Avoid cross-border investment pitfalls | Canadian Real Estate Wealth

Canadians investing in U.S. real estate might have the right idea, but they’re prone to errors, says a Florida-based expert.

Lauren Cohen, international legal and real estate expert of E-Council Global, noted that many of her company’s deals fell apart at the beginning of the pandemic as few knew how deleterious and disruptive COVID-19 would be, but the pendulum swung the other way during American Thanksgiving. Since then, Canadians have been enthusiastic about investing in real estate south of the border—although their overtures are often mistake-laden.

“What they usually get wrong begins with professional guidance, like getting an LLC without the help of a cross-border expert, and the consequence is often that they pay a price later, like being penalized with double taxation,” Cohen said. “The second thing is people invest in the United States without regard for how that will impact them in Canada—if you invest in the U.S. and take money to Canada, there’s potential double taxation, so you have to make sure your structure is set up properly. People try to cut corners but it never works because they’re looking for the cheapest options, and if it seems too good to be true, it is too good to be true. If you do that, you create a path that’s fraught with obstacles.”

Establishing cogent short- and long-term strategies, Cohen says, paves a path that enables investors to run their U.S.-based real estate investment as a business, but that usually requires securing various visas or green cards. If the Canadian investor’s relationship to the United States will be “casual,” a different structure is required, especially if the investor intends on moving to the country at any point.

“The No. 1 problem is lack of strategy; they do things haphazardly,” Cohen said. “There’s no one-size-fits-all. For example, do you have children, are they in school, and what are your ultimate plans—do you want to go back and forth? Some clients want to come here to the U.S. and never go back, in which case they should look for an Adjustment of Status Visa. They would do that internally in the U.S. but when they leave, they lose that designation because it’s not intended for somebody who goes back and forth across the border.”

Cohen added that most clients want flexibility now because of the pandemic and unpredictable lockdown measures that differ from city to city, even country to country. That isn’t the only factor they fail to consider, though.

“You need a social security number in the U.S. to build credit because that helps you get financing,” Cohen said. “People don’t realize they can run out of money, so they need to figure out how to get financing, which could even be pooling other people’s money as investment funds.”

South Florida is a hot real estate market and Canadians comprise a notable share of purchasers, but as many are finding out the hard way, approaching American real estate is vastly different than it is in Canada. Setting up the correct legal structure is the first thing to do, Cohen advises, followed by crunching the numbers and ensuring the investment is neither undercapitalized nor over-invested with personal funds.

“Get your financing in place before you make an offer,” she said. “Cross-border investing is much more accessible and now is the perfect time. But remember that having a visa in your pocket is like an insurance policy; it doesn’t mean you have to move or be in a certain place at a certain time, but it gives you the option to go back and forth and to have the opportunity to run a business or real estate investment across borders. It also allows you to look for new opportunities.”



2021-09-30 19:12:24

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Canada’s housing sector is highly vulnerable: CMHC

Canada’s housing market entered a high degree of vulnerability in the second quarter, says the Canada Mortgage and Housing Corporation.

Previously facing only a moderate degree of vulnerability, Toronto, Ottawa and Montreal are the country’s most risky markets because of rapid price acceleration and overvaluation. Moreover, there have been persistent imbalances in a few markets in Ontario and Eastern Canada.

“Exceptionally strong demand and home price appreciation through the course of the pandemic may have contributed to increased expectations of continued price growth for homebuyers in several local housing markets across Ontario and Eastern Canada,” Bob Dugan, CMHC’s chief economist, said. “This, in turn, may have caused more buyers to enter the market than was warranted.”

The federal agency noted that historically low-interest rates, financial support provided to Canadians due to the pandemic, more disposable income and elevated employment during the first half of the year strengthened housing market fundamentals. Additionally, mass vaccination programs have also played a role in increasing purchasing power, but CMHC doesn’t believe those are the only reasons for stronger fundamentals.

Canada had historically high home sales in Q1-2021 thanks to demand outpacing available supply, and while transactions slightly moderated in the second quarter, the market remains overheated at the national level, CMHC says, largely because of insufficient inventory.

In the Greater Toronto Area, home sales decelerated in Q2 but there still wasn’t enough supply to meet demand, which resulted in persistent price acceleration.

In Montreal, CMHC says prices have risen higher than existing fundamentals, including labour income, justify. Consequently, there are signs of overheating in the market even though sales softened and inventory rose in Q2.

However, CMHC adjusted Vancouver’s rating from moderate to a low degree of market vulnerability because price growth in the city eased in the second quarter. Additionally, homeowners in Vancouver are listing their homes in droves—certainly in a larger-than-usual quantity—and it is quelling competition between homebuyers.

But there remains a high degree of vulnerability in both Hamilton and Ottawa because of price acceleration and overvaluation in the former and low listings in the latter, despite sales having slowed down since April, which has resultantly put upward pressure on pricing.



2021-09-30 19:16:56

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Downtown Hamilton brims with multifamily sector prospects

Hamilton’s smaller multifamily dwellings are still commanding strong rents, but they’re flat in the city’s taller apartment buildings, says a local investor.

“Plexes are where the money’s at with rent,” Sandy MacKay, founder and CEO of the Sandy MacKay Realty Network, said. “You get parking and other things, too, that people put a high emphasis on these days. A lot of these properties create more space for the tenants, including yards. If you put some extra money into these types of dwellings, even though you might not have in the past, to create a nice outdoor space, you can collect a lot more in rent.

“It’s easier to do this in small multifamily apartment buildings and it’s harder to do in taller apartment buildings.”

Downtown Hamilton is where MacKay recommends investors should search for multifamily apartments. Although rough pockets of the district still exist, much of the city is unrecognizable from years past, especially around James St. N. where gentrification is in full effect. As more people become inoculated against COVID-19, street life is returning to normal and adding an extra layer of allure to the city’s burgeoning downtown.

“The downtown core has some awesome spots now, and with life coming back to the area, with restaurants opening and people generally doing stuff outside, there’s more inventory on the market than in the summer,” MacKay said. “The area is seeing a lot of growth happening—there’s been gentrification and higher quality tenants moving to the area. For multi-residential, we are seeing prices not go up substantially but they are up in the downtown core with a lot of opportunities to cash flow.”

Rents have grown by around 10% in the last 12 months, MacKay says, and by as much as 20% in the last several years. Cash flow opportunities are, however, becoming tighter because property valuations are rising, as tends to happen in economically diverse cities. MacKay says there are still opportunities for growth, although investors may have to look harder than they have in years past.

One reason rents are quickly rising is that there’s downward pressure on vacancy because a lot of Torontonians have decided to settle in the city, and not just because their jobs brought them there. As a result, Hamilton is beginning to experience a big city problem, MacKay says.

“We’ve seen a high uptick in fake applications in the city. There is decent demand for tenants but we’re seeing so much more fraud than we did in the past, so landlords really have to do their due diligence today,” he said. “As tempting as it can be for someone to come in and offer six months’ rent up front, you have to do your due diligence now more than ever. I’ve seen so much more fraud because of technology like e-signature tools, and this is especially the multifamily sector, so I work with a really good property management company.”



2021-09-28 13:07:01

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Detached home sales catch fire in Calgary

The Calgary Real Estate Board’s (CREB) latest statistics revealed the city’s housing market had a strong, if balanced, August, with detached homes leading the way.

And according to Jesse Davies, a local Calgary realtor who runs his own team at Century 21 Elevate, those are positive developments.

“As a realtor, I prefer this over hectic markets. It’s a lot more stressful for buyers and sellers and it makes life and real estate more stressful because any time a listing hits the market, everyone scrambles for the next 12 hours,” Davies told CREW. “In the detached segment of the market, prices increased across all districts in the city, but they trended down in the city centre compared to last month. However, I felt like August was a vacation month for most people, and while volumes dropped off for the most of the month, the last week of August and the first week of September were hectic again.”

Sales in Calgary rose by 37% year-over-year in August to 2,151 units, says CREB, albeit at a moderated pace compared to earlier this year. Nevertheless, there were 19,516 year-to-date transactions recorded, smashing previous totals during the same eight-month periods during each of the last six years.

“Sales have far exceeded expectations throughout most of the pandemic, driven mostly by demand for detached homes. At the same time, supply could not keep pace and conditions shifted to favour the seller, something that has not happened in over six years,” Ann-Marie Lurie, CREB’s chief economist, said in a news release.

“With more buyers than sellers, prices rose, providing opportunity for may of the move-up buyers in the market. Over the past several months, we have seen some adjustments in supply relative to sales, helping move us toward more balanced conditions.”

Noting that August 2020 was an aberration because of the pandemic, Davies pointed out that detached home sales during August are 81% higher than they were during the same month in 2019, citing COVID-19 as the preponderant driver, because “people want their own backyard, privacy, and their own front door, as opposed to sharing common spaces.”

The fact that Calgary has starter homes in the detached segment hasn’t been lost on the rest of the country, added Davies.

“The work-from-home movement has definitely brought a different kind of buyer to the Calgary market, and that would be people who can’t afford to live in Toronto or Vancouver, and for $800,000 you can get a beautiful house here,” said Davies. “We’re getting quite a bit of migration from outside of the province. With the pandemic, we’re not getting people from different countries but that’s also a sign that when the borders start opening, and when people get more comfortable with the idea of relocating, they might choose Calgary.”

The city’s real estate market is balanced because of the laggard condo sector, but that’s actually where all the opportunity is, says Davies, because there’s long-term appreciation potential. Due to the inventory glut of the last few years, most condo projects are recalibrated into purpose-built rental developments, but the condo inventory will gradually get absorbed over the next few years.

“The rest of the housing sectors have had really healthy gains but the condo market, because of both COVID and the surplus of inventory, has seen downward pressure on pricing,” said Davies. “But the mid- and long-term horizons should see healthy appreciation. When the pandemic is behind us, people won’t be afraid of sharing elevators and touching buttons. I’m already getting a lot of calls from Vancouver and Toronto about condos because there’s an overabundance right now. As the spread between low- and high-rise homes becomes too wide, which it inevitably will, affordability will push people back into the condo market, so it’s a good idea to get in early while the prices are still low, because they won’t be for long.”



2021-09-28 13:13:37

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80% of luxury buyers are millennials: Engel & Völkers

Millennials, entering their peak years, and are slated to comprise 80% of North American luxury home purchasers in 2021 and 2022, says a new report from Engel & Völkers.

“The past year has seen a significant surge in housing demand, resulting in record-low inventory levels with rising prices to match and a red hot market across North American real estate,” Anthony Hitt, president and CEO of Engel & Völkers Americas, said. “However, in every market situation there are homeowners willing to sell. The key is to identify which consumer segments fall within this group, and that is what we have done in this new trend report. At a time when the market is moving very quickly, we’ve gathered the intelligence that will allow real estate professionals to stay ahead of consumer trends and provide their own clients with an edge when buying or selling a home right now.”

The report noted that 65% of millennials with household incomes of at least $250,000 are planning to sell their homes, adding significant inventory to markets that, in part because of the pandemic, have seen downward pressure on new listings, thereby driving up sale prices. Moreover, Engel & Völkers’ data suggests that 60% of these sellers don’t intend to move out of their current cities, with 83% already property owners in urban centres. Additionally, a whopping 96% reported either sharing their present households with parents or having them move into their new homes, signifying that multigenerational living, a relatively nascent trend, is not going anywhere.

Millennial-aged entrepreneurs comprised two-thirds of luxury home sellers in the process of getting businesses off the ground, and they’re abetted by remote work capabilities, with 29% opting to relocate. Although the overwhelming majority want to be in urban areas, 28% reported a preference for rural settings, which Engel & Völkers believes is indicative of family-oriented individuals—they’re more likely to either be married or living with a partner or have young children, and 20% are responsible for caring for at least one parent.

The report also identified what it calls COVID HENRYs—high earners, not rich yet—who are young professionals with household incomes of $150,000-250,000 and who belong to the millennial and zoomer generations. During the pandemic, this cohort ascended to the aforesaid level of remuneration but has not yet reached the same level of wealth as older generations who’ve spent significantly more time in the workforce. According to Engel & Völkers’s data, over 50% of home sellers this year and next will be COVID HENRYs, a third of whom work remotely and nearly half of whom desire travelling globally, and 41% of whom already own a second home. However, 49% of COVID HENRYs want to live in cities and 43% prefer suburban lifestyles.



2021-09-28 12:57:33

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