Investing in real estate has long been considered an excellent opportunity to build equity and ultimately, a solid financial portfolio. Not only can you create a monthly income through a good real estate investment, but over time, your asset has the potential to increase substantially in value. With the American housing market still in flux and the volatility of stocks and bond investments, many Americans are in search of an alternative investment opportunity. Canadian real estate is raising itself as an intriguing investment opportunity for some.
Canadian Real Estate Market shows Solid Growth
According to various recent reports, the Canadian real estate market remains strong with Toronto, Calgary and Vancouver all reporting solid year-over-year increases. Canadian Imperial Bank of Commerce economist Benjamin Tal stated he believes some of its strength is the result of homebuyers’ eagerness to lock in low mortgage rates before they rise in the near future. According to a local real estate board in Calgary, September sales were reported 19 percent higher than one year ago and 14 percent higher than the long-term average for the month. Ann-Marie Lurie, chief economist for the Calgary Real Estate Board, states in a press release that “sales growth remains strong, in part because net migration has been stronger than anticipated and rental product is in short supply.” Another reason many Americans may be looking toward Canada for investment opportunities is the strength of the Canadian Dollar. In the long run, this could offer some refuge against the possible challenges the US dollar may face in coming years.
Americans Permitted to Invest in Canadian Property
The good news for American investors is Canada doesn’t require citizenship to own property. You will need to follow immigration requirements, however, if you plan on staying on an extended basis or decide to become a permanent resident. If your property is strictly purchased for rental purposes, you will need to file annual tax returns with the Canada Revenue Agency. If you do decide Canada is a viable real estate market for your investment needs, there are several points you need to consider.
Considerations when Investing in Canadian Real Estate
Just like any investment, from stocks and bonds to mutual funds, real estate investment includes a level of risk. If you invest substantial money into a property that does not rent or provide adequate cash flow, it increases your potential for financial loss. And if the real estate market fluctuates, it may be more difficult to sell the property and cash out on your investment, if needed. It’s generally more difficult to sell a house quickly than to liquidize stocks or mutual funds.
It’s also vital to keep in mind when investing your hard-earned money that you will take in more than you will be charged for borrowing the funds. It’s essential to fully-investigate the market in the particular area you wish to purchase as some cities in Canada may have already reached the top of the market, and you don’t want to be caught in a housing bubble where your property is ultimately worth less than you paid for it.
Make sure you create a legitimate investment strategy for yourself and not rely solely on “real estate tips” from friends. This will help you set goals and keep you accountable on expenditures. Determine your financial goals on paper, both for the long-term and the short-term. Another great way to cut costs is to research through commission free real estate networks such as Comfree. It’s also important to consider how much time it will take to manage your rental property.
If you don’t have the capability to deal with tenants and maintenance efficiently, especially from afar, be sure you factor in the cost of a competent management company.
Research Tax Implications when Investing
There are tax obligations associated with every stage of your investment, from ownership, to renting or living in the house, to selling it. It is recommended that Americans contact a professional accountant about the process as it is somewhat different than the US. When a property is purchased, you may be responsible for a provincial transfer tax which is often around one percent on the first $200,000 with two percent due on the balance. Some exemptions do apply.
Annual property taxes will also be due, levied by municipalities. There are also taxes levied on rental properties. The Canadian Income Tax Act requires that 25 percent of the gross property rental income is paid each year. If you are not a resident, however, you may choose to pay 25 percent of the net rental income (after expenses) by submitting an NR6 form. If your property incurs a net loss, then you may recover previously paid taxes. From an investment perspective, it’s also important to note when a non-resident sells a Canadian property, the Canadian government takes 50 percent of any sale as a withholding tax. As an American, you would need to report the capital gain to the U.S. Internal Revenue Service. If you have been taxed in Canada, this may be claimed as a foreign tax credit. Again, contact a professional accountant to ensure you understand the tax obligations.
Remember to Exercise Good Business Sense
When you purchase an income property remember to view it as a business deal. It is not a house you need to love or become attached to – the property needs to make good business sense. You are an investor and your expenses, from mortgage, to taxes, insurance and repairs, need to be estimated so that if the market takes a dip, you will be able to hang onto the property until the market improves. Again, just using good business sense can go a long way toward protecting you from bad investments.
Photo courtesy of: James Thompson