Tag Archives: real estate investing

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

new-real-estate-investors-tips

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

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

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

#1. Ask Yourself These Questions

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

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

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

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

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

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

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

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

#3 Order Home Inspections Before Buying

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

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

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

#4 Get an Appraisal

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

#5 Focus on One Property

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

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

#6 Consider Exit Strategies

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

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

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

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

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

#7 Know Your Tax Laws

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

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

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

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

#8 Have Six Months of Money Reserves

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

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

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

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

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

Source; GlobalRemax.com – January 5th, 2021

Tagged , , , , , ,

Home renovations: a primer on how to do them right

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

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

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

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

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

Kitchen

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

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

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

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

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

Lighting

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

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

Bathroom

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

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

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

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

Bedroom

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

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

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

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

Water issues

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

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

Condo renovations

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

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

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

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

The cardinal rule of fix and flips

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

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

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

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

Tagged , , ,

Welcome to Canada’s new real estate hotspot

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tagged , , ,

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

Tagged , , ,

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

Tagged , , ,

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

Tagged , , , ,

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.

Article content continued

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.

Tagged , , , , ,

Understanding The Loss To Lease Calculation

Photo:

Photo:GETTY

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. 

Tagged , , , ,

What Does a Property Manager Do? Here’s the Job Description

If you’ve recently started out in the real estate business and have glanced at the property manager job description, you might think you’re saving money by skipping this expense. You can handle all these tasks—right?

Think again. Half of the appeal of investing in rental property is the passive income it yields. Maximum financial reward for minimum effort. Everyone has the time to be a landlord for one property, even two. But once you have a handful under your belt, the workload can become a bit overwhelming.

Owning real estate shouldn’t be a job; it should allow you to live life on your terms, give you the freedom to enjoy life when and wherever you wish. But you can’t do that if you’re spending all your time managing your properties. Whether you have just four or five properties or an entire empire, it’s best left to the experts.

You’ve heard the phrase “Jack of all trades, master of none”? Don’t be Jack.

Purchasing your first rental property is just the beginning of your real estate journey, because being a good landlord is almost as important as making good deals. BiggerPockets’ free guide How to Become a Landlord: Managing Rental Properties for Real Estate Investors will teach you everything—from setting rent to handling evictions.

Property Manager Job Description: The 10 Key Tasks

Here’s how a property manager can help you grow your real estate business:

1. Setting the right rates

Pricing your property competitively is vital for every landlord. Too high and you won’t fill the space. Too low? Good luck making money. A property manager knows the micro market, local area, and current rental rates, enabling them to correctly value your buildings’ worth and price the units accordingly.

2. Marketing and advertising

You lose money every day your property is empty. Exposure helps you find tenants, and a property manager can help you create a coherent marketing strategy that will develop your brand, establish your reputation, and boost interest from prospective tenants.

3. Complying with housing regulations

State and federal laws around housing and evictions can be rather confusing. A professional property manager can walk you through everything, from paying taxes, discrimination laws, and needed certificates. But be warned that you are still liable if your property manager gets into legal trouble, so make sure they know what they’re talking about.

4. Finding good tenants

Property management companies find higher-quality tenants for filling vacancies because of their rigorous screening processes. These people often sign longer term leases, inflict less wear and tear, and cause fewer problems. If you work alone, you might find yourself drowning in applications—but a professional property manager can assess applicants quickly and easily using a comprehensive screening process, including background and credit checks.

5. Collecting and depositing rent payments

Strict rent collection is crucial to financial success. A property manager acts as a buffer between you and your tenants so you don’t have to chase up late payments or listen to complaints.

RELATED:How Much Does Property Management Cost? Here’s What Fees to Expect

6. Providing customer service

If you’re not a people person, it may be best to have someone else deal directly with tenant complaints. Not everyone has A+ communication skills—and that’s okay. A positive, smiley, helpful property manager will build up a rapport with your tenants and placate any problems with practiced ease. A company also ensures there is someone tenants can contact, even when you’re on that two-month Caribbean cruise.

7. Handling maintenance and repair

Let’s be honest—no one wants to be woken at three in the morning because a pipe burst in a rental unit across town. When things inevitably go wrong, your property manager brings a set of management skills that help quickly and efficiently handle any problem. Remember, your tenants want problems solved immediately. Delays can lead to complaints. Thanks to their wealth of experience in real estate, property managers can also suggest preventative maintenance before a problem has even occurred.

8. Managing vendor relationships

When you do require maintenance or repairs, it can be a hassle to get the right tradesmen for the job. A good property manager will know reputable, reliable, licensed workers—and have good relationships with them. They should also have established policies to prevent any problems when the workers enter the property, which protects you from litigation.

9. Assisting long-distance investing

As your property empire grows, you may wish to begin looking for investments outside your immediate area. If you sign a contract with a state or nationwide property management company, you can rest easy. Your properties are all being looked after to the same high standard as you enjoy in your own town.

10. Maximizing profitability

If you intend to live off the revenue from your real estate business, you need to dedicate your time to searching for new investments. Once you’ve got a few rented properties under your belt, you’re probably ready to expand. But how can you do that if your time is spent dealing with tenants, addressing problems, and collecting rent? With daily operations handed over to your property manager, you’ll have more time to scour the market for that next investment.

Financial Benefits of Hiring a Property Manager

Don’t forget that hiring a property manager is financially sound. You may feel somewhat reluctant to fork out for this service, but it will pay dividends in the long run. These experts can maximize your business profits by creating distance between the property owner and tenants.

Most charge between four and 12 percent of your monthly rental rate—but remember that higher percentages often lead to a higher quality of service. Less is not more in this case, and a good property management company can be worth its weight in gold. Don’t skimp on this aspect of your business; it’s not worth it.

Of course, it’s important to do some thorough research before you hire your property management company. Ask your property manager these 20 questions before signing on the line.

RELATEDHow to Spot a Great—Not Just Good—Property Manager

Do Landlords Need a Property Manager?

Clearly, a property manager wears a lot of hats. But maybe you think you can spare the expense and do the work yourself. The property management job description encompasses more than just basic tasks. Before you dive into managing your own properties, think about if you can:

  • Negotiate a decent rate on maintenance issues with a surly contractor
  • Convince a mostly broke renter that paying rent is more important than buying steak
  • Keep track of at least three and as many as a dozen separate streams of incoming and outgoing money. Don’t forget rent and security deposits, some commingled and some not, across anywhere from four to a dozen different accounts… while being able to provide proof at any given moment of what went where, when, and why
  • Advertise property inexpensively and effectively without sacrificing your ability to get a tenant who will pay a reasonable rent and not destroy the place before move-out
  • Avoid signing a mostly reasonable-looking new tenant (who ends up destroying the place)
  • Handle all of the property maintenance—including those 3 a.m. floods
  • Communicate with, placate, and motivate tenants who have conflicting goals and priorities.

Property Management Advanced Skills

That job description is just your run-of-the-mill, no-frills property management. If you want a top-of-the-line real estate empire, you need all those skills at their peak level—plus the ability to:

  • Navigate a court case, remaining professional and calm while tenants make absurd claims about how you ate their dog and that’s why they’re late on rent for the third month running
  • Comprehend the effects that the large-scale and local-scale market movements are having on each client’s properties. In addition, predict how that will affect your ability to charge, your future costs, and the client’s risk levels
  • Work with finicky city inspectors to bring buildings that were—just last week!—70 percent hellhole into the realms of livability
  • Comprehend the systems used by your writers, inspectors, agents, photographers, builders, vendors, and so on well enough to troubleshoot and help guide them toward effective solutions.

This might seem easy to you, or maybe even fun. If that’s the case, feel free to dive into the property management world solo. But if you find the above job duties frightening, hire an expert to deal with the nitty-gritty.

However, you must remember: It’s your business. You’re the CEO, the big cheese, the top dog. Therefore, don’t get bogged down in the day-to-day running of things. Leave that to someone else, someone qualified and experienced and capable of making you lots of money. As a real estate investor, it’s your job to sit back and watch the money roll in.

Source;Engelo Rumora – BiggerPockets

Tagged , , ,

How Much to Charge for Rent in 2020: A Landlord’s Guide

rent-sign-front-yard

So now that you have an investment property or two under your belt, you are probably considering the possibility of renting them out. However, determining the right property rent rates can be difficult at times. Not sure how much to charge for rent? You’re not alone.

After all, if you charge too much, you’ll likely have higher vacancy rates—but if you undercharge, you’ll lose out on profit.

Here’s how to check if your rental unit is priced correctly.

Purchasing your first rental property is just the beginning of your real estate journey, because being a good landlord is almost as important as making good deals. BiggerPockets’ free guide How to Become a Landlord: Managing Rental Properties for Real Estate Investors will teach you everything—from setting rent to handling evictions.

First: What Is Market Rent?

The term “market rent” refers to the current average rent price for nearby rental property. Remember, rent is determined by the real estate market value. So when determining how much to charge for rent, what other landlords are charging is valuable information.

However, keep in mind additional variables that can affect your rent, such as:

  • The number of bedrooms and bathrooms
  • Any special amenities
  • Square footage
  • Single-family homes vs. apartments or condos
  • Garage or storage space available to tenants
  • Pet policies

Prospective tenants may place more value on certain amenities, like pet-friendliness. That might mean higher rents. Just pay careful attention to your return on investment—and your boundaries.

Read More: The Ultimate Guide to Fair Market Rents

Calculating Market Rent Prices

In addition to browsing local rental listings, we recommend signing up for Rentometer, which costs about $100 per year. This website allows you to compare monthly rents for similar properties by city or zip code. It gives you the 75th and 90th percentile, so you can estimate the highest applicable rent and the lowest rent. Most likely, your property is going to fall somewhere in the 90th percentile.

This is a great place to start, so use it as a baseline. Don’t blindly rely on the data provided on Rentometer though, because you don’t know what those properties look like. Pairing this with your own research is the best strategy. For example, go on Apartments.com or Zillow and find nearby properties that resemble yours. Pay attention to the year built, the number of units, amenities, convenience, interior and exterior finishes, and inclusion or exclusion of a washer and dryer. It’s unlikely that you’ll find an exact match, but this is still enough to get a good estimate on the rent.

You can also go low-tech—simply drive around your neighborhood. If you pass any properties up for rent, call their owners and ask how much they are charging. This will give you a rough indication of how much you should be charging.

These methods will help you understand the viability of different rental rates.

Know How Occupancy Rates Affect Rental Price

What’s the average occupancy rate in the area? Is it 95 percent or 85 percent? How’s your property’s occupancy rate compared to the region’s? You don’t want it to be higher or lower by too much.

If your occupancy rate is much higher than the regional average, then your rent is probably not aggressive enough. If it’s a lot lower, then your rent might be too high—or you might have a much bigger issue than just pricing.

Check In With Your Property Manager

Property managers are great resources, but don’t rely on them completely. Ask them about the current market rents and for a market report to determine how much to charge for rent.

For the report, your property management company can give you a list of comparable properties with the current rents, which you can then verify yourself—either by researching online or visiting the properties in person. They can also advise you on what amenities might increase your rent. For example, if your property lacks a dishwasher, adding one might be an easy way to raise rents by $50 per month. Of course, you should carefully calculate your potential return on investment before making any major changes.

If you don’t have a property manager, real estate agents can also help you assess the local rental market.

Don’t Skip the Site Visit

Once you’ve found a couple similar nearby properties, call or visit the property as a potential renter. Ask questions regarding the current rent, unit size, amenities, utility bill, and any special features. Preferably, you should visit the site to get a good feeling of the property overall.

Go through these steps at least once or twice a year for each of your properties. Studying the current local market increases your rental income, helps you properly manage your current properties, and ensures you make better acquisitions in the future.

All that information is helpful, but serious investors need to dig deeper to know exactly how much to charge for rent. Follow these rules to arrive at the perfect price.

1. Minimum rent requirement

The rent has to be high enough for you to be able to afford expenses and provide cash flow.

Let’s assume your expense ratio is 50 percent, covering both the economic losses and the operating expense. Thus, in the case of a $500 rental, a 50 percent expense ratio would leave us with $250 to cover three very important things:

  1. Debt service—such as your mortgage
  2. Capital expenditure (CapEx) reserve
  3. Cash flow

You’ll likely find that $250 is simply not enough to cover all three of the above. And since debt service is mandatory, the choice we face is between our profit and CapEx reserve. What we often see is landlords pocketing the money left over after debt service, then getting excited about their great cash flow. But eventually, something will happen—maybe their house gets trashed and they need to replace the flooring, water heater, and stove.

What they suddenly experience is that tragic feeling in the pit of their stomachs which accompanies cash flow in reverse. All of the money they thought they’d made suddenly transfers from their account to their contractor‘s.

Related: How to Really Calculate Cash Flow on Your Next Rental Property

This is what happens when one has to make a choice between CapEx reserves and cash flow. That’s why you need a minimum rent. There’s no hard-and-fast rule, but for apartment settings, this is often around $650—and likely more like $750. For single-family rentals, this minimum rent requirement is much higher.

2. Maximum rent requirement

We are always looking to fulfill two objectives: to both protect and grow our investment. Just like there is a minimum requirement for rent, there is also a maximum. We have to be able to appeal to the widest cross-section of the potential audience. If you buy rentals that are too high within the scope of your market, this becomes difficult.

Shoot for rentals between the 55th and 70th percentile of market rents. This appeals to stable, reliable tenants but isn’t so exclusive that only a tiny sliver of the marketplace can qualify.

3. Focus on price per square foot

In order to truly compare apples to apples, you have to price your rentals on a per-square-foot basis. Let’s say you purchase an apartment building currently renting one-bedrooms for $525, and online research indicates the market could withstand a $150 rent increase.

But how big are those comps? If they’re 850 square feet, and your rentals are 600 square feet, that market research is no longer relevant—even if they’re both one-bedrooms. Can you convince people, for example, to pay even $625 if units that are 250 square feet larger are available for $700? Unlikely.

With the above information, you should now be well equipped to set an appropriate rent price for your investment properties.

Source; By Jay ChangJay, a civil engineering graduate from UCLA, is an active investor, developer, and writer.

Tagged , , , ,