Friday, October 20, 2017

HST and its Impact on the Ontario Real Estate Market

One of the most common questions I get asked is about the New HST tax and its impact on the real estate market in Ontario. This law is very new and many people are still unsure of its ramifications on the industry. A lot of industry experts are unclear, on what the legislation actually entails. If lawyers and accountants have only a vague understanding of the new Tax, imagine how confused the average Ontario resident must be.

According to a recent survey by Royal Lepage, most home buyers believe that HST applies to the sale price of resale properties. The survey goes on to show that this misconception is impacting buyer behavior, which has been a driving force in the recent slowdown on the market place.

So Exactly how does the new HST impact the Ontario Real estate Market?
There is no HST on resale properties. HST is only levied on preconstruction homes. HST will not be applicable to new homes costing under 400,000. For New homes costing between 400,000 to 500,000 home buyers in Ontario will receive rebates up to $24,000 to lessen the impact of the HST. For homebuyers purchasing homes over $500,000, they will have to bare the full brunt of the HST Tax . It is estimated that this will increase the purchase price of homes over 500,000 by as much as $30,000- $50,000.

The ramifications for purchasers of preconstruction homes who are investors and not end users is a little more complicated. If you claim that you are an investor who will not reside on the premises, HST will be applicable, but credits may be offered for up to 75%. If you are considering buying a pre construction property as an investment it is best to consult with an expert as to how the tax can effect your purchase.
While resale purchases are HST exempt it is estimated that the new tax will will add an additional $2,000 in closing costs to consumers on resale properties .

While maintenance fees, energy cost and closing costs will inevitably rise, the increased costs are significant but not dramatic. It is estimated by the Minister of Finance for Ontario that only 7% of preconstruction homes bought in Ontario are over 500,000.

The jury is still out on HST and the damage that it may or may not have done to the Toronto Real Estate Market. I think the damage has been more psychological, as the tax has left many consumers confused and scared. In my opinion the impact will be short term, and things should flatten out this fall and begin to rise again by next spring. Canada and Toronto have still way too much going for it for the politicians to mess it up.

10 Golden Rules to Pre-Construction Condo Investing

September 9, 2010 by  
Filed under Investment Properties, Real Estate

Toronto has the strongest condominium market in North America, with immigration projected to remain strong throughout the next decade and given the affordability of out market place in comparisons to other major cities our condo market will continue to be a good place for investors at home and abroad to invest their money.

With soo many projects coming out all the time, it can be overwhelming to both the novice and seasoned investor alike. In an attempt to cut through all the clutter and projects, I am going to outline the 10 golden rules of Preconstruction investing.

1. Let your money work for you. Always buy in an area that’s gentrifying. When buying preconstruction you are buying 3-4 years out. Why pay a premium to be in an area that’s already developed? The greatest up tick will be found in areas that are undergoing rapid growth and gentrification.

2. The Toronto Condo Market is similar to that of a night club. You have to know someone to get in at the beginning. The key is to target the project that you are interested in and be the first to purchase. By being the first purchasers you ensure that you are paying the least and amount and that you have your choice of the best floor plan which generally sells out before a project goes to the public. You need an experienced agent who is in the know.

3. Always buy small when buying for investment. It is better to purchase two 500 square foot units from an investment perspective then it is to invest in one 1000 square foot unit. Smaller units are easier to sell or rent out, and there is less exposure to market fluctuations. With Toronto currently at a rate of about 500 psf, for preconstruction you will need to purchase small units in order to avoid a negative cash flow position, which is paramount.

4. Never buy at the high end of the market. When you are buying preconstruction you are essentially buying condo futures. While we can all gaze into out crystal ball and predict the future we can never be sure with 100% certainty that our predictions will come true. Those who buy at the high end, you will be the most exposed when the market softens or if there is a downturn at the time of the project completion. By buying astutely in the mid to low end of the market you are better positioned to sustain a market shift or correction.

5. Parking. There was a time when you would be considered a fool to buy a condo without parking. Well, times have changed. Toronto is going the way of other major cities like New York where it is becoming too expensive to drive. Not having a car is becoming a generational thing and more people living in Toronto do not own a car. Parking in preconstruction condos in Toronto are selling as high as $45,000 and from an investor’s perspective, it is simply isn’t worth the money. Most new condo’s all have autoshare or zip cars on site and are near a on a subway line. So my recco is to buy near or on transportation lines.

6. Avoid investing in the monster buildings. From a resale prospective when it comes time to sell your investment, you are going to get a higher price for you unit if you are selling to an end user as opposed to another investor. End users view smaller boutique , building and settings at a premium. It is preferable to resell to an end user as they will pay more for a property once they are emotionally attached to it, then an investor who is just looking at the numbers. Also when it comes time to sell if you purchase in a small building there is far less chance of competition, while in a 400 unit building there is a very strong chance that here may be several similar type units for sale. The competition will decrease the amount you will be able to sell your unit for. It is simple supply and demand.

7. Invest in something that is unique. There is so much inventory going up in Toronto, but most of it is cookie cutter type of stuff. Exceptional projects will always stand out and as a result they will better hold their value in a downturn and will command higher prices when the market is strong.

8. Budget to wait at least a year or two minimum after the condo project is completed. In most projects in the first year after its completion is the time where most investors are going to try and realize their profits and then cut and run. Wait till all the original investors are out, let the grass settle, and the paint to dry , before putting your unit on the market place. In the interim while you wait for the ideal time to strike , a tenant is living in your unit. Paying down your mortgage while your property quietly appreciates.

9. It may not be worth the premium to purchase on a higher floor. This may depend on the project, the views, and the charge per floor. Typically, the price you pay for a difference of 10 floors will be difficult to make up in rental income while you hold the property. On average it will cost 2000 premium per floor, while it is with paying to have a good view it generally will not be worth paying to be in the top floor. These types of units should be purchased buy end users who will feel inspired by the potential views.

10. Do not pay for upgrades. They are a great profit centre for builders and are generally over priced. Since you will not be living in the property why are you paying a premium for the enjoyment of future tenants? Most of the newer project all offer great standard features, like stainless steel appliances. The added upgrades are paid in full on the spot and are not rolled into the mortgage and therefore cannot be leveraged. You are better off to keep your money in your wallet. – RF

7 Pitfalls to Avoid When Buying a Multi Unit Home

Buying a multifamily investment property can be a complex process. In order to maximize the return on your investment, when considering making a purchase, it is important to understand some of the basic pitfalls that can come back to bite you in the long run.

1. Not all income properties of the same size and even location are equal. For example take two properties located on the same street each with 6 units. Property A has 6 one bedroom , one bathroom units and Property B, has 6 2 bedroom 2 bathroom units. Which property is more desirable? When evaluating properties it is essential to analyze and understand the local rental market. When evaluating properties it is essential to take the mix of rental units into consideration as all things are not equal.

2. Square footage, are they accurate and are the rental units the right size? I have always held the mantra “trust but verify” In most listings the selling agent and vendor will provide square footages. However in the actual listing the listing agent will almost always have a disclaimer depicting that these are just estimates and they nor the vendor can be held liable for any errors. In situations where price per square foot is relevant in making an investment decision – pull out the tape measure and measure the unit yourself.

When evaluating a residential property it is also important to look at the size of the units themselves. Are the units desirable and efficiently laid out? A poorly laid out unit, or one that seems either over sized or undersized will have a higher turn over rate.

3. Beware of quoted vacancy rates. Most agents and experts will quote the vacancy rate when talking about the desirability of investing in a property. Vancay and tenant turnover rates are across the board averages, Properties on the same street can differ from one another as much as different neighborhoods can within a specific geographic area. Talk to local agents and residents, and do your due diligence. Spend some time researching classified rental ads on sites like Craig list.

4. Chattels and Fixtures included. When purchasing a multi family property you are not just purchasing the land and property you are also purchasing the fixtures as well. If you are looking at purchasing a 10 unit property, makes sure that in the agreement of purchase sale, the refrigerators, stoves, dishwashers, are all listed, and included in the agreement, and that such agreement stipulates that all appliances are in working order. To have to go out and replace appliances can become a costly proposition. Logically speaking if one or more of the units do not have appliances the price should be discounted accordingly.

5. Zoning. Your right to use, live in, build on, renovate, add on to, conduct business,
and lease out , will all be set out in the zoning. Know your rights and limitations before offering to purchase a property. Applying for zoning variances can be done but it can be a timely and expensive proposition. Be aware of any and all potential issues from the outset. Height and restriction and setbacks will not only govern new construction but will also limit renovations conversions and building additions.

Owning a property that is not compliant to the current zoning could potentially open up all sorts of cans of worms, from insurance and mortgage issues to issues with the city or local fire departments. The bottom line is to do your research and make sure that you are asking all the right questions.

6. Rental Income. The most important aspect when evaluating an Income producing property is to ensure that the rents and income provided by the vendor are accurate and in line with current market realities. DO YOUR HOMEWORK. Ask to review the lease agreements to ensure that ensure that the units are in fact rented. Cross reference these numbers with the income statements provided. Then go research the local rental market. Are the rents being charged over, below or at the market value? Answering this question will give you greater in your ultimate decision to move forward or to sit this one out.

7. Environmental. This issue is becoming more and more of a hot topic as of late. Most people assume that environmental issues surround commercial properties, but they can also affect residential and multi residential purchasers. Once you purchase a property you as the owner may be liable partially or entirely liable should an environmental issue come up at any time. If you are purchasing an older property in an older area, there is a good chance that there could be a buried oil tank or asbestos around some old pipes. You will be responsible for all of the clean up. In older properties it can be wise to have an ‘environmental phase one report’ included as a condition in your agreement of purchase and sale.

Buying and investing in real estate and investment properties can be financially rewarding, the key whether you are a first time investor or seasoned pro is to make sure that you have an experienced team working you to make sure that you are not missing anything that could cost you in the long run. – RF