Tag Archives: real estate investing

9 tips for buying profitable investment condos in Toronto

Photo: Jenny Henderson

Real estate is not a one-size-fits-all strategy. Pierre Carapetian, a top 1 percent agent in Toronto and an avid real estate investor himself, shares what we should know about buying an investment property in Toronto. Here are his tips to profitable purchases.

1. Understand your goals

The type of product you invest in will depend on your goals as an investor. Are you investing for equity gains or are you looking for an investment that generates cash flow?

Cash Flow

Toronto’s lucrative condo market and rising interest rates have raised carrying costs, making it more challenging to find cash-flow positive properties. There are, however, strategic ways to improve your margins, like a higher downpayment or purchasing the right product. Your Realtor will know best.

Type of property to invest in: Resale

Equity Gains

If it’s equity gains you’re after, you’ll need to think long-term. Toronto condos are a great option as prices in the core have been stable and rising substantially. An experienced Realtor can help guide you to the right product and the right neighbourhood so that you can achieve higher equity gains.

Type of property to invest in: resale or pre-construction

2. Know your budget and closing costs

Ensure you know how much cash you will need and how much mortgage you can afford to carry. This will influence the types of properties to evaluate when investing. If this is your principal residence you are allowed to purchase with as little as 5 percent down. However, as an investor purchasing a secondary property you must have at least 20 percent down.

5 Percent vs. 20 Percent Downpayment

Different products have different downpayment structures:

Type of property to invest in with < 20 percent downpayment: resale
Type of property to invest in with 20 percent + downpayment: resale or pre-construction

Closing Expenses

Beyond your downpayment, you’ll also need to account for closing expenses. These include Land Transfer Taxes and, on pre-construction condos specifically, HST (capped at $24,000).

Use this Land Transfer Tax Calculator to find out how much you’ll owe. First-time buyers are also eligible for a partial Land Transfer Tax rebate.

When investing in a pre-construction condo, you’ll need to pay HST on the registration date (approximately four years after purchase) to a maximum of $24,000. With a one year lease in place though, this amount is fully refundable as you’re able to file for a full HST rebate.

3. Understanding price per square foot averages in the neighbourhood

Paying attention to the price per square foot is a great indicator of an investment’s profit potential. Look for properties that have a low price per square foot compared to a comparable unit trading in that same neighbourhood. This will also help you determine if the best deal is pre-construction or resale.

“If the average resale condo in King West is trading for $900 per square foot and the current pre-construction deal is selling for $1,100 per square foot, you’re likely going to generate higher returns investing in resale,” says Pierre.

Photo: Jenny Henderson

4. Know how to spot a good deal

Beyond the price per square foot, there are many other factors to consider when spotting a profitable investment condo. Some of these include:

  • Does the builder have a good reputation?
  • Does the location or floorplan allow you to rent for a premium?
  • Is there future infrastructure development coming to the area?

We aren’t all real estate whisperers — if you don’t know how to spot a good deal, or maybe don’t have the time, hire an experienced Realtor to help you.

“I’m always scouring the market for profitable purchases that I can send along to my investor clients.”

5. Purchase investments where you can charge a premium in rent

There are key factors to look for as you search that will help guide you to a profitable investment property.

Rental prices favour condos along major transit/subway lines. You can also typically charge about the same rent for a two-bed, two-bath, 750-square-foot condo as you would a two-bed, two-bath 800-square-foot condo if they are in the same building. That 750-square-foot condo, however, will cost less to purchase, so you actually will improve your margins and lower your carrying costs.

6. Buy in gentrifying neighbourhoods

When it comes to equity gains, the biggest wins to be had are in pre-construction properties in up-and-coming neighbourhoods. If you can invest in areas when prices are low, you’ll reap the benefits in years to come as the area becomes more desirable.

Leslieville is a great example of how gentrification impacts property values. Condo prices there have increased 50 percent since 2014.* Investment opportunities in up-and-coming neighbourhoods where rental inventory is low will also allow you to charge a premium in rent.

PRO-TIP: Be on the look-out for investment opportunities on the Danforth along the subway line.

7. When purchasing, think long-term

When it comes to investing, it’s always wise to think long-term. The longer you hold your investment, the more equity you amass. As your investment’s market value goes up and your mortgage goes down, you’re able to leverage that equity into other investment condos. Learn about Pierre’s leveraging strategy and building a real estate portfolio.

PRO-TIP: Borrowing to invest can dramatically improve ROI.

8. Understand the tax implications

Knowing how your investment will affect your taxes — and the amount you owe — can make all the difference when purchasing property.

Capital Gains

When you sell your investment property, you are required to pay Capital Gains Tax. This means that 50 percent of your net profit will become taxable income. You are entitled to deduct expenses incurred during the investment from these gains (like interest on a loan and cash-flow losses).

HST

As we mentioned earlier, when investing in a pre-construction condo you’ll need to pay HST to a maximum of $24,000 when the building registers with the city (typically four years after your initial purchase). Your lawyer can file for a full HST rebate, refunded approximately four to six weeks later, provided you have a one year lease in place.

If you do not rent out your property for the minimum one year, you are not eligible for the HST rebate.

9. Ensure you’re playing by the rules

Ensure you play by the rules when investing. This includes understanding the rules regarding short-term rentals (eg. Airbnb) in the building to flipping condos and the financial consequences that come with it.

If you sell your investment too quickly you run the risk of being taxed as a trader rather than as an investor, which means you can be taxed on 100 percent of your profits as it’s seen as business income. It is best to get legal and property advice from your lawyer and/or accountant regarding tax implications as a flipper.

When it comes to spotting profitable investment opportunities in Toronto, just remember: it’s not about buying something, it’s about buying the right thing. Equipped with these nine investment tips, you can rest assured you’ve invested with sound advice and guidance from one of Toronto’s top real estate brokers.

You can read more on Pierre’s investment strategies here.

*Based on E01’s average condo price for 2018 compared to 2014

 

Source: Livabl.com – Feb 11, 2019

Advertisements
Tagged , , , , ,

Naborly protects landlords’ investments

As every landlord surely knows, running a credit check during the tenant selection process is paramount. However, not every landlord realizes what to do with the information the credit check reveals.

“Every independent landlord knows that to screen a tenant, you have to look at their credit, but a lot of them have no idea how credit relates to a tenant’s ability to pay rent on time,” said Jerome Werniuk, director of sales at Naborly Inc., which runs free credit and background checks. “Ninety-five percent of landlords have tenants show up with their own credit file, meaning they go to Credit Karma or Equifax, but when we hear professional tenant stories, these people come with doctored credit checks.

Doctoring a credit check is as easy as finding a template online and filling it in as one wishes. It’s what Werniuk describes as a huge problem within the industry.
While savvy landlords realize they can obtain credit checks from Equifax or TransUnion, many still don’t know, nor have time, to mine the information therein to decipher a tenant’s capacity for prompt rent payments.

“To get a credit file from either of the credit bureaus, they have to pay for it and a set-up fee for the individual’s report, but there’s a heavy credentialing process to pull somebody’s file,” said Werniuk. “Even when the landlord gets a credit file, they don’t know how to read it. They don’t know exactly what an R9 is or how someone paying a cell phone bill on time impacts their ability to pay rent. So credit is not necessarily a good tool for independent landlords.”

Naborly builds a different type of credit report using critical criteria like contemporary cost of living and verifiable income to determine a potential tenant’s ability to pay rent. It has proven so popular that, when it launched in February 2018, Naborly screened 100 people a week. Now, it screens at least that many people in a day.

“The biggest feedback we’ve received from landlords is our tool is amazing at assessing risk so that they can properly evaluate whether or not to accept the rental application,” said Werniuk. However, there remain risks that are extremely difficult to predict. Landlords have said that many of their previous evictions  were due to circumstances that changed after the tenant moved in, like job loss or some other unforeseen, and expensive, event in their lives. Nobody can predict those things.”

The average cost of eviction in Ontario is $9,000, and that could cripple an investment. In response, Naborly has rolled out Rent Guarantee, which doesn’t just risk assess but also protects the landlord for the full term of the lease. In effect, Naborly cats as the tenant’s co-signor, which shields the landlord’s investment.

“It’s based on the Naborly report and the risk score we give, which directly correlates to a tenant defaulting on rent,” said Werniuk. “We give a quote for how much rent guarantee will cost. They can have Naborly become a guarantor on the lease, meaning if the tenant ever defaults then Naborly steps in and covers the rent for up to six months. Our primary customer for Rent Guarantee is the landlord who only owns one or two units because if they don’t collect rent for two or three months, they’ll have issues paying their mortgages and they could lose the property.”

Tagged , , , , ,

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

Tagged , , , , , ,

Five Ways To Tell If You’re Cut Out To Be A Landlord

 

Getty

Investing in real estate by purchasing rental properties can be a smart way to balance your portfolio, hedge against inflation and build long-term wealth. Not everyone is cut out to be a landlord, though — but even if you feel you’re not landlord material, you can get the same portfolio benefits by investing in real estate indirectly through a private loan fund or a real estate investment trust. Here are five questions to help determine if investing directly in real estate is right for you.

1. Do you have 20% down payment and 5% to cover repairs and unexpected expenses?

Buying a rental property takes a much bigger down payment than buying a personal residence. Most lenders want at least 20% down, even if the property will generate enough income to pay the mortgage plus expenses like property taxes and hazard insurance. Having another 5% set aside to cover repairs and big-ticket expenses, such as replacing a roof or an HVAC system, may keep you from having to dip into personal funds to pay for unexpected problems.

2. How will you handle renters who don’t pay and the possibility of evicting tenants?

At some point, almost every landlord has to deal with tenants who stop paying rent. Eviction is a financial decision with emotional underpinnings. When tenants don’t pay rent, you still have to pay the mortgage, the property taxes, the water bill and all the other holding costs. But sometimes, nonpaying tenants are families with children or have unexpected circumstances like a serious illness or accident occur, leaving them unable to pay rent. If it’s too emotionally taxing to handle the eviction yourself, you can hire an attorney to represent you in court and movers to remove the tenants’ possessions from the property. Before becoming a landlord, you should know that the possibility of evicting a tenant might become a reality.

3. How do you feel about other people using your stuff?

Landlords hold security deposits because damage happens. Carpets get stained, hardwood floors get scratched and there is a fair amount of general wear and tear that should be expected in and on your property. As long as the cost to repair damages doesn’t exceed the security deposit, there shouldn’t be an issue. The real question becomes, what happens when the cost of repairs required exceed the security deposit? How will you confront your tenant to address these issues?  If contemplating this (somewhat common) scenario is stressful, becoming a landlord may not be an optimal option for you.

4. Can you wait at least 15 years for your investment to pay off?

Real estate is a long-term investment for a couple of reasons. First, the transaction costs are high. Real estate sales commissions, state and local transfer taxes, appraisals and settlement costs all reduce your resale profit. Second, the length of your mortgage dictates the monthly payment. The longer your keep your mortgage, the lower the monthly payment.

 

Source: Forbes – Bobby Montagne, CEO of Walnut Street Finance

Tagged , , , ,

Why cash flow doesn’t matter

Although it may seem counterintuitive, cash flow is not the be all and end all of investing in real estate.

“Everyone has such a cash flow mindset, and don’t get me wrong, cash flow is amazing and will help support a different lifestyle eventually, but making those dollars year-over-year is where the wealth comes from,” said veteran investor Lee Strauss of Strauss Investments. “If you have an extra $1,000 in your pocket every year, the return on investment is dismal and doesn’t even add up. But if you take $26,000 year-over-year, now we’re talking.”

Strauss is, of course, alluding to tenants paying down a mortgage’s principal balance for the investor while the latter rides the property’s appreciation.

“On average for a single-family dwelling, the principal pay down is going to be about $6,000 a year,” he said. “The other reason is you have an income-producing asset that is hedged against inflation, and that income-producing asset appreciates, on average, 5%.

“If you purchase a $400,000 property and it goes up by 5% in one year, that’s $20,000 in the first year. Five percent appreciation plus mortgage pay down, which you’re not paying and will be about $6,000, is $26,000 in one year.”

Mind, appreciation is a compounding factor.

“After year three, you’re at about $460,000 on an asset you bought for $400,000, and it’s been paid for by somebody else for three years, so now it’s worth more. After three years, the pay down is $18,000. That’s why people have always invested in real estate; they just didn’t know it.”

Laura Martin, COO of Matrix Mortgage Global and director of Private Lending Hub, notes that the process by which equity is built can be expedited in a couple of ways.

“The first process is by lessening the amortization period and increasing the payments of the mortgage in order to pay it down faster. This means there would be next to no cash flow, but there will be less money going towards interest payments on the loan,” she said.

“The second way is to ‘force’ equity in the home by making improvements that will drive up the property’s value. It’s referred to as ‘forced’ because it doesn’t rely on the external factors of appreciation caused by the real estate market.”

Martin adds that the extent to which an investor ameliorates the property should be determined by how far below market value they paid for it.

Mortgages have some of the best terms available of any loan type, says Martin, and that flexibility can be leveraged to purchase more properties.

“At an average of 3.5-4% on a fixed mortgage with down payments of around 25% and with amortization periods at 25 years—coming across such favourable financing terms with other investments is highly unlikely,” she said. “There is also leverage, in terms of using the asset as collateral, to finance other properties, thus making an increase in net worth more attainable.”

Source: Canadian Real Estate Wealth – by Neil Sharma 24 Jan 2019

Tagged , , , ,

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.

Tagged , , , , , , ,