According to tax laws, the interest on money borrowed for business purposes is tax deductible. So, theoretically, someone investing in real estate should put as little of his own money as possible into an investment property and use borrowed funds.
However, that means getting a high-ratio mortgage, which must be insured. Devison says the Canada Mortgage and Housing Corporation (CMHC) requires that borrowers looking to invest in real estate have a net worth of at least $100,000. And the most the CMHC will lend is 85 percent of the property's worth.
So, for a $300,000 property, you still need $45,000 in capital. If you want to avoid the expensive high-ratio mortgage, you'd need $75,000. And that's before you start spending on renovations.
Whether you can afford to flip comes down to cash flow -- do you have enough to service the debt while you renovate? You have to be able to carry the mortgage until you're in a position to sell the home, which will likely take at least a few months, at the same time as all your usual debts.
Commissions and taxes
If you flip your own home and you live in it for more than a year, it might qualify as your principal home and thus be exempt from capital gains taxes. However, you should consult a professional because if you are flipping, the Canada Revenue Agency (CRA) might consider that your occupation and tax you differently on the money you make, when selling the property.
Devison says he has clients who buy houses and flip them, but they're usually builders. "For the person off the street, it's very difficult." He says you're better off buying the property and occupying it while you renovate; and then selling it after a year or more. "Do it two to three times to get to know the ropes."
That will also allow you to build up a network of trades people, whom you will likely have to call on to help with the renovations.
three key renovations to make
However, he says, "the money is there for someone who is real savvy about renovating."
He says there are three basic renovations that will noticeably increase the price of a home. "Kitchens, bathrooms and flooring are the biggest return for your money."
While everyone loves hardwood in hallways and living rooms, it's not necessarily the best choice, says Bilash. "It's such a competitive market for flooring right now. There are all types of great laminate products out there that wear a lot better than real hardwood floors."
For kitchens, ceramic tiles are popular, but be careful not to use colours or patterns that "make the place look choppy." For bedrooms, fresh carpeting is a must.
Beef up kitchens and bathrooms
Fresh tiles are key to improving a kitchen's aesthetic appeal, says Bilash. While new cabinets are nice, he says you can cut costs by replacing the cabinet doors and installing new facing materials and doorknobs. You should also replace the countertop, and new appliances are highly recommended.
Bilash says you should also spend money on curb appeal. That means a new coat of paint and possibly new windows and doors. Landscaping can also give a house a fresh look.
that don't pay
Leaky basements, for example, usually require that you replace the drain tiles, which can cost $30,000 or more. "If you spend that money, it's hard to see it come back," says Bilash, because it's hidden and not a cosmetic change. As such, you might only get half the value of the investment on resale.
So, make sure you hire a home inspector to take a good look through any house you intend to flip, before you buy, to make sure the only changes it needs are cosmetic ones.
However, Bilash says any addition to a fixer-upper should pay off in some fashion. "Almost everything at this point in time gets something back the way the market is right now," he says.
Although a recent study by the Canadian Imperial Bank of Commerce (CIBC) study shows that Canadians think real estate is a better investment than the stock market, the fact is if you put $100,000 into a basket of stocks reflecting the TSX index, it will probably earn a far greater return than real estate will provide, in the top urban markets, for a lot less effort.
Jim Middlemiss is a freelance writer
and lawyer based in Toronto. He's a frequent contributor to the National Post,
Investment Executive and Wall Street & Technology.
Posted: Aug. 29, 2005||