INSIGHTS

Landlord Lesson #2 -Why You Should Always Increase Your Rent

Published on 21st November 2019

Notice to Reader – I must warn you that this Insight Article may spark some controversy for anyone who is NOT a landlord. But alas, I have to share this insight with landlords. For tenants, it’s a terrible feeling when your landlord increases your rent (and I can empathize as a former tenant myself), but from the other side of the coin, increasing the rent is something that ALL LANDLORDS MUST DO.

Addressing the Elephant in the Room – Most people are afraid of being landlords and are anxious about the whole notion of dealing with tenants because they think it’s all about fixing toilets at 3:00 AM in the morning. Oftentimes, these large mental roadblocks stop them from actually being invested in building some serious side hustle money. This Insight Article is meant to equip you with some tips and tricks, so that you can become a more confident landlord and investor.

One of the biggest tips is to ALWAYS increase your rental rate (when you can). This is a MUST. I often get a lot of push-back from clients on why they don’t want to increase their rent when the renewal period comes along. Typically, the reason is that they have a good tenant in their property and they don’t want to lose them, or the cost of filling the unit is too much (learn more about how to fill a unit, step-by-step, in the link below). I wouldn’t want my tenant to be upset either (this is a valid reason), but allow me to explain why you should be charging ahead and leave the emotions behind.

READ: HOW TO FIND THE PERFECT TENANT

It’s All Business – I’ve always told all of my clients that they should treat investment properties like a business. To some, this may sound really cold and harsh, but you have to remember, you’re the one carrying the cost of your investment property.

  • When taxes go up each year, you pay;
  • When condo fees go up each year, you pay;
  • When insurance goes up each year, you pay;
  • If interest rates increase, you pay.

That’s a lot of payments you’re responsible for. So if you don’t increase your rent, then who will be responsible for covering these rising costs? Without increasing your rental rates, all of these price increases will eat into your monthly cash flow, and maybe even put you in the negative.

When the minimum wage jumped by a few dollars in 2017, the cost of labour increased. Guess what happened as a result? Business owners went on to increase their prices so that they could still hit their profit targets. Unfortunate for buyers, but this is standard practice because you need to retain margins in order to continue the business.

The Message – If you’re afraid of negotiations or afraid to have that hard conversation with your tenant, then you can say something along the lines of this via whatever communication method you prefer – see below.

Dear Best Tenant in the World,

As you know, your lease will be coming up shortly. Thank you very much for taking care of my property so far. If you would like to continue staying at 123 Main Street, unfortunately, the new rent will be X. As you know, my monthly costs have increased due to taxes, insurance, and inflation. Let me know if you wish to stay at 123 Main Street. Please let me know your response in a week’s time.

If they agree to your proposed rent increase, don’t forget to use the Landlord and Tenant Board’s N1 form. Here’s the link to that form: N1 Form 

In the Numbers – If you’re an empirical, numbers person like me, perhaps a few numbers will help explain how much money you’re losing by not increasing your rent. This year, the maximum allowable rental rate increase is 1.8%, and although 1.8% doesn’t feel like it can add up to a lot, keep in mind that you can compound the rental increases each year.

Below is a chart for you to see how much money you could be losing by not increasing your rental rates:

This example uses a $2,000 rental property, which is basically a junior 1-bedroom unit in downtown Toronto. Over the first year, if you don’t increase the rent, then you lose almost $2,000 in the first year. However, over the course of 5 years when compounded, that’s over $20,000. That’s not a small amount by any means.

Secondly, if you have a vacancy, you should always increase your rent to at least the going market rent. In our current market, I always recommend listing the property above the market rent because I’ve been doing this for a while now and the rental demand is so strong that there is a high likelihood that someone is willing to pay above the market rent.

The Wrap – Ultimately, you should always increase your rent by the allowable amount. If you have a vacancy, you will want to increase it higher than the market.  More on that to come in the coming week but the underlying reason is the higher the initial base rent, the better off you will be in the future because you can only increase it by approximately 1.8% per year. Leaving it empty for one month and getting a much higher rental rate is going to pay off in the future. If you take the emotions out of real estate investing and treat it like a business, then you’re on your way to building your very own real estate empire!

Until Next Time, Happy Real Estate-ing,
Zhen
Zhen@PrimePropertiesTO.com

Landlord Lesson #1 -How to Be a Landlord

Published on 14th November 2019

Over the next few weeks, I’ll be releasing a series of Insight Articles on how to be a great landlord. I’ll be talking about a lot of the essentials such as finding the right property and crunching the numbers, but I’ll also be shedding some light from the investor angle as well, that is, some tips and tricks for investor landlords.

The Fears – I know the fear of being a landlord is usually top of mind for most first-time investors. They’re afraid of:

  • Late-night calls;
  • Damages to the property;
  • Late payments;
  • Vacancies;

Simply put, there many fears when you’re thinking about being a landlord, so that’s why I wanted to take these next few weeks to shed some light on how to be a landlord, THE RIGHT WAY. Hopefully, after all of these tips and tricks, you will have the landlord confidence that you need to buy your next investment property. When that time comes, give us a call at 416-436-9436. The team at PPTO is here to support you through your landlord journey!

So without further adieu, I’ll start off this series with “Landlord Lesson # 1 – How to be a Landlord”.

Landlord, Defined – Technically speaking, once you own a property and you put a tenant in there, you become a landlord. The actual term is “lessor”. There is no license required to be a landlord (except for Waterloo) or any pre-requisite education. You just simply need to have a tenant in your property and you become a landlord. It’s as simple as that.

The Mind of a Landlord – What’s hard about being a landlord is the mindset that’s required. It’s like being a Realtor – easy to become one (that’s why there are so many out there), but it’s hard to be a good one. Being a landlord is easy, but I have yet to meet a person who has expressed to me how much they aspire to be a landlord (and all of the duties that come with it). People have told me that they can’t wait to own an investment property, but no one ever says, “I can’t wait to be a landlord!”

The difference between being a landlord and being an investor is that an investor owns an investment property to specifically leverage it for financial rewards – the why and the underlying motivator. On the other hand, a landlord deals with the operations and up-keep of the property – the how. Nobody wakes up in the morning passionate about being a landlord, and telling themselves, “I can’t wait to deal with all of these potential tenant issues.”

Timing is Everything – The other daunting thing about being a landlord is that the issues always seem to arise at a time when it causes the most problems and is the least convenient for you. You never get a 1-week notice for when the furnace breaks down, and you never get a 1-day notice for a 3AM late night call. It’s always a surprise – a bad surprise might I add.

The WHY for Landlords – So then why are there so many landlords? The act of being a landlord gives us financial wealth. It’s similar to having a job. You may like it, or you may not like it. But the real question that you should ask yourself is, “If your job doesn’t pay you for what you do, would you still do it?” This is the same for being a landlord. People choose to be a landlord because the financial rewards are that great.

If the rewards are that great, then what’s the golden nugget for how to be a great landlord? I’ll bring this up many times over the course of this Landlord Lesson series, but I would have to say that being a great landlord comes with having the right mindset. You need to have the mindset of operating your investment properties as a business. I’ll go into this in more detail over the course of the upcoming weeks, but that is truly what I think would make or break being a good landlord.

The Wrap – I always like to remind my clients that when the proverbial sh*t hits the fan, you may spend 5 hours dealing with this unwanted surprise and it’s always at the worst possible time. However, those 5 hours are probably all that you need to do for the year as a landlord to make $50,000 from your investment property. So if you find yourself in these unwanted landlord situations, ask yourself whether your time is worth $10,000 per hour. More often than not, the answer is usually yes.

If you’re ready for the rest of this Landlord Lesson series, then stay tuned for more. If you’re ready to invest in your next income property already, then make sure you contact Zhen at Zhen@PrimePropertiesTO.com to get started today.

Until Next Time, Happy Real Estate-ing,

Zhen

A Reality Check for Pricing

Published on 6th November 2019

During my day-to-day trading, I’d like to think that I don’t get surprised by things anymore. I’d like to believe that I’ve seen and experienced it all, but that’s just not reality. There are always surprises, both good and bad, especially when it comes to pricing. Good surprises are the ones that come in the form of a buyer paying a lot more money than you would have expected. A bad surprise comes in the form of a property that you’re trying to buy that ends up selling for far more than you expected.

To say the least, the ongoing surprises keep me on my toes. Imagine what surprises you would be getting if you didn’t actively trade real estate on a daily basis. Yes, I’m talking about the buyers and sellers with unrealistic expectations.

Pricing Shock and Awe – The toughest thing about unrealistic expectations is giving the buyers and sellers a reality check – somebody has to be the bearer of bad news. The most common reality checks that I see right now are sellers who still believe their detached house is worth what it was back in 2017. Sorry, but that’s just not happening right now unless you’re in Toronto. The other common reality checks are buyers who want to buy a condo or freehold in downtown Toronto thinking the prices are still circa 2017. This is true for those looking at the pre-construction prices and haven’t come to terms with the price per square foot being over $1,000 yet. Both of those situations are bad surprises that the real estate market has given us because prices are not what they used to be anymore.

SOLD… at Market Value – With surprises comes a reality check for all of us. The market value is what a buyer is willing to pay. Reality check – are the buyers actually willing to pay this market price? The short answer is unfortunately, yes – the buyers are actually willing to pay the market price. Condo prices have increased; every sale that happens in the same building pushes the limit on prices until the next one is sold, which pushes the limit even higher. The demand is there, and people are willing to overreach for it.

In the case of pre-construction condos, the builder sets the starting price in the hopes that the entire project will be purchased and absorbed. The buyers will dictate whether or not the builder’s prices are acceptable and whether those units will be purchased. If a project is successfully sold, then all of the other builders will see that a new limit has been set and a new reality at a higher price has been created.

Pre-construction vs. Resale – Throughout the years, the pre-construction to resale prices have fluctuated in a weird way. I was explaining this to a client the other night and created this graph that I believe depicts how the prices have changed relative to each other. Take a look at the graph below.

In early 2010, pre-construction was less than resale. In mid-2016 and 2017, pre-construction and resale prices were on par with one another. Now in 2019, the story has reversed and pre-construction prices are now higher than resale prices. As buyers continue to absorb pre-construction inventory, it only pushes the prices higher and higher. Initially, pre-construction was thought to be a risky undertaking because you’re essentially buying something that doesn’t exist (hence these prices were lower than resale prices back in the day). Nowadays, the narrative is such that you’re buying a brand new product so of course you’re going to pay more than an older resale unit.

Reality Check Conundrum – A reality check question that you should ask yourself is whether the current pricing from builders in today’s market is going to be a reality in 5 years time? Will resale prices eventually catch back up to pre-construction prices? Is this … continue reading by clicking here>>>> going to be a good surprise or a bad surprise? Are the builders pricing their new projects unrealistically? Do builders need a reality check?

Pricing Matrix – Under the assumption that pre-construction prices are going to be on par with resale prices when they finish, I mapped out a model for you to see below.

In early 2010, pre-construction was less than resale. In mid-2016 and 2017, pre-construction and resale prices were on par with one another. Now in 2019, the story has reversed and pre-construction prices are now higher than resale prices. As buyers continue to absorb pre-construction inventory, it only pushes the prices higher and higher. Initially, pre-construction was thought to be a risky undertaking because you’re essentially buying something that doesn’t exist (hence these prices were lower than resale prices back in the day). Nowadays, the narrative is such that you’re buying a brand new product so of course you’re going to pay more than an older resale unit.

A reality check question that you should ask yourself is whether the current pricing from builders in today’s market is going to be a reality in 5 years time? Is this going to be a good surprise or a bad surprise? Are the builders pricing their new projects unrealistically? Do they need a reality check?

Using the narrative of the pre-construction prices are going to be on par with resale when they finish, I mapped out a model for you to see below.

Pre-construction condos that have sold this year were priced at $1,350 per square foot. That’s a delta of $250 per square foot or 22%. That’s a pretty substantial difference. However, based on the 4% appreciation model scenario above, if the condo completes in 2024, then the market value will be the same as resale value, as per the yellow highlighted cell above. If the condo appreciates at 8%, then we’re looking at parity in 2022.

In the last few years, condos have appreciated approximately 8%, however, one would argue that type of growth is “unsustainable”. Regardless, in most instances, the condos sold in this area have an initial occupancy of 2022 with an expected closing in 2023. This means that if we continue to see the same growth that we’ve seen from the previous few years, and the fundamentals suggest so, then the builder’s expectations could be a reality.

What Does This All Mean? So does this mean that pre-construction is still a worthwhile investment? Given all of the changing dynamics, my answer to that is maybe, but it really depends on what your strategy and goals are. Two years ago, I was confident that we would break the $1,000 PSF mark. I am also confident that we’ll break the $1,200 PSF mark next year, but are we going to break $1,350 PSF over the next 5 years? I’m less confident about that latter mark since this level of growth is quite out of the norm, but the stats and fundamentals indicate that the answer may possibly be yes to all of the above.

The Wrap – For me, I would love to be pleasantly surprised that we hit $1,350 PSF in 5 years. For investors, this means that we would see substantial growth in our portfolios. If you’re on the outside looking in or sitting on the fence, and are also pondering this reality check, there are other strategies that I’m utilizing to profit from this potential pleasant surprise. If you’re interested in knowing this strategy, please reach out to me, Zhen at Zhen@PrimePropertiesTO.com.

Until Next Time, Happy Real Estate-ing,
Zhen

Good News, Bad News – Toronto has Reached $2,500/month Average Rent

Published on 30th October 2019

Trick or Treat! It’s Halloween and we have some trick or treat rental numbers that I’d like to share with you. Traditionally during Halloween, kids go trick or treating and most of the time, they get the treat. Kids are practically trained to expect treats, candy and chocolate when they put on a costume. If only that were the case with real estate! Unfortunately, we have a trick with this rental update.

Good News, Bad News – I’ll share the bad news first because like all media outlets, negativity catches eyeballs! The bad news is rental rates on apartments are still increasing by 6% from last year (around this time of the year). Yes, rental rates are still increasing year-over-year and above the inflation mark. That’s what happens when we have a supply issue, and when additional immigration and lots of jobs are being created in Toronto.

Now for the good news!

#1 – A year-over-year rental rate increase of 6% seems like a pretty steep increase but when you map it out to the previous 3 years, that 6% rental rate increase is actually about 40% less as compared to the increase over 3 years. Over the last 3 years, we saw an average of 10% increase in rental rates year-over-year, which explains why we’re now averaging about $2,515 per month for rental rates. So depending on how you look at it, the rental rate increase slowing down from 10% to 6% is nice.

#2 – We’re seeing more project completions than before, which means that more supply became available. Take a look at the chart below. We saw an additional 27% increase in units available.

Having more supply is definitely going to help alleviate the rental crisis we’re experiencing. The challenge right now, and this is back to bad news, is that despite the additional supply, we still have a rental crisis on hand.

READ: Rental Supply Crisis

Despite 27% more units becoming available since Q3 2018, the vacancy rate only increased by 0.2%. Any vacancy rate under 1% is still incredibly low, and as a result, we should see rental rates increase. I’m just happy to see a 6% rental rate increase as that is a lot more steady and stable because wages clearly never catch the rate at which rental rates increase.

Less Cranes, Less Construction – Another unfortunate piece of bad news is that we’re dealing with less construction starts yet again. We saw a decrease of 32% construction starts between Q3 2018 and Q3 2019. This means that in a few years time, we’re going to continue to have supply issues if the supply pipeline remains this way (i.e., fewer construction projects underway). Remember, it takes a number of years to complete condo projects, and this 27% increase in supply was from the construction starts from a few years back. As a result of this, I would expect the rental rates to continue increasing at a more moderate pace.

The Wrap – So how you view all of this will be up to you. Are you a landlord? Are you a tenant? Are you a cup-half-full kind of person or cup-half-empty kind of person? Personally, I like to view this as good news for us investors because rental rates are still increasing at a very healthy and stable rate, and it still looks like there will be a supply issue coming down the pipeline. For investors, this means that there are still opportunities for us to find cash flow properties right now as a result of the increasing rental rates. If you’re looking for an investment property, then make sure you contact me immediately, Zhen@PrimePropertiesTO.com. Increasing rental rates typically means increasing purchase prices in the near future – don’t snooze so that you don’t lose!

Until Next Time, Happy Real Estate-ing,Zhen

1 in 5 Homes in Canada Bought by Immigrants

Published on 23rd October 2019

There is always a lot of ongoing talk about foreign investment and non-Canadian money that comes into the real estate market. I’m not one to say that I don’t have clients who are not Canadian, but I was always skeptical of how much “foreign money” actually comes into the real estate market. Back in 2017, I would say that there was definitely a good “sizable” amount of foreign money at play, but post-April 2017’s foreign buyer tax policy implementation, that “sizable” amount has definitely dwindled.

It’s All in the Name – I was always skeptical of “foreign money” because being an immigrant myself and knowing how the home ownership system works, I would argue that when I purchase properties, I look like a “foreign investor” despite being fully Canadian. I can’t speak on behalf of other cultures, but in the Chinese culture, our immigrant parents tended to give us a legal English name that was based on the pronunciation of our Chinese name. So when properties are purchased, the legal name tends to look “foreign” despite the common practice of also having an Anglo-Saxon English name. Whether these names are Canadian or not, these are what appear on results of title searches.

The reason why I’m giving you this background information is to anecdotally explain that there is no way to predict what is considered to be a foreign investment. I tend to believe that there are actually more local buyers, such as immigrants, and these local buyers with seemingly “foreign names” make up a large portion of the home buyers in Toronto.

The Study- A recent Royal LePage study surveyed approximately 1,500 of people who arrived in Canada in the last 10 years, and it showed some very interesting statistics. I’m going to list them out for you and then give you a breakdown of what it all means.

Statistics:

  • 21 % of all home buyers are immigrants, having immigrated less than 10 years ago;
  • 31% of the above are families;
  • 25% are students;
  • 20% are independent;
  • 86% of the immigrants see real estate as a good investment;
  • 32% of immigrants in Canada own homes;
  • 68% of all Canadians are homeowners.

Product Breakdown

The following is an immigrant home ownership breakdown by product type:

  • 51% detached house
  • 18% condo
  • 15% townhome
  • 13% semi-detached

If you parse through the stats, those are some pretty shocking numbers. This means that about 20% of our market is driven by immigrants who view real estate as a good investment despite accounting for only a small fraction of the population in Canada.

Approximately two-thirds of the Canadian population own homes (68%) and only about a third of the immigrant population own homes (32%) but the latter group has a huge desire to own homes (86%). You know what that means… DEMAND!

The New Wave Profile – If the number of immigrants expected in 2019 alone (almost 350,000) and 86% of them want to be homeowners in Canada, the demand for housing will continue to be strong. One of the key factors that everyone seems to forget about is the fact that the immigration process in Canada is no longer a lottery system but rather it is a selection based on capital and skill for the economy and workforce.

Given that Canada is one of the most highly sought-after places in the world to live and Toronto being at the heart of it, our immigration system allows us to pick and choose the best of the best to let into our country. This means that our new crop of immigrants are those with money and the skills to make more money in the workforce. So despite the rising cost of real estate, the idea and ability to own a home for these people don’t seem to be far-fetched given their profiles.

The Wrap – With so many wealthy and skilled immigrants coming into Canada, it is very easy to anticipate that demand will continue on its upward trend and accordingly, the prices will continue to rise as well. So ultimately, that’s why I keep urging you to continue investing in real estate and to be one of the beneficiaries of this fundamental change to our country. Do not miss out. If you’re looking profit from this movement, make sure you contact me at Zhen@PrimePropertiesTO.com

Until Next Time, Happy Real Estate-ing,
Zhen

What Happens to Toronto Real Estate Prices During a Recession?

Published on 17th October 2019

There has been a lot of chatter about a looming 2020 global recession. I’ve heard people talk about how we’ve had a strong economic run for the last 12 years and we’re due for a recession. YouTube has even suggested videos to me called “Is a Recession Inevitable?”

Big Nose Dives, Big Waves? Technically, a recession is when you have at least 2 months of lower gross domestic product (GDP) declines, even if it’s the smallest of percentages. I think what a lot of people are worried about is whether we should expect to see another financial crisis that is similar to the one that we saw in 2008. If that happens, what will happen to real estate prices in Toronto?

In the past 13 years, there have only been 2 points in time where GTA prices took a fairly big nose dive. These periods are… continue reading by clicking here>>>> March 2009, right in the middle of the financial crisis, and the latest one occurring in May 2018, right after the foreign buyer tax was introduced. The chart below illustrates how rapidly prices fell during the last recession as compared to our foreign buyer tax implementation.

Coincidentally, the year-over-year change for both was 5.43%. If you are curious to see how much of a change it made on our real estate prices, then take a look at the chart below.

Although the financial crisis had a large impact on the global economy, it didn’t affect Toronto as much because we were a blossoming city. I’ll say it again here – our supply issue keeps getting bigger and bigger as the years progress. The biggest dip in prices occurred when the foreign buyer tax came into effect. This tells me that currency outside of North America has a bigger impact on our market than the US. So for our market to have similar effects, I would look to a financial meltdown in the Asian countries.

Where’s the Bottom? There is 100% merit in worrying about the real estate consequences if another recession comes about in 2020, but unless you buy at the absolute bottom and even if you do, your price difference is only 5.43%. The longer you wait, the greater the risk of prices continuing to escalate. As of right now in October 2019, we are just about to pass the absolute peak in composite home prices from May 2017 of $815K. That means it took about 18 months to recover from the worst price fluctuation in over a decade. We’re trending towards a tighter market and prices will likely continue to climb consistently.

The harder you try to time the market, the less money you’ll make. Remember, with real estate investing, you make money with “time IN the market, not TIMING the market”.

Who Wants a Crystal Ball? If you’re right about the recession and can time your purchase perfectly, then great, you may make an incremental 5%. If you’re wrong about timing the market, and even by a little bit, you could be losing LOTS of money. Just take a look at the trajectory of the “Greater Toronto Benchmark Price” graph above showing the fact that real estate prices have only been increasing over time. Don’t you wish you had bought something back in 2007 rather than worrying about that looming 2008 financial crisis back then?

That’s why I’ve been recommending for my investor clients to pick up a cash flow positive property and ride the time in the market. A cash flow positive property will be recession-proof because a tenant will be paying for all of the expenses and you won’t feel the pressure to sell your property if our market is severely affected by a recession. The market will rebound like we’ve seen in the past – it may take 6 months, maybe 12 months or maybe 18 months, but it’ll rebound and you’ll watch your property appreciate.

The Wrap – If this makes sense to you, then you’ll understand why I’m doubling down on the Toronto real estate market in the next 10 years. If you want to ride the next wave and move with the smart money, then make sure you email me at Zhen@PrimePropertiesTO.com. Don’t try to time the market, it’ll only cause you more stress. Just get in the market, set it and forget it!

Until Next Time – Happy Real Estate-ing!
Zhen

What the Election Means for Your Housing Issues

Published on 10th October 2019

I try to stay out of political conversations as much as possible, whether it be the Hong Kong protests that my family often talks about or all the current chatter about the upcoming Federal election. I just do my due diligence so that I know what the election would mean for me. I’m no climate expert, but I can tell you a lot about housing. So I’m going to use this week’s Insight Article to tell you each political party’s housing platform and explain what it could mean for you. Also just for fun, I’ll grade each party’s platform at the end as well.

Justin Trudeau and the Liberals

The Platform:

  • Expand First Time Home Buyer Incentive for Victoria, Vancouver and Toronto to $800,000 from $500,000
  • 1% vacancy tax on non-Canadian residents
  • Up to $40,000 interest-free loan for renovations
  • A few climate-related green initiatives for homes relating to Energy Star

The 2 most prominent points are the expansion of first time home buyer incentive for the more expensive cities and the 1% vacancy tax. The amount up to $800,000 will undoubtedly force a lot of the entry-level products to increase in price. It’ll open a huge floodgate for buyers who have been priced out of the market and let them back in. In the first 6 months of this incentive becoming effective, a spike in the activity and average price would be expected for the Toronto area. All of the condos and semi’s in Toronto will increase in price, in addition to all of the towns and semis in the 905. I would expect the average price to increase by about 4-5% as a result of this policy.

As for the 1% vacancy tax, we still have no definitive proof of how many properties are held empty by non-Canadian residents. There is definitely a handful, but likely not as much as most people would think. This policy feels more like a talking point for the Liberals because it’s a popular talking point among my local clients.

A $40,000 loan for renovations is nice – I can see that being useful for forcing appreciation in properties, but we’ll have to see what the terms on that program are.

Overall Mark: B+ for helping out the first time homeowners in the short-run but may negatively impact the market as a whole by driving prices up at a much more rapid pace in the long-run (due to the spike in demand after first time home buyers receive their incentives to buy a home). In any case, the Liberal platform does not address the supply issue.

Andrew Scheer and the Conservatives

The Platform:

  • Increase amortization periods on insured mortgages to 30 years for first time home buyers
  • Remove stress test for mortgage renewals

Increasing the amortization period for first time home buyers will effectively allow them to qualify for a larger mortgage because their debt ratios will be lower. If you take a look at the chart below, you can see that this new policy will allow you to do a 30-year amortization with 5% down and it could have a sizable difference in your monthly payments (approximately 11% difference in your monthly payment).

The other policy is the removal of the stress test for mortgage renewals. It’s not a removal of the stress test entirely (I honestly don’t think the stress test as a whole is going anywhere anytime soon). The removal applies only to mortgage renewals. It prevents your existing bank from locking you just because you cannot qualify under the new stress test rules with another bank. For example, a few years ago, you got a mortgage from Bank A before the stress test. In present day, you can no longer qualify for the same mortgage with other banks given the current stress test rules. As a result, you’re stuck at Bank A even if they increase the interest rate. You’re out of luck. This new policy will allow you to move your mortgage to a different bank without having to qualify again from scratch and having to go through the stress test again. It’s real purpose is to prevent banks from being shady and increasing interest rates for people who can no longer qualify elsewhere. This issue has actually been happening very low-key since 2018.

Overall Mark: A- because longer mortgage periods will allow first time home buyers to enter the market at a more steady pace, thereby slowly increasing demand and pricing, rather than a rapid spike with free cash incentives from the Liberals. This will allow for more stability of the housing market as a whole in the long term. However, the Conservative platform doesn’t address the supply issue either.

Jagmeet Singh and the NDP

The Platform:

  • Create 500,000 units for affordable housing in the next 10 years, at 50,000 units/year
  • Double Home Buyer’s Tax credit to $1,500
  • Remove GST/HST on new rental units
  • Re-introduce 30-year terms to CMHC for insured mortgages (Similar to Conservatives)
  • Add $5 billion dollars of spending to affordable housing in the first 18 months in office
  • Invest $40 million dollars over 4 years in a shelter enhancement program

This platform is like a beefed up version of the Conservatives’ platform. All of the effects of the 30-year amortization for first time home buyers apply to this NDP platform as well. All of the other proposed policies sound great as well as they are catered to affordable housing in addition to increasing supply. This should help alleviate some supply pressure from the entry-level condo market. The removal of GST/HST will also stimulate a lot more institutional money to build rental buildings to help alleviate the supply issue again. Very good intentions. My only concern about this is that the private sector (builders, developers and investors) can barely create 25,000 units per year in Toronto. As such, how would the NDP be able to promise to double that output to 50,000 units per year, and where is all of this money coming from for housing?

Overall Mark: B- but A+ for the intention of addressing affordability and supply, however, it seems there could be delivery issues in some areas of this platform.

Elizabeth May and the Green Party

The Platform:

  • Housing becomes a fundamental human right for all Canadians and permanent citizens
  • $1.5 billion into co-investment fund and rental assistance programs
  • Remove the first time home buyer incentive
  • Tax incentives for purpose-built rental
  • Remove GST when builder sells empty condos

These policies will ultimately slow down the housing market. The other 3 political parties are going forward with assisting Canadians with buying properties, but the Green Party is going in the opposite direction. Their policies are more geared towards helping those who are in need of shelter (100% approve of that).

Overall Mark: A+ for intentions but D- for not addressing the supply crisis for the middle-class segment in Canada.

The Wrap – I hope that was insightful and helped to shed some more light on the upcoming Federal election. Go out there and vote, because your vote makes a difference!

Until Next time, happy real estate-ing,
Zhen

Rental Supply Crisis

Published on 2nd October 2019

When I was a teenager, my mom used to tell me lessons over and over again in the hopes that I would listen and learn. However, despite many times of telling me the same thing (for instance “stop staying up so late watching TV”), I wouldn’t listen. Even though she meant well, I was just drawn to watching TV late at night before I slept, as with most teenagers. I never really understood why she repeatedly nagged me about sleeping early until I was in my 20’s and realized that falling asleep at my desk was not something I should be doing. Well, lesson learned the hard way… nobody to blame but my stubborn teenage self! These days, I always try to sleep as early as possible to get enough rest. Oh, how the times have changed!

Broken Records Don’t Lie – My point here is that sometimes we don’t understand why someone sounds like a broken record until their message just hits us in the face, metaphorically speaking, at some point down the road. Every time I write about the lack of rental supply or something related to it, I find myself coming back to the same thing. We have a major supply issue no matter how you slice it and dice it. I’m writing about the rental crisis yet again (sorry to be “that naggy parent”!) because I do hope there will be an understanding that with this rental crisis comes an opportunity for real estate investors to profit. Hopefully you will make this realization sooner rather than later. Don’t be that person 10 years in the future telling your kids, “I had a chance to invest in the Toronto Condo Market 10 years ago, but darn I didn’t do it and missed my chance”. Should’ve, could’ve, would’ve – don’t be that person.

Doubling Down Supply – With that being said, another major report titled “Big City Rental Blues: A Look at Canada’s Rental Housing Deficit” by RBC Economics basically labelled Toronto’s rental supply as a crisis. The report explains that we need to double our pace of creating new rental housing in order to meet Toronto’s future demand, which is essentially what I have been saying for the past 2 years.

If you want to read the full report, you can download it by CLICKING HERE

One of the most staggering statistics in the report is that we have a demand of 53,500 rental units that needs to be filled in order to reach equilibrium in the Toronto rental market. 53,500 is a LOT of units. The chart below shows how large of a discrepancy we have right now if we were to try to fix our rental crisis over a 2-year period.

Immigration Influx – Currently, Toronto is at an all-time high for construction and even then, we’re only producing approximately 22,000 units per year – that’s assuming no delays, and if you’re already a pre-construction investor, you know the possibility of a delay is very likely. So then what? In order to fill the demand backlog, perhaps we need to stop immigration and build for more than 2 years just to be at equilibrium. Well, realistically, that isn’t much of a solution. Immigration isn’t coming to a halt anytime soon. Canada only planned for 250,000 immigrants last year but we ended up with 319,000 in 2018. In 2019, we’re on pace for even higher immigration numbers. Of those 319,000 immigrants last year, 47% of them came to Ontario. Effectively, that means we’re had more than 150,000 people immigrate to Ontario, yet we’ve only been building 22,000 homes per year. Is it pretty obvious why we have a supply issue now? Houston, we clearly have a housing crisis.

No Vacancy – Another good point from the report indicates that in order to reach a balanced rental market, we need to be around 3% vacancy rates. Toronto’s vacancy rate has not been above 2% in over 5 years. Have a look at the chart below for our current vacancy rates. It’s absurd when your highest vacancy rate is 1.1% in the Peel Region. Literally all signs point to a major rental crisis!

TAX TIPS – Top 10 Things You Can Expense as an Investor

Published on 26th September 2019

You would be surprised to know how many times I get asked about accounting questions in my day-to-day life when I interact with clients. The two most common questions that I get from clients are the following:

1) Can I expense X (where X is some cost incurred)?

2) Should I incorporate?

So in today’s Insight Article, I’ll do my best to answer both questions for you. Let me preface this by saying that I am not a tax accountant, and even though my wife is a Chartered Accountant, it doesn’t mean you should take what I’m telling you as formal tax advice because everyone’s situation is different and there could be further stipulations attached to the following points. These are just the things that I have learned from my investing journey and talking with good tax accountants who are also investors. Consider this as heads up insight, and for you to consider in your real estate investing journey.

The Top Ten – So without further adieu, here are the top 10 things that you can write off as a real estate investor:

1) Interest – This is probably the biggest one. You can write off your mortgage interest, your Home Equity Line of Credit (HELOC) interest and essentially any interest you may have incurred as a result of investing in real estate. To write off your mortgage interest and your HELOC interest, you must keep very clear documents in case you are asked to prove that the interest is linked to an investment property. An example of what not to do is writing off HELOC interest on the portion used to fund your family vacation. That’s a no-no with the CRA, and you’ll be in trouble for doing so. Keep anything you do with interest or monies in real estate in a separate account, even if that means you have to pay some bank fees.

2) Property Management & Condo Fees – You can also write off any condo fees or costs associated with having a property manager to look after your property. Again, keep your invoices and statements to prove that you paid these fees. PRO TIP: If you’re bad with paperwork, use an app called Expensify or Everlance. You can just take a picture of your receipt and leave it on the cloud.

3) Accounting & Legal Fees – This one is fairly standard because any legal fees paid on closing or accounting fees you pay for taxes related to real estate investing can be expensed.

4) Property Taxes – Yes, you can write this off as well for investment properties. Keep those bills from the city!

5)Repairs & Maintenance – This one can be a little bit confusing but I will do my best to explain it. Any repairs that are deemed “upkeep” for your investment property can be expensed. These are repairs such as appliance repairs, general handyman repairs and even cleaning. They are all deemed as regular and routine in nature.

On the other hand, any repairs that are deemed to be “capital” in nature will be subject to different rules. These would be defined as expenses that are incurred to extend the useful life of your property, or in other words, the work done adds some sort of long-term benefit to the rental property. Some examples of such expenses that are capital in nature include kitchen renovations or putting in a brand new roof. You won’t be able to claim 100% write off on these expenses all upfront, but rather, think of these expenses as being written off little by little over time (i.e., amortization of the capital expense).

6) Insurance – You will always need fire insurance on your rental property to get a mortgage and guess what – you can write this off! There are also specialized insurance policies for short-term rentals, rental protection, vacancy protection and damage protection that will cost you a little more but could give you peace of mind. All of these insurance costs can be written off as well.

7) Utilities – If you are providing an all-inclusive unit for your tenants, whether that be long-term or short-term, you can write off the utility bill. This includes water, gas, hydro (electricity, not water, I know it’s confusing), internet bill and telephone bills.

8) Commissions – Any commissions that you pay to sell or lease your property can be written off on your tax return as well.

9) Advertising – If you opted to lease or sell your property on your own, you can write off any advertising costs associated with it such as classified ads on Kijiji, newspaper ads, Facebook ads, etc.

10) Travel Expenses – Any travelling related to the investment property can be written off. This includes gas for travelling to see your investment property. This is why I use Everlance because it tracks my mileage for me automatically.

To Incorporate or Not? Now for the second question, should you incorporate? This is a case-specific question, and for this one, you should definitely talk to a tax accountant. If you need a good real estate specific tax accountant, I would be more than happy to connect you to one. Generally speaking though, the answer is no because qualifying for a mortgage in a corporation would be more difficult and it requires a higher down payment. Furthermore, your tax efficiencies must outweigh the accounting and legal costs associated with incorporation. If you’re a non-T4 worker, then perhaps incorporation may be more worthwhile. Either way, speak to a tax accountant about your specific needs.

The Wrap – I hope this was helpful in providing you with some guidance on what you can and cannot expense as a real estate investor. From a top level, there are a number of benefits and liberties as a real estate investor. If you’re looking to get started with your first investment property, please reach out to me; my contacts will be below.

Until Next Time, Happy Real Estate-ing
Zhen
(416) 436 9436
Zhen@PrimePropertiesTO.com

Pre-Construction Condo Prices are Going UP!

Published on 18th September 2019

About 18 month’s ago, I wrote an Insight Article about how pre-construction condo prices are primed to increase. If you want to read the Article, you can find it HERE. Was I correct in writing that 18 months ago? Heck yeah!

Soaring to New Heights – We were just about to break the $1,000 per square foot milestone in the M5V postal code (Entertainment District) 18 months ago and today, that same area is easily over $1,300 per square foot. They say a picture is worth a thousand words, so here a price list of a building in the M5V area at the time of launch 18 months ago versus now.

The ridiculous thing is that these were “summer prices” and projects adjacent to this, such as The Well, sold out at $1,350 per square foot despite being further from the subway.

So, here we are in the Fall of 2019 and unfortunately, I have to write another version of this article. Let me preface this Insight Article by saying that I am not suggesting that prices can increase like this again (at the same rate), however, what I can say is that all of the same patterns which I saw 18 months ago still apply to today’s market.

Development Charges (“DC Rates”) – I wrote the 2018 version of this Insight Article because development charges quietly doubled overnight in February 2018. This was a low-key and sneaky move by the City of Toronto back in 2018, and the final half of that development charge increase is about to kick in. Have a look at the photo below. The red arrow is where we are right now and anything to the right is going to phase in within the next 15 months.

That’s another cool 30% increase in development charges alone! That cost is NOT being paid by the Builder nor the City. You guessed it – these fees are on us, the end-users and investors. We’re forking out this additional 30%!

Reverse Engineering – I want to give you an idea of how I reverse engineer what I think prices will be for a given project. So let me be real with you for a second. All of the Builders that I know are FOR PROFIT businesses and they must build to make money – that is a fact. However, the perception of greedy Builders is usually just false presumptions (although it could be true for some). As with any business though, Builders work with margins and bottom lines. From speaking to various Builders, the target profit margins on condo developments is roughly 15%. Seemingly, this may seem like a low profit margin percentage, but you have to remember that it’s 15% of a multi-million dollar project – the profit is huge!

So with that out of the way, let me show you how I reverse engineer the pricing.

By the Square Footage – On the left-hand side, you can see my rough estimates that make up the per square footage cost in 2018. For example, the cost Downtown was approximately $1,000 per square foot in 2018. On the right-hand side, I only increased the development charges by 30% as per the chart above, and you can already see that it increases the price that is passed down to the end consumer. For instance, the cost Downtown is now approximately $1,060 per square foot in 2019 after considering the increase in development charges.

In this next chart below, if I also (conservatively) increase the cost of land by 10% and construction costs by 20% (both of these costs have increased more than ever as per studies by the Altus Group), you can now see clearly as to why $1,350 is the new norm.

Now combine all of the above with the next 30% increase in development charges (in addition to possibly land and construction costs), and you can probably now understand why I’m writing this Article on why pre-construction condo prices are going up yet again. Don’t forget, this is all before ANY appreciation in the actual marketplace – this is all just taking into account the increase in costs.

There is More Room to Grow – How much more growth will we experience exactly? This will depend on how the market appreciates. If Trudeau gets his way in this year’s election and the first time home buyer incentive gets a turbo boost from the Liberals, then expect even more room to grow. That’s why I’ll be doubling down on Toronto investments over the course of the next 10 years. If this is something that you are interested in doing with me, do reach out, my contacts are below.

Until next time, Happy real estate-ing
Zhen
416-436-9436
zhen@primepropertiesto.com