Category: Blog (20)

Getting your Maximum Mortgage Qualification

You need to be as strategic about your mortgage as your real estate. Here’s how.

To grow your real estate portfolio, you need to be able to qualify for as much financing as possible.  To get your maximum mortgage qualification, you need to work with an investor-focussed Mortgage Broker.  Most people think about their real estate as a portfolio, for good reason.  But they overlook the fact that they need to be thinking about their MORTGAGES as a portfolio as well.  This means that you need to be AS STRATEGIC about your mortgages as your real estate.  It cannot be an oversight, since one wrong move could limit your ability to get financing for future properties.

Simple Example

Just as a simple example, let’s say that CIBC is the easiest lender to work with.  That means that I should go there first, right?  WRONG.  If they are a flexible lender, you want to save them for when your back is up against a wall.  Conversely, let’s say that Scotia has a 4 door policy, beyond which they will not lend to you.  This may mean that you want to utilize Scotia first, because you won’t be able to use them later.

This is necessarily different from how most people think about mortgages.  Most people think of mortgages as a commodity – you can get it from here, or there, or anywhere.  The reality is much different.  Getting your first mortgage is easy, anyone can do it.  Even getting a second mortgage isn’t that hard.  But once you start growing your portfolio to 5, 7, or 10+ properties, you will see a different side of the mortgage industry.

This means that you actually need to think of your mortgage portfolio as a chess game.  You need to be thinking 5, 7, or 10+ moves ahead.  You need to have all the lenders mapped out in the order in which you wish to use them.  You need a financing blueprint.

There are many clients who we’ve worked with who didn’t plan out their financing, and at best it severely hindered and slowed down their real estate investment progress, and at worst it was very VERY expensive to remediate (i.e. mortgage prepayment penalties in order to move them to a different lender, etc.)

Advanced Example

For a more advanced example, imagine that you are employing the BRRR strategy, in which Volition is helping you find, purchase, and renovate a Single Family home in a fantastic neighbourhood into a Legal Luxury Triplex.  The key component to making this work is being able to refinance at the higher ARV value in order to do an equity takeout and get most (or all) of your $500k reno money back out so that you can roll forward with another project.

The reality is, mortgage rules are a constantly moving target.  Literally, lenders rules and regulations and conditions change on a weekly basis.  This makes it incredibly difficult (read: impossible) for the average investor to follow and figure out how to optimize.  This is where the investor-focussed mortgage broker comes in.  They should be able to map out your plan for you, according to your goals.

Keep in mind: THIS is the bigger fish!  This necessarily means that sometimes/often, you won’t be going after the absolute lowest mortgage interest rates!  Be strategic, don’t be myopic.  Think about the bigger picture.  It’s more important to be able to reach your goals than to try to save a few bucks every month on a slightly lower mortgage payment.

Importance of Investor Mortgage Brokers

Investor-focussed mortgage brokers are important as well because they understand how to get financing specifically for investment properties.  The problem with investment properties is that for every investment property you purchase, it makes it HARDER to get a mortgage for the next one.  On top of lender policies for door limits and appetite for investment real estate (or lack thereof), the problem is 50% add-backs (and not 80% rent offset, which is more favourable for investors).  In general, lenders only consider 50% of your rents, but use 100% of your expenses when calculating your GDS and TDS ratios.  This means almost ANY investment property in Toronto will have a negative impact on your ratios.  In order to continue buying more properties, you will need to service the remaining debt using your own personal salaries (which you will eventually run out of as well), or switch up your strategy and consider Join Ventures (using other people’s mortgage qualification), or going bigger into larger Multifamily (which utilizes commercial financing and the asset itself for qualification purposes, not you personally).

This is exactly why an investor-focussed Mortgage Broker is incredibly essential to your success.  They know which lenders to approach, they know how to structure your file in a way that the underwriters will understand, and they can even (somewhat) advise on the parameters of the investment properties you will need to acquire in order to be able to continue qualifying for financing.  Your Investor Realtor and your Investor Mortgage Broker will work hand in hand according to your strategy, your plan, and your goals.  If they aren’t working together, there is a gaping hole in your real estate investment execution that immediately needs to be shored up.  Volition is constantly working alongside our clients’ mortgage brokers, accountants, lawyers, and other advisors to ensure that we are all working off the same playbook.  And oftentimes, that playbook was originally designed BY Volition’s Advisory Services, in accordance with our client’s life, financial, and real estate goals.

Investor Mortgage Brokers also know how to work with real estate held in corporations.  At normal lending institutions, if you are intending to put properties into a corp, and you are working with just a regular mortgage specialist at that bank, chances are that they (and the underwriter) will not know how to deal with the corporation.  They will even sometimes resort to turfing your mortgage application over to the commercial lending department.  SERIOUSLY!?  A commercial mortgage for a normal residential house is NOT the solution!

Advanced Investor Protip to “Improve Cashflow”

Something you may want to consider is getting a readvanceable mortgage at the time you are getting your financing.  This means that you will get a HELOC alongside your mortgage, and the HELOC grows with every mortgage principal payment you make.  Again, your investor mortgage broker will be able to advise, since it’s very hard to get HELOCs on investment properties, and so your best bet is to try to get them early on when your portfolio is smaller (and definitely on your primary residence as well).  HELOCs can also be a way to “improve cashflow” on a property, if you consider moving funds from your HELOC back into your bank account upon every mortgage payment (equivalent to the mortgage principal paydown on each mortgage payment).  You are “improving cashflow” at the expense of “mortgage principal paydown” (in reality, you are just moving money from one pocket to another pocket).  If that tradeoff makes sense for you in your situation, it could be a way to improve cashflow for your investment business.  In a market like Toronto, where true wealth is built on capital growth of the asset and not by the slow process of paying off the mortgage, this could make sense.

Another way to do this is to get the full 80% LTV as a 65% HELOC segment and 15% mortgage segment  (NOTE: HELOCs are not allowed to be more than 65% LTV).  This means that you won’t be paying off any principal when making HELOC interest payments, and only a small principal payment when making your mortgage payment.  This can drastically improve cashflow as well, in a similar fashion to the previous example… the mechanics are just slightly different.  Qualification for a large HELOC can be much tougher than a mortgage, though, so this might not be for everyone.

Finale

And as you start progressing into more complicated and complex projects, there is a whole other world of financing: B-lenders, Purchase Plus Improvements, construction financing, private lending, RRSP 2nd mortgage lending.  Some of these will be thru your mortgage broker, but you will only learn about some of this from advancing your knowledge of Investment Real Estate and being part of real estate investment communities, like our Real Estate Investor Meetup (which is the largest in Toronto).  In fact, November 2021’s meetup is about RRSP 2nd Mortgage Lending!

Volition is strategic partners with the top investor-focussed mortgage brokers in the country.  As a result, our clients have the best chance to qualify for as much financing as possible.  Reach out if you are interested in being a Volition client, and we can refer you to our top mortgage brokers partners.

10 Things You Should Know About Building Your Own Laneway Suite

Volition was featured on HGTV.ca to share top tips for building a laneway suite – you can check it out here.

In true Volition fashion, the original was WAY over the max character count, so we’ve posted it below. Read on for the FULL version!

Laneway houses are a unique solution to Toronto’s high real estate prices and creative way to add gentle housing density and expand housing options in the city. They are secondary dwellings constructed on residential lots that abut a publicly designated laneway, and offer tremendous flexibility from rentals to work from home spaces to housing loved ones. Volition partnered with Lanescape and Ambient Designs, leading authorities on laneway development, to share the top 10 things you should know about building your own laneway suite.

Credit: Lanescape

 

Why Laneway Suites?

Laneway suites offer incredible flexibility for a wide variety of use cases. Possibilities include multi-generational living for adult children priced out of the hot Toronto market or loved ones to age in place, income properties with or without maintaining the garage for homeowner use, or live/work flex space. They can range from 450 to more than 1,700 square feet above grade, and be a place for both end users and tenants to call home.

 

The Design and Build Process

It is exciting to build a home completely customized to your needs! Consider the use case, shared use of the backyard (or not), and parking requirements as that will inform the design selection and development budget. Expect the project to take up to a year, with the first half for design and approvals. Services such as gas, electricity, and water are typically supplied from the main house, and can either be sub-metered (hydro) or on a check meter (gas and water). Don’t forget to plan for contingency (typically 10-15% to account for unknowns in servicing, market fluctuations, and flexibility in decision-making), tax, and fun but potentially pricey items such as landscaping, furniture, and decor!

Credit: Ambient Designs 

 

Site Requirements

The “Changing Lanes” initiative approved by the City of Toronto in 2018 allows self-contained residential units to be built as-of-right (without a lengthy and costly public hearing and approval process) if the site meets the zoning bylaws and related requirements. Considerations include abutting a municipally designated laneway and emergency service access. It is important to work with seasoned professionals with laneway suite experience as not all lots with garages are eligible for laneway houses, and it can be a costly mistake to acquire a property without confirming laneway suite eligibility. Lanescape offers free property reviews when you e-mail info@lanescape.ca with a survey or address, and eligibility and an approximate buildable area can be provided without a site visit. Due diligence from multiple sources and additional documentation will be required to determine the final buildable area and options.

 Credit: Lanescape 

 

Use Case: Income Property

Laneway suites are a terrific alternative to basement suites and condos as income properties. Tenants and landlords don’t have to share walls, entrances, or laundry, and private outdoor spaces can be created for tenants to enjoy. Tenants will pay premium rents for a property with no shared walls with their landlord, and landlords enjoy multiple benefits: lower acquisition costs, ability to sub-meter utilities, price appreciation, and low maintenance. Rental units can be over one or two floors, and garage or flex space can be reserved for homeowners on the main floor.

Construction costs range from $300 to $400 per square foot excluding development costs, contingency and taxes, but the rental income produces a higher ROI than a condo. The costs vary widely based on the level of finishes (e.g., rental vs. end-user), and the cost per square foot decreases as the building size increases). A two-story laneway house in Toronto can rent for more than $3,000 per month and can be paired with a multiplex conversion for the main house for investors to enhance returns even further.

Credit: Lanescape 

 

Use Case: Multi-generational Living

Multi-generational living reflects our changing demographics, and laneway houses can accommodate families through different phases of life. This ranges from adult children priced out of the hot real estate market with a win-win by building family equity while paying their share of the mortgage, retirees downsizing and trading spaces with their children for a carefree pied-à-terre while traveling the world, or elderly parents aging in place with thoughtfully-designed main floor living spaces and supportive family mere steps away.

Credit: Lanescape 

 

Use Case: Live/Work Flex Space

We have learned how powerful flex spaces can be: they can serve as offices, studios, gyms, guest suites, or a retreat from the family! These are best considered as an extension to the main house and can include a shared backyard and indoor garage. They can also be used as short or long-term furnished rentals for supplemental rental income when the unit is not in use – win-win!

Credit: Lanescape

 

Parking and Outdoor Spaces

Zoning bylaws do not require parking for laneway suites, but parking can still be incorporated into the design at your own discretion. The only parking requirement is to provide two bicycle parking spaces which can be located inside the structure, within the laneway setback, or at the rear yard.

For outdoor spaces, a 1.5 m setback is required from the lane which can be attractively landscaped, and there are no restrictions on fencing off a portion of the backyard dedicated to the laneway house. Imagine your own private outdoor oasis alongside all the comforts of home, and space to entertain your guests!

Credit: Lanescape

 

Design Decisions

The use case will drive decision criteria which include cost, maintenance, and durability. Laneway suite design involves tradeoffs and optimization in a small footprint. Creative solutions include space-efficient tankless hot water heaters and radiant floor heating, and using skylights instead of windows to preserve privacy from the main house and surrounding neighbours. Adding a basement is possible, but often expensive, so the use case should be well defined to ensure it makes financial (or personal) sense.

Credit: Ambient Designs

 

Looking Ahead

Emboldened by the early success of laneway suites, the City of Toronto is exploring alternative forms of housing, and other municipalities such as Hamilton are embracing the mandate.

The city is looking into developing a policy for garden suites, which are detached accessory dwelling units located in the rear yard of a house. They would enable greater housing flexibility for homeowners and families who do not currently have access to laneways with their current properties. There is a current survey underway to gather public input to inform the new policy, and you are invited to complete the online survey and participate in public consultations being held in May 2021.

Credit: City of Toronto 

 

Next Steps: Building Your Dream Team

It can feel daunting to embark on a construction project of this scale. Consider all the professionals you have to engage: real estate agents, mortgage/construction financing experts, architects, engineers, and builders.

Volition Properties is a firm with deep real estate investing and construction experience. We leverage in-house expertise and partner with trusted firms to acquire, design, and build your dream laneway home. At Volition, we manage the entire process for you – not just the professionals mentioned above, but also communication and managing relations with neighbours, tenants, and other stakeholders.

We want to make it an exciting time and a successful experience, and encourage you to take the time to educate yourself on laneway housing in Toronto. Two great options include joining the Toronto Real Estate Mastermind Meetup group to connect with like-minded individuals, and attending free monthly information sessions hosted by Lanescape.

How To Get The Highest Appraisal Value

Doing just 10% more will make all the difference.

Appraisals are possibly one of the most important aspects of real estate investing, particularly when trying to scale or grow your portfolio using the Volition “Multiplier Effect”.  They don’t happen often, but when they do, It’s critical that you give them the time and due diligence they deserve.  An appraisal can literally make or break your business model.

When are appraisals important?  Obviously, you’ll need an appraisal when you are acquiring a new property.  Most of us who have bought a property have gone through an appraisal, whether or not you were directly involved.  Oftentimes, your mortgage broker or lender will order an appraisal and it will happen seamlessly behind the scenes.  It’s not usually a problem… unless the appraisal comes in light.

But appraisals are key in the refinancing of your property as well.  Once you have equity established in your property (whether through capital appreciation over time, force equity lift through renovations, change of use, creation of value, etc.), one of the most common ways to access that equity is through a refinance.  This can include a complete payout of your existing mortgage, a top-up of your existing mortgage, or placing a HELOC on your property in addition to your existing mortgage.

Generally speaking, the higher the appraisal, the better.  A higher appraisal will allow you to get MORE equity out of your property, which means more cash in hand… cash that is typically used by real estate investors to go buy another property.  Basically, one property turns into two.  Done right, you should be able to accomplish this every 3-4 years.  This is what Volition has coined the “Multiplier Effect”.  And this is how Volition investors have been able to scale their portfolio from 1 to 2, to 4, to 8 or more properties in Toronto.

With this in mind, let’s learn how to get the absolute highest appraised value for your property.

You can approach appraisals in one of two ways: you can take a passive approach like everyone else, or you can take an active approach which is how Volition investors do it.  In the passive approach, you leave it to the fates to determine your value.  In the active approach, you try to influence the appraised value as much as possible.

At Volition, we pride ourselves on finding and working with the absolute best service providers in the industry.  The best mortgage brokers, the best accountant, the best lawyer, etc.  Funny enough… appraisers are the ONE time that we don’t mind working with an incompetent and lazy service provider.  Let me tell you why.

Volition recommends that you put in the extra 10% effort.  That extra 10% effort is what can make all the difference in the world.  Most people don’t put in that effort.  So when you do put in that effort, you can impress the hell out of the appraiser, make their job easier, and make it more likely that they will just go with whatever you have provided them.

What we do is we create an Appraisal Package for the appraiser.  So when the appraiser comes on-site, I hand them a well-developed, well-considered, well-thought through set of documents for them to look at.  This will quickly give the appraiser an idea of the property, an idea of the neighbourhood, sample comparables, and why it’s reasonable for your property to be worth $2.1M (or whatever your target value is).

You have to remember: appraisers appraise properties ALL OVER THE CITY.  It’s impossible for them to be absolute experts for every property they appraise, since they have to do upwards of 8-10 properties A DAY!  You want to quickly establish yourself as an expert and knowledgeable, without being overbearing and/or condescending.  You want to work WITH the appraiser and their ego and not overstep your bounds, but at the same time make their job easy.  Soft communication and interpersonal skills are a must.

One of the most common questions that the Volition team gets in our Exclusive Whatsapp Mastermind Chat is “if I do xyz upgrade (mini-split AC system, marble instead of quartz, etc, etc, etc.), will I get a higher appraisal”.  Our answer is “That’s not how appraisals work”.

The best way to understand this is to actually obtain and STUDY an appraisal report.  You’ll then see EXACTLY how it is that an appraisal works, and then you can reverse engineer and work backward to provide exactly what the appraiser needs. As a Volition client, we will provide you with a sample real-life, redacted appraisal report, so you can learn more about it.

Sample Appraisal Report

 

Essential Components of an Appraisal Package:

1. Feature Sheet

The feature sheets we create aren’t too much different than the ones we create for listings when we are selling a property!  Your goal here is to highlight the key features of the property.  Appraisers will spend maybe 15-30 mins doing a quick walkthrough of the home, and when making “notes”, they are essentially going through a checklist.  “Overall Condition of Property: Exceptional”.  “# of bedrooms”.  “# of half baths”.  “# of full baths”.  Etc.  They don’t have the time or energy to go through and examine every nitpicky detail.  They generally get “overall” impressions of a property to determine the level of property you have (i.e. is it a recently renovated property, to what quality, completely renovated or partially renovated, any major issues like slanted floors, etc) and then they use that as an input into the next stage of the appraisal process.

2. Comparables

After getting an overall impression of your property, Appraisers will then pull “comps”.  Comps are properties that are comparable in size, quality, and location to the subject property.  No two properties are exactly alike (unless they are in a subdivision with a single developer/builder with a cookie-cutter model, or perhaps condos), especially in downtown Toronto, so they are pulling comps that are as close as possible to your property.  After pulling a number of comps, they then make ADJUSTMENTS based on distance/location, quality of finishes, size, etc.  This is the key component.  You want the appraiser comparing with MORE EXPENSIVE properties and adjusting downwards, rather than LESS EXPENSIVE properties and adjusting upwards.  For example, if your property is in Seaton Village (west of Bathurst), you want the appraiser to be comparing (as much as reasonably possible) to Annex properties (east of Bathurst) rather than Christie Pits (west of Christie).  If an appraiser didn’t know the difference and you managed to get them to compare to Annex, you could very well get $200-300k more in your appraisal!

Also, this is why your feature sheet is important.  You want to be compared against those super-luxury, newly reno’d, expensive triplexes, not the beat-up triplex.  Even if you only spent $200k on your reno, you want to be compared to the $500k reno.  Again, appraisers GENERALLY don’t know the difference.  They only know by the pictures on MLS!

As you can plainly see, their guess is basically as good as ours!  It’s a HIGHLY subjective opinion, and we want to work this into our favour… and so it’s then easy to see why it’s not a bad thing to have a lazy appraiser.  If we do all the work for them, then they might just use it and give us what we want (or something close to it!) 

3. Summary Table

The last part is the summary table.  The summary table is the nice finishing touch that pulls together the entire appraisal package. This is where Volition investors summarize the important features of the property and compare it to other like properties, to try to get the appraiser to think that your subject property is in the same realm as the comps that you have pulled for them.

For example, if your property is a 25ft wide lot, you may wish to show a comparison of lot widths to other 25ft lots. The key takeaway here is that every summary table will look a little bit different.  You want to design your summary table so that it highlights your property in the best possible light.  Let’s say that yours is a true 3-storey and everything else is a 2.5 storey, then maybe this is something you want to include in your summary table.  However, if something that you’re trying to compare against is a little bit better than yours, then maybe you don’t actually include that in the summary table. So let’s say that yours is a 20-foot lot and you’re comparing against 25ft lots, then maybe that’s something you actually intentionally exclude from the summary table.  This is also where you would put your intended estimated value for your subject property – if you’re wanting to get $1.4M, then put $1.4M.  You’re really putting together a business case, and hoping that the appraiser will just say “Okay, yep, this is reasonable, I’ll use this”.

The idea here is to be smart, with the ultimate goal of influencing the appraiser to try to bring them into your line of thinking.  If you do all this work FOR the appraiser, and you supply them with the comps, and you’ve done the background legwork to prove that your property is indeed comparable to those comps, then there is a possibility that they’ll just use those comps (or ones like it).  Every appraiser is supposed to conduct their own independent search.  But the reality is, it takes a long time and it’s a lot of effort to narrow down properties.  If they even simply just use your suggestions as a starting point, it will lead to better outcomes for you. 

Finale

So as you can see, this is why we don’t mind having lazy appraisers.  It’s definitely not a guarantee that this will work.  It’s very plausible that some appraisers will just take the entire package and throw it in the garbage.  That has not been the experience for any of our Volition investors’ after having done hundreds and hundreds of appraisals using this methodology.  There is also the chance of offending the appraiser with this approach, which is why we also caution positioning this as “trying to be helpful”, rather than “being annoying and coming across as a know-it-all”.  It’s a delicate balance. 

As a value add to our Volition clients, we coach them through this appraisal process, we provide them with a sample appraisal package that they can then customize for their own needs, and we pull comps for them to assist in them getting the HIGHEST possible appraisal valuation.  Contact us if you’re interested in working with Volition (info@volitionprop.com), and getting the highest appraisal values just like our other Volition investors.

Welcome to Volition’s new blog series on construction projects!

I’m Florence (but everybody calls me Flo), the Strategic Initiatives Manager at Volition. I started attending Volition meetups in 2016, and the education and community here enabled me to grow my portfolio from a one-bedroom condo in 2013 to eight doors including legal triplexes in Trinity-Bellwoods and Little Italy in downtown Toronto.

I became such an advocate for Volition’s mission to help investors build wealth and achieve financial independence that I crossed over from the corporate world to join Volition and help grow the business.

Having been through several renovations including a 16-month legal triplex conversion, I am also applying my renovation and project management experience to oversee large-scale multi-family construction projects on behalf of clients.

For those who are new to construction, it feels like a black box with lots of pitfalls and things that could go wrong. It’s all true and not for the faint of heart, but it is incredibly rewarding to take something run-down and turn it into a warm, comfortable, and beautiful home.

The intention for this series is to journal two projects underway at our new property. I say “we” because this is the first renovation my boyfriend Fred and I are fully completing together. As you can see, Fred’s not afraid to roll his sleeves up and swing a hammer!

It is a detached house close to the Danforth on a 20.5’ x 140’ lot. We chose the neighbourhood as it has a great school and family-oriented community, proximity to TTC, and walking distance to retail infrastructure. These are characteristics to look for not only in your primary residence, but investment properties as well.

We chose the house due to the potential (dun dun dun…) – having shared walls with tenants and adjoining houses over the years, we value having a detached property. It’s an incredibly charming old house that is easy to fall in love with, and with the deep lot, offers options on what we can build over time.

On to the project details!

  1. Main House
  • About 1,400 square feet above grade and 830 square feet below grade. The barn/garage is 970 square feet
  • Original plan: Quick refresh of the kitchen by painting the cabinets, adding new countertops and appliances, plus a powder room
  • New plan: Drastically different after we confirmed asbestos covers much of the main and second floor walls and ceiling. Since the remediation involves stripping much of the material, we’re taking the opportunity to take down the interior walls and completely redo the main floor. There will be a new kitchen, new flooring, and we are adding a powder room and closet. Watch the video walkthrough and see what we have in mind!
  • We also conducted an energy audit as we are looking to improve insulation and efficiency, and will apply to the Enbridge rebate program
  1. Laneway Suite
  • I have been “house hacking” for years, and would like the luxury of living in an entire home by ourselves 🙂 I am still a real estate investor at heart, so we like the potential of a laneway suite to have rental income, but enjoy privacy and extra space for our own use such as a garage, office/workshop, and potentially support aging-in-place for family in the future
  • We love the existing barn/garage in the back and contemplated whether it could be converted to a laneway suite, but it would involve significant additional cost and removal of much of the existing brick and character to meet today’s building standards
  • Our property is eligible for a 2-storey structure at 1,340 square feet. The lot depth provides for the opportunity to build the entire second floor with a full height ceiling and not be subject to the 45-degree angular plane requirement

 

I am excited to blog about the construction process and share our journey with you!

Let us know in the comments if you have any questions, and I’ll do my best to answer them in future posts!

Volition’s very own Ming Lim was featured on the RISE Real Estate Investing Podcast!
Ming is a passionate educator with 20 years of real estate investment experience in Toronto, the GTA, and Southwestern Ontario. He purchased his first investment property in 2001 and has been hooked ever since!
Ming is both the Head of Advisory and Construction at Volition Properties where he mentors and guides new and experienced investors who are interested in purchasing and developing real estate in the Toronto market. Ming’s background in Computer Science from the University of Waterloo along with his construction experience give him a unique analytical lens on investing, and a practical approach to implementing investing strategies.
Check out the episode to hear more about:
  • Real estate investing in Toronto
  • How to identify risk in investment properties
  • Strategies that work today in Toronto

Listen to the episode now:

Congratulations to our client on their first investment property!

Here are three reasons why this property is a great investment:

  • Location, location, location – mere steps to the subway.
  • Outdoor space – especially important during COVID, this sets the units apart from other rentals on the market.
  • Three separate turnkey units – ready, set, rent!

Looking to start or improve your investment journey?

We can help you too, get in touch!

info@volitionprop.com
1-833-416-BRRR (2777)

 

 

We may be biased, but we believe investor agents make the best “normal” agents.
Here are some questions we can help you answer when you make what is likely THE BIGGEST PURCHASE OF YOUR LIFE!
  • Does this property hold to long term appreciation fundamentals?
  • Does it require construction? How much are those things going to cost?
  • Can I have a secondary suite to help with cash flow? How much are rents? What tenant profiles will I get?
  • How can my primary residence help me qualify for investment properties in the future? HELOC? Secondary suites?
Looking for your next home? We can help, get in touch!
info@volitionprop.com
1-833-416-BRRR (2777)

Investing in Toronto Preconstruction Condos 101.

What should I invest in? Houses vs. Resale Condos vs. Preconstruction Condos.

Preconstruction condos have their place in real estate investing.  If you’ve worked with the Volition team, or if you’ve attended our meetups, you’ll know that we preach that freehold (i.e. land) is generally the best investment.  But land comes as a price… both in terms of monetary perspective and from a time/energy perspective.

Condos are easy.  You buy a condo, and if it’s in a half-decent location, it’s easy to rent it out, and it’s easy to manage it.  The building itself and the amenities is largely taken care of by the condo property management.  Your unit is generally fairly new and thus not likely to run into too many issues.  And if you’ve chosen your location carefully, you should be able to attract what we consider to the our A+ tenant profile (millennial, a couple of years out of school, making $60-80k, working for a large firm in downtown Toronto, etc.).  And again, if you’ve chosen a good location, then the economic fundamentals of the area will support economic growth, job growth, population growth, etc.  Pretty straightforward.

Houses are a bit trickier.  Funny enough, the reason you want to buy a house is not actually because of the house… It’s because of the land.  It’s the land is that is the appreciating asset.  The building is actually a depreciating asset, because it gets older over time.  But the hard part is that land is generally not an income generating asset (with the exception of a few use cases, like mobile home parks, etc.).  So you need a building on top of the land in order to generate some income.  And then you need to lease out that building in order to cover your expenses and hopefully generate some positive cashflow.  So now, not only are you managing tenants, but you now have a building that you are having to take care of and worry about.  Generally, freehold/land/houses have been a better investment in Toronto over the past 10-20 years (and even longer), averaging a 10% compound growth over the long term… this is why the nice Italian grandma who lives next door who bought her house for $20,000 40 years ago now owns a property that is worth $1.2M… (Recall the “Rule of 70”: at 10% growth, it will take 7 years for prices to double.  At 7% growth, it takes 10 years to double).  So here we go, $20k -> $40k, $40k -> $80k, $80k -> $160k, $160k -> $320k, $320k -> $640k, $640k -> $1.28M.  That is 6 doubling periods, which is equivalent to 42 years at 10% growth.  Therefore, I’ve just been able to prove that Toronto houses grew at 10%. QED.

Condos, on the other hand, have grown at about 7% compounded over the past 10 years.  That’s not bad either.  A real life example is the preconstruction condo I bought in 2008.  I bought it for $295k and a recent comparable sold for $550k in 2018.  That’s roughly a doubling period of 10 years, which generally equals a 7% growth.  QED.  Also not bad, considering at a 20% downpayment, a 7% growth actually equates to a 35% return annualized.

More specifically, I bought it in 2008, and it wasn’t built and I didn’t take possession until 2012.  It normally takes 4-5 years for a preconstruction to be built.  When I took possession, it was worth about $350k.  So at 7% growth applied between 2008 and 2012, that figure ends up being $387k.  The difference between the figures is accounted for due to the fact that condos were not very hot during that phase, so it was only closer to 5% growth.  Condos in the last couple years (2017-2018) really took off for a variety of reasons (I’ll leave that for a future article), so the growth in condos in 2017 and 2018 has been closer to 10%, which picks up the slack.

That was the background info.  Ok, now to preconstruction.  Why is preconstruction a good idea?

I’ll sum it up quickly.

 

Why Preconstruction Condos?

  1. Resale is cashflow negative.  Condos right now are generally cashflow negative at 20% down (there are a few exceptions, but this is the general rule).  Cashflow negative is bad for many reasons.  It means that you are continuing to fund your investment out of your own pocket.  It also makes it harder to get financing for your next property because of your Debt Servicing.  Real estate is supposed to work hard for you, not the other way around!  It literally means that you have to work harder at your job just to keep your investments afloat!
  2. Potential for positive cashflow.  Rising rents allow for preconstruction to be cashflow positive after the building is constructed.  Rents rose 10.7% in Toronto last year according to Toronto Star or 15.7% according to Toronto Storeys, so if you grow current rents at even just 3-4% for 5 years, you’ll be into cashflow positive territory by the time you take possession.
  3. No tenants. As per a previous article we wrote entitled “Why Invest in Toronto“, tenants are the BIGGEST RISK TO YOUR BUSINESS!  It’s not “the market”, or interest rates, or Trump, or any one of the thousand things that regular average joe investors think… quite simply, it’s tenants.  Preconstruction allows you the luxury of not having to deal with tenants for 4-5 years while the building is being built.  AWESOME.
  4. Delayed Deposit Structure.  Most preconstruction condos have a delayed deposit structure, with 5% initially, then 5% in 90 days, 5% in 270 days, 5% in 720 days, or some variant.  This means that you don’t need all the capital upfront.  In fact, some developers (i.e. one developer in particular that we are working with and are Platinum VIP Brokers for) are offering an INSANE deposit structure: 5% initially, then $1000 a month until you make up another 5%.  For example, for a $600k 2bdrm, this would be $30k initially, then $1000 a month for 30 months.
  5. Mortgage.  As investors, the biggest roadblock we all face, at one time or another, is financing.  Some will hit their financing wall earlier, some later, but everyone will hit it eventually.  Preconstruction offers a way to continue to invest, and not have to continue to qualify for mortgages.  You don’t need a mortgage until the condo registers (i.e. 4-5 years down the road), which is amazing.  This can be great if you have too many mortgages already.  This also can be great if you cannot qualify for a mortgage right now, but anticipate that you will be able to in the future (new to Canada, bruised credit because of divorce, new job, don’t make enough salary now but will in the future, etc, etc, etc.  There are a dozen different use cases that follow under this category).  Also, precon doesn’t hit your credit bureau, so you could potentially buy preconstruction, and then CONTINUE to invest in regular buy-and-hold investment properties that need mortgages.
  6. VIP pricing/incentives.  As Platinum VIP Brokers, we have early ground-floor access to projects.  This is important, because it can often mean built in equity as soon as the NEXT phase is released.  We recently had one client purchase a preconstruction 800sqft condo at $1000/sqft, and within 3 months, the next phase pricing was released at $1200/sqft.  He made a paper gain of around $160k in 3 months, without hardly lifting a finger (well, he did have to sign his cheques, I suppose).  This is obviously not guaranteed, nor a typical case, but it can happen.  A more typical scenario is the price-per-sqft goes up maybe $25-50 for the next phase… but either way, it’s built in equity.  And then there’s the regular incentive crap that most people buy into… upgraded countertops or something like that.
  7. Today’s pricing. This ties into #1 and #2 above.  You are buying at today’s prices and will be getting tomorrow’s rents.  The problem with #1 above is that you are buying at today’s prices and getting today’s rents.  If you were able to get today’s rents and you bought at yesterday’s prices (i.e. you bought years ago), then you could also be in cashflow positive territory.  And in terms of valuation, you’re buying at today’s prices for a future built condo unit (which is traditionally worth more after it’s built).  Why is it worth more after it’s built?  I could write an entire article on why, but to keep it short and sweet, it’s because of expensive developer financing (the “mezzanine” financing in the early stages of a condo project is very expensive, and only after pre-selling 60-70% of a building can they switch over to a triple A lender at triple A lender rates).  Also, it’s due to uncertainty… you are only buying a piece of paper, a contract.  At the presales stage, you aren’t actually buying a unit.  So you don’t know if it’s actually going to be built, or if the developer is going to go bankrupt, etc.  Also, you don’t have a physical unit to inspect prior to purchase.  You are HOPING that it will be built like you think it will be, and as per the floorplans and feature sheets.

Because of some of these aspects, some investors tend to think that preconstruction condos are just for speculators, and that they don’t fall into the tried-and-true buy-and-hold investing model.

I disagree.  At the end of the day, real estate investing is all about identifying risk, figuring out your strategy, and mitigating risk.  There is definitely an element of uncertainty, but that uncertainty can be mitigated thru careful research and location selection.

For example, one of the areas that the Volition team is helping our clients with is in the Eastern Waterfront area.  Why?  Two words: Google Smartcity (or three words if you think that Smart City are two words).  Technically, it is Sidewalk Labs (Google’s sister company), but for all intents and purposes, we can think of them as Google.  They won a proposal from the City of Toronto to develop the eastern waterfront called Quayside, which is an area just east of Parliament and south of Lakeshore.  It’s potentially a gamechanger, with 50,000 new jobs, and the new Google Canadian HQ will be going in there as well.  You can read a descriptive Globe & Mail article about Google Smartcity here.  So we naturally selected a preconstruction development right beside it.  Boom.

And even in the event that everything falls thru, the City of Toronto has mandated that it will be developing that area.  So even if it’s not Google who’s going to be developing it, someone will be.  And if it’s not that… George Brown is near there, Corus is nearby, it’s close to downtown, it’s near other developments and condo buildings that are already more expensive on a $/sqft basis meaning it still has upside potential.  And the area is definitely going to continue to gentrify.  And it’s still proximity to Distillery District, and to East Harbour (50,000 new jobs, new transit hub).  These are types of defensive measures that we take to mitigate “market” risk (again, refer back to our Whitepaper for the 4 Types of Risk in Real Estate Investing).

 

Ok, you’ve convinced me.  What do I do now?

So now we know why Preconstruction fits in as a investment strategy into your overall business strategy.  But how do you actually execute?

Buying Preconstruction is not actually as easy as it sounds.  It’s actually very challenging… if you aren’t working with the right agent.  I know it sounds cliché… and maybe it is.  But it’s also very true.  When trying to get early access and ground level pricing, developers in Toronto only give a select number of Platinum VIP agents access to units.  This is called “allocation”.  This is often because of that agent’s reputation and relationship with the developer.  So if you wanted to walk in off the street and get access to VIP pricing, good luck.  Similarly, if you wanted to work with your brother or aunt or sister-in-law’s chiropractor who is an agent on the side and wanted to get access to the best possible deals and best possible pricing, also good luck.  I’m not trying to being pretentious or condescending.  This is just the reality.  Those agents are only going to get access only after the presales early phases have already sold out, and now the developer can switch over to Triple A financing and start their construction, and then they can just sit and wait for the other unit to sell… now at a much higher premium.

So what do you do?  Align yourself with an agent who has early access, and one who can get allocation, and one who can be your advocate, and one who can get you assignment rights, and one who can cap your development fees, and one who can help you select effective floorplans that minimize wasted space, and one who can help you identify your tenant profiles & projected rents & projected cashflow & projected returns.

This article has focused on the why.  The next article will focus on the how, including touching on HST, HST rebates (and the forms to use to get the rebate back), assignments, occupancy, owner occupied vs. rental, pros/cons,and exit strategies (i.e. what if can’t qualify for a mortgage after it’s built?)… and most importantly, how Preconstruction Condos help new investors get started as part of a broader investment strategy using the “Stepping Stone Approach”, and how to build up to eventually owning land in Downtown Toronto!

 

Meetup: Pre-construction Condos – Do they make sense as an investment?

We actually delivered a meetup presentation specifically for Preconstruction Condos in May 2018.  Details of it are available here.  Contact us for the slides/video/audio.
https://www.meetup.com/Volition/events/rcztmpyxhbwb/ 

 

About Us

The Volition Investment Properties team are experts in Toronto real estate.  We’ve helped investors invest in over $110M+ in real estate, build over $47M+ in wealth, and generate $4.5M+ in cashflow.  We’ve also educated over 650+ investors at our Monthly Real Estate Investment Mastermind meetup (www.meetup.com/Volition).  Contact us today for a free 60 minute complimentary consultation to see how we can help you reach your real estate goals, so that you too can “Live Life By Design, Not By Default”.

 

 

Capital Gains

Simply put, capital gains occur when a property is sold for more than what it was purchased for.  A property that was purchased for $1M and sold for $1.2M will have $200k capital gains.  Only 50% of the capital gains is subject to tax, meaning only $100k is taxable.  This amount will be added to the owner’s taxable income for that year.  For all intents and purposes, this generally means that almost the entire $100k will be taxed at the marginal tax rate, which we can generally estimate at 50%.

So if you were to sell a property and make $200k in capital gains, you should estimate to set aside $50k (25%) to pay in taxes at the beginning of the following calendar year (e.g. if sold in 2018, 2018 taxes are filed in April 2019, taxes to be paid around April 2019).

 

Reducing Capital Gains

Going deeper… capital gains are actually calculated using the Disposition Proceeds MINUS Adjusted Cost Base MINUS Outlays & Expenses.

  • Disposition Proceeds are the funds you received for your property from the sale.
  • Adjusted Cost Base would be the purchase price of the property.  Renovations costs can also be included, as well as any expenses to acquire it, such as legal fees, Land Transfer Tax, etc.
  • Outlays and Expenses:  Costs associated with the sale of the property.  Lawyer fees, Realtor fees, etc.

So it’s important to keep good records / bookkeeping because you are actually able to reduce your Capital Gains by deducting the relevant expenses.

 

Recapture

Claiming depreciation on the building is a GREAT thing from an operational perspective (i.e. straight line depreciation of 4% of the cost of the building over the course of 25 years… and you/your accountant can designate the building value vs. land value to whatever is appropriate… I recommend making the building value as high as possible).  It effectively brings down your operating income down to zero, in 99% of the cases, meaning that you SHOULD be paying income taxes due to rental income (this is a separate topic altogether).  BUT, upon sale, if you sell the property for MORE than what you paid for it, then the CRA will say “hey, you can’t depreciate it after all, since it went UP in value!”.  This means that you have to pay the tax deduction that you took on the depreciation of the building back to the CRA.  But that’s ok, because you effectively had a tax free loan from the CRA during the entire time.  And it helps with cashflow from an operations perspective.

 

Principle Residence

Your PR is NOT subject to capital gains.  NOTE: Starting in 2016/2017, the CRA requires that the sale of a principle residence to be reported on your tax return.

 

% of Use

If you lived in one unit of a multi, an accountant would probably recommend to designate your unit as a % of the entire property as Principle Residence.  For example, 1 unit out of 3 would be 33.3% principle residence, 66.6% rental property.  This is not an exact science… you may be able to argue your principle residence portion as a actual % sqft of the whole, or # of floors… so let’s say that you lived on 2nd and 3rd, then you may be able to say that you are designating 50% as primary residence.  This is going to be up to you and your accountant.

 

Change of Use

If a property was previously your primary residence, and then you moved out and then turned it into a rental property, then it’s deemed a Change of Use.  It would be capital gains exempt under Principle Residence for the duration that you lived there, and then it would be subject to capital gains for the duration that it is a rental property.

At that point, you are supposed to technically get a appraiser to appraiser its market value at that point in time.  However, this is usually overkill and a waste of money, and a “Letter of Opinion” from a reputable Realtor (i.e. us!) would usually suffice.  We would pull comps and be able to defend the market value.  You would want the market value to be as HIGH as possible, so that more of the capital gains would be Principle Residence exempt.

 

Dirty Little Secret Rule

Oh, and there’s a very obscure little known rule whereby if you change your Primary Residence into a rental property (“Property #1), and you move somewhere else (“Property #2”)… let’s say that you are RENTING the Property #2 (i.e. you become a tenant)… or if Property #2 is not as valuable of a property with limited upside potential… you can continue to designate Property #1 as your primary residence for up to another 4 years, even though it is actually a rental property.

http://realestatetaxtips.ca/the-little-known-4-year-extension-on-principal-residence-exemption-after-you-move-out/

 

About Us

The Volition Investment Properties team are experts in Toronto real estate.  We’ve helped investors invest in over $110M+ in real estate, build over $47M+ in wealth, and generate $4.5M+ in cashflow.  We’ve also educated over 650+ investors at our Monthly Real Estate Investment Mastermind meetup (www.meetup.com/Volition).  Contact us today for a free 60 minute complimentary consultation to see how we can help you reach your real estate goals, so that you too can “Live Life By Design, Not By Default”.

Toronto skyline

Why Invest In Toronto?

Toronto skyline

Why Invest In Toronto?

We get this question all the time! With prices high and competition fierce, why do investors still pour money in to the Toronto market? It doesn’t take skill to buy a property – if you’ve got the money, you can make a purchase; but what separates your average person from a sophisticated investor is being able to mitigate your investment risks.

 

What are the major risk factors?

1) Tenant Risk – the risk of having bad tenants
2) Market Risk – the exposure your invest has to market changes
3) Property Risk – the risk of the property itself
4) Investor Risk – the risk stemming from the lack of knowledge of the investor.


How is risk different in Ontario vs. the rest of Canada?

Ontario cities have a different risk profile compared to typical Canadian cities. A typical Canadian city has a balanced risk profile, with each major risk element being equally important. Therefore, your risk mitigation strategies would also be equally weighted. Ontario has laws which are much more favourable to tenants, making tenant risk much higher. If you have bad tenants in Ontario, it can take months and cost thousands before an eviction. This can impact your investments long-term sustainability.

So how does investing in Toronto help mitigate my risks?

Return is a direct function of risk and real estate is no exception. While investing in Toronto might come at a premium, your investments are less prone to the four major risk factors.

Tenant RiskWith tenants as your biggest risk to your investment portfolio, it’s key to invest in areas which attract the best tenants – not just “okay” tenants. Investing in the right areas in Toronto means you attract the best demographic – young, professional Millennials working in the downtown core. They are typically university educated; have stable well-paying jobs in Finance, Insurance, Consulting, Healthcare, and Tech; and earn salaries between $60k–$80k. This demographic is also willing to pay top dollar for great apartments, allowing you as an investor to maximize rent potential. Finally, this demographic is transient, which means they’ll move out after a few years. This is vitally important: due to rent control laws in Ontario, you’re only able to easily increase rent on tenant turnover. In contrast, investing in a small town can mean a more challenging tenant profile which means a larger risk to your investment portfolio. If you invest in the right areas in Toronto, you reduce your tenant risk and as a result, your investment is more easily held for the long term – which is where real wealth is generated.

Market Risk – Population growth drives real estate prices and jobs drive population growth. Toronto is the economic and job creation centre of Canada. Not only is Toronto the headquarters for many businesses, it’s spread across a diverse number of markets; there are no ties to a single industry. Toronto’s population boom is expected to continue given recent legislation. The Canadian government announced that we will be accepting one million immigrants over the next three years and approximately 50% of all new immigrants (roughly 150,000) settle in Toronto. This, in combination with domestic in-migration due to job growth in the professional services sectors, will contribute to continued demand in the Toronto market. Downtown Toronto’s strength in economic diversity and its attraction as a place to live and work was shown through its resilience during the market downturn in 2017. Additionally, Toronto’s strength is reflected in its rental vacancy rate, which at the time of writing, sits at 0.7%.

Property Risk – Problems can and will occur with the actual property itself (e.g. leaky faucets, blown furnaces, old roof, etc.). A cashflow positive property will help build your reserve fund to ensure that you can handle any unexpected expenses and hold for the long term.  Volition will help you identify the right investment property in the right areas of Toronto that will allow you to cashflow positive. The other way to mitigate property risk is by building the right team of professionals. A home inspection will provide you with insights into what you can expect with the major systems of the home in the next 5 years of ownership, which you can then budget for.  Renovations are an effective way to reduce property risk, as a well-renovated updated property has less propensity for things to go wrong. All Volition clients have access to our rolodex of dependable plumbers, electricians, and handymen, which helps make your business run like a well-oiled machine.

Investor Risk – “Risk comes from not knowing what you are doing.” – Warren Buffett. Reduce this Investor Risk by getting educated and networking. Attend one of our Volition monthly seminars – they’re a great place to become educated and develop a strong network of other investors. Ultimately, a sophisticated investor can turn an underperforming property in a  strong performing property, because they know which strategy to employ at any given time. Likewise, a sophisticated investor knows how to deal with any situation that arises, or has the network to lean on in the event that something is beyond their expertise. Treat your investments like a business.

 

I’m ready! How do I invest in Toronto?

The best way to invest in Toronto is by building a strong team. Volition is an award–winning investment firm and the Real Estate Investment Network (REIN) exclusive Investor Realtors in Toronto. We provide four areas of services for our clients:
1) Advisory – Guiding investors through the entire investment process
2) Realty – Finding and purchasing investment properties
3) Renovations – Build and renovate properties to maximize returns
4) Property Management – Help our clients hold for the long term

We help our clients live their life by design, not by default!

 

Contact us today for a FREE 60 minute consultation! We’ll review your investment goals and develop a plan on how to reach them. Email us at info@volitionprop.com to setup your appointment!

 

 

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