Often I get asked by friends and family alike, and even some investors, “What do you think of investing in the United States?”In a few short words, with respect to my American friends, in my opinion, this is not yet the time to be investing in real estate south of the border.I know; there are numerous people who are spending millions of Canadian dollars there. I am not one of them, and will probably not be for at least a couple years… if ever.
There are several factors which lead to my decision. The current stimulus package is going to lead to US inflation, and have a depressing affect on the value of the US dollar.Those bills have got to be paid somehow, and without increasing taxes, the Government is going to have to print money, with inflation to follow.I doubt our American friends will see inflation as they had in Zimbabwe.But, it will drive the value of the US dollar down compared to other currencies, including the Canadian dollar.
As the US dollar falls, the price of oil, which is expressed in US dollars, goes up. Oil is not going up in value.The dollar is falling.That has a positive affect on resource based countries like Canada and Australia.Our currencies will strengthen in response.
One factor to watch is the price of gold.It is another measure of the US economy.It is hovering around $950 an ounce today, with many predicting it could hit $1,200 by the end of 2009.
In terms of falling values alone, any Canadian considering investing in real estate in the United States needs to really consider the inflationary impact on that decision.
Then we have the current housing crisis in the US.There are some centres that are doing alright.But, from the news I hear, I suggest that as a whole, the US has another year to go before it hits bottom. July 2009 was one of the hardest months in terms of the number of foreclosures.
Then I hear, “But, I can get it for $60,000.”Right!You can get it for that.But, who is going to rent it?What is the neighbourhood like where you are looking?There are large expanses of Detroit, an exception, I agree, that have been bulldozed to prevent the vacant buildings from becoming a blight.Large sections and subdivisions in other cities sit vacant, and are deteriorating.Houses that are vacant for even a short time become subject to vandalism and theft of the metals, such as copper wiring and pipe, used in the construction.
And as for that $60,000 building… wouldn’t it be better to pay $30,000 or $40,000 for it later.A drop in value of the US dollar of, let’s say 25%, would wipe out any ROI for a long time.And if values come down, rents are going to follow.
There is a huge inventory of property across the United States that needs to be absorbed before there will be a significant swing in values.
Next we have taxes, and dealing with income tax issues on both sides of the border.Anyone seriously considering investing on the other side of his or her own border needs to consult an accountant or tax expert familiar with both countries’ laws.
Now, the final concern I have is physically crossing the border.A Canadian investing in the United States needs to be scrupulously clean about his or her intentions when entering the US.If Border Services discovers that you are not where you said you were going to be, or doing what you said you would be doing, the possibility of your being barred from ever entering the United States again is high.
There are ways for Canadians to invest in the United States and do well.However, it is not a field for amateurs or new investors to enter without knowing all the facts, and rules to play within.Do your due diligence before you decide to play south of the border.
NB: While everyone should take note of this, the phone numbers below for the credit bureaus are for Canada. Sorry, my American friends. :-(
We have all heard the news reports of identity theft. You may even have experienced it yourself. However, I have had a recent experience I want to share with you, that you may be able take some lessons from.
Last week I went to pay for my dinner at a local restaurant by using one of my credit cards (one of the ones with the new memory chip in it). The card was rejected. I treated it rather lightly and figured I missed a payment, something that I try to avoid, but which does happen from time to time. My thought was I would pay it over the weekend and be up and running again by midweek, at the latest.
On Sunday I called the bank and learned that my account balance was more than $21,000. I almost had a heart attack as I sat in my chair listening to the message. I knew I had not made those kinds of purchases and that I had better talk to a real person, ASAP.
I called the Lost Card department and got through to a real person. When we began going through my purchases since my last statement, I could identify everything until she asked about a cash advance. “I don’t use my credit card for cash advances.” was my reply. We went through some more purchases, including a couple really small ones that I did not recognize, but weren’t worth worrying about. Then she asked about another cash advance… and another… and another. In total, there were 23 cash advances of $750 or more.
Leaving much of the minutia out, I have had several conversations with the bank investigators and RCMP (our local police force) over the last few days. In summary, this is what I have learned, and what I pass on to you for your information:
1. There is a gang of bad guys working the North Shore stealing credit card data.
2. They think my mail was compromised and that the bad guys intercepted both my card info and PIN directly from my mail
3. Both the card and PIN were then remailed to me, with the PIN on what may be a phony letter. (My PIN letter, which fortuitously I kept, is now with the RCMP.)
4. There is also a possibility that a retailer I shopped at had its credit card information mined, although this is the less likely scenario. NB: At least one of the North Shore theatres has had its system attacked.
5. The bad guys use the card for cash advances until they can't use it any more. They may buy gas at a gas bar, but tend not to make purchases where they could be identified later by a person.
The lessons I have been handed over the last week include:
1. Those chipped cards can be compromised.
2. As soon as you receive one, after activating the card, change your bank issued PIN immediately, and frequently after that.
3. If your card has been compromised, this will limit your exposure to the fraud, but may not eliminate it. The bad guys go to work within days of collecting your information, giving you sufficient time to activate your new card. They may even activate the card themselves, although this is unlikely. They don't want you, the legitimate card owner, to call to activate your card, only to find it has already been activated by someone else.
4. Check your credit rating at least annually, and preferably every 6 months, to see if anyone is creating accounts in your name. CHECK BOTH!
a. Equifax Canada 1 800-465-7166
b. Trans Union Credit 1 800-663-9980
(As I noted above, these numbers are for Canada. My American friends should check for the US phone numbers.)
5. When they arrive, check your credit card and bank statements carefully for irregularities.
When this first started I thought it was a bit of a joke, and treated it lightly. However, as a result of my talks with the RCMP I recognize how serious this really is. I do not know yet whether or not I have been a victim identity theft.
Recently, I became involved with a property that was clearly over price for the neighbourhood. It was a very well built side by side duplex, with each side having a self-contained suite. Workmanship and finishes were first class.
We see all kinds of programs on TV where, generally, new investors go into a property, with the hopes of renovating and making a killing when they resell. It would be interesting to learn what percentage of those "speculators" actually make money on the transformations. I call them speculators because newbies entering a business they do not know with the hopes of making a profit on the flips are not true investors, IMHO. They may become investors over time and with experience.
A rule of thumb in renovating a home is to never spend more that 5% of the value of the home on a renovation. So, if a home costs $300,000, the most you should spend is $15,000.
There is a lot to be said for adding rouge and lip stick only when renovating a home, in others, cosmetic repairs only. However, if the property in question is the lowest valued home in the neighbourhood, and doing major renoes, such as redoing kitchen and bathrooms, will bring the value up to the neighbourhood standard, then by all means do the renovations.
What about the property I mentioned above? Well, another rule of thumb is, "Never do improvements to a property that would increase its value more than 10% above the neighbourhood average." If homes in the area have an average value of $300,000, and the combined value of the property in question and the renovations totals more than $330,000, you will be over improving the property, and will never get your money back.
In this case, the market value of surrounding detached homes was about $330,000. The asking price for each unit was $400,000. I first looked at these two units in August 2008. As of June 2009, they are still for sale.
Years ago a friend of mine owned a home in an area where the average price was about $140,000, as I recall. He decided to do MAJOR renovations to the home. The house was a one of a kind home when finished. They had a huge walk in closet and bathroom off the Master Bedroom (taking out the other two BRs on the main floor in the process), a cavernous basement family room, a party room with hot tub accessed through the MBR by a circular staircase. This room had a spectacular view of Halifax Harbour. This is a house that I would love to own.
When my friend put it on the market, his asking price was well into the $200s, far above the 10% guideline. I do not know what it finally sold for, but I am pretty certain my friend took a bath, other than in his hot tub.
In summary, when doing renovations, keep your work under 5% of the value of the property. Do not take the supposed value of a property after renovations over 10% above the average value of the neighbourhood.
Did you know that in today’s uncertain economy there's a safe, solid way to protect your RRSPs?
With a mortgage-based security, you can place your money into tangible assets with a solid record of return: Property. Don't let the mortgage mess south of our border scare you. Canada’s real estate market is much more stable than that of our southern neighbour. In fact, one statistic states that every Canadian could own one or more of the houses in the United States currently in foreclosure.
But, aren't values are falling across the country? Yes... to some degree. However, investors across Canada are finding very good deals in today’s economy. They're buying properties with positive cash flows. When an investor has positive cash flow and he/she is holding for the long term, it doesn't matter if the value of a given property drops slightly in the short term.
SO, WHAT IS A MORTGAGE-BACKED RRSP?
To use RRSPs for mortgages, the process is really quite simple. First, there are four team members involved in mortgage backed RRSPs:
1. The Real Estate Investor/Entrepreneur 2. RRSP Planholder Investor/Lender 3. Institutional Trustee (bank or trust company) 4. The real estate lawyer
With those team members established, the process is as follows:
1. Open a self-directed RRSP account 2. Contribute funds to that account, either new or transferred money 3. Prepare instructions to your Institutional Trustee to place mortgage 4. Transfer the funds to the lawyer for mortgage registration
That is it! Note that you want to work with lawyers and trustees who know and understand the process, who can give you quality advice. (I wouldn't suggest just asking your lawyer brother, unless he specializes in this type of law!)
WHAT ARE THE ADVANTAGES OF A MORTGAGE-BACKED RRSP?
* Solid, safe, consistent, and predictable rate of return * Low set up costs * No management fees (unlike mutual funds) * You have control of the plan, and can set up short term or long term investments * The investment is in solid and tangible physical assets… not ideas * The Trustee who holds and administers the plan for you acts on your behalf and your direction * You see the projected income and expenses, and appraisal prior to making your decisions * The property is insured with an Insured Interest
TWO SIMPLE RULES TO FOLLOW
Mortgage backed RRSP securities are simple to use and easy to understand. Here are the basic rules:
1. The transaction must be with someone at arm’s length to you (cannot be related by blood, marriage, or adoption) 2. The mortgages must be placed on real property (residential or commercial) in Canada and registered in the local “Land Titles Office”. Raw land does not qualify.
WHO CAN CONTRIBUTE?
There are three categories of Canadians who can participate in an RRSP mortgage plan.
1. Those who are currently RRSP contributors 2. Those who are new RRSP account owners 3. Those who have unused RRSP contribution room
While we can own mortgages secured by RRSPs, we cannot own real estate directly in our RRSPs.
WHO ACTS AS THE TRUSTEE?
At the time of this writing, there are two banks or trust companies who will act as Trustees under this program: Canadian Western Bank, through its trust subsidiary Canadian Western Trust, and Laurentian Bank, through its trust company, B2B trust. There are rumours that RBC has gotten into the program, as well.
This is just a basic outline of how RRSP mortgages work. If you would like more information, feel free to contact me.
This past week I wrote an offer on a property in Edmonton that was subject to financing. Of course, with all such offers, it was necessary to get an appraisal for the bank... paid for by me, the buyer, of course.
Well the appraisal was done, and the next day my mortgage broker called me to say the appraiser had stated the rent would be $500 less than I had allowed in my calculations. After asking a few questions I learned that the appraiser had understated the achievable rent for the main unit, a 3 BR townhouse, by about $500.
The mortgage broker said we could reposition the mortgage, but it would cost me another 1/4 point in interest. While I was angered by this error, the deal still made sense, so I was okay with it. In the meantime, I had five people working to get the appraiser to correct her very obvious error, which it turned out, came from a lack of knowledge of the rental market.
But, the mortgage broker kept asking questions about the legality of the basement suite. It turns out the appraiser has also said that the suite was illegal. She was unfamiliar with changes in Edmonton's policy on secondary suites. Again, it took five people a couple days (the same couple days as before) to get the appraiser to revise her appraisal report.
My point in this is that even professionals make mistakes. Keep your eye on their ball to ensure that their mistakes do not cost you money in the long run. When this deal closes I will be asking the appraisal company for a FULL refund of my fee. This professional did not have a full understanding of all the things she was commenting on. The bank relied heavily on her original opinion, and I paid for that error.
Today I ran into Russell Westcott of the Real Estate Investment Network (REIN) at the airport in Abbotsford as we were both bordering the plane for Edmonton. As we were gathering our luggaage at the end of the flight I told Russell I would be interested in making a presentation about Networking to a REIN meeting a couple months from now.
Russell replied that he would like that, that he heard I enjoy teaching, and that he was going to call me. He wants to interview me to get some ideas of learn more about how a seasoned real estate professional got where he is.
I felt very honoured to be recognized in that manner, and look forward to talking with Russell in more detail.
You've most likely heard a lot about the economic situation that's currently effecting our world, much of which has been blamed on sub-prime mortgages in the US.
But, are these mortgages really to blame? Or are they just a convenient scapegoat for the current economic situation?
Recently I read an online article written by Jeff Rubin of CIBC World Markets That gives a completely different viewpoint of today's economic crisis. I feel it’s important to share some of the realities of our current economic landscape, and as such have summarized the article in the following paragraphs.
Pointing the Finger
Over the last few months, we have all heard commentators on national broadcast media blame the current world wide economic melt-down on the US Sub-Prime crisis. But, is that a fair and accurate assessment of the situation, or are there other factors at work?
To put the US Sub-Prime Mortgage crisis in perspective, approximately 2,000,000 homes in the United States have mortgage arrears, about 2% of the total outstanding mortgages. If we put all of those properties in one city, it would be about the size of Cincinnati, Ohio. It does not seem possible to blame the entire world economic troubles on a problem that small. Something else must be going on.
How the World Economy Works
A quick micro-economics lesson might be in order. When John the butcher opens his shop, the money he earns from his sales goes to Bill the cattleman, who in turn pays Betty the equipment manufacturer, who in turn pays for the iron in the equipment. The mine has hired Joan the home maker who buys meat from John the butcher. Money in a free market flows around and around.
This is how the world economy functions as well, with money constantly flowing around the globe through international trade. But, what would happen if something altered that flow of funds? Economic chaos would probably result.
The Real Problem?
Over the past two years, the price of oil rose from, what now seems like a sweet deal, about $50.00 a barrel to just shy of $150.00 a barrel. Most of that money went to the Middle Eastern countries, where they do not spend as freely as we do in Western Countries. Simply put, more than $700 Billion was taken out of the US economy and not replaced. The same phenomena occurred in Europe and around the world.
With $700+ billion removed from the American economy, economic chaos was soon to develop, with fewer dollars being left in local hands keeping the local economy alive and healthy. Financial turmoil was bound to follow, and follow it did.
China has now become the largest debt holder for US bonds. The Chinese also tend to save their money much more than North Americans… another factor in the world fiscal imbalance.
Looking back over the last fifty years, we can see similar economic patterns follow every time the price of oil went higher than would be considered reasonable. Most industry experts seem to believe that a realistic and sustainable price for oil today is around $80 per barrel. But, that is the topic of another discussion.
This treatise is a very simplified explanation. But, suffice it to say, that the world wide credit crunch cannot be blamed solely on the US Mortgage Crisis.
f you would like to read the artcile in its entirety, click here.
