Real Estate Investing For Canadians For Dummies
Interested in adding Canadian real estate to your investment portfolio? Give yourself a head-start by brushing up on your real estate terminology, learning how to identify profitable properties, and knowing where to turn for reliable help online.
Real Estate Investing Terms for Canadians
Wondering what the acronyms CREA, MLS, or CMHC stand for? Decode the jargon and brush up on your real estate investing vocabulary with these key terms:
Adjusted cost base (ACB): The value of the real property established for tax purposes. It is the original cost plus any allowable capital improvements, plus certain acquisition costs, plus any mortgage interest costs, less any depreciation.
Amortization: The reduction of a loan through periodic payments in which interest is charged only on the unpaid balance.
Amortization period: The actual number of years it will take to repay a mortgage loan in full. This can be well in excess of the loan’s term. For example, mortgages often have five-year terms but 25-year amortization periods.
Canada Mortgage and Housing Corporation (CMHC): The federal Crown corporation that administers the National Housing Act. CMHC services include providing housing information and assistance, financing, and insuring home-purchase loans for lenders.
Canadian Real Estate Association (CREA): An association of members of the real estate industry, principally real estate agents and brokers.
Capital budget: An estimate of costs to cover replacements and improvements, and the corresponding revenues needed to balance them, usually for a 12-month period.
Capitalization rate (CAP): The percentage of return on an investment when purchased on a free-and-clear or all-cash basis.
Deed: This document conveys the title of the property to the purchaser. Different terminology may be used in different provincial jurisdictions.
Equity: The difference between the price for which a property could be sold and the total debts registered against it.
Equity return: The percentage ratio between an owner’s equity in the property and the total of cash flow plus mortgage principal reduction.
Multiple Listing Service (MLS): A service licensed to member real estate boards by the Canadian Real Estate Association. Used to compile and disseminate information by publication and computer concerning a given property to a large number of agents and brokers.
Operating budget: An estimate of costs to operate a building or condominium complex and corresponding revenues needed to balance them, usually for a 12-month period.
Pyramiding: The process of building real estate wealth by allowing appreciation and mortgage principal reduction to increase the investors’ equity in a series of ever larger properties.
Title insurance: This insurance covers the purchaser or vendor, in case of any defects in the property or title, that existed at the time of sale but were not known until after the sale.
Vendor take-back: A procedure wherein the seller (vendor) of a property provides some or all of the mortgage financing in order to sell the property. Also referred to as vendor financing.
Scouting Canadian Properties for your Real Estate Investing Portfolio
Considering a few practical elements may help you choose between an adorable rental property in the middle of nowhere or a tear-down shack with long-term potential. Keep these factors in mind when you’re evaluating a property:
Price: Compare the asking price of a property to the average sale price for the area. An undervalued property in a good neighbourhood stands a better chance of increasing in value than an overpriced home in a neighbourhood that’s going nowhere.
Condition: You may be getting a great deal on a property but if you haven’t counted on the cost of long-overdue maintenance, you may face a losing proposition. Though you may be able to make something of a property, if the improvements cancel the potential return, what’s the point?
Cash flow: Make sure you can attract tenants to a property if you’re counting on cash flow, not just a rising price, from your investment. Remember to balance the projected cash flow against operating costs, to ensure your income stays ahead of expenses.
Finding Canadian Real Estate Investing Help
When you need reliable, Canadian real estate help in a hurry, The Canadian Real Estate Association, Canadian Mortgage and Housing Corporation, and Bank of Canada Web sites are your best bets.
Canada Mortgage and Housing Corp.: Need to know how many homes are being built in your area or what rental rates are like? Need information on financing and incentives for renovations? You’ll find it all, and much more, here.
Canadian Real Estate Association: Get connected with your local real estate association, find property listings, and discover what it takes to sell real estate. Packed with useful information, this site is an online primer for home buyers and the residential properties.
Bank of Canada: More useful than it sounds, the Bank of Canada site provides valuable information to investors and wannabes alike. Whether you’re looking for interest rate trends, fiscal analyses, or calculators to figure out the impact of inflation on your investments, here are the resources you need to make sense of your dollars.