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Tips for real estate

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BY JAY BRIJPAUL

Louis J. Glickman, a widely known as a  real estate investor and philanthropist, said that “the best investment on earth is earth.” For many, owning a home is the heart’s desire. A home is more than a shelter and over time becomes one of the best investments.

John has been renting for ten years. He stacked a pile of rental receipts that tallied to about two hundred and fifty thousand dollars. John got caught in a rental trap. The first thing is to set a realistic goal. Joanne wants to buy her first home in five years and plans to save one hundred thousand dollars for the down payment. She paid herself first by transferring twenty percent of her paycheque to a savings account. She contributed to an RRSP and took advantage of the tax break. For her, success is moving confidently towards a worthy goal.

Daniel and Diego celebrated their first marriage anniversary in their new home. They reviewed their mortgage statement and noticed that most of their mortgage payments were interest. They met Jan, a financial planner, who advised them that instead of making monthly payments on their mortgage, choose “bi -weekly accelerated payments.” She explained that with a monthly payment plan, they are making twelve payments every year, but with bi-weekly accelerated payments, they will make payments every two weeks. Since there are fifty-two weeks in a year, then, they would have paid twenty-six payments equivalent to thirteen months in one year. With that strategy alone, they can pay off for their home in twenty years instead of twenty-five. Daniel and Diego, instead of saving money to pay down their principal on the anniversary date, chose to pay the extra on every payment date and in doing so paid less interest.

Philip bought his first home in 2010. Since then, the price doubled. His plan was to sell the smaller home and buy his dream home. Mrs. Smart, his realtor, advised him to increase the mortgage on his current home and use the equity to buy his dream home. With this idea, he saved on real estate commissions, lawyer fees and mortgage penalties. The income from his rental property carries the increased mortgage. Mrs. Smart explained that the increase in equity from a property can be used to buy another property in seven years. At retirement, if Philip has just four rental properties with an average rental of twenty-five hundred dollars per month, it adds up to a retirement income of one hundred and twenty thousand dollars yearly and that sure beats an RRSP.

Over the span of thirty-one years in the field, I met many individuals who became mortgage free but were afraid to invest in rental properties because of bad tenants. Choosing good tenants is easy. Start by finding a realtor who has investment properties. It’s best to buy a rental property where there is a strong rental pool. Out of town properties are cheaper and have poor quality tenants. Always meet with the tenant before committing to gage their personality. Choose a small working family because the property gets to rest when no one is at home. Some investors hire a management company instead.

Investing in second mortgages is profitable. Most people have one mortgage, called a first mortgage. If someone needs to borrow more money against their home and the lender refuses to lend, they will turn to a private secondary lender. The secondary lender will lend at a higher interest rate because of higher risk.  Mr. Money Lender took a line of credit against his home. The interest paid on the line was 4%. He lent it to Bonney Burrow at 13%, making a profit of 9%. In addition to that, he charged Bonney a lender fee of 4% of the mortgage amount plus legal fees.  Mr. Lender made sure that the first and second mortgage when tallied did not exceed 85% of the property value. He also stipulated that the money can only be used to pay off Miss Bonney Burrow’s credit cards. His lawyer will take care of that. Investing in second mortgages is lucrative. A good mortgage broker can help. Keep the second mortgages under $50,000 and do not lend to investors or on out of town properties.

I met Mr. Money Lender at the auto dealer. He bought a new car for Christmas and took a loan from the dealer. He told me that a car is a depreciating asset and instead of paying cash, he can lend the money at a higher interest rate.  The interest earned on his investment will pay the car loan.

Most successful people never make instant decisions. They think through the process and then commit after twenty-four hours. Happy Holidays.

Jay Brijpaul is a 29 year Toronto Real Estate veteran and one of Canada’s top Real Estate Brokers. He has been involved in over 3000 Real Estate sales representing both buyers and sellers. His team, The Brij Team, is consistently among the top RE/MAX residential teams in Canada and around the world. Since 1994, Jay became a member of the Fellows of Real Estate Institute of Canada (FRI), giving him an additional 5 years of Real Estate training beyond what virtually all Real Estate agents have.

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Real Estate

Some tax saving strategies in real estate

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BY JAY BRIJPAUL

Properties were taxed temporarily to raise cash during the war. Today, real estate taxes are one of the government’s most significant revenue sources. There are many tax-saving strategies in real estate; let’s look at a few.

Buy RRSP’s. Many first-time buyers have their downpayment in a saving account or short-term deposit. It’s better to open a self-directed RRSP account. If you were contributing yearly, then you can top it up. If you still need to, you will have room to transfer a large sum which will trigger a tax refund. A first-time buyer can take up to $35,000 (or $70,000 as a couple) from their RRSP. The funds must be in the RRSP account for 90 days. The buyers must withdraw the funds within 30 days before closing the deal.

Build a basement apartment. Income from a basement apartment is taxable. Similarly, the operating expense is deductible. However, having a basement apartment on a principal residence property can change the use and limit your principal residence exemption. CRA has three criteria to determine that the use has not changed:

  • The rental use of the property is secondary to the principal residence
  • There are no structural changes done for income generation
  • There is no capital tax deduction on the secondary suite (You cannot write off the cost to build the suite)

If one or any of these criteria are not met, then, upon sale, the secondary suite portion of the property will be taxable. You can only claim some expenses if you rent a part of the property. If the basement apartment is 1/3 the size of the property, you can claim 1/3 of the utilities, mortgage interest, property taxes, insurance, etc.

Buy a rental property. Let’s assume that you have $100,000 saved up as a downpayment to buy an investment property and that your principal residence has a remaining mortgage of $400,000. It’s better to use the $100,000 to pay down your principal residence’s mortgage and then borrow $100,000 from the property for investment. You must set up a Home Equity Line Of Credit (HELOC) on the principal residence to borrow. The interest paid on the HELOC is tax deductible. With an investment property, an investor can write off the interest on the mortgage, rental insurance, some legal costs to purchase the property, property taxes, and other related expenses.

Split your rental income. If you are in a high tax bracket, consider splitting your rental income with your spouse or adult child. The party with the lower income must be actively involved in the day-to-day activities of the rental property. Some duties include bookkeeping, communicating with tenants, and collecting and depositing rent.

Claiming an expense on a rental property. There are two types of expenses, and they are called operating and capital expenses. Operating expenses are expenses incurred in the day-to-day operation such as accounting fees, maintenance, minor repairs, management fees, etc. Capital expenses are called capital improvements. For example, when you install a new roof. You can claim Capital Cost Allowance (CCA) and deduct the cost over time.

Claiming a rental loss for the property. When the gross rental income is lower than the rental expense for the year, that is known as a rental loss. You cannot claim rental loss when you rent the property to a family or friend below fair market rent. If a tenant has been living in the property for a long time and the rent is lower than reasonable market rent, that loss can be considered a rental loss. Rental losses that originated from a tenant who failed to pay rent are also tax deductible.

There are many more tax-saving ventures available. The government of Canada website, www.canada.ca, is resourceful. You cannot claim your labor and services in real estate, and it is better to use the services of a professional. I recommend finding an accountant who specializes in real estate taxation. The accountant’s fees are tax deductible.

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Real Estate

Downsizing is becoming a trend

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BY JAY BRIJPAUL

Recently I visited a client who sold her 2,600 square foot home in Etobicoke and bought a one-bedroom condo. I asked her how she felt about such a drastic move. She said that now, she can enjoy an affluent lifestyle. I pried further.

“When living in my Etobicoke house, I would have hotdogs for dinner. Now, I can have a steak instead. I was house-rich and cash-poor then, and today I am house-poor and cash rich.”

Downsizing is becoming a trend with all age groups. A bigger home will cost more for mortgages, property taxes, insurance, and maintenance. A smaller home will bring less financial stress, less care, less housework, and more time to relax. Some families choose to downsize so that they can spend more time with their loved ones instead of beating the streets to pay the bills. Usually, homeowners who reduce appear happier since they also downsized their financial load.

Doreen had a resort-style home with a large in-ground pool, sauna, and built-in BBQ. It was a hot spot for friends and families. There was only one problem—when the guests and family members left, she alone had to clean up and cover the bills. Now moved, her small dwelling brings her happiness and money too.

Many of us are worried about what others will say if we downsize. The size of our home gives us a sense of prestige. The best way to overcome this is to list the advantages and disadvantages of scaling down.

Moving to a smaller home is stressful. Families with children used to having bedrooms and adequate washrooms will need help to adjust. Have an open and honest discussion with family members. For financial reasons, consider converting the basement into a rental unit.

Upsizing is easier than downsizing. We love to move up to bigger and better. It’s exciting because, with the new home, we want more oversized furniture. Before downsizing, look at the kinds of homes you want to move to before selling your home. Don’t search for a home based on the size of your furniture, or you will be disappointed. This exercise can give you an idea of what to expect.

The next step is to sort through your belongings and decide what you will take to your new residence. You may need to get rid of oversized furniture. It’s an excellent time to sort clothing, books, and everything else. Group the items in three categories: keep, not sure, and good riddance. Dispose of the ones in the good riddance category. These can be sold at a discount or given as a donation. Social media such as Facebook marketplace is helpful.

Now, look at the second category. Sort the items into two sets: keep and good riddance. A rule of thumb is that if you do not use an item for a year, chances are you will not need it. Avoid the temptation of renting storage space to store items that you may not use for a while. Storage can be costly.

Should you sell first and then buy or do the opposite? In a market where prices are climbing, buying first and selling later is better. In a market where prices are coming down, it’s best to sell first and buy later. A good realtor can guide you through the process. A decluttered, cleaned, and staged home will be more appealing to prospective buyers. Avoid pumping money into significant upgrades. A fresh coat of paint can add thousands of dollars to your pocket.

It is advisable to take possession of the home you are moving to a week earlier than the one you are selling. You can do so through bridge financing, where the lender will facilitate the request. This way, you have a week to do minor repairs, cleaning, and moving.

If you are selling to free up retirement cash, consult a financial planner to invest the proceeds. There are situations where a family needs the space but cannot afford the home. Instead of downsizing, consider moving to smaller towns, and you will pay less for a bigger house.

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Real Estate

Real estate forecast

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BY JAY BRIJPAUL

Picture a stream. You can stop the flow by building a dam. The stream before the dam will swell while the other side will fall. As the swell continues, the dam will collapse under pressure. The resulting flow will be turbulent.  Rising interest rates are like a dam that inhibits the natural flow of buyers into the marketplace. It’s an artificial solution to a bigger problem. When interest rates decrease, the dam will crack, and the market will explode. The answer is to boost immigration.

Between 2023 to 2025, the Canadian government plans to welcome half a million permanent residents. As a result, we need to build more homes. To keep up with the demand, we have to add approximately 200,000 new homes in 2023 and 2024.  Currently, there are around 100,000 new homes being built across Canada yearly. The swell is growing rapidly.

The GTA is a city of ethnic diversity. Many immigrants want to live there, but the infrastructures are not in place to handle the influx. We cannot build enough accommodations to offset the flow. As a result, house prices will continue to surge.

Increased immigration is not the only reason for the drastic climb in house prices. Policies such as exclusionary zoning, heritage designations and high development charges slows growth. When other factors such as supply chain issues and lack of skilled labour, are added, housing becomes expensive.

Usually about 10% of the current resale home stock is from senior citizens. Seniors are choosing to stay at home instead of selling and moving to retirement residence. Many seniors are taking reverse mortgages, where they can live at home and withdraw equity to supplement their income. This trend creates more shortages and as a result there is upward pressure on housing.

Jason Mercer, chief market analyst for The Toronto and Regional Real Estate Board (TRREB) said, “It would be a year of two halves in 2023. The first half will feel similar to the fall of 2022 due to lingering effects of higher borrowing costs and related economic uncertainty. However, recent polling by Ipsos suggests buying intentions are edging up. The second half of 2023 should be characterized by an increase in demand for ownership housing supported by the lower mortgage rates, a relative resilient labour market, and record immigration.”

It is estimated that over the past year, one of every three homes sold in the GTA are bought by investors. This trend will continue because investors are benefitting from high rent and surging prices. As a result, the stock available for other buyers are depleted. Lack of adequate supply will cause prices to increase which in turn benefit investors and homeowners.

Bidding wars are resurging, and affordable homes are selling above market value. Buyers have a strong appetite for resale homes that are renovated. Homes with rental potential are more desirable. When there are multiple offers, sellers will choose a firm offer with strong deposits. Buyers should do their due diligence, such as obtaining a pre-approval before purchase.

There are buying opportunities available. Look for homes that are sitting on the market for over a month. You can negotiate the price down. Always make your offer subject to obtaining appropriate financing and inspection. When buying a home, first choose the location, then the type and style of home and finally the upgrades.

I represented some buyers who had two homes to choose from. One was a semi-detached, 5 days on the market and nicely upgraded. The other was a fully detached that had less upgrades and was on the market for 35 days. They were both priced at $799,000. The semi-detached had 10 offers and sold for $900,000. My clients bought the detached for $750,000. With some upgrades over time, they are ahead because they bought a detached home for far less than that semi-detached sold for.

If you are buying a home, it is better to buy in the first half of 2023. Go short term on interest rates. Once the rates drop, you can lock it in. If you are planning on selling your home, then re-evaluate the reasons you want to sell. Instead of disposing of your current home to buy another, it is better to refinance it and use the equity as the downpayment on the other one. You can then collect rent from one of the homes.

Homes in the GTA are becoming increasingly expensive. Over the long term, it’s a great investment. Prices will continue to climb. Own as much real estate as possible. It’s better than mutual funds and the good thing is, you can live in it or collect rent from it. It’s a win-win.

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