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My Experience With the New Residential Rental Property Rebate (HST Rebate)

I wrote about the HST issue a couple months ago, calling it the “Elephant in the Room” with respect to the pre-construction condo market. I wanted to follow up this post with my own personal experience with dealing with the HST rebates (New Residential Rental Property Rebate-NRRP) when buying a new condo for investment. In short, it was a surprisingly quick and painless process to get back my rebate money once I figured out all the forms and the calculations.

The photo above is of One Park West, or 260 Sackville Street. The building was recently registered and I own a unit in the building which happens to be the Smallest Condo in Toronto. I recently closed on the unit and as an investor-owner had to pay an additional amount for HST on final closing. Here is my story for getting that money back from Revenue Canada:

In order to qualify for the rebate, I had to have a tenant in the property and a signed lease for a minimum 1 year (which I did). All in all it only took just 40 days from the time I sent in my application to the time I received my rebate monies back in full. Quite contrary to some of the reports I have heard of it taking as long as a year to get your money back. If you have your paperwork in order and you complete the forms properly this seems to be the result you get. I even was paid some interest on my rebate amount (presumably taking into the account the time I paid it until the time I was paid it back).

Some additional things that I learned when going through this process:

• Provincial tax (PST) is the biggest portion of the rebate by far
• Federal tax (GST) is the smaller one
• Provincial rebate is 100% until Fair Market Value (FMV) hits $450K, then is zero after that
• Federal rebate is 100% until FMV hits 350K, then reduces down to zero when you hit $450K
• Therefore if your FMV is less than $350K you should receive 100% of your HST monies back. If your FMV is between $350K-$450K you will receive most of it back. If your FMV is greater than $450K you will receive zero back.

The Problems I see with the New Residential Rental Property Rebate:

• If the FMV of your condo is $450K you will receive back more than $20K. If the FMV is $451K you will receive zero. What policy maker in Ottawa came up with this scheme??
• FMV is still a conundrum to me. Who determines it? How is it determined? What happens if the government doesn’t agree with your FMV number?
• FMV of  your unit does not take into account what you will actually ‘net’ on your unit if you sold it at FMV (it does not take into account selling costs).
• A better system might be to simply add an additional tax on investors who flip their unit after final closing as a percentage of their actual profit. Under the current system, you might both lose money on your sale (due to closing costs when buying and selling), and also have to pay tens of thousands extra in HST just for the ‘right’ to lose money on the transaction. Doesn’t make sense.
• Is the government in the business of discouraging people from investing in real estate unless that real estate is priced below an arbitrary figure of $450K??
• FMV is the crux of the calculations used to figure out if you qualify for the rebate. FMV is determined at the time that the HST is paid (at final closing in Ontario). The higher the FMV, the lower the rebate amount. Therefore I observed that it might be better for investors to actually pay the HST amount UP FRONT when buying a pre-construction condo, because this will result in a lower FMV and therefore a higher rebate amount!

Questions about the New Residential Rental Property Rebate (HST rebate)? Wondering if you qualify for the rebate or need help completing the application process with Revenue Canada? Contact me or leave a comment.

Cap Rates and Condos

I had a condo buyer email me recently and tell me they were looking to buy a resale condo with a 6-7% cap rate. This would be a somewhat rare but achievable cap rate if you were buying a multi-unit freehold property in the core of Toronto, however, for a condo, this kind of cap rate is unheard of. Cap rates for condos downtown would be something more like 3%.

Cap rate, or capitalization rate, is basically a measure of return on an investment property you would get if you bought the property with all cash (no debt/no mortgage). It is calculated by dividing the annual income a property generates AFTER expenses by the purchase price of the property. So if a property that costs $300,000 generates $2000/month after expenses, then the cap rate would be 8%.

What are cap rates like for Toronto condos? Take for example the listing that I have at 16 Yonge Street right now. The numbers break down like this

• Asking Price $329,900
• Current tenant pays $1575/month
• Expenses: Maintenance fee $327/month, taxes approximately $167/month, insurance approximately $20/month = $514/month

So if you do the math it works out to ($1575 – $514)*12 / $329,900 = 3.8% cap rate. This is actually a very good cap rate as the rent:price ratio for this unit is quite high compared to most downtown condos, and the maintenance fees and taxes are relatively low. To acheive a cap rate of 6%, the rent would have to be increased to about $2200/month if the expenses stayed the same. Finding a condo that you can buy for $329,900 that will rent out for $2200/month is basically impossible in Toronto.

So why are cap rates typically much lower for condos than for multi-unit properties (i.e. duplexes and triplexes in the core of Toronto)? One simple reason is that with condos, there is almost zero maintenance a landlord has to do. You can very realistically own a rental condo for 5-7 years and spend literally nothing on maintenance and repairs. Try doing that with a freehold property! Low cap rates is one trade off for the relative convenience and simplicity of condo ownership.

But the fundamental reason behind the low cap rates is that condo investment in Toronto is driven by an expectation that prices will increase (appreciation) versus a desire for cash-flow (income). Prices have kept appreciating over the last 15 years in Toronto and thus cap rates have pretty much always been quite low for condos. If prices start to decrease, or rents go up faster than prices, cap rates will start to rise.

Questions or comments about investing in resale condos? Please contact me.

How to make $100K in 3 Months

There are dozens and dozens of units available for sale at Festival Tower. Most have been sitting on MLS for months as assignments (tricky to sell at the best of times), but now that the building is registering in a matter of days I expect these units will start moving quickly. I noticed something quite interesting looking through the sales data for a client – one of the bigger 2 bedroom units on a high floor sold in March as an assignment for $945K. Another one of the same floor plan also sold around the same time for about $1.03M, and just this week another one of this floor plan came up as sold for $1.05M (interestingly as I am writing this blog post I noticed the sales price has been removed and it now says ‘sold conditionally’).

So what happened? Seems to me the person who bought for $945K in March is up at least $100K in just 3 months time. Also it occurs to me that selling by assignment is a crap shoot at best – buyers and sellers alike are dealing with very limited an imperfect information and ‘fair market value’ is a very hard thing to determine.

This blog post is really designed as an illustration to show why I preach to my investor clients that the best time to sell your pre-construction purchased condo is 6-12 months after registration.

Reasons:

1. 1 year is the length of a typical lease. Assuming a 3-6 month occupancy period for most condos, selling 6-12 months after building registration will align perfectly with the end of that lease.
2. 6-12 months gives time for the dust to settle in the building (literally), and for the common areas to be completed. Common areas do add value to your property, make no mistake!
3. Allows time for the resale values of a building to get established. Much of this is driven by supply and demand principles – many investors selling at first, and few buyers aware of the building because it’s brand new.
4. To qualify for the HST/GST rebate as an investor, most lawyers will tell you you need a 12 month lease signed.

We see this pattern time and time again with new buildings when they first are finished – those who sell first tend to undersell. Those who are patient and wait reap the rewards.

Questions or comments? Thinking about selling your investment condo this year? Contact me.

The Elephant in the Room: HST

NOTE: the following blog post is not to be considered legal or tax advice. I am not a lawyer or an accountant. I’m writing this strictly for informational purposes only. Always consult a lawyer when purchasing pre-construction real estate.

ANOTHER NOTE: If you find this article confusing, good. That’s the number one point I’m trying to make: the HST on new condos is very confusing and it needs to be fixed.

This is a subject that very few people in the pre-construction condo industry are talking about, but one that could actually have major repercussions on our industry over the next few years. HST and how it affects new condo purchasers, specifically those purchasers who are investors (i.e. up to 80% of the market right now), is a terribly unclear issue. When the Mcguinty government introduced the HST in July 2010, it was said that it would not really affect the real estate market. While this may be true in an overall sense, for investors of new condos, there can be serious implications to your bottom line.

The issue is essentially this: there is an HST rebate built into the price of every new condo sold in Toronto. The assumption is that the buyer of any given new condo is an end-user (they are buying it for themselves to use, not to flip for profit, or to rent out to a tenant), therefore they qualify for this rebate which the builder collects on their behalf. In reality we know that the pre-construction condo market is dominated right now by investor-buyers NOT end-user buyers. Investors do not qualify for this rebate, so the builders must charge them to account for this rebate, effectively increasing the price of their units significantly at final closing. Now, there is a process in place whereby investors can apply to get this extra money back from the government after the fact, but as you can imagine any application process involving extracting money from the government is long, painful, and tedious.

The key questions that are so difficult to get concrete answers on are:

• Who qualifies for the HST rebate in the first place?
• How much is the HST rebate? How is it calculated? How much do I have to pay extra if I am an investor?
• How do I apply to get my money back if I am an investor? When can I apply? What conditions must I meet? When will I get my money back? Do I get all my money back or only a portion of it?

If you talk to 3 different real estate lawyers, I gaurantee you will get 3 different answers as to how the HST rebate works and how it affects investors. This is a serious issue as thousands of investors are buying condos in Toronto every month, and I think many will get a shock in 2-4 years when they meet their lawyers for final closing and they are asked to write a cheque for thousands of dollars to cover the HST.

Why are there seemingly no clear answers on how the HST works for investors? Part of it can be explained by the fact that the HST has only been in effect for a year, and very few (if any) NEWLY purchased condos have actually completed and closed in the last year. In other words, very few lawyers have actually completed a final closing for a client who purchased a new condo during the HST era which began July 1, 2010.

Toronto real estate lawyer Stephen Shubb has done his best to explain how the HST works (and I think he did a pretty good job) on his website: HomeLegalCost.com. Essentially his explanation boils down to this: if the purchase price is less than $450K, you will get the full rebate back after the fact as long as you rent it out for at least 1 year after final closing. So you will be in the same position as the end-user is, but you have to pay up front and wait to get your money back. If your purchase price is over $450K (which many units are of course in Toronto), buyer beware! You may have significant additional costs at final closing that you might not be getting back.

Call me crazy, but I actually believe that someone up there at Queen’s Park might be reading this blog (especially with an election coming). With that in mind, I am calling on the Ontario government to do the following:

• Come up with a clear statement and communication to the public about how the HST will affect buyers of new condominiums in Ontario.
• Come up with a clear statement and explanation for the real estate law industry (lawyers) so they can explain it to their clients
• Increase the limits on who qualifies for the full HST rebate. $450K is a ridiculous upper limit in a city where the average single family home costs about double that
• Get rid of the application process for getting back the HST rebate for investors. If the rebate is in fact the same as for end users, why complicate the entire process, create unnecessary bureaucracy at a great cost to the public, just to get the same result in the end?

Questions or comments? Totally confused? Please contact me.

Quality Investments in Pre-Con Becoming an Endangered Species

Hype-driven marketing seems to be at an all time high in the pre-construction condo market. I am finding it harder and harder to find quality investment opportunities to recommend to my clients. This at a time when a new condo project is launching almost every week. Prices are soaring. Suite sizes are shrinking. Every agent and their mom is calling themselves a “VIP” agent. Something has got to give.

I am getting more and more calls from buyers who have felt pressured into signing contracts to buy pre-construction condos without really thinking through what they are doing. So far this week I talked to 2 people who were in their 10-day rescission period and they flat out told me they don’t trust their agent who they used to buy the condo and were unsure if it was a good investment. They attended one of these hype-driven “VIP” sales events (VIP has really become a meaningless term), everyone there told them it was a great investment and they would make a lot of money, and so they signed on the dotted line. [Side note: Often I find that the agents used in these scenarios know nothing about the pre-construction condo market (or worse, the condo market in general), and there is often a family connection - the agent is the buyer's uncle, friend's uncle, god parent etc. Hire a professional who you trust!]

I am not thrilled with the tactics some developers are using to sell their projects, but more importantly, it’s the pricing that is automatically precluding me from recommending several projects to my investor client base. Buying at $600+PSF when comparable resales are selling at less than $500PSF just doesn’t make sense. To be clear, I am not in the camp that believes it is only a good investment if pre-con prices are LOWER than equivalent resale – I just think the gap needs to be about $50-$75PSF in most cases to make sense from an investment perspective.

Questions or comments? Wondering what projects I am recommending to my clients for investment and which ones I am not? Please contact me.

What is Your Money Doing for the Next 4 Years?

At the risk of sounding trite, do you work for your money, or does your money work for you? Is your money sitting around collecting dust in a savings account at 1% interest, or worse – going up and down like a yo-yo in the stock market? Have you been thinking and talking about buying an investment condo for years but never acted on it and keep watching the market pass you by? The time to get into the market is now.

Every week I get contacted by would-be first time investors, fed up with seeing their savings do nothing in the traditional methods of investing, and looking for guidance to get into the condos-as-investments game. Unfortunately, so many of these people who contact me get the information they need to make an informed buying decision but ultimately never pull the trigger and don’t buy anything. They are paralyzed to make a decision. The market continually passes them by and every year they look back and say, ‘Well, I guess I should have bought a unit at ‘ABC’ development, I would have made $$$ already’.

The fact is most people don’t ‘get’ real estate. They don’t understand the key dynamics that make owning and investing in property the greatest investment vehicle in the world (in my opinion). All they see is the risk and all they listen to are those who tell them that ‘there are too many condos, the market is going to crash!’ (Background reading: Losing Mentality vs. Investor’s Mentality).

If you money just sitting around doing nothing for you, it’s time to seriously consider putting your money into some property. A great way to get started in the property game is to buy a pre-construction condo. It’s a passive investment vehicle that over the last decade or so has made many, many people very wealthy in this city.

If you are considering purchasing an investment condo for the first time, if you are fed up with the lousy interest rates the banks are offering you, if the thought of playing the stock market has no appeal to you, maybe it’s time we sit down and have a chat about opportunities today in the Toronto condo market. Contact me today.

What Your Lawyer Will Say

So you just bought a pre-construction condo. Well, you haven’t actually bought anything yet, you’ve just signed the paperwork, dropped off a deposit cheque, and your 10-day cooling off period has begun. You hired a good buyer’s agent to represent you, therefore you already know that it is imperative to have a lawyer review your agreement of purchase and sale during the 10 days (if your agent didn’t tell you this, ask yourself why). Here is what you can expect he or she will most likely talk to you about:

• Capped Closing Costs. If you don’t have caps in place for things like development levies and hydro/gas hook-ups, your closing costs could theoretically be in the tens of thousands (not including land transfer taxes and legal fees). The number one thing your lawyer will recommend is having a good cap on these costs. What constitutes a ‘good cap’ is always up for debate. 5 years ago, caps were in the $1-2K range. Now developers are pushing things up into the $8-9K range. Most lawyers push for something in the $2K range for levies, $1K for utility hook ups, but frankly, most lawyers are out of touch with what is normal for pre-construction contracts in 2010.
• “Nickel and Dime” charges. Developers are notorious for trying to sneak in charges for all sorts of things related to the purchase. They can be very creative. Your lawyer will probably point out some of them and recommend you ask them to be waived. Most builders will say no.
• Square Footage. You will get a copy of your floor plan in your agreement but 90% of the time the square footage and dimensions are not listed. Your lawyer will point out that you may get a unit that is 600 sq ft instead of 700 and there is nothing you can do about it! In one sense they are right: there is no protection in the Ontario New Home Warranty Act (provincial legislation) for consumers on this issue. There is a bulletin that Tarion put out in 1989 stating that the size of unit should not be off by more than 2%, but this is just a guideline (not written in law). In reality, variances are usually negligible, but if there was a major discrepancy, it would be a legal issue that you would have pursue through the courts. One option would be to have an amendment added to the agreement that explicitly states variance will be in accordance with the Tarion Bulletin, however, be prepared that most builders will not agree to this. Proceed with caution and understand this is part of the risk of buying pre-construction.
• Rent During Occupancy. Make sure you tell your lawyer if you are planning on using the property as your principal residence or as investment. If investment, they will probably tell you the contract says you cannot rent during the occupancy period. You may want to request a clause which allows you to do this.
• HST Rebate. There is an HST rebate (formerly GST rebate) for end-user buyers that is built into the purchase price of condos in Ontario. If you are not planning on living in the unit, you might have to pay this amount back to the developer on closing. You may apply to the government to receive the exact same rebate given back to you after final closing. Your lawyer should advise you of this reality of buying for investment.
• Assignment. If your lawyer is really sharp, and he or she knows you are buying for investment, he or she will recommend you get an assignment clause that allows you sell prior to occupancy.

There may be other issues that come up like mistakes in the contract or inaccuracies that will need to be changed, but most of the time these contracts are 95% the same from one to the next. Questions or comments? Please contact me.

What Happened The Last Time

You know the resale condo market is slowing down when the mainstream media starts writing articles telling us that it is. By the time the MSM gets on the train, it has already left the station and is well on its way to its destination. Reader of this blog and clients of mine have already known that the market has peaked and has been slowing for quite some time already.

On the pre-construction side however, it’s a different story. Buyers and agents are still lining up for the latest and greatest pre-construction launches all over downtown (seems to be one just about every week). Demand is still far outstripping supply with projects like FIVE condos supposedly receiving several hundred worksheets in the first few hours post-launch, and other projects like The Berczy and King Edward Hotel practically selling out overnight.

This is all eerily similar to the pattern we saw the last time the market slowed down. The resale market started to show signs of cracking around June/July 2008, but the pre-construction market kept humming along until the fall of ’08 when it too was affected. But prices if you recall, did not come down in pre-construction until around the spring of ’09 when everyone was ‘relaunching’ their projects with reduced pricing and finally the momentum came back.

The resale market is much more sensitive to changes in the overall housing market than the pre-construction side. Individual sellers are much more inclined to reduce prices compared to slow moving developers who don’t do anything without talking about it for at least a month or two. The pre-construction market will slow this year, but developers will probably not notice it until the Fall.

Does this mean it is a bad time to buy pre-construction? Not necessarily. I believe there are good opportunities to buy in any market, you just have to know how to evaluate the opportunities and make smart buying decisions. One project that is a still a great buy for me remains DNA3. Questions or comments? Contact me.

The Market Has Peaked, So Now What?

So the market has peaked (probably). Now what do you do? Well, first thing to remember is that most people won’t realize the market has peaked for about 3 months so if you are reading this you are way ahead of the curve. Secondly we are not talking about a market crash, and quite possibly we may not even see prices start to fall till Q3 or Q4 of this year. Making predictions on exactly how much prices will rise or fall is fool’s game, so I won’t go there, but I could forsee a scenario with flat or slightly falling prices by the end of 2010. Depending on what your situation is, here are some quick thoughts moving forward:

For Buyers:

It’s already much better now than it was just 2 months ago. Inventory is up, some sellers are starting to get a grip on reality, and you actually have multiple properties to choose from. Things will continue to get better as inventory continues to rise along with interest rates which will increase supply and decrease demand at the same time. Don’t rush into anything. Now is not the time to pay higher for a property than the last guy did. Buy smart, buy for the long term.

For Sellers:

Understand that the market has changed. Price your property for what it is worth and don’t follow the “price it low for multiple offers” strategy. Remember that if you want to command top dollar in terms of selling price, your property must show better than all the other properties on the market – proper staging and marketing is vital. Better to list now than wait till Summer. There is still time to close before the HST kicks in July 1st. Want to talk about selling your condo? Contact me.

Investors:

Keep buying if the property makes sense and the neighbourhood has good long-term upside potential. Stop buying if you are hoping to flip for a quick profit or if you are over extended.

Questions or comments? Thinking about buying, selling, or investing and want the advice of a professional who understands the market? Contact me

Buy to Sell in a Buyer’s Market

While the title of this post may sound confusing at first, the meaning is simple: whenever you buy a condo, make sure it is a unit that would be easy to sell again in the future – even in a strong buyer’s market. This is advice I always tell my clients, especially investor clients. May seem like common sense, but it is worth exploring a little further.

Besides a brief 6-month window between October 2008 through April 2009, the Toronto market has basically been a seller’s market for the better part of the last decade. Anything sells in a seller’s market, and hopefully when it comes time for you to sell you reap the benefits of a strong seller’s market, but what if you sell and the market is slow? What if there are 10 listings for every buyer, instead of the other way around? Make sure you buy smart and buy a condo that will be easy to sell and sell quickly even in a buyer’s market.

Some more tips to consider when thinking about selling in a buyer’s market:

1. Always buy a property that a wide range of buyers would be interested in.
2. Avoid one-of-a-kind units. Cookie cutter condos are not always a bad thing when it comes to investment!
3. Be wary of units with special features like terraces, multiple parking spots, customized kitchens etc. Not all buyers appreciate these features and therefore they will not be willing to pay extra for them.
4. When in doubt, buy the smaller of two units. Smaller=Cheaper=More potential buyers
5. Go as high as possible. The 25th floor will sell before the 2nd floor in a slow market.

In a hot market like we are in, it is easy to lose sight of the fundamentals of real estate investing. Buyer’s often ‘settle’ for a property that does not meet the above criteria just to get into the market. Don’t settle and always think about what if you had to sell during a buyer’s market.

Questions about buying investment condos in Toronto? Contact me directly or leave a comment here.