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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.

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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.

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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.

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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.

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Investor Mentality

In contrast to yesterday’s post, “Losing Mentality“, I wanted to present to you some observations about the people who are successful condo investors. Those who buy (and sometimes sell) multiple condos over years and understand that condos as a great way to accumulate long term wealth.

1. They are entrepreneurial. Either they run their own businesses, or they can at least think like a business person. They treat buying and selling condos as running a micro-business. Money in + time + effort = Profit
2. They are risk takers. Buying a piece of paper and hoping it turns into a highly profitable asset is RISKY. Either embrace the risk, or put your money in the bank at 1%.
3. They don’t follow the flow. Simply put, if your mom/friend/uncle/blog-comments-section tells you shouldn’t be investing in condos because ‘there are too many condos downtown’, you are listening to the wrong advice.
4. They are focused. They decide what they want before they go looking for it. They don’t consider every development and project that appears just because it is the ‘flavour of the week’. They have a set of criteria and they stick to it.
5. They have money. Let’s face it, most people don’t have the typical 15-20% deposit required to buy most pre-construction condos. Those that do and have invested it in condos in Toronto, have done very well. The rich are in fact getting richer.

Some exhibit these characteristics on their first purchase, others learn them in time. Most of these can be acquired and practice makes perfect, but at the end of the day, you either have the stomach for condo investing or you don’t. I’d love to hear your comments and thoughts. If you are a seasoned condo investor, or want to learn how to become one, let’s talk.

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Losing Mentality

Buying a pre-construction condo takes guts. It takes vision. It takes money. It’s not for everyone, but for those who understand the game and play it well, the rewards are huge. Those who are fearful, lack vision, and have no access to capital will continue to sit on the sidelines and wait. And wait…

Every month I meet people who are looking to buy their first investment unit on a pre-construction sale. Some of them end up buying a unit and in time will reap the rewards. But most get stuck and never actually buy anything. They are trapped in what I call a ‘Losing Mentality’ that prevents them from taking part in one of the most incredible investment vehicles ever.

These would-be buyers all suffer from a similar mindset/perspective that prohibits them from getting into the condo investment game:

1. They don’t think like an investor. Investors don’t worry about if a suite is facing the wrong direction, or if the neighbourhood is not one they would like to live in, or if the building only has 3 treadmills instead of 4. The condo is not for you to live in, it is a vehicle to accelerate the growth of your money!
2. They listen to bad advice. No offense to all the moms, uncles and internet trolls* out there reading this, but you don’t know anything about real estate, let alone the specific niche of pre-construction condo investment in downtown Toronto. Stop listening to people who have never bought a condo and start following those who own dozens of them.
3. They don’t know what they want. So many would-be investors I talk to can’t make up their mind – Do I want to buy new or resale? Am I buying an investment property or is this for me to live in? Up and coming area or established neighbourhood? If you don’t know what you are looking for, you’ll never find it.
4. They are risk-averse. Purchase agreements for new condos are downright scary (from the buyer’s perspective), just read one if you don’t believe me. The developers write them, so what else would you expect?! Developers are out to protect their own butts and in exchange they offer you the chance to make a ridiculous return on your investment. If you want safety and assurances that everything will be fine and your money is totally safe, put it in the bank at 1%.
5. They are looking for something that doesn’t exist. The proverbial 2 bedroom condo downtown, close to subway, with parking for $250K doesn’t exist. Get a grip on reality and stop dealing in fantasy. Understand the process and the capital investment involved. Understand where the market is today and where the market is going to be in 5, 10, 20 years.

Check back in tomorrow as I contrast this list with a list of common characteristics for what I call the “Investors Mentality”. Things that many of my most successful investor clients have in common. What do you think about this list? Leave a comment or contact me.

*Tongue-in-cheek representation of the types of people who tell you that buying a condo as investment is a bad idea. Many of my clients are actually moms and uncles, although I try not to associate myself with internet trolls!

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Rental Market Heating Up?

The Globe and Mail had an article last week that suggested that the rental market was heating up as would-be buyers were leaving an overheated condo market in favour of renting. As a result, the rental market is now heating up considerably. The evidence for this hypothesis provided by the author was strictly anecdotal, so I decided to do some investigating on my own to see what was happening in the condo rental market downtown.

I polled some of my colleagues who work rentals at Remax Condos Plus because I rarely get involved with rentals so I am not on top of this market. Unfortunately there wasn’t much consensus. Some agents disagreed with the article completely – they said that supply is higher than ever in the rental market.  When there are over 100 rental units in a single building like Maple Leaf Square, and plenty of other new condos set to come online this year, it’s hard to call it a landlord’s market. However, some agents had stories of bidding wars such as one agent who mentioned they had a few rental listings at CASA (33 Charles) recently and all fetched multiple offers within days of listing for rent.

The fear for investors who are buying units in new developments is will rents continue to rise to catch up with rising property prices downtown? I had one person email me and lament about how Toronto is a lousy place to be a landlord essentially because rents are so ridiculously low compared to other major world cities.

The rental market is one that investors and buyers should keep an eye on as it does affect the condo (sales) market. So I’d like to hear from you: agents who read this blog and also those of you who are looking for rental properties or investors who are trying to rent out their properties at the moment. Would you characterize this market as a tenant’s market or a landlord’s market? What is happening on the street?

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What Ever Happened to Cash Flow?

Investing in Toronto condos used to be a pretty straightforward proposition: buy a property with as little down as possible then rent it out with the income from the rent covering your mortgage, taxes, maintenance on the property etc. For much of 90s and the first half of the 2000s, this was the way it worked in Toronto and many investors took this approach. Sometime around late 2006 this all changed when property values continued to rise while rental rates began to stagnate and in some cases drop. Positive cash flow with 20-25% down disappeared.

When the market dipped in late 2008-early 2009, prices fell, interest rates fell, and rental rates stayed the same. It was a perfect storm whereby positive cash flow with 25% down reappeared on the Toronto scene, and a few savvy investors noticed this and began to buy once again. The market heated up in mid 2009 and has stayed hot ever since.  Prices rose, and so did interest rates. Today, it’s safe to say that buying a resale condo downtown for more than about $500 per square foot will result in a negative cash flow situation (assuming 25% down). Nobody likes negative cash flow!

The obvious question is how sustainable is a market like this where investors are buying condos by the thousands priced at $600-$800 per square foot that they know for a fact will not generate positive cash flow? So many investors are counting on their properties to appreciate so that they will make a profit. This could very well happen, but by definition this is speculation rather than investing.

I’d like to know what cash flow rates in the larger cities like New York or London are like. Any of my readers with experience in these markets, feel free to comment on how investors approach this issue in one of these cities that Toronto is being compared to more and more often these days.

Questions or comments? I always welcome my readers’ feedback!

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Why No One is Buying Your Assignment

Around this time last year I predicted 2009 was going to be the year of the assignment. I was wrong. While assignments did begin to take a greater role in the overall Toronto condo market, they still have not gone ‘mainstream’. Quite frankly, this method of buying and selling real estate will probably never go mainstream, however, in 2010 it looks like assignments will be seen as a “Third Way” of buying condos in Toronto (the traditional two ways being pre-sale or resale).

People contact me just about every day and ask me about assignments - I want to buy an assignment! I want to sell my condo by assignment! The truth is, most people have no idea what is involved when buying and selling an assignment. When the Average Joe learns just a fraction of what there is to know about assignments, 95% of the time Average Joe ends up returning to the comparatively simple world of pre-sales and resales.

So for all the sellers of assignments, as well as those who may be thinking about buying a condo by assignment, I’d like to introduce to the the top-5 reasons why many assignment listings never sell:

1. No Market Exposure. You are not allowed to advertise assignments on the MLS. Many assignment listings don’t sell because no one knows about them!
2. Lawyers. Most lawyers hate assignment deals. They often look for reasons to kill the deal – and with assignments, you don’t have to look to hard.
3. Price. This is probably the #1 reason why many assignment listings don’t sell. You can’t price an assignment like a resale property. Investors buy assignments and investors don’t pay current market value for property!
4. Closing Day Too Far Away. Buying a pre-sale condo then trying to flip it a month later is a fool’s game. The unit must be at or very close to occupancy so that market value can be accurately predicted and the investor can safely determine if they are getting a deal.
5. Closing Costs. Did you get your closing costs capped by the developer when you first bought your condo? If not, there is no way to tell exactly what they might be. Buyers of assignments need some degree of certainty as to what closing costs they will incur, otherwise they will move on.

Bottom line, assignments are not for everyone, but for the right buyer and seller, working with a good Realtor and co-operative lawyers, they can be a fantastic way to transact in real estate. Questions about assignments? Contact me.

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Pricing Starting to Favour Pre-Construction

Once upon a time in Toronto real estate, there was a rule  that investors followed religiously – you only buy a pre-construction condo if the price is lower than that of a comparable existing resale condo. If the price wasn’t lower than existing resale condos of similar quality in the immediate area, then it just didn’t make sense to buy. After all, why take on the risk of buying ‘from plans’ when you don’t know how long it will actually take to be delivered, what the final build quality will be like, and what additional surprise costs you may incur along the way.

When market really started to get hot sometime in mid-2007, and pre-construction condos became the thing everyone and their mom were investing in, this long-held rule was abandoned. Prices of pre-construction started to reach heights never seen in the resale market. $600 Per Square Foot was suddenly a normal rate for pre-builds, whereas resale prices were still hovering around $425 PSF.

Over the last six months, there has been a seismic shift in the resale market. Prices have escalated at about 2% per month since June 1. If you bought a condo on May 1st of this year anywhere downtown, it likely has appreciated about 12% in value. Congrats.

Prices have gone up so much and so quickly in the resale market that the value is now, incredibly, starting to once again favour pre-construction.  Resale prices in several of the ‘prime’ downtown buildings like College Park, The Hudson, The Met, 18 Yorkville, Mozo, are now routinely hitting the $550-$575 PSF range. One upper floor 1+den with parking unit at College Park recently sold for $660 PSF! With several pre-construction projects across the downtown still selling between $500-$550 PSF, it doesn’t take a genius to figure out where the best value for your investment dollar is and where it will be in the months ahead.

If you are interested in taking advantage of some hidden gems in the pre-construction market downtown, let’s talk.

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