Buyer prepare

Prices for US real estate are rising, but have not reached their precrash levels. That means you can still pick up a good buy — as long as you do your homework.

If it sounds too good to be true, it probably is. The old saying holds a lot of truth when it comes to investing in US real estate. For several years following the market collapse of 2008, when many US property owners were losing their homes, Canadians saw an opportunity to use their relatively strong currency to scoop up bargains.

But experts say the bargain sell-off has for the most part run its course. Since hitting bottom in 2011, prices have been climbing back toward their prerecession levels as those who lost homes and jobs continue to regroup in a recovering US economy. And the sinking Canadian dollar has recently made US real estate less affordable for Canadians.

That $50,000 home in Florida you see in advertisements for seminars on how to make a killing? US companies selling bundles of properties? “Investment advisers” selling shares in bundles of properties? All a case of caveat emptor.

AVOID BULK DEALS

“When the market crashed in the United States, there was an opportunity for people to buy real estate at significantly reduced prices,” says accountant Mark Serbinski. “Subsequently, a good number of companies have set themselves up reportedly to facilitate the acquisition of profitable real estate investments, especially by Canadians.”

Serbinski, a CPA in Ontario, Florida and Illinois, likens this phenomenon to the “shoeshine boy with the stock tip” — i.e., when everyone you meet is talking up the stock market, the party is over.

It’s not that Serbinski believes buying US real estate is a bad idea — on the contrary. But he advises against bulk deals, where he has seen promoters packaging duds with good properties. Buyers should also avoid companies that have designed deals from a US perspective, he says, because Canadians have much to consider about taxes and liability when buying crossborder. (See “Tips from the experts” below.)

“Is there still real estate that’s a good buy in the US? I would say certainly,” Serbinski says. “But it’s not necessarily a good buy because it’s depressed. It’s a good buy because of future potential.”

In all, foreigners bought US$104 billion worth of US property in the 12 months ended March 2015, up from US$92 billion for the 12 months ended March 2014, according to the National Association of Realtors. But at US$11.2 billion, Canadian spending was down 19% from the year ended March 2014, and down 35% from the seven-year high of US$17.1 billion in 2010.

A TELLING COMPARISON

Diane Olson is a former Canadian police officer with dual citizenship who specializes in helping Canadians purchase and sell property in the Phoenix area. She provides a telling comparison of pre- and postcrash markets based on supply. “From 2004-’06, there might have been 4,000 to 6,000 homes on the market in the greater Phoenix area,” she says. “At the bottom of the market in 2011, there were 50,000-plus.”

As of July of this year, 20,000 homes were listed in the area. At 25,000 listings, you have what is considered a balanced market, Olson says.

At the same time, prices are rising, but have not reached their precrash levels. “We’re up significantly in certain areas from 2011,” Serbinski says. And Olson points out that “you can still get a really nice house for US$200,000 to US$250,000 — a 2,000- sq.-ft. home with three or four bedrooms.” She’s also been busy listing homes for Canadians who bought low and now want to realize profits.

Olson estimates that postcrash she made about half her sales to pure investors. The other half went to people looking to vacation in Arizona, some with the intention of renting out the property for the rest of the year, and many with the anticipation of a sunbelt retirement.

Winter vacationers and eventual retirees are the ones that the sunbelt will most likely continue to attract, says Tony Maiorino, vice-president and head of wealth management services at RBC Wealth Management in Toronto.

“We are still seeing some ongoing investment in the US,” he says. “But I think it is less from a purely opportunistic perspective. Being able to own a property that will get you out of Canada during the winter is a big part of it.”

WHEN THE DOLLAR TAKES A DIVE

Maiorino says the biggest consideration right now is the Canadian dollar. Over the 12 months ended in March, it depreciated by 13% against the US dollar, according to the National Association of Realtors. The association calculates that a property going for $210,734 in the first quarter of 2014 would have cost $252,480 if purchased during the first quarter of 2015. “But if you believe the values are going to go up and you’re going to use the property throughout the year and may rent it out for a period through the year, now is as good a time to buy as any,” Maiorino says.

For high-net-worth buyers seeking properties purely for investment, he says private placements might be a good way to go. “And if you don’t have the ability to participate in some sort of private placement, real estate funds that have property in the US are the easiest and most effective way for the average Canadian.”

Still, for some, the bargain hunt continues. And it can pay off for those who know what they’re doing and have done their due diligence.

Allan Madan, an accountant in Mississauga, Ont., owns investment property in the US worth US$2.45 million, including a 79-unit apartment building in Ohio. Recently, he put in a short-sale offer of US$257,000 for a house at Lake Nona in Orlando, Fla. The house had an outstanding mortgage of US$400,000 and the owner was unable to make payments, so the bank agreed to make a deal below the mortgage value rather than take ownership, while the owner agreed to walk away. The house needed only a minimal amount of work to prepare it for renting.

As an investor, Madan can see that the days of easy profits from flipping US real estate are over. But he also says that when you have a buyer and a seller, there is always potential value to be found. “You just have to keep your eyes and ears open and it takes time to find the right deal.”

TIPS FROM THE EXPERTS

Understand your options for structuring a crossborder real estate deal to minimize taxes down the road. US estate taxes, in particular, can be particularly onerous. For this reason, some Canadians use crossborder trusts to purchase US properties.

Some US states have higher property taxes for nonresidents. And investors should be sure to factor in maintenance and management expenses that come into play when renting out properties.

Some accountants advocate limited liability partnerships (LLPs) as a way of protecting your Canadian assets should someone sue, for instance, after having been hurt on your property. (Limited liability companies, on the other hand, can be problematic for Canadian investors.) LLPs can be structured in various ways to limit liability to the amount invested by the limited partner. It’s important to remember, however, that the outcome of litigation is dependent on court interpretation. Liability insurance is another option to protect yourself.

Rental income must be reported on a US tax return, but tax treaties allow for tax credits in Canada, so double taxation can usually be avoided.

Understand the demographics of the market you’re going into. Is a property in a desirable neighbourhood? Are people moving into the area? Are there employment opportunities that will keep people coming?

It is best to pay cash if you can. It is more difficult for Canadians to get a mortgage in the US than it is at home. And owning outright means you will not be forced to sell at the wrong time.

Before you sign anything, always sit down with your lawyer and an independent tax adviser to make sure you have all the facts.

About the Author

Susan Smith


Susan Smith is a freelance writer in Toronto.

comments powered by Disqus

Highlights

Update your knowledge and strengthen your network at this must-attend conference covering the most important issues and trends affecting audit committee members.

It’s probable that someone you know is deep in debt. If you are observant, you might see one of these seven signs.