CANADIAN REAL ESTATE INVESTING

Do you know anyone who has made a long-term real estate investment and continuously lost money? Probably not. That's because, as long as you invest in a region with a strong economy, real estate is one of the safest asset types you can buy for the long term. The problem with the land is that it is not something that continues to be produced, making it a valuable asset.

How to Get the Most out of Real Estate Investing

Purchase a Primary Residence

While your primary property is an asset, some people believe it should not be considered an investment. The fundamental reason is that it does not generate cash flow. Regardless of your position on the subject, the home you reside in has the potential to appreciate significantly in value over time, especially if you purchase in a rising property market.

Renting out a portion of your House

Converting your primary residence into an income-producing real estate investment is perhaps the simplest way to own income property. This can be accomplished in a variety of ways. Renting out a portion of your house also known as house hacking is a common practice. House hacking is when you rent out parts of your primary dwelling, such as a bedroom or a basement apartment, while you are still living there.

The rental unit(s) generates money that helps to offset the expense of your mortgage. It's a fantastic approach to boost your income flow while also increasing your net worth. Short-term rentals, such as Airbnb, can be considered house hacking as well.

Invest in a Rental Property by Converting your Primary Residence

If house hacking is not for you, you could always buy or rent a new home and turn your old one into a rental property. There are a couple of benefits to doing so. You avoid the cost of purchasing a rental property from the ground up because you already own the home. On rental properties, most lenders want a down payment of 25% or more. You also have to discover a suitable home and go through the mortgage approval process. It takes a lot of effort.

However, if you intend to do so, be sure that your current home is suitable for rental purposes. Consider asking yourself the following questions: Is it possible to generate a positive cash flow? Will the monthly rental revenue, in other words, be sufficient to cover the mortgage, property taxes, and any other connected expenses?

Is it in the right part of the city? Is there a need for rental units in your neighborhood? Find out what the vacancy rates are and how likely it is that the home will be always occupied. A vacant rental property can rapidly become a hardship.

Invest in a Residential Property Flip

If you have ever seen HGTV, you're aware of what it means to "flip" a house. House flippers make money in real estate by purchasing an investment property with upside potential, pouring substantial sums of money to increase the property's value, and then selling for a profit. Some house flippers will keep the property as a rental, but the goal is usually to get in and out quickly.

House flipping might be risky, but it can pay off attractively if done correctly. To be successful, you will need specialist knowledge of the local real estate market (or the assistance of someone who does) as well as extensive renovation experience. While some house flippers can get away with merely aesthetic improvements (i.e. interior/exterior paint, landscaping, and staging), others invest in costly and time-consuming structural improvements in the hopes of generating a profit.

In most property flipping situations, the goal is to make a substantial profit sooner than later. It is the only rationale for taking such a big risk because the consequences could be disastrous.

Commercial Real Estate

Commercial real estate ownership is a less common but very profitable way to invest in real estate. A single-unit retail storefront to massive office complexes and shopping malls are all examples of commercial real estate. Commercial real estate is used by businesses to operate retail stores, restaurants, offices, and manufacturing facilities.

Higher rental margins, the stability of long-term leases, and the ability to diversify are all advantages of commercial real estate investing. Commercial properties, on the other hand, necessitate extensive and expensive, care as well as a large time investment. There is also the issue of responsibility when it comes to owning public structures.

Invest in Real Estate Investment Trusts (REITs)

REITs, or Real Estate Investment Trusts, are pooled assets that allow you to buy and sell real estate on the stock exchange. The benefit of including REITs in your portfolio is that you can profit from the real estate market's growth without incurring the high costs and hassles of purchasing individual properties. You can own hundreds of residential and commercial addresses across Canada through a REIT.

Tax Implications of Investing in Real Estate

If you understand the Canadian tax regulations that relate to real estate investments, owning property in Canada can be rewarding.

Taxes on Property

When you acquire a home, you must pay a provincial land transfer tax, which varies by province, but is typically 1% on the first $200,000 and 2% on the remainder. If this is your first time buying a home in Canada, you may be eligible for some tax exemptions. Municipalities also charge annual property taxes based on the assessed property value, which is the market value.

The federal Goods and Services Tax (GST) applies to new house purchases, however, if you expect to reside in the home or rent the home, you can get a partial rebate if you buy a new or builder-renovated property. Resale properties are exempt from the GST.

Taxes on Rental Property

The Canadian Revenue Tax Legislation requires the remittance of 25% of gross property rental income each year. Non-residents, on the other hand, can fill out an NR6 form and pay 25% of their net rental income. You may be able to reclaim previously paid taxes if the rental property has a net loss. An important thing to consider is whether the income you earn from the space in your home will be reported as business or rental income on your personal income tax return.

To gain rental revenue, you can deduct two categories of incurred expenses: current running expenses and capital expenses. You cannot deduct the cost of furniture or equipment for a rental property from your rental income for that year. However, because these items decline in value, the cost can be deducted over time. The capital cost allowance is the name of the deduction (CCA).

If the property is an investment property, property taxes, mortgage, bank loan, and line of credit interest are tax-deductible in Canada.

Disposing of your Property

If you are a Canadian resident and the property is your primary residence, you will not be taxed on the capital gains when you sell it. Any residence can be designated as a primary residence if you "ordinarily inhabit" it. Seasonal homes, such as a cottage or a mobile home, may be eligible for the designation. Each year, a family unit can only have one primary dwelling. This stipulation has significant ramifications. If you own multiple properties, for example, you must choose one to identify as your primary residence based on the capital gains for that year.

If you live in Canada and are a resident, but the property was not your primary residence for the time you owned it, you must prorate the capital gain for the years you did not use it as your primary residence. A change of use, such as from rental to primary residence, may result in a "deemed disposition," triggering capital gains taxes. You can, however, choose to wait to recognize this gain until you sell the house.

When a non-resident sells a property in Canada, the Canadian government deducts 50% of the transaction price as a withholding tax. The capital gain must also be reported to the Internal Revenue Service by American residents (IRS). If the profit was taxed in Canada, however, it can be claimed as a foreign tax credit. When a non-resident sells a property in Canada, the seller must give the buyer a CRA clearance certificate. Without this certificate, the buyer can keep a portion of the purchase price because he or she may be personally liable to the CRA for any unpaid taxes owed by the non-resident.

Conclusion

A fundamental transformation in the workplace has reverberated throughout the real estate industry. There have been views on how long those changes will last and what the future of work will look like, there is no doubt that the workplace will appear different than it did before 2020. This will have implications for business decisions across key asset classes as well as for the users of real estate themselves.

A shifting landscape for offices, changing migration patterns, and a greater focus on mixed-use communities are all key developments. Low-interest rates, increased savings by some Canadians during the epidemic, and a desire for additional living space have all helped to drive housing demand and, as a result, property prices and affordability issues.

The information contained was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete and it should not be considered personal taxation advice. We recommend that clients seek independent advice to suit individual considerations.