Vacancy tax is pointless, say Vancouver sales agents

Empty abodes in Vancouver will be slapped with a vacancy tax, that one sales agent says amounts to little more than a slap on the wrist.

While the hope is that the tax could free up as many as 25,000 empty units for rent in a city suffering from a rental supply shortage, the 1% vacancy tax likely won’t dissuade owners willing to forgo rental revenue, says Marilou J. Appleby of Dexter Associates Realty.

Homeowners must declare their property’s status annually, however, properties for which no declaration is filed by February 2 will be considered vacant and, in addition to being subjected to the tax, will be fined $250.
An amount Appleby believes is palty.

Moreover, she says it’s affecting Vancouverites who spend part of the year away and don’t want to rent their homes out to strangers.

“Owners are not thrilled about it,” said Appleby. “A lot of people in Vancouver spend winters down south and they have to have their places rented. In my opinion, it’s not going to solve any problems. Really, who it will hurt again are Vancouverites who are living a very normal life, who want to have the opportunity to spend winter in a warmer climate.

“I live in downtown Vancouver and people talk about dark buildings, but I don’t see that. There’s a very vibrant downtown community.”

She also said that if a homeowner can afford to leave the place vacant, taxing them 1% practically amounts to asking them for their pocket change.

“One percent could be substantial to some people, but if you’re allowing your place to stay vacant then you’re losing revenue anyway, so what’s 1%?” she said. “That’s why it’s a useless tax.”

Mahmoud Ahmed, managing broker of Nu Stream Realty, agrees with Appleby.

“The vacancy tax won’t do anything,” he said. “There’s a lot of money in the city, so 1% won’t make a lot of difference. If they don’t need the rent, that’s why it’s sitting empty anyway. It’s not going to be the solution for affordable housing.

“Most homes that are vacant are not entry-level homes, they’re mansions. It won’t make an impact on the rental market because most people don’t have $10,000 a month to spend on rent.”

As for how the tax will affect the market, Ahmed says it’s far too early to tell. But he says the 15% foreign buyer tax only managed to cool down the market temporarily, therefore, a 1% tax probably won’t even make a dent.

“Fifteen percent is a big hit, but 1% won’t do damage,” he said.

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Why researching your rent-to-own company is important

While rent-to-own purchases are becoming more popular, it’s important to know who you’re dealing with, and to balance the risks and rewards.

According to Bob Aaron, a real estate lawyer with Aaron & Aaron, rent-to-owns typically surge in popularity during market downturns, and they’re also one of the few options people with bad credit have available to them. However, Aaron also says that it’s his preference to advise clients against entering such arrangements.

One way in which buyers get short-shrifted is by paying above-market rental prices than they would for a similar house, which, if the buyer chooses not to purchase the home, cannot be recovered.

“Rent-to-own helps when the seller can’t sell and when buyers can’t get approved for mortgages, but the way it often works is the seller gets the lump sum from the buyer/tenant which is used to underwrite the down payment,” said Aaron. “So if the buyer decides not to close, or can’t close, or can’t get a mortgage, all that money they paid up front and along the way is down the drain.”

He also says another problem with rent-to-owns is there aren’t any industry standard forms.

The buyer/tenant isn’t the only party at risk, though.

“A defaulting owner can stick the landlord-/investor with all kinds of arrears, mortgage taxes, utilities, and damages to the house, and the landlord/owner/seller is going to be stuck with those arrears and damages,” said Aaron, adding the courts don’t recognize rent-to-owns under the tenancy act.

“If the buyer- occupant is in default, it’s very difficult to get rid of them.”

There have been stories of unscrupulous rent-to-own companies in the media, but one in particular has taken a unique approach to the rent-to-own model, and has a 100% success rate of turning its renters into homeowners.

Dale Monette, CEO of Homeowners Now, explained to CREW that by empowering renters with everything they need to improve their credit scores, save money, and eventually own their homes, the rent-to-own model can become an exceptionally successful way to help families achieve homeownership.

Homeowners Now endeavors to get their clients both financially- and emotionally- invested in their future homes. by holding tenants’ down payments in trust. The company a client-first approach, which entails allowing the client to choose the home they want to live in and purchasing it for them.

“Some rent-to-own companies do a $0 down payment, but we want to get them financially invested by an initial down payment, typically 3% of the purchase price, and holding it in trust for them,” said Monette. “Based on our research, $0 down programs have a higher likelihood of the client walking away from the property, because they weren’t financially invested.”

Homeowners Now made the internal decision to return down payments should their clients default, but with a 100% success rate that’s never happened. One reason is the company does everything in its power to make sure its tenants have everything they need at their disposal.

“We actually pay for home inspection reports and appraisal reports, as well as the closing costs for our clients,” he said. “They don’t have to give us any more money for closing costs or legal fees – they just provide the down payment and monthly rent. We take care of the rest. When working with us, essentially our clients are working with a team of self-employed entrepreneurs, like realtors and mortgage brokers, so they stay directly in touch. We even help our clients with grants when they experience hardship, which ultimately helps them become successful in the rent-to-own transaction.”

As Aaron says, it’s important to have all documents perused by a lawyer. Equally as important is selecting a company that invests in its clients as much as it does in properties.

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A hands-off investment that will diversify your portfolio

Being a landlord is time consuming and, at times, frustrating. One professional has an alternative real estate investment idea that some landlords may want to add to their assets.

Why would a residential real estate investor be tempted to add REITs (real estate investment trusts) to their portfolio?

We asked an expert in the field that very question.

“Diversification. Depending on the amount of wealth you have, how many investments are you going to have in your portfolio of homes – is it two, three, four? Are they in different geographies and sub-markets? Are they subject to different macro-environment risks that could impact value in one way or another?” Corrado Russo managing director, investments and global head of securities at Timbercreek Asset Management, told CREW. “Certainly buying REITs gives you A: Diversification across broader spectrum of markets and it also gives you broader spectrum of commercial real estate. There are different dynamics and growth prospects and risks when it comes to retail, office, industrial, storage, healthcare, data centres, that can all have different demands and characteristics.”

Investing in REITs allows investors to own assets in various markets and take advantage of the varying levels of risk and reward afforded in each, according to Russo.

So what is a REIT, for the uninitiated?

It’s a company that owns and, in many cases, operates income-producing real estate. They own commercial real estate properties and investors can become shareholders.

They allow a more hands-off approach to real estate investing.

“The other one is management intensity. If you’re buying these and managing them on your own what are the headaches involved? How are you managing them?” Russo said. “If you’re doing it yourself, how time consuming is that? Are you following best practices if you’re doing it yourself or if you have a small local person that’s doing it?”

REITs may not be for everyone; but for the real estate investor looking to diversify – or add a more hands-off asset to their portfolio – they may be worth a look.

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CREW poll: Pot growing in rentals

With a proposed marijuana legalization bill in the offing, should the government tweak the bill to ban people from growing in rented homes?

Take our poll today.

The Cannabis Act was introduced in the House of Commons earlier this week. Under the act, adults will be permitted to grow as many as four marijuana plants in their homes.

The announcement has one landlord group calling for reform already.

“Fundamentally we want marijuana growing to still be prohibited in rental units and in multiple-dwelling units, (ncouding) include condos (and) co-operatives,” The Canadian Federation of Apartment Associations President John Dickie told CBC News. “Because, from that point of view, there are impacts on the neighbours.”

There are also concerns about the impact grow-ops can have on the resale value of a home because of the stigma attached to those homes.

Growing plants in-house can also cause mould issues and increase the possibility of fire hazards, both of which could result in costly bills for homeowners.

Many lenders also shy away from financing former grow-op homes, according to several mortgage brokers.

“I think the government is obviously balancing a lot of issues here,” Dickie told CBC. “They do want to break the black market, and that’s important. But we think we can break the black market if they let people [only] grow it in their own owner-occupied homes, and the product is readily available in stores or by mail order.”

Related stories:
Selling a pot-growing home in B.C. might prove tricky
New federal regulations to allow growing of medical marijuana at home

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Budget options for Canadian millennials in the age of soaring prices

With Canadian housing price growth having set new records this year, more and more millennials are branching out to other viable options aside from home ownership.

Among these alternatives, especially popular in red-hot Toronto, is cooperative purchases of homes between friends or relatives, The Canadian Press reported.

In its recent survey, RBC noted that co-ownership is a top choice among 24 per cent of millennials. HomeLife/Realty One Ltd. (Toronto) sales representative Alan Aronson said that a leading reason is that each of the buyers in a co-purchase can qualify for a larger mortgage, while sharing the remaining costs (such as land transfer taxes and insurance) among themselves.

However, Aronson warned that this route has its own share of risks, especially considering that relationships can and do become strained when it comes to money. For instance, if one party neglects their fiscal responsibilities, all the co-owners might be forced to sell the property early or might even lose it to the lenders.

Another option would be to rent, probably in perpetuity. Jason Heath of Objective Financial Partners said that this might indeed be the better choice in the most expensive markets, if one is willing to “ignore the practical and psychological benefits of home ownership.”

Instead of using one’s funds for down payment, one can instead invest it—and in the process avoid other, not initially obvious, expenses such as taxes and closing fees.

Earlier this month, Statistics Canada warned in its report that young workers nationwide are facing far worse conditions compared to professionals from older generations, with the youth unemployment rate over a period of 4 decades (from 1976 to 2015) being around 2.3 times higher than the rate among workers older than 25 years old.

This trend accompanied a severe decline in the take-home pay and the purchasing power of this demographic by the early 1980s, with young Canadian males (17 to 24 years old) experiencing a 15 per cent reduction in their real hourly wages, and young females suffering a 10 per cent drop.

Related Stories:

Young workers’ wage and job situation placing market at risk

Low down payments are ultimately detrimental to first-time buyers – CMHC head

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CREA releases latest sales figures

Canadian home sales have fallen for a third consecutive month.

“Home sales continued to trend lower while price gains further accelerated in the Lower Mainland of British Columbia,” said Gregory Klump, CREA’s Chief Economist. “This suggests that sales are being reined in by a lack of inventory and a further deterioration in affordability. The new 15 per cent property transfer tax on Metro Vancouver home purchases by foreign buyers took effect on August 2nd, so it will take some time before the effect of the new tax on sales and prices can be observed. That said, the new tax will do little in the short term to increase the supply of homes.”

National home sales fell 1.3% month-over-month in July and 2.9% year-over-year.

The average price jumped 14.3% year-over-year last month. Newly listed homes, meanwhile, increased 1.2% month-over-month.

“National sales and price trends continue to be heavily influenced by a handful of places in Ontario and British Columbia and mask significant variations in local housing market trends and conditions across Canada,” said CREA President Cliff Iverson.

Many cities in those two provinces continue to be considered “seller’s markets.

“With sales down and new listings up, the national sales-to-new listings ratio eased to 61.6 percent in July 2016 – its second monthly decline following its peak of 65.3 percent in May. A sales-to-new listings ratio between 40 and 60 percent is generally consistent with balanced housing market conditions, with readings below and above this range indicating buyers’ and sellers’ markets respectively,” CREA said in a release. “The ratio was above 60 percent in about half of all local housing markets in July, virtually all of which continue to be located in British Columbia, in and around the Greater Toronto Area and across Southwestern Ontario.”

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B.C. government mulls housing market cooling measures

With the upcoming preparation and approval of its budget next month, the British Columbian government is set to tackle housing relief as a primary concern.

Premier Christy Clark said on Tuesday (January 12) that luxury or speculation taxes won’t be implemented in the government’s bid to moderate Vancouver’s surging housing market, which has put an increasing number of homes out of reach of a growing fraction of would-be owners.

Clark did not give further details, only saying that the measures would focus on providing relief for first-time buyers without devaluing the properties of current owners.

“We’re thinking of a whole range of things. You’ll see more of it as we get closer to the [Feb. 16] budget,” Clark told media in a press conference, as quoted by The Globe and Mail.

In an economy struggling with a weakening petro-currency and reduced purchasing power, affordability has become a more important consideration for buyers. While first-time buyers in B.C. are exempt from the property-purchase tax on homes worth less than $475,000, nearly one-thirds of homes in the region – especially in Vancouver – lie well beyond this price range.

Late last year, the government said that it was considering some adjustments to the current property-purchase tax thresholds, including revisions to the $475,000 exemption for first-time buyers.

“We are not interested in taking steps that will see a diminishment in people’s equity, the value of their homes, but we are interested in facilitating entry into the housing market by young families, young British Columbians,” Finance Minister Mike de Jong said last September.

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Not-so-good news for investors in these two markets

An excess of homes for sale has constricted price growth in Regina and Saskatchewan, according to RE/MAX who predicts those two markets – and local investors — are in for a difficult 2016.

Prices in Saskatchewan fell 3% year-over-year, according to the company’s recently released national housing outlook for next year. The average price in that province fell to $319,850.

“Higher than normal inventory characterized the Regina housing market in 2015, due to significant new construction that came on the market over the past two years,” RE/MAX said in the report. “High inventory kept Regina in a buyer’s market throughout 2015; however, as construction slows and inventory is absorbed, a more balanced market is anticipated next year.”

Meanwhile, the average price in Saskatoon fell 2% year-over-year to $354,150.

“An increase in new builds has created market conditions modestly favouring the buyer in Saskatoon,” RE/MAX wrote. “Currently, there are four months of inventory on the market, and inventory is expected to increase as more of these new builds come to market next year.”

Single-family homes priced between $350,000a and $425,000 were in the highest demand last year, according to the agency.

Similar to Regina, prices in Saskatoon are expected to remain stable next year.

So while the respective markets will show some improvement in 2016 over this year, they will remain difficult places to make significant gains as an investor.

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Finance minister announces down payment rule changes

New down payment rules will go into effective February 15, 2016.

“The Government’s role in housing is to set and maintain a framework that is equitable, stable and sustainable. The actions taken today prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions,” Finance Minister Bill Morneau said in a release. “They also rebalance government support for the housing sector to promote long-term stability and balanced economic growth.”

The minimum down payment for new insured mortgages will increase from 5% to 10% for the portion of the house price above $500,000, the finance ministry wrote.

Minimum down payment for properties up to $500,000 will remain at 5%.

The changes are meant to reduce taxpayer exposure while supporting long-term stability of the housing market, according to the ministry.

“This measure will increase homeowner equity, which plays a key role in maintaining a stable and secure housing market and economy over the long term,” Morneau said. “It also protects all homeowners, including many middle class Canadians whose greatest investment is in their homes.”

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