Updated October 2018
The investment market can often seem like a fickle playmate. On some days, the potential for profit is easy to see. On others, each step seems like a cautious step towards sure losses. All in all, that’s part of the thrill of investing.
But the best investors know that, thrill aside, analyzing a new market before so much as dipping a toe into the investment pool is a must.
When it comes to real estate investment, Toronto is a booming city attracting investors with all types of portfolios. The market is hot, and that means there’s a lot to look out for. Every investor turning an eye towards real estate investing in Ontario’s capital must know the following things about real estate investment opportunities in Toronto before moving forward.
Owning Property As A Foreigner: Requirements & Rights
The first important thing to note is that both Canadian citizens and non-residents have the right to acquire, hold, and dispose of real estate property in the country.
Second, Canada has a few rules that govern the processes of owning real estate property as a foreigner. These laws don’t just apply to non-residents alone. Citizens of Canada who stay out of the country for over six months are categorized as non-residents, a situation that subjects them to the same rules as foreigners.
On the question of special immigration privileges, owning real estate property in Canada as a foreigner doesn’t guarantee any of that. In fact, if you don’t have a work visa, permanent residency status, or student visa, the longest you can stay in the country is six months at a time.
That aside, note it’s important to mention that federal government laws and those at the provincial aren’t the same in relation to owning property as a foreign buyer. Let’s briefly look at what’s expected by the two levels of government.
Knowledge of the Investment Canada Act (ICA) and how it applies to your specific potential investments in Canada should be top on your to-do list as a foreign investor. Generally, the act governs every acquisition of control of a business in Canada by foreigners.
In addition, the ICA prescribes the obligation of foreigners who plan to invest in the country and also specifies all the information they have to submit. In some cases, you may be required to present a government approval and/or notification, like when you want to acquire or establish a Canadian business (real estate included) and you’ve exceeded the applicable financial limits.
Real estate property law is primarily handled by provinces. Each province has the right and capacity to come up with their own legislation. This may include regulations that govern the acquisition of real estate property by foreigners and the corporations or associations under the control of such individuals.
In provinces like Alberta, Québec, Prince Edward Island, Manitoba, and Saskatchewan, there are restrictions imposed on the size/type of land a non-resident can own.
Luckily, in Ontario, there are no special restrictions imposed upon individuals who are not Canadian citizens or permanent residents, except just a few provisions in relation to registration, taxing, and reporting. The province’s Alien’s Real Property Act accords foreign investors the same rights as Canadian citizens when it comes to holding or disposing of real estate property.
However, just like in all provinces, corporations that have been registered and licensed in other jurisdictions have to redo the same process in Ontario in order to be allowed to operate. ‘Operate’, in this case, may include an activity as simple as holding interests in real estate property.
In Canada, non-residents are subject to tax, but only on incomes whose source is in Canada. That includes the profits you obtain from disposing of your Canadian real estate property.
But the process isn’t as straightforward as it looks. Let’s briefly look at different situations and the types of taxes you’ll be expected to part with.
Disposition Of Property
Disposition of real estate property by a non-resident will initiate a requirement under the Canadian Income Tax Act where the individual purchasing the property is required to withhold a share of the purchase price until the seller issues them with a tax certificate supplied by the respective authority. The certificate affirms that the authority has obtained assurances that they will be able to fetch applicable income taxes owed by the seller as a result of the sale.
Transfer Of Property
You will have to part with a land transfer tax during the process of transferring your real estate property. In Toronto, the tax is imposed at both the municipal (Municipal Land Transfer Tax) and provincial level (Ontario Land Transfer Tax). The tax is usually charged as a percentage of the purchase price and ranges between 0.5% and 2%.
Fortunately, sellers are exempted from paying it. Also, if you are a first-time buyer, you may be eligible for a rebate. To qualify, it must be you or your spouse’s’ first time acquiring property not just in Canada but across the world and the property must be a residential one.
Capital Gains Tax
Your investment property will be subject to capital gains tax as it appreciates in value, right from the time it qualifies as an investment property to the period you dispose of it. However, if you used your residential property as a principal residence, you’ll be exempt from this kind of tax.
Foreign Buyers Tax
Unless you are a refugee, provincial nominee, or your spouse is a permanent resident, a Canadian citizen, a protected person, or provincial nominee, there’s a 15% Non-Resident Speculation Tax (NRST) to be incurred when you purchase a home within the Greater Golden Horseshoe (CGH) region. However, you’ll qualify for a full rebate if:
- You obtain Canadian citizenship or permanent residency within four years of acquiring your real estate property
- You are an international student on full-time enrolment for at least two years
- You are a foreign national working full-time in Ontario and you’ve done so for at least one year since you acquired your property
What If I’m A Non-Resident Collecting Rent?
Under this situation, you’ll incur a 25% withholding tax, which is computed against the gross rent received. There are two ways you can choose to go about your tax obligation. You can either end it there or file the taxes with the Canadian Revenue Agency where the amount can be cut down by claimable expenses like property taxes, mortgage interest, property repairs, and maintenance, etc.
Annual Property Tax
The annual property taxes you’ll pay are based on the assessed value of your home (roughly 0.75-1% of the amount for residential property owners and 2-3% for commercial properties).
Non-resident corporations that bought and disposed of a taxable Canadian property during the tax year are also expected to submit an income tax return.
In conclusion, before you go ahead and buy an investment property, it would be great to talk to an accountant who fully understands the tax implications of such a move.
Are There Any Other Costs Besides Taxes?
On top of the one-time buying cost of your property, you may pay monthly costs such as mortgage payments, property management costs (if you leave the management of the property to a professional), property insurance, condominium fees, etc.
The majority of utilities usually fall under condominium fees and/or are an obligation of your tenants, if applicable. In the case of a commercial real estate, insurance, maintenance, utilities, and the like are mostly paid by renters.
Can Foreign Buyers Access Financing?
Yes. There are certain lenders, like the Canadian Imperial Bank of Commerce (CIBC), that offer financing to foreign buyers. Back in 2016, 2.7% of mortgages issued in Toronto went to non-permanent residents.
However, the requirements seem to be changing, mostly as a result if the recently introduced guidelines by Canada’s federal banking regulator.
Initially, foreign buyers and international students would be given an uninsured mortgage provided one was able to deposit at least 35% down payment. Some lenders even went as low as 5%. But with the new system, there are a number of requirements one must meet in order to qualify for financing. (The link above sheds light on these requirements.)
How About Insurance?
To protect your real estate investment against risks like theft and fire, you are going to require insurance coverage. At the same time, some lenders will demand that you insure your property before they finance you.
You’ll have to be physically present in Toronto in order to register for property insurance. How much you’ll pay will depend on the type of property you buy and location. To learn more, get in touch with a Toronto-based insurance agent.
Is My Presence Required In Order To Buy Real Estate Property?
Yes. Your lawyers and the Canadian banks are going to require your physical presence in order to sign the mortgage documents. This process takes place in three stages when you are a non-resident.
The first part is the mortgage approval which takes roughly 3-4 days followed by payments. Because you’ll be transferring the funds, the process has to be done as per the FINTRAC regulations.
The second stage is identifying the property. Usually, there are a few things to consider before selecting a property, like your investment goals, preferred neighborhood, family, etc. It takes about a week to finally find your ideal property.
The last part is scheduling a meeting with an accountant (for tax purposes and other reasons), a real estate lawyer (to facilitate the transaction), and a property management company (management of your property, whether residential or commercial, investment consulting, etc.).
Structuring Your Real Estate Investment
In Canada, one or more people and/or corporate entities can own real estate property. That means property ownership can take multiple forms in terms of organization and structure.
Mostly, foreign investors join forces with local partners, especially where the investment in question requires local expertise. This then leads to intricate real estate investments that often take the form of a partnership, corporation, sale-leaseback, co-ownership, amongst other arrangements.
One of the deciding factors as to what arrangement is suitable for the involved parties is the tax implications and liability ramifications expected of each partner.
Investing In Toronto’s Real Estate: How Does One Make Profit?
Even though there has been a slowdown in Toronto’s real estate market lately, which is partly a result of the Fair Housing Policy introduced back in April 2017, industry players predict that everything will get back to normal later this year.
To be on the safer side, talk to an investment consultant more often so that they can equip you with more knowledge on how to invest in real estate in Toronto and also keep you updated of what’s going on in Toronto’s real estate market.
Meanwhile, here are some of the ways you could make money by investing in the city’s real estate property.
Appreciation is the situation where disposing of the property earns you more money than you actually paid for it. For example, if you bought a detached home for $500,000 and sold it for $750,000 later, the extra $250,000 will count as the appreciation. Given the Toronto’s ever-rising house prices, you have a good chance as an investor to make a profit if you invest in a property with the potential to appreciate in value.
If you purchase property and decide to rent it, the extra cash that remains after you’ve collected rent and deducted the expenses is the cash flow. However, it may be a bit difficult to get such properties (acquired with 20% down payment) but it’s possible to break-even at the end of each month. Factors that affect cash flow are mostly beyond the real-estate market. A common example is the mortgage terms.
If you acquire property for, say, $500,000, with a $90,000 down payment, then rent it for 30 years where the renter will pay down the rest of your mortgage, you’ll be developing equity. In the end, you’ll end up with a property free from mortgage. When you sell it for $530,000, you’ll have accumulated $440,000 in equity out of which you can recoup your $90,000 down payment back.
Acquiring real estate interests can take several forms. The two most common options include:
- Freehold – You own the real estate property and the right to retain it in perpetuity so long as you pay your lender on time.
- Leasehold – You buy the structure and buildings but the land is on the lease.
Leases can be active for up to 99 years, but the owner will decide if they want to renew it or not when it expires.
Some of the calculations investors use to estimate the amount of returns a property is likely to generate include:
- Return on Investment (ROI)– Sums up the mortgage pay down, cash returns, and appreciation of a property.
- Capitalization Rate – Arrived at by dividing the operating income by purchase price then multiplying the result by 100%.
- Cash flow – Operating income less the financing costs
- You will come across many other tools that can help you figure out the efficiency of a potential investment. If you want more assurances, enlist the help of a reliable property management company that doubles up in investment consulting.
Real Estate Investment Options At Your Disposal
As we mentioned earlier, the province of Ontario has no restrictions on the type or size of property you can invest in as a foreigner. That leaves you with plenty of options to choose from. It’s, therefore, up to you to decide which one suits your situation. Let’s briefly look at a few of what could easily be your best real estate investment in Toronto.
Like most large cities across the world, Toronto has a huge selection of investment condos, which could be an option to consider for those seeking long-term investments. Actually, there’s a possibility of finding a condo that can break even, even with as low as a 20% down payment, generate cash returns, and appreciate in value over time.
Not to mention the minor repair and maintenance work. Getting a good tenant can be a slight challenge, but if you enlist the help of a property management company, that won’t be a problem.
A house can be an income property, especially if it’s the kind where you can rent out a part of it. A good example is a multi-residential house. It has a greater potential of making you some money in the form of cash returns, appreciation, and equity when the right time comes, unless you have renters in leases. Their only downside is that the level of repair and maintenance works could be relatively high.
This option is quite common. It involves acquiring a property during the pre-construction phase and putting it on sale when it’s ready. With this option, you have the opportunity to select the location and unit, unlike the rest where the market decides for you. There are challenges too, one being that resale condominiums tend to be a lot cheaper than new ones and builders can cancel projects eventually, affecting your down payment.
This category of investment includes both commercial and residential properties. Given their versatility, they seem to be a potentially good investment if they sit in a growing neighborhood. Unlike the rest of the properties, this type of property has a special financing and buying process that can better be navigated with the help of a professional investment consultant.
This is yet another common option that happens in most cities. It involves acquiring a fixer-upper then renovating it for the purpose of selling it. It’s a relatively risky venture, but worth a shot where due diligence has been carried out.
What Else Should I Know About Real Estate Investment In Toronto
There are a few more important things you must know about real estate investment in Ontario’s capital:
You’re not the only investor noticing the huge potential there is in the real estate investment Toronto has to offer! Investors from all walks of life are ready to start turning a profit in Toronto, so you need to be aware of two major things that this competition means for you.
First, prices in Toronto are constantly rising. The longer you sit on making a decision, the higher prices will get. The demand for properties is huge, so sellers can, in many respects, expect to get whatever price they want. And someone will pay it. It’s important that potential investors remember to be wise, but speedy, in their decisions.
Second, bidding wars are less of a potential and more of a sure thing when looking at purchasing property in the Toronto area. The huge number of buyers and investors looking in the area means that every auction can get a little hot. Expect a lot of bids to come in on properties by potential homeowners and investors alike.
Finally, the most lucrative areas of the city are likely to be full of investors already. Try reaching past the competition and pick out the next hot spot. It may take some imagination, but you can begin a movement to revolutionize a previously untouched city area.
Continue To Research The Latest Tax, Credit, And Purchase Laws
Because Toronto has been experiencing a surge in real estate investing by both foreign and domestic investors for the last few years, the government has been making some changes to prevent the market from burning itself out.
The main issues plaguing non-investors in the area are bidding wars, low inventory, and huge rental costs. In order to stabilize a market that was becoming inaccessible to the city’s residents, Toronto has implemented some new rules regarding investment properties, particularly for those investors who are not Canadian citizens.
Because the market is constantly changing – and the government is constantly reacting to those changes – it is important that you clearly understand any and all laws surrounding investment properties before you begin looking at properties. The laws won’t suit everyone, so it’s good to be sure that the Toronto market is still right for you.
In particular, pay close attention to the purchase taxes and mortgage rules. Some areas and banks are working against investors by requiring someone to be a resident of the home in order to be able to take out certain mortgage types. The laws can get a bit complicated, but we can help you find the perfect solution for your investing needs.
Rental Inventory Is Low
The rental market in Toronto is hot, with prices higher than ever before, largely because there are so few rentals to go around!
The city is growing every single year. Some people moving into the area are looking for rental properties since it is too expensive for them to buy a house outright. Others are immigrants, new to the country entirely, so they do not want to purchase until they learn about the neighborhoods and ideal areas to live.
So, how can you use these facts to your advantage?
If you are buying an investment property(s) in Toronto, consider how you might be able to create more units on a piece of property. From converting a large home into smaller units to building a duplex or multi-unit property from the ground up, the key to increasing your profits is increasing the number of spaces you have available to rent.
Filling up rental properties is not difficult in a market that is as booming as investment property in Toronto is. While the price for initial investment might be high, the returns will begin coming back to you almost immediately.
Toronto Living Is Appealing
If the hot Toronto property market hasn’t scared you away yet, you may decide that you want to move forward with buying investment property in Toronto – but not on your own.
Finding investment partners or backers to help fund your future portfolios is a good way to buy properties without the need to deal with long-term mortgages, which are becoming more complicated.
But what points will help assure your business partners that Toronto is a market that is going to continue to attract people? The key is showing them all of the whys of what brings people to Toronto on a consistent basis:
- Great tuition rates at high-quality education establishments
- Easy to use public transportation
- Wide variety of public parks, museums, and other gathering places around the city
- Trending restaurants and shopping
- Significant arts & culture districts
- Large number of start-ups and businesses from and growing in Toronto
By touching on the growth of new business and huge appeal consistently bringing new people to the Toronto area, any investors you are hoping to work with are sure to be able to see the potential of this expanding market.
As any other great guide to real estate investing will show you, no matter what route you plan to take, real estate investing just makes sense for those with a will to compete, thrive, and grow with one of the most rapidly growing cities in Canada. And when you need help figuring out how to maneuver your way through the Toronto market, we’ll be here to help.