The Investor Dilemma

I was recently asked by a “small” investor/landlord what the likelihood would be that an “above guideline” rent increase would get approved by the Landlord & Tenant Board (LTB) given the fact that his expenses are about to increase astronomically when his mortgage renewal goes through.

 

The short answer is there is no chance whatsoever that that would get approved….

 

The longer answer is that there are a lot of complexities to this issue because what is good for a landlord is not necessarily good for a tenant, & vice versa.

 

For properties that fall under rent-control rules, the approved rent increase for 2023 was 2.5%. The approved rent increase for 2024 is 2.5%. Meanwhile, landlords’ expenses have sky-rocketed with insurance up 25-30% & mortgage costs up by more than 30%.

 

Every investment comes with a certain amount of risk. And to be fair, it’s not the tenant’s responsibility to help a landlord cover their expenses. It’s the landlord’s responsibility to provide a livable space to a tenant for an agreed upon price, at agreed upon terms.

 

BUT…

 

The reality of rents not covering expenses means that landlords have a shortfall that needs to be covered somehow every month. And let’s face it, the goal of investing is to make money.

 

Rentals.ca released some research earlier this year that said that the average advertised rental price in April was up 20% from pandemic lows in April 2021. And that the average rents across Canada were up 9.6% compared with April 2022. Read more in this article HERE

 

So that’s the kind of spread we’re talking about….

 

Or to make it even clearer with a real-life example, a small investor bought a sweet little property in 2021, rents were great, life was good. His variable rate mortgage is now $1,900/mo on his $1,100/mo rent & due to his particular financial situation, he has no choice but to bail out. $27.50/mo (2.5% rental increase) doesn’t do much to help his $800/mo shortfall…

 

But here’s where it gets really tricky:

 

Who is willing to buy an investment property that costs them money each month rather than pays them money each month (or at the very least is cashflow neutral)? So now we’re talking loss of value to the property itself, because it’s not an investment that makes sense to a prospective purchaser unless they’re getting a deep, deep discount on it! Capital gains just pile on to this already painful scenario that some landlords & would-be sellers are caught in.

 

Taking rental properties/units off the market also means less rental opportunities in our already critical housing supply shortage environment.

 

Less rental supply means higher rents & more competition for the existing supply.

 

 I know, I know, it feels like I'm always the voice of doom & gloom as I try to educate &  provide context to what's currently going on in the market! Sorry!

  

So here is the dilemma….

 

Should existing investors hang on? Extending amortizations to lower monthly costs until rates start to come down again?

 

A CIBC Landlord Poll found that 74% of homeowners believe that even with a negative cash flow, the tax deductions available to them can help make an income property a worthy investment. Read more about that HERE

 

Or should existing investors sell their Ontario rentals & buy in other provinces, overseas, or in the US, basically anywhere the laws governing tenancies are more fair to landlords & the price-points are likely to be lower as well.

 

And what about those who want to get into investing in real estate now? Or really, just get into the market, period.

 

Warren Buffett famously said “be fearful when others are greedy & be greedy when others are fearful”. Market and/or economic downturns are the best time to find the opportunities that will help you get ahead!

 

New investors can focus on units that are not covered by rent control, however they do need to stay in-line with “market” rents regardless of what their expenses are.

 

First-time homebuyers may find that this is their moment as well…writing about capitalizing on others’ misfortunes has a lot of “ick” to it, but that’s how our system is set up 🤷

Want to chat more about your real estate options? Call or text me at 647-697-4071 or email Kelly@HomeInDurham.ca

Additional Reading:

Analyzing An Investment Property HERE

Do The Math! - this was an email out to those who get my Mid-Month Note but I'd be happy to send it to you as well, just ask!

Until next time,

Golden Handcuffs

We used to use this expression when it came to employment & compensation packages, but now it’s just as applicable to the circumstances many would-be seller-buyers find themselves in today. Not to be confused with the Golden Parachute, which is a much more pleasant set of circumstances, lol!

If a seller has a fixed mortgage at a rate that is MUCH better than today’s rates & they want to sell their home and buy something else, it may not make sense financially, even if it makes sense in every other way, because their current rate is so good they can’t justify the increased payments on a new home at a higher rate. That was quite the run-on sentence, but that in a nutshell is the quintessential Golden Handcuffs situation.

An option to address this could be to port the existing mortgage to a new home & not everyone is aware of that. Port, blend the old rate with the new rate & extend the term of the mortgage. Unfortunately not all mortgages are portable though. Throughout the ultra-low rate environment of the past 10’ish years we’ve seen many cases of “stripped down” mortgages, those that traded super low rates for “privileges” like pre-payments & porting, causing home owners difficulties due to their lack of flexibility when something unforeseen arises. Another road block for some is Collateral Charge mortgages - those can’t be ported either because they’re secured differently than a traditional mortgage.

 

A colleague recently shared a story  about a client with the Bank of Nova Scotia who was spending more on a new purchase & was looking to port & blend and & the bank wouldn’t let them. They told them to pay the 20k penalty & THEN they would give them a new mortgage. Every mortgage is different, know your terms!

 

Another option could be an Assumable Mortgage. The buyer essentially takes over the existing mortgage with no changes to the terms & payments & pays you the balance of the purchase price in “cash”. The ability to assume a mortgage at a favourable rate can be a very attractive selling feature! That being said, they’re not that common here in Canada, but in theory most fixed-rate mortgages can be assumed. In reality, lenders don’t like them & don’t want to deal with them. A talented mortgage professional is a must when it comes to any sort of “outside of the box” financing ideas!

 

And yet another option could be a Rate Buydown. More common with mortgage brokers & new home builders, this is a scenario where the seller pays the lender a lump sum to lower the interest rate for a fixed term to benefit the buyer. More information on that HERE. Just like the Assumable Mortgage option above, this would be viewed as a selling feature if offered by the seller, or a negotiable term if asked for by the buyer in an offer. This is another “outside of the box” financing strategy where you want a knowledgeable & experienced professional at the wheel!

 

Another dilemma that’s holding seller-buyers back is the question of buying first or selling first. A good rule of thumb is that in an increasing market you want to buy first & in a balanced or decreasing one, sell first. If you’re buying & selling in the “same” market, then the state of the market is almost irrelevant. It can even be to your benefit if you’re a “move up” buyer. I wrote about the potential advantages last July in an email that went out to those who get my Mid-Month Note called “Moving Up in a Down Market” (I can't link an email but would be happy to forward it to you if you send me a message!)

 

There are a lot of facets to the buy first/sell first dilemma & one of them is the needing to know how much you can sell for, like the actual number, before you fully commit to purchasing. Enter the SPP (Sale of Purchaser’s Property) condition, which I wrote a blog post about last fall (see it HERE). It makes a lot of sense & was common practice when I first got in the business back in 2011, but is very rare to get accepted these days, at least in our local markets!

 

If you’re only willing to move for the “right” property & you can’t/don’t want to commit unless you have a firm selling price on your existing home & you can’t get an SPP condition accepted on that “right” property…how do you ever move forward?

 

Both of these very common scenarios essentially “handcuff” those who want (or need) to make a move. The “Golden” part is the fact that they’re already IN the market. But those handcuffs also keep inventory out of the market for those who are trying to break into it for the first time. It’s a big contributing factor as to why the entry level market stays very competitive regardless of what the overall market is doing. Less inventory at the entry level keeps prices elevated in this segment & competition fierce!

 

And finally, if you want to have a look at the full breakdown of market activity in July, click HERE  Spoiler Alert: all the leading indicators are down in July vs June BUT they’re up by a healthy margin when compared to July 2022.

 

Until next time,

Tax Free Money 🎉 the NEW FHSA

Ch...Ch...Changes 🎶 The month of April is bringing you more than just spring showers that will turn into May flowers, but also an increase in the carbon price & higher alcohol taxes. In the good news column for April is an increase to the federal minimum wage & the introduction of the Tax-Free First Home Savings Account program.

I am automatically skeptical when there are any new government initiatives announced that relate to real estate (or housing in general) because it always seems to be all flash & no substance. The "appearance" of doing something rather than the real life practicality or consequences of it. First-Time Home Buyer Incentive, I'm looking at you! (The FTHBI was not well received & has had very low participation among eligible Canadians).

So let's talk about this new savings vehicle for First Time Home Buyers, shall we?

It's a good policy. It's easy to understand and work. And the tax policy part of it is the same as an RRSP on the way in and the same as the TFSA on the way out, which makes it a very strong tax savings program.        -James Laird, co-CEO & co-founder of RateHub.ca

How it works is that it allows you to save up to $40,000 (lifetime limit) tax free to purchase your first home. The yearly maximum contribution is $8,000 – and that part is important, more on that below. It’s a registered plan like an RRSP, and like an RRSP, the contributions are tax deductible. And here’s where it gets good,  unlike an RRSP, the withdrawals are also non-taxable. Tax-free in; tax-free out.

 

Who is eligible? A resident of Canada, at least 18 years of age who qualifies as a "first-time home buyer". A first-time homebuyer is defined (in this case) as someone who has not owned a qualifying home that they lived in as a principal place of residence at any time in the year the account is opened or the preceding four calendar years.

You can combine your withdrawals from the FHSA with your TFSA & the HBP (via your RRSP) when it comes time to purchase your first home to maximize your total downpayment.

 

My biggest take-aways from this program are:

• You need to have a good handle on the timing of your purchase & your ability to save since your contribution room only carries over from the previous year, so no “catching up” beyond that

 

• You can only contribute for 5yrs from the time you open the account & then hold the account for a maximum of 15yrs before any unused balance must be transferred to an RRSP, RRIF or withdrawn on a taxable basis

 

• If you have money in an RRSP, you can transfer funds tax free to the FHSA & then withdraw them tax free with no obligation to pay the funds back, unlike a withdrawal under the HBP where the funds have to be repaid within 15yrs

 

• FHSA funds can be withdrawn immediately after contribution whereas RRSP funds have to be in the account for at least 3mos

 

• The home you purchase has to be used as your principal residence

 

• If you’re purchasing in the short (or shorter term) then it could still make sense to open & contribute to the account simply for the tax deduction on the contribution – you do NOT need to (nor should you) invest the money in the account

 

• The total benefit of using the FHSA is the combination of the tax deduction from your contribution + any gains you make by investing the funds while they’re in the account (should you choose to do so)

 

• The Big Banks may not have their sh&t together for many months to come, for example TD is saying available in November, lol 🤦 but I have heard that Questrade is ready & willing to open accounts right now!

 

As always, this post is intended to bring something to your attention so that you can look into it further. Follow the links below to get a more in-depth understanding of the FHSA & how to best use it to achieve your real estate goals:

 

Recommended Reading:

 

Real Estate Tax Guru Cherry Chan’s breakdown of the FHSA - HERE

 

CPA Canada (Industry association for Chartered Accountants) also has an excellent breakdown that covers some issues that Cherry Chan didn’t -  HERE

 

The Government of Canada as a number of home-buying resources all linked up in the same place - HERE

 

 

Until next time,

AI & Real Estate

 I recently read an article about RBC (Royal Bank) getting into the real estate space with the purchase of an "AI-powered real estate company" & that has renewed conversations in our industry about the flaws surrounding home valuations powered by AI/Algorithms.

For many years Zillow (in the US) was the butt of the joke around their unreliable "Zestimates" & what a disservice their inaccurate information was for buyers & sellers.

And now we get to join in the fun too, lol! Well, to be fair, it's not new here either...

Power of Sales...Lately

The Bank of Canada made an announcement on July 15^th, 2020:

If you've got a mortgage, or if you're considering to make a major purchase or you're a business and you're considering making an investment, you can be confident that interest rates will be low for a long time.  -Tiff Macklem, Governor of the Bank of Canada

 

Then in August we found out that July 2020 was actually the hottest market in real estate HISTORY – for a blast from the past, watch  THIS video that I recorded at that time – but “a long time” turned out to be shorter than many borrowers wanted or needed, as interest rates jumped 3.5% in 6mo starting in April 2022. The prime rate was 2.45% in March of 2022 & now 6.70% in March of 2023.

 

And nobody was sounding the alarm in the early days, not economists, not regulators & not the lenders, that consumers should be locking in their rates so that they could weather this storm!

 

$5K Penalty? Yikes!

Do you own a rental property? Then this post is for you!

 

Think it’s not for you? Read it anyways just to be sure…remember the subject line - $5k Penalty!

Let’s dive right into it!

 

If you own a residential rental property with 3 units or less then it’s time for a chat with your accountant to discuss whether you need to file the Underused Housing Tax Return .

 

Many are under the impression that this form is only required if there are foreign investors involved, or if there have been vacancies in the property. But that’s not entirely accurate.

 

New Laws that Will NOT Help

Will not help what, you ask? Improve housing affordability as the government suggests...

Anti-Flipping Tax

If you buy a property & own it for less than 12mos before you sell, then your net profit is taxed as business income. This is not really new though, it's just been officially added to the Income Tax Act. The CRA has been operating under this premise for years! There are also lots of exemptions like for death, divorce, relocations etc.

What is the net profit? What is left after all your costs associated with buying, selling & renovating the property - that is what is taxed at your regular marginal tax rate, based on your total income. If you're buying & selling through a corporation, that can help lessen the sting because the corporate tax rate is less than for personal income tax.

What Happens When a Property is Damaged Before Closing?

 A property needs to be in the same condition on closing day as it was in when a Buyer contractually agreed to purchase it.

A simple & logical premise, right? But sometimes things get damaged before closing whether through negligence, accidents, Acts of God, you name it, it's probably happened, lol! So let's talk about it!

A few years ago my client purchased a condo, a condo that was tenanted & the tenants were moving out a couple of weeks before closing. When they moved out, they caused some damage to the flooring.

Title Insurance - Did You Know?

I listened to a presentation by Chicago Title Canada a couple of weeks ago & learned a bunch of stuff that I didn't know, so I thought I'd share some of my key takeaways here for you!

First of all, what IS title insurance?

It's an insurance policy that protects residential or commercial property owners & their lenders against losses related to the property's title or ownership. Most purchase the policy through their lawyer (typically when closing on a property) with a one-time premium in the range of $250-$500. You can read a more detailed description & what a policy may include/exclude HERE & the Ontario Government has a good general knowledge booklet HERE as well.

There are 2 types of policies available - a Lender's policy & an Owner's policy - 1 protects the lender's interest in the property & the other, the owner's. Full coverage = 2 policies!

Multiple Offers in 2023...so far

 There was a property that made a big splash last month, coming on the market at the low, low price of $549k with a hold back on offers for 6 days. And talk about starting the year off with a bang! It got a gazillion showings & 36 offers!

The property in question was 377 Laguna St, near the Oshawa/North Courtice border, just off Adelaide, in the Eastdale neighbourhood of Oshawa. Good mid-town location. See it HERE

 

A 1970's 3bed/2bath bungalow with single car garage in well-kept, but dated condition. With a non-legalized bsmt apartment. As I mentioned, the list price was $549k with a hold back on offers for 6 days. The firm selling price of $747k was posted the following day. Firm refers to no conditions. I thought it might go for less than that & some REALTORS® in our office thought it would go for more…

 

FRAUD

A surprisingly busy start to the year combined with a little writer’s block & here I am at the end of January finally hitting publish on my first blog post of the year!

FRAUD has been all over the news for the past few weeks thanks to 2 high profile cases of fraudulent real estate sales. For some reason this topic has been a tough one to wrap my head around & mostly it’s about what do I want to say about it? What is the point that I want to make? What value can I add to the conversation?

 

• Regurgitate the news articles that have already been written with some added commentary?
• Provide deeper context beyond the sensationalism of the news headlines?
• Lament the fact that fraud seems absolutely rampant in every facet of our lives (the over-dramatic hot take)?
• Ways to protect ourselves?

 

And that’s where I finally landed – how do we protect ourselves? And a bit about how rampant it is, from the little white lies to the really bad stuff…