Investment Alternatives in unsophisticated Real Estate Market.

At some point you must have wondered about the various investment options available in Canadian real estate market, especially in view of consistent upward trend of the housing market and the fact that the Canadian economy has shown remarkable strength despite the European and American market slowdown. As such, I thought of sharing with you, my write-up on various Real Estate Investment Alternatives :
 
In my opinion, there are various ways investors can use real estate as an investment tool. Given below are the most popular Real Estate Investment Alternatives :
 

1) Principal residence as an equity builder :

Given the fact that market is steadily rising, the home equity could be used to buy another house or debt consolidation. In most cases, people sell the existing house & use the equity to make a good down payment on a bigger home, with mortgage amount most of the times, remaining same. In some cases, when people use it to downsize, it leaves them with a bigger chunk. Sometimes, when the equity is huge, people also use it to invest in another property, which is called leveraging.

2) Rentable residential property :

The idea is to own a property which is connected to the transits, shopping and schools so as to be able to rent it easily to tenants. The rent covers its operational cost and giving a little cash flow in addition. The property then, is sold for a profit at later date. Assuming an average appreciation of approximately 5 – 10% on the value every year, (given the fact that location is favourable, condition of the property & market conditions are stable) we can easily conclude that the rate of return on equity is about 25% each year (if 20% of the value of the property was invested as down-payment).

3) Pre-construction Condos :

Condos Appt or a townhouse in a demand location & then flip it upon occupancy, generally in 3-4 years, gaining almost 40k on an average. Again as good as 5-10 % appreciation per year and almost 25% of equity return each year. The main difference between the pre-construction investment property and a resale investment property, however is that in case of pre-construction condos, you make an investment of about 20-25% over a year in steps and do not have to worry about any carrying costs for at-least 3-4 years until they are built & you are given the interim occupancy. Between the interim occupancy & the final closing, you pay a rent almost as good as the mortgage amount to the builder & your mortgage, property tax and maintenance starts only after the final closing which takes anything from 6 months to 1 or 2 years depending upon the height of the building, your floor etc.

4) Fixer Upper detached property in an effluent neighbourhood :

Another interesting option is to buy an old outdated or a rundown property (demolition costs & architectural plans of rebuilding a new house included in the price) in an exceptionally demand location. One may then keep the property for few years with existing tenants or no tenants. And then either sell it to a developer for a huge profit or one may hire his own developer and sell the newly finished home at an exceptional value. The trick however in this case is the location and the knack of picking the right property at the land value & the perception to be able to understand its future value.

5) Commercial Business without property :

To purchase an established business with good will, without property, can be tricky as it is a vast ocean of opportunities and variety of businesses are available for sale in various sectors and with innumerable uses and permits with prices starting from as low as few thousands. It is therefore essential to have clarity on your interest and skills to be able to successfully carry it forward. The important thing to remember here is that the purchase of a business does not include the property or land. It only includes the good will or the loyalty of clients, some chattels and fixtures and sometimes the inventory. The existing lease needs to be assumed. A good business is the one which has a Cap Rate of 6% or more and your Realtor should be able to guide you on Net Operating Income, TMI (Taxes, Maintenance & Insurance), Existing lease and the renewal option, daily or weekly cash counter, Franchise fees, royalties etc.

6) Commercial Retail with property :

This is an option for a more advanced commercial investor who knows which business will work best in which location and accordingly purchase the unit at the pre-construction or post-construction level. This unit can be then leased to the business owner, who would furnish it to his requirement and operate. The banks require higher down payment (about 35%) in case of commercial, as against residential properties. There are a lot of intricacies involved in buying a commercial property with regards to the permitted uses allowed by the city and allotted to the particular unit, available parkings, TMI etc.

“In the end, there are many options available to invest. Finally it depends upon your interest, risk tolerance and of course the assistance and guidance of your Realtor to make it a successful investment decision.”

 

TAXATION FACTS TO CONSIDER ON AN INVESTMENT PROPERTY :

 

  1. If property is not primary residence and sold within a year, it is considered a commercial transaction and hence the HST is charged on the difference between the purchase & sale price.

 

  1. The Income Tax Act allows for a 50% inclusion rate when accounting for capital gain income. Therefore, only 50% of the profit would be taxable at your income tax bracket. If your income is in the highest tax bracket which is $126,000 or more, you are required to pay (about 22% (half of 43.7%) on the profit made on the property.

 

  1. It is important to point out the if you are in the "business of buying and selling properties", the Canada Revenue Agency (CRA) will likely tax your capital gain income as regular business income, which has a 100% inclusion rate. In this situation, you would be required to pay 43.7% on the profit made.

 

  1. There are tax deductions available on the investment property like insurance fees, legal fees, property taxes, land transfer fees, maintenance etc. These costs are deducted from the profits while calculating the taxes.

Disclaimer : This article is an attempt to provide simplified options widely used by Canadian investors in unsophisticated Real Estate Investment Market. There are a lot more complex and advanced solutions available mostly in the commercial real estate industry.

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Asmita Raina

Asmita Raina

Sales Representative
CENTURY 21 Affiliate Realty Inc., Brokerage*
Contact Me