Southern comfort

by Alain Forget 30 Mar 2020

With the high cost of owning property in any major city or vacation destination in Canada, the US real estate market continues to offer a tempting alternative for buyers seeking a second property. Whether the motivation is to establish a home away from home in a warmer climate or to generate a recurring source of revenue, investing in the US presents a number of advantages for Canadians exhausted by diminishing cap rates and the increasingly arduous process of financing their property purchases.

Canadian interest in second properties is significant. A recent Re/Max study revealed that 40% of Canadians are in the market for a recreational property, and 30% they would use a recreational property for themselves or as an investment opportunity.

There is, however, a prevailing misconception that US recreational properties in desirable vacation hot spots are more expensive because of the exchange rate. However, a review of the housing market numbers indicate that this isn’t the case in many prime recreational locations. According to a 2019 study by the US National Association of Realtors, the median purchase price for Canadians buying US real estate, the median purchase price was US$280,600, or around $373,000 CAD.

The exchange rate works in an investor’s favour when it comes to collecting rents and generating cash flow. A monthly condo rental in Phoenix might bring in $3,000 during peak season; the monthly mortgage payment on the same property would be around $900. And while those monthly mortgage payments will remain consistent, rent values will continue to climb.  Even when factoring in additional condo fees and maintenance, ownership can still be an attractive investment proposition, given the potential to offset costs with rental income.

Surprisingly, Canadian interest in the US isn’t only focused on the condominium and townhome sectors. Many Canadians are looking to purchase bigger houses for large family or group gatherings, whether for their own extended families or large groups of vacationing renters. It’s not unheard of to see a seven-bedroom home sell in the US$600,000 range.

Options galore
Despite the ongoing political furor in the States, the US market has been labeled one of the safest countries for real estate investment by the Association of Foreign Investors in Real Estate. When it comes to preferred locations for vacation properties, tried-and-true destinations such as Florida and Arizona continue to lead the sales numbers, but California and Texas (Austin and Houston, specifically) are gaining ground. All of these destinations offer similar advantages in terms of affordability and potential ROI from rental income. Interestingly, Hawaii has also become an emerging market of interest, although that’s largely due to high-net-worth individuals looking for a second home.

If you’re looking to generate income from your investment, you’ll need to consider both the location and the seasonality of the market. Orlando, for example, offers year-round potential for short-term rentals, given that it is home to one of the top theme park destinations in the world. Investors looking for a less frenetic environment may be more attracted to the southwest part of Florida in Naples or Fort Myers. Miami and Fort Lauderdale offer up yet another lifestyle option that’s rich in culture and activities.

Phoenix or Scottsdale, on the other hand, experience soaring temperatures in the summer months, limiting income potential to the fall and winter seasons. When peak season arrives, however, demand is high. Arizona is also experiencing an economic boom that has drawn a number of large corporations ready to invest in the area, where properties can be had for as little as US$100,000.

Points of difference
There are some key discrepancies between the US and Canada when it comes to buying properties. For example, the average down payment in the US is 20%, higher than in Canada. But this is higher initial cost is offset by the fact that the US offers a lower mortgage rate environment and longer amortization. In fact, mortgage rates in the US for three-, five- and seven-year terms are at their lowest level in four years .

Purchasing south of the border also comes with its own set of rules, regulations and processes that many Canadians may not be aware of. These range from tax and estate planning to currency exchange and financing considerations.  

There are additional costs to consider as well, including property management services and the tax implications of a US home purchase and its rental income. The tax issues involved are rarely overcomplicated, but awareness of them from the outset is key. The best course is to work with Canadian professionals with experience in cross-border tax accounting who understand allowable deductions and how to avoid double taxation.

The final, but equally important, pieces to consider are currency exchange, financing and mortgage options that can help reduce significant upfront exchange costs. Most loans in the US are open, which means there are no prepayment penalties, giving investors the freedom to accelerate mortgage pay-down. Many US lenders, however, charge an origination fee in addition to closing fees, which equates to 1% of the loan. Others, such as RBC, do not.

The most important thing is the main purpose behind a property purchase. Is it mainly a lifestyle and leisure play, a diversification strategy or an income-generating opportunity with a strong return on investment? Once that question is answered, the rest falls into place. 

 

Alain Forget is head of sales and business development for RBC. He is a Canadian expat residing in Florida who also has his real estate licence in the state of Florida.

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