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Real Estate Investing in Canada

By |2017-08-14T17:19:17+00:00August 13th, 2017|Categories: Canadian Real Estate, Real Estate Investing|Tags: , , , , |Comments Off on Real Estate Investing in Canada

With a glut of American information on real estate investing available on the internet and in book stores, it’s tough to find Canadian information that applies directly to Canadians.

It’s true, the USA is the land of milk and honey when it comes to real estate investing, 300+ million people, 100+ million homes, irresponsible banks, foreclosures, and auctions make America the place to make big money in real estate.

However, there is still lots of money to make in Canada, there are just a few things that you will find that are different from the books and online American advice:

No 1031 tax free exchange

Canada does not have a “Tax free” trade up law on property. In the United States if you sell an investment property with the intent of purchasing a bigger property, you can defer your capital gains tax as long as you are trading up. This is a huge benefit to being in the USA. As of writing right now, in Canada you can tax defer the sale of your personal residence, but nothing else. In addition, the CRA is cracking down on people who are buying and selling too many personal residences.

Tougher banks, 20% down

Canada has the strongest banks in the world. It’s illegal to have a cartel, but we have a banking cartel in Canada and 5 major banks that control the market. These banks demand 20% down for all properties and get insurance from the government institution CMHC to insure all mortgages with less than 20% down. CMHC is a farce when it comes to profits in the billions and CMHC fees are so high that first time home buyers with 5% down lose almost all of their equity to CMHC fees. Such is the power of the almighty Canadian bank.

Limited mortgages and personal credit

With the strongest and most conservative banks in the world, Canadian banks are extremely limited in the credit and mortgages they give out. Many small investors are maxed out after a few mortgages making it very hard to build large real estate portfolios in your personal name.

Harder to find product

With a strong economy and 5 very strong banks, it’s harder to find foreclosed distressed property. By contrast, America has over 4000 banks all competing for customers with looser lending than the 5 oligarchic banks that we have in Canada. In addition, Canada has smaller cities and less product to choose from in general so it is much harder to find distressed property because there is simply less supply.

Higher property prices

Supply and demand. With less supply of homes and higher costs to build, property in Canada is inflated when you compare it to what you get south of the border. Some experts argue that Canadian real estate is 30-60% overvalued and if you compare dollars per square foot in some Canadian metros with what you can buy in the USA, Canadian property looks vastly overvalued.

No wholesale networks

The USA has had it’s share of info marketers and education companies educating the American population and real estate industries for years. Subsequently, there are developed wholesale networks of real estate and an entire industry around REIA’s (real estate investment associations), education companies, and wholesalers looking to move private distressed assets. Canada is far less developed and has much less ability to move wholesale product compared to the USA.

Active business income 11% vs 20%

One advantage that Canada has over the USA is that our corporate small business taxes are lower at 11% when compared to 20% in the USA. However, this only applies on the first 400k to 450k of active business income.

Mortgage terms, 5 years etc.

In Canada mortgages typically are renewed on 5 year terms. That means you have to renegotiate your interest rate every 5 years, vs in the united states, most mortgages go for the life of the asset and you don’t have to renegotiate every 5 years. This is a major difference when it comes to lon term buy and hold properties.

CMHC 

The Canadian Mortgage and Housing Corporation is a variable in the Canadian market that has to always be watched. CMHC is necessary for most first time home buyers to get into the market and paradoxically, CMHC also tries to keep first time home buyers out of the market. CMHC is constantly changing and manipulating rules to keep the housing market from overheating and this affects the buying and selling process and liquidity of all residential real estate across the country.

7 Year cycle has not happened in the last 25 years

A natural real estate cycle is 7 years, 18 months of going up, 48 months flat and 18 months going down, it’s simple economics and the USA follows this pattern in many markets. In Canada, we have had a run going up for the last 25 years which defies the laws of natural economics. What does this mean? What goes up, must come down at some point, artificial forces have kept the market going up, up, up. What goes up, up, up, eventually goes down, down, down.

Foreign investors

Canada is a safe haven for foreign money from all over the world, but mainly from Asia. Vancouver and Toronto have been international magnets for foreign money and these markets have become inflated to the point where the locals can no longer afford to buy local real estate. If international trade is open and international trust Is high, this will continue, however, with the government trying to impose 15% tax on foreign buyers and all sorts of other variables, this could change at any given time.

Foreclosure laws and power of sale

To protect farmers in Canada, the government passed laws years ago to prevent banks from robbing their mortgagees. The spirit of the law is to protect people in foreclosure by having their properties marketed and sold at 95% of fair market value to protect the consumer. This law however makes it very difficult to buy properties at a discount. So instead of buying foreclosures in Canada, we must buy pre-foreclosures as investors.

Overall, buying property in Canada is much more difficult than in the USA, but even still, many people make very high incomes in the property game in Canada and can even become affluent or rich.

Respect The Grind,
Stefan Aarnio