Does COMFREE Work? – Part 2

By Heather Whyte

We’ve received some great comments on our blog post ‘Does COMFREE Work?’  that are both favourable and not so favourable towards selling real estate privately, and realtors in general. We thought we would address some of the comments that are not so agent-friendly, to offer up a different perspective.

Why pay an agent for something I can do myself?

There seems to be a belief that agents simply put an ad online, put a lockbox and sign up, and that’s all that they do. There is a plethora of other tasks going on behind the scenes to get a property listed, get an offer, and then take it through to closing. I won’t list them all here, as risk of inducing sleep. Between 90 and 95% of properties that sell, sell with an agent. I recently spoke with a real estate lawyer who does a large amount of business and he said that between 5 and 10% of properties sell privately. Do private sales happen? Yes. Is it the norm? No. The fact is,  we are the professionals, and the likelihood is that the process will be easier, and a lot of times you end up netting more working with an agent. Take an accountant for example. Can you do your taxes yourself? Yes. Will you net more money if you do it on your own? It’s possible. Do they know tax law better than you do? Certainly. I agree that there are bad realtors, bad accountants, lawyers, financial advisers etc out there. The best thing to do is to do your research and make sure that you are aligning yourself with a competent professional, no matter the task. And if after that research, you’re confident that you can do their job better than they can, and have the time to do so, then more power to you!

‘It just takes one buyer ‘

This is true, which is why we say that ComFree can work, it’s just usually more challenging as you don’t have the same access to information on the current market,  and are not advertising it on as many channels. Buyers can come from anywhere, and the more eyes that can see it, the more likely you are to get a good offer, in good time, for top dollar.

Agents put buyers on an automated search and they are bombarded with emails for properties that don’t meet their criteria:

This can happen as well, when the buyer has broad criteria. In this case, they should be getting a lot of listings. The key here goes back to that professional relationship. We set our buyers up on searches so that they can see the new listings coming in, but depending on the buyer, they may not want emails frequently, or they may not want the automated emails at all. They would prefer someone to look for them, and send them properties that truly meet what they are looking for. Some buyers have very strict criteria on neighbourhoods, price points, finishes, etc. and they will get very few listings. Each buyer is unique and needs to be treated as such. Good agents will formulate a specific plan for each buyer, and should be checking other sources for properties in addition to our system. We do not just rely on an auto-generated search with our buyers. With a large overpopulation of agents, however, this isn’t always the case. The key is to match yourself up with someone who is ethical, knowledgeable and experienced.  A professional agent will sit down with each buyer and perform a buyer consultation to find out exactly what their criteria and needs are.  We have some buyers that in the initial stages want to be bombarded with every new listing as they enjoy looking educating themselves on how far their money goes in the different neighbourhoods.  These are typically people who are new to the area and don’t really have a sense of the different neighbourhoods.  In most cases these types of buyers start out with very broad criteria and we refine as we go.  How do you dismiss a neighbourhood if you have never seen it?

Yet other buyers who have lived in the city and know the area might have criteria so stringent that it is limited to a particular street.  In these cases we typically door knock and flyer these streets to find potential sellers.  I am not sure this is a service ComFree is currently offering?

All the agent does is put a sign on the lawn:

There is a common misconception that selling real estate is easy, and the only thing an agent does is put a sign on the lawn, put it on MLS and wait for the offers to pour in. If this were true, there would be a lot more successful agents out there. Yes, there are a LOT of agents out there. In Kitchener/Waterloo alone, there are over 1,200. However, the average agent in Kitchener/Waterloo sells  4.39 homes per year. That’s not remotely enough to live off of. The perception is that real estate is easy – it’s anything but. It can be a great career, but easy? Definitely not. There is a lot that goes into representing clients on the list side and the buy side. On the list side, a lot of what happens goes on behind the scenes, and is not as tangible as a buyer’s agent that’s been out night after night showing you property, for example. When you list your home with an agent, they are responsible to represent you properly. We all have to carry insurance. If we make a misrepresentation, intentional or not, we can be sued. We take on that liability for you. If you’re selling yourself, and make misrepresentation, you are on the hook for that. We also have an understanding of contract law, and the nuances of how that applies to real estate. It’s our job to understand the ebb and flow of the local market, the neighbourhoods, the statistics, the local economy, etc. We are this resource for our clients. Additionally, there is the advertising piece. Each agent has their own marketing strategy for clients. Ask your agent for specifics on what they are doing to market your home. We also provide services to our clients such as a staging consultation to have their home show it’s best, and a pre-list inspection to find out if there any major issues that would impact price or a buyer’s decision to purchase the property. Then once the house actually gets an accepted offer, there are a myriad of tasks, as well as surprises that come up between acceptance and closing. There is much more that goes into it as well, but at the risk of boring you, we’ll stop there.

In summary, COMFREE and other private listing services can work for the right person and the right property. If you are considering listing privately, see what COMFREE and other companies offer, and interview a few agents. Will it be worth it to you to do it yourself? Make sure you fully understand what you’re getting yourself into.
We’d love to hear from you. What has your experience been with selling privately?

CMHC to Allow 100% of Suite Income

The market for houses with basement apartments is about to get a little hotter. CMHC has announced it will allow 100% of the rental income from legal secondary suites to be used when qualifying for a mortgage. Currently it allows 50%.

The nation’s largest default insurer says the move is meant to “facilitate affordable housing choices for Canadians.”

“Secondary rental suites are recognized as a source of affordable housing offered at a cost that is often lower than those for apartments in purpose built rental buildings,” it adds. Secondary/basement suites also give lower-income Canadians the chance to live in single-family residential neighbourhoods.

The new rule takes effect September 28, 2015.

“This is definitely good news for anyone who is looking to buy a home and subsidize the cost” with a renter, says Vancouver-based broker Peter Kinch, of DLC’s Peter Kinch Mortgage Team. “…The ability to utilize 100% of the rental income to qualify for the mortgage…can certainly make the difference for many homeowners and may move a larger number of homebuyers from condo purchases to a single-family home with a mortgage helper.”

Broker Marg Green, of Concierge Mortgage Group, agrees that “there will be a big demand for it,” but rightly notes that more clarity is needed on what CMHC considers a legal suite. “What is legal? Is it fire retrofitted? Is it registered with the city? If the suite isn’t legal, lenders generally won’t use the rental income (for qualification purposes).”

Here’s what we’ve gathered thus far, with respect to what’s required to use 100% of suite income with CMHC:

  • The property must be owner-occupied.
  • The property being insured can have only two units (i.e., a duplex or a single home with a legal secondary suite).
  • Rental income cannot be used if the suite is “illegal/non-conforming” but “legal non-conforming” is okay. (Non-conforming means that the suite was grandfathered in before zoning/regulations restricted such units. You can check with the city to confirm if a suite is legal.)
  • The suite must be self-contained with its own entrance.
  • Property taxes and heat must be factored into the borrower’s debt ratios (which is currently not the case when using rent from legal secondary suites).
  • For existing units, there must be two-year history of rental income from the suite. The maximum rental income allowed for qualification is a two-year average of the unit’s rent.
  • For new units, a market rent appraisal can be accepted if an appropriate vacancy rate has been applied to the estimated rental income.
  • Mortgage applicants must “demonstrate a strong history of managing credit” with a minimum credit score of 680.

On 3-4 unit owner-occupied properties and 1-4 unit non-owner occupied rentals, CMHC will be allowing a net rents calculation (i.e., gross rents less operating expenses).

Note that individual lender guidelines may very well be tighter than what you see above.

Genworth and Canada Guaranty have had a 100% add-back policy for a while (for basement suites), but mainly in Victoria and Vancouver. CMHC’s new policy extends nationwide. Both private insurers say they’re reviewing CMHC’s changes and haven’t decided if they’ll match this guideline. We’ll bet that one or both of them will.

“In the big picture, I do not see that this will have a significant impact on the overall housing market,” says Kinch. “But in certain suburban areas, this shift in CMHC policy will help speed up a trend that is already taking place, and that is the widening price-gap between single-family and multi-family (condo, townhome) homes.”

Another broker, who didn’t want to be named, said the move could encourage more people to lie about owner-occupying a property (i.e., say they’re living in one unit but renting out both units). That minor unavoidable side effect aside, CMHC deserves applause for trying to boost the stock of affordable rentals and allowing young homebuyers an alternative to condo living.

 

Author: Robert McLister

Source: http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2015/07/cmhc-to-allow-100-of-suite-income.html

Things to know about power of sale and foreclosures

5 things to know when buying from a bank

I have started receiving inquiries from buyers who notice residential properties for sale and the seller is shown to be a bank. This usually indicates that the owner could not make their mortgage payments and the lender is selling the property to recover the mortgage amount owing. If you are considering making an offer on one of these homes, here are 5 things you need to know:
1. The process that most lenders will follow in Ontario is Power of Sale, and not Foreclosure. The main reason is that a Power of Sale can be completed much faster than a Foreclosure. Powers of Sale can be completed generally in 3-4 months, while the Foreclosure process will typically take up to a year to complete. Banks also prefer this method as it permits them to get bad loans off their books quickly and if there is any shortfall, they can immediately sue the original borrower for the deficiency.
2. Lenders are supposed to try and get fair market value for the property that is sold, so it is not automatic that you will be able to buy the property at a substantial discount. Use a professional buyer agent to make sure you know what this property is worth before making any offer.
3. The lender will usually contain special clauses in this contract that will be important to any buyer. For example, all appliances will be sold on an “as is” basis, with no warranty, meaning you are out of luck if the appliances are not working when you close. No warranty will be given regarding the room sizes or even the lot size for the property. If there is a tenant on the property, no guarantees are given about the length of any lease or how much the tenant may be paying in rent. If HST is payable, for example if the property had a business running in it before the lender took over, or if it had been substantially renovated, then this extra HST has to be paid by the buyer on closing. Finally, if the original owner comes up with the money before closing to pay off the mortgage, then the deal is over.
4. In order to deal with the above clauses, buyers should make sure that any purchase is conditional upon a detailed home inspection condition so that everything can be verified, including the condition of the home, the room and lot sizes, and whether there was any business, such as a day care, operating in the home before closing. This could involve discussions with the neighbours as well as well as any tenant that the buyer will be
assuming after closing. Regarding the lot size, ask the bank’s real estate agent if the bank has any survey relating to the property and if not, check at www.landsurveyrecords.com or www.protectyourboundaries.ca as there are over 1.5 million surveys available for purchase through these websites to assist you when the boundaries are not certain.
5. Buyers should attempt to close the deal quickly, once they have satisfied themselves as to all conditions, to avoid having the original owners come back and pay off the mortgage before closing, thus ending the deal. When you understand what is involved in buying a home from the bank, you should not have any unwelcome surprises either before or after closing.

Source:
Mark Weisleder
62 Hillmount Ave. Toronto, Ontario,M6B 1X4
(416) 702-2499
170 Wilkinson Rd., Brampton, Ontario, L6T 4Z5
(905) 454-9606
mark@markweisleder.com / http://www.markweisleder.com

Doon neighbourhood girds for annual student onslaught

By  Catherine Thompson

KITCHENER — A walk through the Lower Doon neighbourhood is a study in contrasts: in the space of one block, there are well-kept homes with tidy lawns and attractive gardens. Next to them though, are houses, or even clusters of houses, where garbage bins stay out all week, where weeds have overwhelmed lawns, where front yards have been almost fully paved over and driveways are clogged with cars.

A short walk from Conestoga College, “For rent” signs stud most lawns on Amherst Drive, where the garages on at least a dozen homes have been turned into bedrooms.

Although the larger Northdale student neighbourhood in Waterloo has attracted more attention, the Kitchener neighbourhood closest to Conestoga College has seen its own radical transformation over the past decade.

And as September approaches, city officials and residents alike are gearing up for another influx of students in south Kitchener.

Conestoga College has boomed in recent years. More than 11,000 full-time students are enrolled for September, up 50 per cent from six years ago.

Most of those students live in what were once single family homes, which have been sold to landlords who put in extra bedrooms they rent to students for upwards of $500 a month.

Tom Ruggle, Kitchener Fire Department’s chief fire prevention officer, estimates there are 150-170 homes in the area that have been converted to accommodate students, often with as many as six or eight bedrooms per house.

The large annual influx of transitory, young tenants has transformed the neighbourhood, say longtime residents.

The streets are often clogged with cars, especially in winter. Parties are noisy and frequent, and students have been known to haul dilapidated couches onto porch roofs for an open-air perch.

Resident Bill Harris has endured next-door neighbours urinating on his hedge in full daylight, loud and drunken swearing, drinking parties in the garage and even the occasional indecent exposure.

Residents point to former “showpiece” houses that were known for fine displays of Christmas decorations, now looking rundown with weed-filled yards. Where roses once bloomed, metre-high weeds flourish.

“There’s deep history entrenched in this area,” says Danuta Akudowicz of the neighbourhood. “It’s a unique piece of ground and it’s being trashed.

“I’m very angry. We’ve been here 33 years and we see this area getting progressively worse and worse and worse.”

They’d love to see Kitchener introduce a rental housing bylaw such as the one Waterloo introduced in April 2012. It compels landlords to pay a licensing fee, limits rentals to four bedrooms per unit and regulates room sizes among other things.

Kitchener council rejected that idea last June, after city staff said drafting the bylaw could eat up two years of staff time. It opted instead to watch how such bylaws play out in other cities, and to step up enforcement.

But city officials say their ability to regulate such housing has been sharply curbed by recent court and human rights rulings that prohibit targeting specific groups such as low-income people or students, and prohibit the definition of a household based on numbers of related people.

The Kitchener Fire Department started up a program encouraging landlords to have higher safety standards for fire separation, fire detection and extinguishers, Ruggle said. Unfortunately, he estimates only about one-quarter of all landlords in the area participate.

“We have a general concern for the safety in the area,” Ruggle said. “The homes weren’t designed to accommodate those numbers of people.”

Fire officials knock on doors every fall to ensure homes are equipped with working smoke alarms, Ruggle said, but can’t do much beyond that in homes still classed as single detached homes. Overall, officers found most homes to be reasonably safe, he said.

The city has stepped up its bylaw enforcement, and has two bylaw officers — one for parking and one for property standards — assigned to the area every weekday, as well as a third officer to investigate noise infractions from Thursday to Saturday, said Gloria MacNeil, Kitchener’s supervisor of enforcement. It’s the only area in the city where bylaw officers are out looking for violations, rather than simply responding to complaints, she said.

“If there’s a party, it’s zero tolerance: they get ticketed,” MacNeil said.

Conestoga College wants to be a good community citizen, but president John Tibbits says there’s a limit to what the college can do. “We don’t own the housing, and we don’t set the bylaws,” he said.

The college’s own residences accommodate about 500 students, but demand for those spots is limited. It makes no sense to build more on-campus residences when there is no demand for more, he said.

The reality, Tibbits says, is that students are adults, and most prefer to live on their own rather than in a residence, with its more restrictive rules on visitors and curfews.

“It’s not as simple as we’ll build all kinds of residences and they’ll come,” Tibbits said.

Some relief might come from recent developer interest in building highrise apartments in the area, which would be designed to accommodate large numbers of people with less impact on the surrounding neighbourhood.

Residents fear their neighbourhood is sliding irreversibly into becoming a student ghetto. “We no longer have a balanced population here,” said Roman Szydlowski.

“It’s a beautiful area,” agreed Peter Jamieson. “It’s going downhill. What is it going to look like in a couple of years?”

Ruggle sympathizes. “Unfortunately, it’s the residents in close proximity to the college that are bearing the brunt of this,” he said.

He believes the neighbourhood has already reached “that tipping point” and that it would be difficult if not impossible for the area to revert to what it once was. “The controls that are currently in place really haven’t had any tangible effect on turning the tide.”

Converting a house and renting it out to a ready market “is a very lucrative business,” he noted.

Coun. Yvonne Fernandes, who represents the area on council, is determined to keep pressing for change. “We have to keep this issue in the eyes of the municipal government and the provincial government.”

“The students have rights and the landlords have rights,” says Akudowicz. “What about our rights?”

 

Source: http://www.therecord.com/news-story/4727872-doon-neighbourhood-girds-for-annual-student-onslaught/ 

Rental Market Report – Canadian Highlights, Spring 2014

Rental vacancy rate unchanged this spring

The average vacancy rate for primary purpose-built apartments in Canada’s 35 major centers was 2.7 per cent in April 20142, unchanged from April 2013.
The stability of the national vacancy rate is attributable to supply and demand factors. Demand for rental housing continues to be supported by population gains from net migration. Analysis conducted by CMHC shows that recent immigrants tend to rent a dwelling upon first arrival in the country. In 2013, net migration increased by 3.4 per cent to 274,501 people. Stable employment levels for young workers aged 20 to 24 also supported rental market demand. Data from statistics Canada reveals that households headed by individuals in this age group have the greatest tendency to rent. From March 2013 to March 2014, employment in the 20 to 24 age group increased slightly by one per cent, after recovering from the losses during the last recession.

Read full report here

 

Source: Canada Mortgage and Housing Corporation (CMHC),Rental Market Report – Canada Highlights – Date Released – Spring 2014. This information is reproduced and distributed on an “as is” basis with the permission of CMHC. 

Multi-family Investing Advantages and Disadvantages

(6+units)

We have many investors approach us and ask which type of property is the best investment.  I always answer this question with -what are your investing goals and what is your risk tolerance?

Each type of property has its own advantages and disadvantages and for every investor the ideal property will be different depending on their goals and risk tolerance.  Below we outline some of these for multi-unit buildings.

Advantages

  • Multiplier effect-income capitalization- for every $1 of extra net income =$16 in increased value of asset
  • Low risk investment
  • Less labour intensive
  • Economies of scale
  • Lower vacancy risk
  • Personal credit does not max out –does the property cashflow?
  • Low cost of borrowing- with current interest rates

 Disadvantages

  • Not very liquid
  • More capital required
  • High personal net worth required
  • Small supply of properties
  • Longer term wealth creation
  • Little cashflow at first- stabilization period (maximizing NOI, repairs, maintenance etc.

Does Comfree work?

By Curt Knight

As a realtor obviously I have my own bias.  But this question comes up from time to time when I meet with clients who are thinking of selling their home. COMFREE has done an exceptional job of marketing themselves over the last few years and has gained some market share.  However, there are always two sides to every story and I thought it would be good for people to here from an industry insider and form their own opinions.

My wife and I actually attended a COMFREE seminar a few months ago  where you can learn “how to sell your home on your own.”  We went more or less just to see what it was all about and to learn about their model and the competition.  I thought it would be a lot of realtor bashing but they were actually pretty good.  In fact COMFREE now has many realtors on their staff.

COMFREE has developed an interesting business model.  They have come up with a wide variety of services to offer to the consumer and the consumer can pick and choose what services meet their needs and budget.  The speaker went through all the different packages but when it came to FULL package I started doing the math and couldn’t help but think- wow you are getting up there quick.  If you go with the full package this includes things like MLS listing, full signage, professional photos, support with negotiating, paperwork, legal advice etc. you are getting pretty close to $2000 plus you still have to do all the work of a realtor- showings, answering phone, open houses, advertising and so on.  The problem is they present the packages in a piece meal form that makes it seem like you are paying less.

Also the seminar we attended they mentioned an interesting statistic- they said that 70% of COMFREE listings sell by a real estate agent- and they actually encouraged COMFREE sellers to agree to co-operate with Buyers Agents (meaning pay them a commission) so more than likely you will still end up paying a Buyer’s agent 2-3% commission, on top of COMFREE’s fees.  I wondered to myself why would they tell people this- after all aren’t most people there to save paying commissions? But after thinking about it for a bit it made sense- they want people’s homes to sell- I mean if homes don’t sell then sellers are not happy- which isn’t a very good business model is it?.   They know the best way to sell a home is with a realtor- Why? Because most buyers out there are working with a realtor- why wouldn’t they? -it doesn’t typically cost them anything as the seller pays their fee’s when they purchase, so therefore they can get the support and help of a realtor to ensure they are not overpaying- which is most buyers biggest concern with private sales.

The other thing I would caution people with is that from our experience many people looking on the private for sale sites are “deal shoppers.”.  They know you are saving money on commissions and they expect some of that savings to be passed on to them. We often find the buyers are also unqualified.  When you work with a professional realtor- the first thing we do is verify that you can get the financing.  With private sales we find that in many cases buyers are not pre-qualified and therefore more deals tend to fall apart.

One of the biggest issues I find with COMFREE is they claim it will go on the multiple listing service or MLS.  This is true it does go on the public  MLS site- however I find most sellers think this means it goes on the local real estate board,  so realtors will get to see it and show it to potential clients- this is not the case.  The issue is that when posting a listing on MLS it is required that the listing must go on the home brokerages board (where the brokerage is located).  COMFREE is not located in Kitchener Waterloo or many other cities- it is in either Hamilton, Toronto or Ottawa- so when I do a search for a property on our system (the realtor system) the COMFREE listing will not show up in our search.  This is problematic because as I said above most buyers are working with a realtor so if this is the case typically we set them up on search using our system and have properties come to them via email- the COMFREE listings will not show up because they are on the Ottawa, Toronto or Hamilton real estate boards.  They will show up on the public MLS but the majority of buyers are not searching there because their realtors have a search set up for them.

It is very annoying for us as realtors because from time to time we have a client say “why didn’t you send me this property?”  I will then look it up and I can’t find it on our system- then when I check the public site it appears but as a COMFREE listing.  It’s frustrating because in essence we are not able to do our job because we are not getting all of the properties that are currently available on the market.  It is actually contradictory to our Buyers Representation Agreement that we sign with our clients which states we will make our clients aware of all properties available on the market. In my opinion it should be mandatory that all listings be posted on the real estate board where the property is located.  This is not only a problem for companies like COMFREE but for agents who are out of town unless they pay the extra fee for it to be on the board where the property is located.

Another downside when you list privately or with a company like COMFREE is it’s difficult to create the hype and urgency you get when you list with a realtor on MLS.  There are fewer bidding wars with private sales and without the realtor to coach buyers on how fast the market is moving many buyer will not step up to the plate.  Here is a testimonial that illustrates this point from one of our clients:

“Dear Curt and Erin,

We are so thankful and completely satisfied with the dedication and hard work you both put forth in helping us purchase our new home, and sell our existing home.  In the beginning we were set on using ComFree to sell our house in hopes to capitalize on a commission free sale.  Erin and Curt were both supportive in our decision, and still offered to help with anything we needed in order to help us sell quickly.  Our ComFree package was purchased, and the appointment was setup, but something didn’t feel right with Erin and Curt.  They called a few days before the appointment with ComFree and showed us a few different scenarios regarding a ComFree Sale and a Sale with Knight Homes.  It truly showed the professional experience, knowledge and hard work ethic these two both have.  We couldn’t believe that even though we had decided to use ComFree, they still cared enough to help us through the process.  After that call we quickly called ComFree to cancel our appointment and package and went with Erin and Curt and Knight Homes.  The Knight Homes sign went up on Thursday, multiple showings, and an open house on Sunday gave us multiple offers on Monday, where we accepted an offer substantially over asking that netted us more than we would have saved listing ourselves.  We are so pleased with the outcome and if it were not for the hard work and commitment these two have to their clients, I honestly believe that the outcome would not have been the same.  Thank you both very much!! We are Knight Homes Clients for life!!” 

Finally a big variable you need to factor in is your time- if you are a parent or a busy professional do you have the time to take calls, show the home, host open houses, negotiate the contract etc.  What is your time worth?  For those that have ample free time, retired or maybe just enjoy the challenge- than for sure this might be the right move for you.

In Summary, can selling privately or with a company like COMFREE work- absolutely it can!  If you have the time to do it, the right home, in the right location that shows well and you can attract the right buyer- more than likely you will be ahead of the game doing it yourself and not paying commissions. However if any of these variables is not right- you are going to find selling your home a very stressful and complicated process.  You could end  paying both COMFREE and Realtor Commissions when you switch if you can’t sell on your own- in turn netting you even less.   Remember realtors don’t get paid unless the home sells- COMFREE gets paid either way.

Comments or Questions always welcome…

Student Investment Opportunity

We want to bring to your attention this amazing opportunity.

Our office has been granted pre-sale incentives and discounts for this brand new turn-key, hands-off investment. It’s prime location- across the street from University of Waterloo and close proximity to Wilfred Laurier University make this the perfect student investment opportunity.
Our clients will receive the following promotions:

  • Two school year rental guarantee*
  • Two school year property management*
  • Two upgraded design packages to choose from + complete furniture & appliances package
  • Complimentary window coverings .
  • Complimentary locker .
  • Discount on Parking:  Underground: $5000 Savings (Reg. $15,000)
  • Above Grade: $3000 Savings (Reg. $10,000)
  • Discount on Locker : $2000 Savings (Reg. $3500)
  • Assignment fees and associated legal fees waived

More details :Email Template_01

Contact us at info@knighthomes.ca or 519-489-0313 to set up a meeting or to learn more about this exciting development

Tax tips for investors: Clearing up real estate confusion

 

Real estate has been a hot investment area in Canada for quite some time now due to favorable economic conditions, immigration, and historically low interest rates. Canadians who have taken advantage of these conditions are sometimes confused about the measures they can take to reduce their tax burden.Here are some tax tips addressing several typical areas of confusion:

To depreciate or not to depreciate

Depreciation, or for income tax purposes Capital Cost Allowance (CCA) can be an effective way to shelter your real-estate income from current taxes by transferring your obligation to future tax years. CCA works by amortizing a portion of the cost of your rental property against your rental income, generally 4% of your building’s cost on a declining basis year over year.

CCA is an election, meaning that it is the taxpayer’s choice whether or not to use it. The drawback to CCA is that it is recaptured in the year you sell your property, meaning that the historical CCA you’ve taken will be added back on income account to your tax return if you sell the property for anything more than your current un-depreciated capital cost (i.e. the cost of your property less the CCA claimed on prior tax returns).

This recapture can have a negative impact on your taxes in the year of sale so some planning around this election is required. Generally, if you plan on holding the income property for a very long period of time then taking CCA to reduce your rental profits to zero will almost always be advisable.

However, if you plan on selling your property in the near future you should attempt to estimate if your potential recapture will push you into a higher tax bracket, thereby reducing the current effectiveness of the CCA claim. You may also want to consider forfeiting CCA in years where your overall taxable income is low thereby allowing you to claim higher CCA in subsequent years when your marginal tax rate is higher. For more information on CCA see the CRA’s Guide T4036, Rental Income.

Documents, documents, documents

As far as the Canada Revenue Agency is concerned, if your expense transactions are not documented then they may as well not exist. When you own an income generating property it is your responsibility to keep adequate records and supporting documents in an organized fashion. Records would be the accounting information supporting the final reporting on your tax returns. Supporting documents would provide evidence of the transactions that make up your final accounting records.

Contrary to popular belief, simply maintaining banking and credit card statements is not always considered adequate supporting documentation. Original contracts, purchase receipts, and other documents should be maintained. In addition, if you are claiming auto related expenses a detailed log of your driving should be maintained outlining the dates of travel, the kilometres travelled, and the reason for travel (it must be to support the production of your rental income). My suggestion is always: If in doubt, save it. The more detailed your back-up, the more likely it will pass the scrutiny of a CRA review or audit. For more information on keeping records and allowable expense see the CRA’s guides: RC4409 Keeping Records andT4036 Rental Income.

Flipping a Property for Capital Gains?

Thinking of flipping a property and reporting the profit as a capital gain? You may want to think again. Capital gains are generally favorable to business or property income for tax purposes because of the fact that only half of your capital gains are subject to income tax. While the sale of a property held for the purpose of generating rental income would normally be considered a capital gain, this is not always a black and white scenario.

Use the analogy of an apple tree: An apple farmer purchases an apple tree in order to grow and sell apples. The apples are her inventory, while the tree is her capital property. When the farmer sells the apples she is generating business income, but if at some point down the road she decides to sell the tree, she is selling a capital property. If she makes a gain on the sale of the tree that would be a capital gain and taxed at only half her marginal tax rate. The same can be said for an income producing property. If you were to buy an income producing property, rent it out for a decade, profit during that rental period, then eventually sell the property at a gain, the rental profits would be taxed at the full rate and the gain on sale would most likely qualify as a capital gain (taxed at half your marginal rate).

The same cannot be said for short term property flips. When buying or selling a property on a short term basis for a profit (say buying, renovating, and then flipping) the CRA may consider the gains to be a type of business income rather than capital, thereby taxing the full gain at your marginal tax rate. Why is this? The law distinguishes between properties explicitly bought to generate rental income and those bought to profit on a sale. The former would normally be considered capital property to the taxpayer while the latter would be considered a type of business related inventory or more specifically an “adventure in the nature of trade.” While there are no concrete rules on whether a transaction is on capital account or an adventure in the nature of trade there are several indicators that the CRA and courts would take into consideration. Among these considerations are:

  • Whether the property was bought and sold in a manner similar to a dealer in that property
  • Whether the taxpayer has developed a pattern of buying and selling properties with short holding periods
  • Whether or not the taxpayer’s intentions were consistent with a business transaction or adventure in the nature of trade.

The determination of whether or not the sale of a property is a capital gain or business income is complex and has been played out in the courts on numerous occasions.

Source: Fabio Campanella, Special to Financial Post

http://business.financialpost.com/2014/01/07/tax-tips-for-investors-clearing-up-real-estate-confusion/

Fabio Campanella is a partner at Campanella McDonald LLP – Chartered Accountants. Fabio@campanellamcdonald.com

How much can I raise rent?

Ontario has rental guidelines which govern the maximum amount rent can be increased each year.  The annual rent increase is calculated based on the Consumer Price Index.  For 2013 the maximum rent raise is 2.5%.  Therefore if you are currently renting your unit out for $1000 you can bump the rent up to $1025 for 2013.

In most cases, the rent for a unit can be increased if at least 12 months have passed since a tenant first moved in, or if at least 12 months have passed since the last rent increase.  Proper notice of 90 days must be given to the tenant before the rent increase takes effect.

Rental guidelines do not apply under the following circumstances:

  • Vacant residential units
  • Residential units first occupied on or after November 1, 1991
  • Social housing units
  • Nursing homes
  • Commercial property

The second bullet point is an important one to take note of.  What this means is that any rental unit built or first occupied after Nov. 1 1991 does not fall under the rent increase guidelines.  Therefore the rents can be bumped as much as the market will bear.  Even homes that were built prior to 1991 but never used as a rental then converted to a rental after 1991- would not fall under the rental increase guidelines.

From my experience many investors are not aware of this “loop hole” and this can be a great tool to crank up the return on under preforming properties built or occupied after Nov, 1 1991.

For more information visit

http://news.ontario.ca/mah/en/2012/06/the-2013-rent-increase-guideline.html

OR

Contact  Curt Knight – info@knighthomes.ca