Category Archives: US real estate

What to know about getting a U.S. mortgage

Obtaining financing for a U.S. purchase, such as these condos in North Miami, with a mortgage is more attractive now that the loonie has sunk value. (Janice Pinto/The Globe and Mail)

Although Canadians and Americans share the same continent, live across from one another on the world’s longest undefended border and speak, mainly, the same language, there is one undeniable geographical advantage that the United States possesses in abundance: year-round warm weather locales.

This has led many Canadians to think about buying a property in a U.S. hot spot.

The bad news for those buying now includes the precipitous dive in the loonie compared with the U.S. greenback and a rise in home prices in the United States since the market bottom of 2010-11.

With affordability tilting away from Canadian buyers of U.S. property, it has made the traditional all-cash purchase (the way four-fifths of Canadians have paid in the past) less attractive and made taking out a mortgage to finance a purchase a much more desirable option, says Alain Forget, director of sales and business development with RBC Bank, a subsidiary of the Royal Bank of Canada.

“It is not a great time for Canadians to pay cash for a U.S. home,” says Mr. Forget, who is based in Fort Lauderdale, Fla.

“In the past, many Canadians have used cash to buy their U.S. home. However that means using the equity in your Canadian home, cashing out investments or using your savings. With any of these options you’ll have to exchange your Canadian dollars for U.S. dollars, significantly reducing the cash you have to buy your U.S. home.”

Obtaining financing for a purchase with a mortgage means that buyers are not exchanging weak loonies for expensive greenbacks. Mortgages are also attractive given the low interest-rate environment and a Canadian dollar that will remain weak “at least through 2017.”

For Canadians seeking a mortgage in the United States, there are a number of key differences to consider.

– It takes longer. It can take just a few days to apply for and obtain a mortgage in Canada. In the United States, it might take 45 to 60 days to complete the process.

– More documents are required. Getting a U.S. mortgage requires different documentation than in Canada because of different regulatory requirements. For most U.S. mortgages, more than 10 documents are required compared to less than five in Canada, according to RBC.

– There are more fees. Buyers can expect to pay 3 to 5 per cent in fees because of third-party expenses such as property appraisal, titles and certain insurance requirements.

– Interest is calculated differently. U.S. fixed-rate mortgages are compounded monthly whereas in Canada they can be compounded semi-annually for a fixed-rate mortgage and monthly or at the payment frequency for a variable-rate mortgage.

– Down payments are bigger. A down payment of at least 20 per cent of the value of the home is now the U.S. standard. It can fluctuate, however, based on whether the home is a primary residence, second home or an investment property.

– Amortization is longer. Now extinct in Canada, the 30-year mortgage is alive and well in the United States, with the option of locking in rates over that span, a situation all but unheard of in Canada.

“U.S. mortgage products provide much longer rate terms including up to 30 years at very low rates,” says Miles Zimbaluk, director of business development with Canada to Arizona, an organization that helps Canadians who are visiting or living in the Southwest state.

“In Canada, you can obtain a 25-year term rate but rates are much higher, persuading people to nearly always choose one- to five-year term rates.”

He notes that the Canadian buyers are in the main getting younger, which means that more of them are likely to be seeking mortgages rather than putting down cash for purchases.

“We still see a lot of retiree snowbirds buying in Arizona but we are also seeing a lot of younger buyers,” says the mortgage broker, whose company assists Canadian buyers to get in touch with realtors, mortgage lenders and brokers.

“Many are buying vacation homes younger in life either as an investment to take advantage of the still lower priced U.S. real estate, or because they can use the property today and work remotely and enjoy more time abroad before retirement.”

Calgary-based executive Evelyn Studer, who owns three properties in Phoenix, paid cash in every case, although for her most recent purchase, she was turned down for a U.S. mortgage because it was a rental property. “But I could get a mortgage or home equity line of credit on the one house I will be using” as her residence in that state.

So she obtained a U.S. home equity line of credit, which she used to build a pool and make other improvements to her property.

“That was actually a very simple process and not much different than getting a home equity line of credit here in Canada. They just needed a letter of guarantee from my company regarding my present employment amount and title, my last two years tax returns and some financial information on my assets and liabilities.”

Source: Globe and Mail  PAUL BRENT Special to The Globe and Mail Published Friday, Mar. 18, 2016

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HIGH NET WORTH – Why the wealthy are heavily focused on real estate

Real estate averages 27 per cent of the investments of the ultra wealthy. (Sheldon Kralstein/Getty Images/iStockphoto)

Real estate averages 27 per cent of the investments of the ultra wealthy.
(Sheldon Kralstein/Getty Images)

With markets roiling in 2016 and commodities lingering in low-price limbo, the holdings of high-net-worth investors can serve as indicators of where the rest of us might consider parking our nest eggs. It turns out that a good chunk of wealthy peoples’ investments is in real estate.

“Real estate is generally accepted as an alternative investment [by high-net-worth investors],” says Simon Jochlin, portfolio analytics associate at StennerZohny Investment Partners, part of Richardson GMP in Vancouver.

“It has the characteristics of an inflation hedge: yield, leverage and cap gains. It does well in upwardly trending markets, it pays you to wait during market corrections and typically it lags equities in market declines – it buys you time to assess the market.”

While the definition of high net worth can be flexible, in Canada and the United States it is generally considered to be someone who has at least $1-million in investable assets.

Thane Stenner, StennerZohny’s director of wealth management and portfolio manager, says a good way for determining what the wealthy do with their investments is to look at reports from Tiger 21, an ultra-high-net-worth peer-to-peer network for North American investors who have a minimum of $10-million to invest and want to manage their capital carefully.

Every quarter the network surveys its members, who number about 400 members across Canada and the United States. Some of the participants are billionaires, and most have a keen eye for business, Mr. Stenner says.

Though the Tiger 21’s Asset Allocation Report for the fourth quarter of 2015 found that its members were becoming cautious about Canadian real estate, they still on average put 27 per cent of their investment into real estate, the largest portion of their allocations. The next largest were public equities (23 per cent) and private equity (22 per cent) with smaller percentages going to hedge funds, fixed income, commodities, foreign currencies, cash and miscellaneous investments.

The real estate portion declined by 1 percentage point from the previous quarter. “While this is the lowest we have seen this year, it is at the same level observed in the fourth quarter of last year, which consequently was the high of 2014,” the report said.

“Real estate is very popular and one of the reasons, in my opinion, is that investors can actually see and touch their investment,” says Darren Coleman, senior vice-president and portfolio manager at Raymond James Ltd. in Toronto.

In his experience, real-estate investors, wealthy or otherwise, seem to behave with more logic than those who focus on markets. “For example, if you own a rental condo, and the one across the hall goes on sale for 30 per cent less than you think it’s worth, you wouldn’t automatically put yours on the market and sell, too, because you think there is a problem. Indeed, you may actually buy the other condo,” he says.

“And yet when a stock drops on the market, instead of thinking of buying more, most people automatically become fearful and think they should sell.”

Real estate also allows for considerable leverage, Mr. Coleman adds: “Banks love to lend against it. Over time, this lets you own a property with a much smaller investment than if you had to buy all of it at once.”

At the same time, Mr. Jochlin says there are disadvantages to real estate that investors should beware of. Property is not particularly liquid, so if you need to sell you could be stuck for a while.

“It’s also sensitive to interest rates and risks from project development,” he says. There are administrative and maintenance costs, and an investor who buys commercial rental property will be exposed to the ups and downs of the entire economy – look at Calgary’s glut of unleased office space, for example.

“Timing is key. You do not want to chase the performance of a hot real estate market,” Mr. Jochlin says.

“Buying at highs will significantly reduce your overall return on investment. You want to buy in very depressed markets at a discount. In other words, look toward relative multiples, as you would an equity.”

As to how one goes about investing in real estate, Mr. Jochlin says it depends. The factors to consider include determining whether your investment objective is short- or longer-term, your liquidity requirements, your targeted return and whether you have any experience as a real estate manager.

“Sophisticated high-net-worth investors have a family office, and thus a specialist to manage their real estate assets,” he says.

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How the rich buy real estate

The wealthy don’t necessarily buy and sell real estate the same way ordinary investors do, says Mr. Stenner. Ordinary people buy something and hope that when they sell it they’ll get a better price. Meanwhile, they like to do things like live on the property or rent it out, whether it is residential or commercial. If it is vacant land they might build something. Not always so for high-net-worth (HNW) investors, Mr. Stenner says. While everyone who invests hopes their investment will rise, Mr. Stenner says that in real estate, HNW people tend to fall into four categories:

Developers

“The real estate developer is looking for substantial returns from individual/basket real estate projects, typically 30-50 per cent IRRs [internal rates of return],” Mr. Stenner says. Developers are highly experienced investors who often take big risks, looking at a raw, undeveloped property and envisioning what it could look like with, say, a shopping mall or office tower. This requires lots of access to capital and a strong stomach, as there can be huge delays and setbacks.

Income Investors

“These HNW investors typically look for a stable, secure yield, tax-preferred in nature and structure if possible, with modest capital growth potential,” Mr. Stenner says. They take the same businesslike approach to property as the developer-types, but they’re more conservative, focusing on cash flow and long-term profit as opposed to getting money out after a development is complete. Often they’re building a legacy that they hope to pass down through generations. Mr. Stenner says lower net worth people can emulate income investors, for example, through REITs that are based on apartment buildings.

Opportunists

These HNW investors tend to look for more short-term higher risk, higher return “asymmetric” payoffs. Income from the investment or project is secondary — they’re in it for the quick buck. Often they see real estate in contrarian terms – investments to look at when the market is low and to sell on the way up, rather than hold. After 2008, many HNW investors bought up depressed-price housing in the U.S. Sunbelt. The sizzling Vancouver and Toronto markets might be the opposite of what they’re looking for right now; commercial property in the stagnant Canadian economy that can be purchased for low-trading loonies right now might be more interesting.

Lenders

This refers to HNW investors who lend capital to developers or opportunistic investors, for a fixed return, plus as much asset coverage from the property as possible. They fund mortgages, invest in real estate financing pools or put money into companies involved in this type of investment. “Because wealthier investors tend to have more liquidity, this also creates more optionality to deploy capital in various ways, while using the real estate as collateral or protection,” Mr. Stenner says.

Being a lender is a way to diversify. In addition, money lent in this way puts the lender high up in the creditor line if something goes wrong. If things go right, it generates income as the mortgage is paid back to the HNW investors or the funds they buy into.

Source: DAVID ISRAELSON Special to The Globe and Mail Published Thursday, Feb. 18, 2016

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What are the top U.S. markets for investing in rental properties?

Want to buy an affordable rental property? HomeUnion, an online real estate investment management firm, has just released its latest list of the top 10 U.S. markets for affordable rental properties.

“Like any other investment, the focus for SFR investors should be on long-term rate of return, and each of the markets on this list has favorable rental yields, low-cost entry points and solid, long-term economic fundamentals,” said HomeUnion CEO Don Ganguly. “Natrually, macro-economic factors such as low homeownership rates are quite favorable for SFR investing, but real estate is still all about location and finding accessible markets that have low entry points, like Cincinnati and Birmingham, or high gross rental yields, like Milwaukee.”

To create the list, HomeUnion looked at non-owner occupied properties and considered a combination of year-over-year job growth, median prices of investment properties, housing affordability and gross rental yield.

Charlotte, N.C., topped the list. It had the highest job growth of any of HomeUnion’s top 10 city, and the third-best job-growth rate of the top 55 U.S. metro areas.

HomeUnion’s top SFR investment markets

  1. Nashville-Davidson-Murfreesboro-Franklin, Tennessee
  2. Milwaukee-Waukesha-West Allis, Wisconsin
  3. Indianapolis-Carmel-Anderson, Indiana
  4. Tampa-St. Petersburg-Clearwater, Florida
  5. Birmingham-Hoover, Alabama
  6. Jacksonville, Florida
  7. Cincinnati, Ohio-Kentucky-Indiana
  8. Baltimore-Columbia-Towson, Maryland
  9. Orlando-Kissimmee-Sanford, Florida
  10. Charlotte-Concord-Gastonia, North Carolina-South Carolina

Source: Mortgage Professional America by Ryan Smith11 Nov 2015

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IN FOCUS: Cross Border Tax Planning Death and taxes: they are unavoidable in the U.S. too

There is a passage from the Bible appearing in Ecclesiastes, “For the living know that they will die, but the dead know nothing; they have no further reward, and even their name is forgotten.”

That may be true everywhere except for those Canadians owning real estate in the United States, because the IRS won’t forget you and will track down their estates beyond the grave to collect its tax.

“If at your death you own U.S. real estate, you will be subject to a U.S. estate tax,” says Robert E. Ward, J.D., LL.M., of Ward Chisholm P.C., whose expertise in the nuances and differences in the U.S. real estate market and how it is taxed has saved thousands for Canadian investors over the years.
U.S. estate tax is different in many respects from Canada’s deemed disposition at death tax, says Ward.

“Two of the most important differences are, first – the rates at which U.S. estate taxes are imposed: federal rates range from 18 per cent to 40 per cent, plus the state in which the property is located may also impose a state estate tax. Second, U.S. estate taxes are assessed on the entire fair market value of the property,” he says.

In contrast, Canada’s deemed disposition at death tax only taxes the gain that would be realized if the property were sold.
Another difference that many Canadian property investors in the U.S. trip up on is believing that they can leave those properties to their spouse, and avoid paying taxes at death – as is the law here in Canada.

Only in some cases will a bequest to a spouse avoid U.S. estate tax. “Unless your spouse is a US citizen, you pay,” Ward says.

There are strategies to avoid paying U.S. estate taxes, but that requires some strategic planning ahead of time.  As Ward observes, “In order for that planning to be successful, it must be undertaken before the American property is purchased”

Do you have questions?  Would further assistance be helpful?  Consultations regarding U.S. tax planning for real estate investments typically are C$1,200.  However, through special arrangement with Canadian Real Estate Wealth you can benefit from a one-hour consultation with one of Ward Chisholm’s experienced tax lawyers for only C$600.  Please call 301-986-2200301-986-2200 and let the receptionist know that you saw this special offer on the CREW website and would like to arrange a consultation.

Source: Canadian Real Estate Wealth September 15, 2015

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How Much You Should Earn to Buy a Home

How much money do you need to make in order to afford a home?

Using data from the National Association of REALTORS®, mortgage site HSH.com pinpointed the minimum salary required to pay for the principal loan amount, interest, taxes, and insurance payments on a median-priced home in some of the largest metro areas in the country.

Nationwide, buyers would need to earn about $51,247 to afford a median-priced home of $217,300, assuming a 20 percent down payment and a 4.37 percent interest rate, according to HSH.com.

However, the minimum income needed to afford a home in specific areas can be much higher. Here are the five metros of the 27 HSH.com analyzed where buyers would need to have the highest salaries to afford a median-priced home there:

  1. San Francisco
    Salary needed: $145,351
    Median home price: $744,400
    Monthly payment (PITI): $3,392
  2. San Diego
    Salary needed: $101,683
    Median home price: $517,800
    Monthly payment (PITI): $2,373
  3. Los Angeles
    Salary needed: $96,514
    Median home price: $481,900
    Monthly payment (PITI): $2,252
  4. New York City
    Salary needed: $92,271
    Median home price: $410,800
    Monthly payment (PITI): $2,153
  5. Boston
    Salary needed: $84,476
    Median home price: $399,900
    Monthly payment (PITI): $1,971

On the other hand, these are the metros that would require the least amount of salary to purchase a median-priced home there:

  1. Pittsburgh
    Salary needed: $32,373
    Median home price: $136,700
    Monthly payment (PITI): $755
  2. Cleveland
    Salary needed: $33,909
    Median home price: $129,900
    Monthly payment (PITI): $791
  3. Tampa
    Salary needed: $35,732
    Median home price: $145,000
    Monthly payment (PITI): $834
  4. Cincinnati
    Salary needed: $35,765
    Median home price: $149,000
    Monthly payment (PITI): $835
  5. St. Louis
    Salary needed: $35,800
    Median home price: $150,200
    Monthly payment (PITI): $835

Source: “The Salary You Must Earn to Buy a Home in 27 Metros,” HSH.com (Dec. 1, 2014)

Some insights into how Canada’s middle class is really faring

How is Canada’s middle class really faring?

In a new paper, Philip Cross and Munir Sheikh – former chief economic analyst and former chief statistician at Statistics Canada – explore this question.

It’s a topic of fiery political debate. Despite often conflicting approaches to measuring the middle class, “what emerges from a review of the array of definitions and data sources is that the politicians and voters can at least partly justify their angst,” they write in a study released Thursday through the University of Calgary.

“While the middle class has seen its income grow, it has not kept pace with the income growth rate of higher-earning groups.”

Not all members of the middle class, however, “face the same plight,” they say, noting that workers who have lost the most ground are those with lower skills and education, who are at the lower end of the middle-income bracket. Thus part of the writers’ conclusion lies in the study’s title – “Caught in the Middle: Some in Canada’s middle class are doing well; others have good reason to worry.”

Some of the paper’s findings:

Defining the middle class

There are many ways to define middle class, and the authors don’t settle on one definition. One common approach is to tally the median income, and then choose a range around that – though there is no clear consensus of what the upper and lower brackets are of the middle class. (They cite one study with a range of between $14,500 and $43,500 in constant 2005 dollars, and another, for families, with a range of between $40,000 to $125,000).

Another approach is to divide the population into quintiles and see what incomes are doing in the middle. By that measure, one study has found “a squeeze on members of the middle class with below-average incomes” as their after-tax income fell 8.7 per cent between 1980 and 2000.

Some say the definition should include consumption, self-identification and broader measures of lifestyle. Sifting through these different approaches, one overarching conclusion is that middle-class income growth hasn’t kept pace with higher-income growth in the past three decades.

Inequality

Inequality, as measured by the Gini coefficient for earned income, rose 13.5 per cent between 1976 and 2011. That’s before transfers and taxes, however. Once they are factored in, inequality still grew, but by a lower 4.3 per cent in those years. The income gap peaked in 2004 “and then fell steadily, except for a slight uptick during the recession.”

The trend is clear: All three measures of inequality show increases over time, with much of the widening gap occurring in the 1980s and 1990s.

Job polarization

The authors looked at earnings and occupations to assess whether the labour market is becoming more polarized. Data show there is “some polarization of earnings” with growth among the highest-paid and lowest-paid occupations, though the total increases were relatively small. Their findings coincide with other studies showing a “slight shrinkage” of the middle class – with almost equal numbers of people moving up the income ladder as moving down.

Manufacturing

The biggest source of downward pressure on middle-class incomes has been the decline of the country’s manufacturing industry, the authors say.

Factory jobs have long been a key source of employment, particularly for people with lesser education.

The authors refute the notion that these jobs have been a source of above-average pay, saying instead their importance, in the postwar era, was in providing middle-class jobs to large numbers of people with low skills.

Within manufacturing, they find the number of low-paying jobs has plunged in the past decade, while high-paying jobs – ones that pay $30 or more an hour – within the sector have quadrupled. The shift in manufacturing jobs, they say, is from jobs that are plentiful but low-paying to scarce but high-paying.

The ‘working class’

It might be time to resurrect the traditional distinction between the middle class and the working class, Mr. Cross and Mr. Sheikh say. Those at the upper end of the middle class – such as public-service professionals – are typically better paid and share characteristics with top-earning professionals, such as valuable pension plans. The working class, however, such as support staff, share characteristics with lower-income earners, including “higher job insecurity and the threat of automation.”

The concerns “commonly expressed about the future of the middle class are really concerns about the working class,” they say.

Need more information or advice on #mortgage_qualification, contact the The Ray McMillan Mortgage Team

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U.S. investment offers more cash flow than Canada


U.S. investment offers more cash flow than Canada

by Jennifer Paterson19 Feb 2015 – Canadian Real Estate Wealth

Despite a falling loonie, investing in the U.S. property market still offers more guaranteed cash flow than investing in Canada, say experts.

“Positive cash flow is really easy in the U.S.,” said Mike Wolf, a Canadian investor who focuses on the U.S. market.

“When I first started investing in the U.S., there were very few Canadians investing down there. It was around nine years ago, our dollar was at around 0.70 cents and the homes were a lot more expensive than they are now.

“Then the recession kicked in, and all of a sudden, all the Canadians wanted to get on board because the dollar went to par and the houses went up for sale down there.”

Chad Urbshott, an investor and founder of EquiGrowth, was worried about the rising prices in Canada around two years ago.

“It was harder to find positive cash-flow properties here,” he added. “The returns were not equal to the risk, so I started to look down south.”

There is still time for Canadians to get involved in the U.S. investment market. After all, Canadians purchased USD$13.8 billion worth of U.S. properties in the 12 months leading up to March 2014, according to a report by the National Association of Realtors.

Favourite spots include Arizona, California and Florida. In fact, according to a recent report by BMO Financial Group, more than 500,000 Canadians own real estate in Florida alone.

The BMO report noted that, compared to record-high prices in hot Canadian markets like Toronto and Vancouver, residential prices in the American Sunbelt are still attractively priced.

Chad Urbshott will be joining a panel at CREW’s InvestorForum, discussing opportunities in the U.S.

The event will be held March 28 and 29 at The International Centre in Toronto. Register here

Also, look out for the March/April issue of CREW, currently on newsstands, for a full report on investing in the U.S.