Looking to buy my second investment property (Ontario, Canada)

14 Replies

I've had my duplex for about 5 months now and it's working out really well! I want to get my second property as soon as I can. I have a few questions I am hoping somebody can help me out with:

1) I have only about $10,000 in cash available to put towards closing costs/ down payment. What are my options to finance a deal? Am I going to have to wait until I have 20% for a down payment or are there any creative ways around this? I have heard several people say that in Ontario the government requires you to pay 20% for your second home. I've also heard there may be ways around this.

2) How can I go about finding out about foreclosed homes in my area?

3) How hard is it to find a decent rental in the USA to purchase and manage from Ontario? I've heard many people recommend this but I'm just not sure if it's going to be too much of a hassle and a risk or if it's right for me at this time.

Any advice for this newbie investor would be greatly appreciated!!

Thanks- Mitch

MODERATOR:  PLEASE, NO OFFERS OF PROPERTIES OR OFFERS TO CONNECT THIS POSTERS WITH SELLERS.

@Mike Purvis  

Welcome to BP!   I spent time in Kingston back in the 1980s (RMC) and my father retired to Bath, just west of Kingston. 

Let me try to answer your questions:

1) A conventional mortgage, on a residential property, requires a 20% downpayment and you must qualify at a 25yr amortization at the 5-year fixed BoC rate.   If you are an owner occupant, then there are various high-ratio mortgage options available to you which result in either a 10% or 5% down payment - these will be insured via CMHC or Genworth depending on the programme and your lender.  BTW: This is not a requirement of the Ontario government, but is part of federal financial regulation.

2) Foreclosed homes - before you get a string of responses from those south of the 49th, you will not find readily available lists of foreclosures in Canada as are available in the U.S.A. This is in {large} part due to privacy law and in-part due to the difference in the financial system around mortgages. On top of that Ontario, along with New Brunswick, Newfoundland, and PEI use Power of Sale, rather than judicial foreclosure and most such properties are sold via MLS.

3) We are in NB, but have properties in New England and are actively searching in the U.S. Rust Belt.   When you invest from afar, you will have to rely on someone else to manage the property.   Our approach has been to partner with a local, boots-on-the-ground investor.

@Mike Purvis  there are some options available.  you can look for a property with seller financing and see if they are willing to accept a smaller down payment.  Also some lenders will allow a seller carry-back (2nd loan) on a property, which can go towards the down payment.  I've used a carry-back before to purchase 2 duplexes for 15% down out of my pocket.

As far as buying abroad, I think its an excellent idea.  Often times the best rental properties are not in nearby markets.  I've purchased all of my properties out of state, and I use property management companies.  The key is finding people you trust. A good start is leveraging your network (biggerpockets).  Once you find potential candidates, a good way to build trust is asking a lot of questions, listen for fishy answers or people trying to side step certain questions.

@Cal Ewing 

Can I please get the name of your accounting firm in Canada?

This is something I'm very interested in but am not even sure where to start. How did you decide which areas in the US to start looking for properties?

@Mike Purvis  

Now that I am not on my phone, I can add a little to my response to #3 above.

If you are going to invest out of country - in the U.S.A., Europe, or wherever - the first thing you should do is sit down and draft your objectives in a concise manner.  Are you investing for cash-flow, equity/wealth building, asset protection/currency hedge, etc.?  What are your initial scale and growth plans/aspirations: 1 property now, 3-more in the next five years, etc.?

Next you need to find yourself an accountant and an attorney who are knowledgable in cross-border business (taxation, finance, business structure/organisation), bring your objectives and sit down with them to determine the approach which best meets your current need and future plans.   This step will cost you a few hundred dollars, but if you skip it, the costs could be far greater in the long term.

Sure you skip the above planning, run off and buy a property in Cleveland in your own name. All the income from that property will flow directly back to you (minus the IRS withholding) and, along with any currency conversion gains/losses, be taxed at your marginal tax rate here in Canada. For one or two properties this may not be terribly punitive, but if your plan is to grow your property holdings in the U.S.A. over the coming years, you may want the ability to control how and when any revenue is repatriated to Canada ... in this case, you may want an incorporated entity (LLC) in the U.S.A. to "own" the properties {there are pros and cons to this approach as well} which will enable you to keep any retained earnings in the U.S.A. - unless you choose to repatriate them.

If you plan on holding properties in Canada as well, depending on your income from other sources, you may want a Canadian company in the mix as well.  All these layers add complexity and cost.  What the professionals - your accountant and attorney - will help you do, is to determine how and when you should organise your real estate business in the beginning to enable you to both meet your present needs while enabling you to grow to meet your mid to long-term objectives - all while minimising taxation.

One final thing to consider when planning to invest in the U.S.A. at the present moment is that the CAD has slid to $0.80 USD over the past four months (much of it in the last month) as the consequence of a strengthening USD and the Loonie having become a petrol-currency.   Unless you have funds in USD on hand, you can plan on adding 20% to your acquisition costs when analysing a property.

@Mike Purvis  

You have received some excellent advice. The US is the #1 country for foreign investors in real estate. 6 of the top 10 locations are in FL rounding the list is NYC, Phoenix, Vegas and Honolulu. 

Two Great reads, I bought both J. Scott The Book on Flipping Houses,The Book on Estimating ReHab Costshttp://www.biggerpockets.com/flippingbook

Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. Here you will meet wholesalers who provide deals and all the cash buyers (rehabbers) you will need. You can begin via phone.

To find out about an area go to IREM.org search for ARM certified property managers. Call 5 ask them what sides of the city they like/dislike and why. Ask what they see them selling for and what expenses are by category. Ask for market occupancy and rents. Ask if they know anything coming up for sale.

You can also search narpm.org for the RMP (Residential Management Professional) and MPM (Master Property Manager) certified.

Connect with Amanda Han a real estate CPA active on BP.

Download BP’s newest book here some good due diligence in Chapter 10. Real Estate Rewind Starting over

http://www.biggerpockets.com/files/user/brandonatbp/file/real-estate-rewind-a-biggerpockets-community-book

Good luck

Paul

Despite the advice given above, Canadians should NOT purchase US real estate in an LLC, at least not without first checking with a cross border tax/legal specialist as to the best approach, or you may end up paying more than your marginal tax rate. Generally a partnership (LLP) is the better approach.

Originally posted by @Chad Urbshott :

Despite the advice given above, Canadians should NOT purchase US real estate in an LLC, at least not without first checking with a cross border tax/legal specialist as to the best approach, or you may end up paying more than your marginal tax rate. Generally a partnership (LLP) is the better approach.

 Chad:

I know we've been though this dance before and as a blanket statement, nether an LLP or LLC is a universal fit for Canadians doing business in the U.S.A. Hence, my stressing of finding professionals (accountant and attorney) who can assist in finding the correct ownership structure to fit each individual case.

As a counter to your example above.  A U.S. child entity, 100% owned by a Canadian corporation will allow retained earnings of the child to be repatriated to the parent with little to no additional taxation.   What is more important is you have control over when funds are repatriated ... this can be extremely beneficial.  As an example, we've been holding retained earnings in a U.S. child for a couple of years when the CAD was on parr or slightly above the USD.  Given the recent slide of the CAD due to it being a petrol-currency these days, we've elected repatriate some of those earnings and get a 20% bonus along the way.

A flow-through entity on the other hand will not give you the ability to control repatriation of income.

@Roy N.  

Your structure as outlined above, I can agree with, by having the LLC controlled by a Can corp will allow you repatriate earnings whenever you choose. (I too used this structure when I first started investing stateside, until I learned the ultimate tax rate by the time it reached my hands was 58% - again, everyone's situation is different so take that with a grain of salt, LOL).

I just wanted to point out the issue when an unsuspecting forum reader does not get proper advice, and thinks they should just set up an LLC and hold in their own name from Canada - that is when the tax implications arise. In most cases, the resultant net tax will invariably be higher than their marginal rate in the province they reside.

Originally posted by @Chad Urbshott :

@Roy N. 

Your structure as outlined above, I can agree with, by having the LLC controlled by a Can corp will allow you repatriate earnings whenever you choose. (I too used this structure when I first started investing stateside, until I learned the ultimate tax rate by the time it reached my hands was 58% - again, everyone's situation is different so take that with a grain of salt, LOL).

I just wanted to point out the issue when an unsuspecting forum reader does not get proper advice, and thinks they should just set up an LLC and hold in their own name from Canada - that is when the tax implications arise. In most cases, the resultant net tax will invariably be higher than their marginal rate in the province they reside.

Agreed on the latter ... once again, new reader, get thee to an accountant and attorney. 

On the former point, there are ways you can mitigate the taxation of the final jump to your hands as well ... if the Canadian company is active and qualifies as a CPCC, then taxation will automatically be lower.  Otherwise there are options which will enable you to put some of the earnings in the hands of your spouse and/or children.  If your holdings are substantial enough, a trust at the top of the organisation may be a logical step.

@Mike Purvis    If you are interested find a market you like and then interview some PM's.  I would be cautious about buying property from them since they will have a conflict (most are realtors and get a commission) but they should be able to guide you to neighborhoods that have better rents and tenants.

Here is a source for PM's National Association of Residential Property Managers  I have no affiliation with them but have used the site to find PM's out of my area.

back on topic - awesome Mike -- any further details about your duplex or second potential ... I am in the same boat having just closed my first in Niagara and ready for #2!

hi I live in Kingston, Ontario as well. i would like to talk to you further about other opinions you may have for the future. If interested let me know

Congrats on your duplex.  Are you currently living in it?  When i purchased my second property in the niagara region, i had to have owned the previous for a year, and you definitely cannot get a 5% down payment on the second.  if you are moving into the second property, look into a mortgage broker.  the one i used got us in at 10% down, but we had sign papers with the lawyer stating that we were moving into the new property.  it seemed like if you were upgrading to a better residence to live in, it was possible, but if you are looking for it to be a rental you are looking at 20% down.  always check with your real estate lawyer as things might have changed since.  

good luck 

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