing to raise rents to remain in sync with the broader market, the property manager is actually costing the owner money in rent that could have been obtained but is “lost” to a lower lease price.

Loss To Lease: An Example

To illustrate the importance of the loss to lease concept and its potential impact on price, consider the following example. Assume that a 150-unit apartment complex has average rents of $900 per unit, per month. The annual rent for the entire property would be:

$900 x 150 = $135,00 x 12 = $1,620,000 annual rent.

Now, assume that the property manager has performed a marketwide survey of comparable properties and concluded that the market rental rate is $1,000 per unit, per month. In this case, the property’s annual income should be:

$1,000 x 150 = $150,000 x 12 = $1,800,000 annual rent.

The difference between these two figures, $180,000, is the loss to lease.

Continuing the example, assume that the property has annual expenses of $1 million. This means that closing the loss to lease gap — raising rents on all units by $100 per month — would result in an increase to the net operating income from $620,000 to $800,000.

Finally, and this is where the impact is significant, assume that the market cap rates for this property are 6%. The increase in NOI means that the property value rises from $10.3 million to $13.3 million, just from closing the loss to lease gap! This is a big win for the owner and their investors.

Risks To Raising Rent

I chose the example above to demonstrate the point that raising rents to market rates can have an outsize impact on property value. But in reality, it isn’t always this easy. There are two challenges:

1. It can’t be done all at once. It must be done on a unit-by-unit basis when each lease comes up for renewal, which means that it can take an entire year to complete the process. In a fast-growing market, market rents are constantly changing and can be a difficult target to hit.

2. Raising rents also increases the risk that the existing tenant will decide they don’t want to pay the higher rate and vacate the unit. Depending on how long it takes to release the unit, this could result in a short-term negative because the unit is not producing any income. However, once the unit is leased, it is a long-term positive.

Summary

Loss to lease is a commercial real estate concept that represents a difference between a given property’s actual lease rate and the current market rate for the same property. It shows up on a property’s income statement and may be an indication of a strong market and/or inefficient management.

Either way, you can view loss to lease as a positive because closing the gap can result in a relatively quick win from improved net operating income that results in an increase in a property’s value.Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. 

Source: Forbes Real Estate Council – Rod Khleif Real Estate Investor, Mentor, Coach, Host, Lifetime Cash Flow Podcast Through Real Estate Podcast. 

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New Home Checklist: 6 To-Do’s Before Settling In

A locksmith changing a door lock.

Moving into a new home is exciting–it represents a fresh start with new rooms to decorate, and a new neighbourhood to explore. However, setting up your house can also be exhausting and stressful. But don’t worry–we’ve compiled a helpful checklist of things to cross off before you settle in. And if you’re moving to a new city, your REALTOR® is a great resource for advice about tasks to take care of, who to tap for help and how tofind the best schools for your kids.

A man in a red shirt contemplates his finances.

1. Update your address and transfer utilities

Before you move in, you’ll need to update your address, which is linked to everything from your driver’s license to your health card. Be sure to inform everyone–your bank, insurance company, credit cards and loyalty programs–so you won’t miss important notices. You may also want to set up temporary mail-forwarding with Canada Post. While you’re at it, get in touch with utility companies several weeks before the move, so they can transfer and activate your electricity, gas, telephone and internet accounts over to the new place. 

A locksmith changing a door lock.

2. Change your locks and codes

Get some peace of mind–who knows how many keys to your house the previous owners gave out–by installing new deadbolts yourself for as little as $30 per lock, or calling a locksmith for about $100 for a service call. Make extra sets of keys for trusted family members or friends, in case you get locked out or need them to check the property when you’re away. Change your garage door and alarm codes, too.

A person replacing the battery in a smoke alarm.

3. Test your smoke and carbon monoxide detectors

Home safety experts recommend checking your home’s smoke and carbon monoxide detectors every six months, and changing the batteries then, too. Be sure there’s one on each floor of the house. Many local fire departments offer free inspections and testing, so ask your REALTOR® about this.

A family washing windows.

4. Get your home squeaky clean

Before moving all your belongings in, take some time to deep clean all the nooks and crannies, or hire a professional to do it for you for about $100. Don’t forget to get your carpets steamed–cleaning services charge about $65 an hour, or you can rent a machine for about $80 and do it yourself. This is also a great time to put on a fresh coat of paint throughout the house and get rid of an lingering pet smells.

5. Get to know your new home’s systems

Becoming a homeowner means understanding how everything works so you can maintain your investment. Know where your property’s HVAC (air conditioning and heating) system, circuit-breaker and main water shut-off valves are located, plus how to turn them on and off in an emergency. It’s a good idea to get your home’s systems inspected (if your home inspector didn’t already do so). 

Pro tip: Check your water meter at the beginning and end of a two-hour period during which no water is being used. If the reading changes, you likely have a leak that needs fixing.

A man taking out his garbage.

6. Make a home maintenance schedule

Your home inspection report might contain suggestions for repairs to carry out, as well as tips for when and how to perform seasonal maintenance checks to your house.  Set up a filing system for manuals and instructions, and create a to-do list you can refer to throughout the year. It’s recommended you save about 1% of your home’s purchase price each year for repairs. Since you’ll probably need the services of a plumber, electrician, exterminator or landscaper at some point, research local businesses. 

Your REALTOR® can also help you navigate the whole moving process and also recommend reputable tradespeople, so don’t hesitate to reach out so all your questions get answered as you celebrate this new chapter in your life.

Source: Realtor.ca –  Wendy Helfenbaum

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