Tag Archives: flipping real estate

Condo flippers beware: The taxman is watching you, and has new tools at his disposal to ‘take action’

A condo building in downtown Toronto.Jack Boland/Toronto Sun/Postmedia Network

If you plan on selling a home or condo that you bought fairly recently, especially if you never actually moved into it, be wary as the tax man will be carefully watching how you report any gain on your tax return, lest it be seen as a “flip” and be fully taxable as income, rather than a half-taxable capital gain.

The Canada Revenue Agency’s ability to hunt you down over your real estate transactions has improved thanks to the recent $50-million boost in funding over five years announced in the 2019 federal budget to help “address tax non-compliance in real estate transactions.” The CRA uses advanced risk assessment tools, analytics and third-party data to detect and “take action” whenever it finds real estate transactions where the parties have failed to pay the required taxes. Specifically, the CRA is focusing on ensuring that taxpayers report all sales of their principal residence on their tax returns, properly report any capital gain derived from a real estate sale where the principal residence tax exemption does not apply, and report money made on real estate “flipping” as 100 per cent taxable income.

But what, exactly, constitutes a real estate flip? That was the subject of a recent Tax Court of Canada decision, released this week.

 

The case involved a transit operator for the Toronto Transit Commission who, along with his brother, bought and moved into a two-story, three-bedroom townhouse in Vaughan, Ontario, in 1999. His brother contributed toward the initial down payment, lived with him and together they equally shared all household expenses, including the mortgage payments. In 2003, the taxpayer’s brother met the woman who would become his future wife, whom he married in April 2007. She moved into the townhouse and they had a child together in February 2008.

Sometime prior to this, the taxpayer and his brother began discussing going their separate ways. The taxpayer testified that he wanted to sell the townhouse and move to a place that was smaller and closer to work. Indeed, in 2006 he found a smaller place, a two-bedroom condo, which was in the pre-construction phase. The tentative occupancy date of the condo was April 2008, but that date was pushed back several times, ultimately to 2010.

Prior to taking possession of the condo, however, circumstances changed. In December 2008, the brothers’ father passed away while in Jamaica, where he lived together with their mother for about six months each year. Following their father’s death, their mother did not feel safe living alone in Jamaica and in March 2009 she moved into her sons’ townhouse. The taxpayer testified that his brother and his family shared the master bedroom, while the taxpayer and their mother each occupied one of the remaining two bedrooms. This living situation didn’t last long and the taxpayer refinanced the mortgage on the townhouse in order to buy out his brother’s share of the property, enabling him and his family to move out.

In August 2010, the taxpayer took possession of the condo and immediately arranged to list it for sale, realizing that it would be too small for both he and his mother. No one lived in the condo in the interim. He sold it in October 2010 resulting in a net gain of $13,412, which the taxpayer reported as a capital gain, taxable at 50 per cent, on his 2010 tax return. The CRA reassessed him, finding that the $13,412 should have been reported as fully taxable income and slapped him with gross negligence penalties.

The common question of whether a gain from the sale of real estate is on account of income or on account of capital always comes down to the underlying facts. The courts will look to the surrounding circumstances and, perhaps most importantly, the taxpayer’s intention.

The judge reviewed the facts in light of the four factors previously enumerated by the Supreme Court of Canada by which these types of cases are decided: the taxpayer’s intention, whether the taxpayer was engaged in any way in the real estate industry, the nature and use of the property sold and the extent to which the property was financed.

The taxpayer testified that he purchased the condo with the full intention of living in it after his brother moved out of their shared townhouse; however, when his father died and his mother wished to return to Canada to live full-time, the taxpayer “changed his plans to move so that his mother could live with him at (the townhouse), which was a larger space.” He testified that since he could not afford to own both homes, he listed and sold the condo shortly after assuming title. As he testified, if not for his father’s death and his mother’s return to Canada, he would have carried out his plan to sell the townhouse and live in the condo as his primary residence.

The judge concluded that the taxpayer’s intention with respect to the condo was indeed to live in it as his primary residence. He had no secondary intention of putting the condo up for resale at the time of purchase.

The judge therefore concluded that the sale of the condo was properly reported as a capital gain and ordered the CRA to reassess on that basis and cancel the gross negligence penalties.

One final note is warranted: while justice was ultimately done and the taxpayer prevailed, it actually took him nine years and three separate visits to court to get relief. The CRA originally reassessed his 2010 capital gain as income back in 2014. The taxpayer filed a Notice of Objection to oppose the reassessment, which was reconfirmed by the CRA in January 2016. The taxpayer then had 90 days to appeal the CRA’s reassessment to the Tax Court. For a variety of reasons, he missed that deadline and ended up in Tax Court seeking an extension of the deadline to file an appeal. The Tax Court denied his request for an extension. He then went to the Federal Court of Appeal which, in June 2017, reversed the lower court’s decision and allowed an extension of time to appeal to Tax Court, which heard the case in March 2019 and released its decision this week.

 

Source: Financial Post – Jamie Golombek July 5, 2019

 

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.

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7-Step Process for Finding Great Contractors for Home Renovations

To be blunt, most contractors are terrible. As a landlord, I deal with it all the time. 

They don’t answer their phone. They don’t show up when they said they would. They don’t do what they said they are going to do.

But there ARE gems to be found in the rubble. The problem is most people have no idea how to identify that great contractor from all the bad ones out there—until long AFTER they’ve already hired one.

I want to share with you my seven-step process to identify a great contractor before hiring them. Whether you’re remodeling your own home, a rental property, flipping houses, or need a contractor for something else, here’s how to land a great one.

How to Find a Great Contractor

  1. Build your contractor list

What I mean by this is you need to get the names and phone numbers of a lot of different contractors in your area. I mean, if we’re searching for a needle in a haystack, we have to first get a haystack.

You can find potential contractors in a number of ways, but my three favorite are: 

  1. Referrals, meaning ask people you know who they have used
  2. Referrals, so yeah, asking people you know who they have used
  3. You guessed it! Referrals.

Human nature is to generally do what you’ve always done. It doesn’t guarantee success, but when you know a contractor has done great work in the past, it’s likely they’ll do it again.

So get in the habit of asking your friends and family often—even when you’re not looking for a contractor. “Who did this work for you?” Then, keep track of those referrals.

There are a few other ways to find contractors, as well. I like to talk to other contractors and ask who they like working with.

Rockstars tend to party with other rockstars, and good tradesmen tend to work with other good tradesmen.

For example, I have a great finish carpenter, so I can ask him, “Hey, do you know any great plumbers?”

You can also build your list by snapping a photo every time you see a contractor sign on the side of a work truck, or by searching Yelp, or by asking the employees in the pro department of your local home store who they like.

Related: The Ultimate Guide to Finding an Incredible Contractor

  1. Pre-screening on the phone and in person

Just as with tenants, our opinion of the contractor begins the moment we start talking with them, whether over email, phone, or in person.

Do they carry themselves professionally? Do they respond well to questions?

Ask them some general questions, such as:

  • How long have you been in this line of work?
  • What skill would you say you are the best at?
  • What job tasks do you hate doing?
  • In what cities do you typically work?
  • How many employees work for you? (Or “work in your company” if you are not talking to the boss.)
  • How busy are you?
  • Do you pull permits, or would I need to?
  • If I were to hire you, when could you start knocking out tasks?

Then, set up a time to meet and show them the project, if you have one. Set an appointment and be sure to show up a few minutes early, just to see exactly what time they arrive.

Are they on time? Late? Early? Do they look professional? How do they act?

If everything feels OK after this first meeting, move on to the next step.

man sitting at desk working on a computer

  1. Google them

The first thing we do now when looking for information on a certain contractor is to simply search Google for their name and their company name. This can often unearth any big red flags about the person.

You’ll also want to add your city name and some other keywords to the search, such as “scam” or “rip off” or “court.”

For example, if we wanted to find out more about First Rate Construction Company in Metropolis, we would search things like:

  • First Rate Construction Metropolis
  • First Rate Construction scam
  • First Rate Construction sue
  • First Rate Construction court
  • First Rate Construction evil

These terms can help you discover major complaints about a contractor. But keep in mind, not all complaints are valid. Some people are just crazy.

What this will do, however, is give you direction about what steps to take next.

  1. Ask for references

Next, ask the contractor for references from previous people for whom they have worked. Photos are nice, but names and addresses are better.

Then, do what 90 percent of the population will never do and actually call those references!

You may want to ask the reference several questions, like:

  1. What work did they do?
  2. How fast did they do it?
  3. Did they keep a clean job site?
  4. You are related to [contractor’s name], right? (If they are, they will think you were already privy to that information and will have no problem answering honestly!)
  5. Any problems working with them?
  6. Would you hire them again?
  7. Can I take a look at the finished product? (This could be in person or via pictures.)

These questions will help you understand more about the abilities and history of the contractor. Then, if possible, actually check out the work the contractor did and make sure it looks good.

Another tip recently given to us by J Scott was to ask the contractor to tell you about a recent big job they’ve done. Contractors love to brag about their big jobs, so he or she will likely regale you with the story of how much work they needed to do and how great it looked at the end.

Find out the address, and then go to the city and verify that a permit was pulled for that project. If not, the contractor did all the work without a permit, which is a good indication they are not a contractor you want on your team.

  1. Verify

It’s okay to be trusting, but make sure the contractor is worthy of your trust first! To do this, first verify that they truly do have a license to do whatever work you intend for them to do.

If they are an electrician, make sure they have an electrical license. If they are a plumber, make sure they have a plumbing license. If they are a general contractor, make sure they have a general contractor’s license.

Next, make sure they do actually have the proper insurance and bond. As we mentioned earlier, you could ask them to bring proof, but you can also simply ask the name of their insurance agent and verify it with that agent. Either way, just make sure they have it.

Remember: this protects you.

  1. Hire them for one small task

Before hiring the contractor to do a large project, hire them to do just one small task, preferably under $500 in cost. This will give you a good idea of what kind of work ethic they have and the quality of work that they do.

If the work is done on time and on budget, and if it meets your quality standards, consider hiring them for more tasks.

Even if the contractor has passed through the first several steps of this screening process, 75 percent of them will still likely fail at this step, so don’t settle with just one contractor. Hire multiple contractors for multiple small jobs and see who works out the best.

Related: 14 Killer Questions to Ask Your Contractor

  1. Manage them correctly

Ninety percent of the time, when I have a disastrous situation with a contractor, the blame lies on no one but myself. If I had managed the job correctly, I wouldn’t be caught in the positions I’ve been in.

Here’s an example. I hired a contractor to paint a bedroom. He says $500. I say, “Great.”

He calls me, tells me he’s done, and I send him the $500.

Now, I go check out the property and what do I see? He didn’t paint the ceiling, despite the obvious need for it. And there are a couple paint splatters on the floor that are easy to clean—but now I have to do it.

I call the contractor and he says, “Well, you didn’t say I needed to do the ceiling,” and “No, the floor was perfectly clean when I left. Someone else must have made the drips on the floor.”

Now, you might be saying, “But that’s ridiculous! It’s clearly his fault.”

But it’s my responsibility to manage him correctly. Therefore, when you work with a contractor, always get a detailed scope of work that clearly lays out 100 percent of what is going to be worked on, what’s included, and what isn’t.

Then, never pay anything until you’ve inspected the work. On larger jobs, be sure to spread out payments over the course of the job, so they don’t get too much money up front. You always want them hungry for the next paycheck.

To help with this, I put together a really simple “Contractor Bid Form” over in the BiggerPockets FilePlace—100% free—so you can fill this out every time you work with a contractor. Just go to BiggerPockets.com/bigform.

The Bottom Line

Whether you’re a real estate investor like myself or not, you’re going to need to deal with contractors in the future. By following this seven-step process, you’ll save yourself time, stress, and a lot of money.

Source: BiggerPockets.com by

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Fix & Flip Overview: How is the current economic environment impacting the market?

 

Deciding on whether or not to invest in fix-and-flip properties can be tricky, as significant benefits and challenges can influence an investor’s decision. The determinants of a good investment in fix-and-flips include the price you pay for the purchase of the property and the cost of the renovation. An investor must also be aware of the general health of the economy and the location of the property, according to a blog post by Allen Shayanfekr at Sharestates.

Understanding how the current economic environment impacts the market can help you get the most out of your investments. If the economy is bad, people resist purchasing homes, often opting for rentals instead. If the economy is too good, the competition for fix-and-flip increases, diminishing profits. If a property is in a bad neighborhood, it will be hard to sell while the cost to renovate could outweigh the investment in the property, risking the loss of some or all of the profits.

To better recognize the potential of a fix-and-flip, Shayanfekr establishes three metrics for ideal conditions when deciding whether or not to move forward on this type of investment property.

The availability and changes in housing inventory can significantly influence decision-making. Low housing inventory is perfect for house flippers, as home buyers have fewer good options, especially with new homes, creating a higher demand for rehabilitated properties. While some have seen higher housing inventory levels in 2019, others see inventory still in decline. It depends on the location. Either way, keep an eye on inventory levels in 2019.

Changes in the rate of home purchases also have a strong impact on investment decisions. The market is seeing an influx in homebuying, specifically with first-time home buyers. Though millennials have waited longer than any previous generation to buy homes, we are seeing millennials now buying or planning to buy homes. This upward trend is a good sign that the market will remain steady.

Fluctuation in the cost of homebuying puts additional pressure on the outcome for investors. Home prices rose 5.6% from January 2018 to January 2019, according to the Federal Housing Finance Agency. The increase in the cost of purchasing homes creates a challenge for many families, often displacing families with few options in future home buying.

While these metrics may not look great, Shayanfekr recognizes the value of the location as a key to finding a good investment property. CNBC Home Hacks writer Shawn M. Carter establishes the following markets as the top 10 states to invest in:

  • Tennessee
  • Pennsylvania
  • New Jersey
  • Louisiana
  • Colorado
  • Maryland
  • Virginia
  • Florida
  • Illinois
  • Kentucky

These states have an average ROI of 83-155% and an average flip of 180 days, making them ideal markets for fix-and-flip investments.

With the market in constant flux, it’s important to keep in mind that just because one market goes south, it doesn’t mean that another location or market can’t offer good opportunities. If fix-and-flip isn’t looking like a sound investment, rental properties are another area that is growing. Whichever direction you choose, remember to asset class diversification is key to building a profitable investment portfolio.

Source: Mortgage Professionals America – Ryan Rose 04 Jun 2019

 

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How to ‘plan, invest and retire wealthy’

What if condo investing were as easy as owning a mutual fund? Well, it can be.

Connect Asset Management will be at the Investor Forum on March 2 to explain how it helps its clients turn one property into several and build portfolios that cash flow millions of dollars. One of the ways in which Connect Asset Management does that is by helping investor clients access to some of the most exclusive real estate developments in Ontario.

“We help investors plan, invest and retire wealthy with cash flow in condos,” said real estate broker and founder of Connect Asset Management Ryan Coyle. “It’s completely hands-off for our clients; we make investing in real estate as easy as owning a mutual fund.”

Connect Asset Management builds a strategy for its clients predicated on timing—that is, strategically choosing when to purchase a property.

“From acquisition to completion, there’s a tremendous amount of growth on capital appreciation and rental appreciation, so when the condo is built they have all this appreciation that gives them the ability to refinance, pull out the equity and buy more property,” said Coyle. “We help our clients identify the optimal time to flow that capital into more properties.”

The strategy, which Connect Asset Management will decode at the Investor Forum, is called the Multiplier Effect: The ability to use equity in a safe, not to mention lucrative, way. Coyle says that, with the right strategy, anyone can become a millionaire through investing in real estate.

For starters, ever wonder why the best units in key developments are gone well before sales open to the public?

“We’ve been a top-producing team for many years now and what that means for us is we get to access all the best developments, and we get our clients first access to all the developments before they open to general public and, quite frankly, before anyone even knows about them,” continued Coyle. “This way, our clients are able to get the best deals on the best units.”

Condominiums are far from Connect Asset Management’s sole investment strategy. The firm identifies key markets where yields remunerate clients well, and some of them include university towns with high enrollment but meagre student lodgings.

“Student housing is often referred to as ‘recession-free real estate,’ meaning that when recessions hit student housing tends to be among the strongest real estate because more people go back to school and that increases the demand on both the rental and resale side. The areas we invest in are seeing some of the highest enrollment rates in the country, and Canadian schools have a shortage of on-campus housing, so there’s a new demand for student living, such as condos.”

Source: Canadian Real Estate Magazine – by Neil Sharma  07 Feb 2019

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How To Buy Foreclosures at Auction

 

Sales of distressed homes usually come in several forms. First, there are short sales or pre-foreclosures, deals where an owner who can no longer afford the property tries to work out a purchase with a buyer, subject to the approval of the lender. If that doesn’t work, the lender may start foreclosure proceedings, and the home may be put up for sale at a public auction. If the highest bid at the auction is insufficient, the lender then gets title to the property and holds it as a bank-owned (or REO) property.

The purpose of a foreclosure auction is to get the highest possible price for the property, in order to mitigate the losses a lender suffers when a borrower defaults on a loan. If the sale amount covers the outstanding mortgage debt and various foreclosure costs, then any surplus goes to the borrower. Bidders, on the other hand, are looking for investment bargains, so many homes sold at foreclosure auctions ultimately sell at something of a discount compared to traditional properties.

Preparing for a Foreclosure Auction

Foreclosure auctions differ substantially from a typical residential sale. There are no terms to discuss, no haggling over paint or appliances. The property is sold as is, where it is, and with any existing faults and limitations. The property may be sold on an absolute basis (the highest bid wins, even if it’s for a tiny amount) or with a reserve or minimum bid (the property has to sell for at least a given price, otherwise the lender gets title).

The condition of the property may range from wonderful to awful, and it may or may not be occupied. Some properties are “zombie foreclosures,” a situation where the borrower has abandoned the property before the foreclosure has been completed. In all cases, bidders should review disclosures with care and seek as much information as possible about the property.

It’s important to visit the property before the auction, if you can, especially if you live locally. Does it seem occupied or not? How does the exterior condition appear? Be aware that trespassing and Peeping Tom rules may limit access unless you’re invited onto the property. Some bidders drive by the property just before the auction to ensure that its condition hasn’t changed since the disclosure papers were written. In some cases, you may be able to see a virtual tour or even attend an open house.

Lastly, real estate values are related to local economies. How much would a given property be worth if it was in pristine condition? What rental could you expect? Is there a lot of local sale and rental demand—or a little? Speak with local real estate brokers to better gauge the market.

Your Foreclosure Auction Questions, Answered

As with any real estate purchase, there are a variety of expenses associated with a foreclosure auction. Charges, fees and costs vary widely, so it’s important to understand these expenses before you bid. Here are some questions people often ask about financing and buying a foreclosure at auction:

Before the Auction

Since it’s the lenders that are selling houses, why don’t they just finance the foreclosure sale? That usually doesn’t happen. The division of the lending institution that sells foreclosure properties and the division that does real estate financing are two separate organizations.

Are foreclosures riskier than existing home purchases? It depends on which foreclosure and which existing home. All real estate investing—like all stock market investing—implies some level of risk. But there are some inherent risks involved in buying a foreclosure home—like the inability to do a thorough internal inspection. People who buy these properties hope that the risk will be offset by the kind of discount prices often available on these homes.

Will I have to register to bid? You bet. As with a rental car reservation, you’ll typically have to provide a credit card number and expect the auction company to take a given amount to hold. Why? They want the money in case someone bids and wins, but doesn’t close the deal. How much will be taken out? It depends, so ask the auction company for details.

Will I have to qualify? Yes. The auction company wants to be sure that you have the funds to close the transaction. Most foreclosure auctions are all-cash transactions. The term “all-cash” generally means the ability to put down a deposit immediately after a successful bid and close within a short timeframe.

Do I always need the full amount in cash to buy a foreclosure? This depends to a great degree on the laws in your state. Most foreclosure auctions require payment in cash (or a cashier’s check) within a relatively short time after the auction. Technically, it doesn’t matter if the funds come from you or a lender. What does matter is that successful bidders have the financial ability to close the deal on time and in full. Ask auctioneers about financing and pre-approval requirements.

What’s the best way to learn about auctions before actually buying? Register for auctions and attend the bidding. Learn the mechanics of the auctioning process in your community. Get to know local auctioneers, brokers, attorneys, repair specialists and appraisers who specialize in foreclosures.

During the Auction

Is it better to go to absolute auctions or sales that require minimum bids? People debate this question, but it’s largely a matter of personal preference. With an absolute auction, one bidder will win, while with a reserve sale, it’s possible that no bid will be sufficient. However, if you attend a reserve sale and the lender takes title, then speak with the lender after the auction about an REO purchase. The overwhelming majority of foreclosure sales are conducted using a reserve, since lenders are trying to capture at least a minimum amount of money to offset their losses.

Can I bid $1 more than the next bidder and win the property? Probably not. There are typically minimum bid increments in place.

If I win, do I get title then and there? Not usually. The seller—usually a lender—must approve the bid. Typically, they have 15 days to do so. Once an answer comes through, there’s an additional period required to arrange closing, which may take several weeks.

After the Auction

After closing, do I own the property? In some jurisdictions, there may be an equity of redemption right that allows the borrower who defaulted to regain title to their property under certain conditions. Speak with a local attorney for details before bidding.

Will there be any liens that will become my responsibility after the sale? Most liens are sublimated (or wiped out) by a foreclosure sale. But there are exceptions. Real estate tends to attract liens, so it makes sense to get title insurance for the property with the insurer you prefer.

How much should I set aside for repairs? Each property is unique, so repair requirements can vary widely. Estimating repairs can be difficult because if the property is occupied, the residents may not want visitors. If it’s unoccupied, the utilities may be turned off. The best approach is to get as much information as possible before in the auction. In some cases, you may be able to find utility records that can help you better understand property issues.

What if I have owners or squatters on the property? If the residents won’t move, you may need to contact an attorney who can obtain an eviction notice and arrange for a sheriff to clear the property.

For more details and specifics, you and your broker should contact the auctioneer. Happy bidding!

Source: Auction.com // November 15, 2018 – By Peter Miller

 

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Why the wealthy are heavily focused on real estate

Getty Images/iStockphoto

Real estate averages 27 per cent of the investments of the ultra wealthy.

SHELDON KRALSTEIN/GETTY IMAGES/ISTOCKPHOTO

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.

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.

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Five Financial Benefits of Owning Residential Real Estate Investments

Financial-Benefits

 

For the last 25 years, I have been helping families and individuals identify goals, establish a plan and determine a clear vision of their financial future. While a financial plan is a future road map that is normally put into writing, it is also a guideline that is used to track results, and make adjustments when needed. Since this is an ongoing process, there are several areas which should be discussed.

When it comes to investments and cashflow, many financial planners will focus on the Equity, Bond or Alternative markets, but I feel it is important to also be aware of the power of investing in cash-flowing residential real estate in areas of the country which make sense.

An important part of many people’s financial plan is the home they live in. The choice between buying a home and renting is among the biggest financial decisions that many adults make. But the costs of buying are more varied and complicated than for renting, making it hard to tell which is a better deal.

Owning a home is potentially the largest investment most people will make during their lifetime. Many purchase homes with the hope that the value will appreciate, and they will be able to build a sizable amount of equity, sell one day and live off the proceeds after investing in a 1 percent Certificate of Deposit (CD).

Homeownership Tougher in High-Priced Markets

 

While homeownership is great for some, there are segments of the population which find that renting a home and investing instead in income-producing real estate is a better financial decision.

Home-Owners

In many areas of the country, home prices are reaching unaffordable levels for many homebuyers, especially in California. According to an article in the Los Angeles Times, California’s median home price is now $537,315, reflecting a compounded annual growth rate of nearly 10 percent since 2012, according to real estate website Zillow. During the same time period, the median rent for a vacant apartments jumped an annual rate of nearly 5.5 percent to $2,428.

As a result of rapidly increasing housing costs in California, more people are leaving, according to a study conducted by Beacon Economics and Next 10, cited in the LA Times article. In 2016, 41,000 more households left the state than moved in, according to the study referenced in the article.

What this means is that people need a place to live no matter what the economy is doing. Unlike the commercial, retail and industrial real estate markets, the residential rental market (in many areas of the country) is less likely to drop as far down.

Money Out of Your Pocket

So is owning a home for your primary residence a good investment? To answer that question you need to understand that your personal property takes money out of your pocket each month. Every month you have to pay the mortgage, insurance and property taxes. Even if the house is paid off you are still spending money maintaining the house and paying your taxes and insurance. The house is still taking money out of your pocket, not producing income.

While your paid-off house might make your net worth look good, the equity is locked up in the home. If you actually need to access that money, you either need to refinance or sell the house, and then you are back to having mortgage debt or looking for a place to live.

A growing numbers of Americans — millennials, baby boomers and Gen-Xers in particular — are showing less and less interest in owning a home, according to new data from Freddie Mac.

Colorful-Houses

The study released by Freddie Mac Multifamily, found that while economic confidence is growing among renters, affordability concerns remain the dominant driver of renter behavior. The study found that 63 percent of renters view renting as more affordable than owning a home. That includes 73 percent of baby boomers. And 67 percent of renters who plan to continue renting said they would do so for financial reasons. That’s up from 59 percent two years ago, according to Freddie Mac.

Additionally, recent trends indicate that segments such as the millennials and baby boomers are electing to rent where they want to live and invest in a single family residence to create cash flow in another, more affordable market. The following are five advantages to such an approach:

1. Leverage

If you pay 10 percent to 30 percent as a down payment, a bank, lending institution or private party will provide the rest of your funding. That means you can own a $100,000 piece of property for just $10,000 to $30,000.

2. Cash flow

If purchased and managed properly, your property can offer long-term positive cash flow, and this ongoing stream of income you receive from an investment offers other benefits — see below.

3. Appreciation

If the value of your property has gone up, and you decide to sell, your profit is called appreciation. Cash flow and appreciation are two forms of revenue from rental properties. Remember, even though you aren’t buying in hopes of selling to earn a quick profit, you should always have an exit strategy in place.

4. Fewer highs and lows

A cash-flowing property is not subject to the daily ups and downs of the markets. It is typically a longer-term play — as opposed to paper assets or the Equity/Bond Markets, where you can have daily ups and downs of up to 10 percent.

5. Tax advantages

Tax credits are available for low-income housing, the rehabilitation of historical buildings, and certain other real estate investments. A tax credit is deducted directly from the tax you owe. You also get an annual deduction for depreciation, which is typically a percentage of the value of the property that you can write off as an expense against revenues. Finally, in some countries, the gains from the sale of real estate can be postponed indefinitely as long as the proceeds are reinvested in other real estate, known as a 1031 exchange.

Important factors to consider when choosing a real estate market for single family rental property investing include population and employment growth and home value appreciation. When buying single family rental properties located in a different city or state, investors also research purchase prices, taxes, and housing regulations.

Other investors also look at the percentage of the population that are renting. For instance, D.C., New York, and California have the most renters in terms of percentage of the population. Another important consideration is that you want to use the 1 percent rule, which means that the monthly rent generated is at least 1 percent of the sales price of the home. For example, if you have a house worth $250,000, you want to be able to generate around $2,500 per month in rent. This is going to eliminate a lot of areas of the country — in particular coastal California, New York and even some middle-America markets such as Denver, Colorado.

Source: ThinkRealty.com – Glenn Hamburger | 

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