You're about to discover the differences, the pros and cons, to investing in Canada real estate versus the United States. For the most part, the techniques that my apprentices and I employ work very well in Canada. There are some nuances to be aware of but for the most part, creative real estate investing is alive and well in Canada. Perhaps the best part is that most Canadian investors think that things are so much different in Canada when in actuality, they aren't. This video was created for the folks in Canada but certainly those in the United States who are curious can check it out as well.
Investing in Canada Real Estate Versus the United States
In this video I want to share with you, and this is more geared toward my friends in Canada, but also for those in the United States that are at least curious as to what the differences are between investing in Canada real estate versus investing in the United States real estate. More specifically, I'm going to touch on some of the more traditional sides, but I'm going to go more on the creative as well, because that is been where we've made most of our money, and it's been most productive in real estate, has been focusing on the more creative techniques, because traditional techniques, and there's great videos on the differences between the two.
That's pretty simple. You're buying a property, and either you're going to rent it out, or you're going to fix it up and resell it. There's not a whole lot of creativity required. For the majority of how we invest, we like to focus on targeting motivated sellers, people who have to get rid of their property, and then we try to come up with a creative solution, hopefully not having to put much money down or use our own credit, and then find a way to turn that deal into money.
The first thing that I want to start with, for those of you in Canada, is you're going to be shocked by how similar what I teach, specifically, I can't vouch for everybody else that talks about real estate investing, but for what I teach, how similar it is to Canada. You can obviously hear my voice, that I'm from the United States. What we traditionally do in the United States, you can do it so much in Canada. It's because most of the laws are basically identical, whether it has to do with property rights, and contract law, and everything in between. My hope in this video is that by the end you're encouraged and you say, "Wow. All the stuff that I'm learning from Phil, I can do this right here in my own backyard, here in Alberta. Here in British Columbia. Here in Ontario."
Differences
- Population: This is just rough estimate. You get thirty four million in Canada, and you've got about three hundred million in the US. Already, you've got just a much smaller overall population.
- Why is that important?
When we're focusing on generating motivated seller leads, it is a function of population. You have to have, in my opinion, at least between fifty and a hundred thousand people to really become a very successful on the market area. If you're in one of those northern territories, where there's no human beings up there, that might be a little bit difficult for you to apply creative real estate investing strategies. If you're in one of the main provinces, and you've got a decent population, you'll be just fine.
- Responsibility: A main, main difference, and sorry if I offend anyone from the United States when I say this, but one of the main differences is, I'm going to call it fiscal responsibility. Americans have developed, over time, a very lackadaisical level of responsibility, as it comes to finances. We have high levels of foreclosure rates. We have a lot of defaults from our tenants. Americans don't do a great job of saving money and paying their bills. They do a very bad job of that, where as Canadians? Canadians are very fiscally responsible by comparison. Canadians save money. They pay their bills. They try to avoid debt whenever possible, where as Americans are like, "More debt, please!"
- Banking
This means that you're less likely to get any great opportunities in Canada from things like foreclosures or short sales. That is so minor, so tiny, almost not even want to talk about it. To go even further, first of all, the way the Canadian banking system works is a lot different. Basically, ninety percent of all mortgages are controlled by the five major banks in Canada, RBC, Scotiabank, you know the rest. I have a list right there. I don't know all five off the top of my head. What ends up happening is, they have much more stringent underwriting guidelines, and so they create loans that people can afford.
This is kind of cool. Those in the United States would find this fascinating. United States, we have thirty year, fixed rate loans. They're thirty year amortized loans, and the interest rate stays fixed for thirty years. It doesn't work that way in Canada. They may have it on a thirty year amortized loan schedule, but after five years the loan adjusts. They have ARM loans, and so that in of itself just proves that, obviously when the underwriters are looking at loans in Canada that they're evaluating, "What's this person going to do five years from now, and what's it adjust?"
Much more responsible in the payment, from the fiscal responsibility side, for the actual borrower, but then from the lender side, they're also very responsible in who they lend money to. There's a lot less of the subsidies, like we have in the US. We have the FHA, where they allow three and a half percent down payment for first time home buyers, and FHA borrowers. Those things don't exist in Canada. It means that people have to have a real down payment, and they have to really be able to make money, and they have to be able to show their income on a loan statement, and those sorts of thing.
In Canada Target Motivate Sellers
I've hit that pretty hard, but you get that. Foreclosures, short sales, not really a part of the overall investing strategy in Canada. Tax deed sales, those things don't really exist either. Obviously, sometimes people don't pay their taxes, but definitely, it's just so much smaller. That's not where the opportunity is. The opportunity is in targeting motivated sellers, but not the ones that are motivated by foreclosure, short sale, or tax sale. That's not where it's done.
I tell you, a lot of what we do in the US doesn't revolve around this either, believe it or not. I mean, yes, we have our short sales, and yes, these foreclosures do roll through, but by and large, we're targeting the sellers of property that just need to get out. Maybe it's an inheritance, maybe they just own it a while, they just want to get rid of it. Whatever the case may be.
Creative Techniques For Canada Real Estate
Canadians, more fiscally responsible. There's obviously just a far smaller population. What's shocking is how many creative techniques you can do in Canada. Yes, you can do subject to's. Yes, you can do lease options. Yes, you can do flips. Yes, yes, yes, yes, yes, you can. Anybody who tells you you can't obviously doesn't know the law. I'll tell you what I love about what they can do in Canada that you can't do in the United States. I may have run out of room, so I'm going to erase this, but you get that lesson right there.
I'll tell you what I absolutely love. Flips. When you flip the deal, because what you can do in Canada, which is really cool, it's called a skip transfer. A little background. In the United States, we have something called a deed. We have a quick claim deed. We have a warranty deed. In California, we have a grant deed, and there's a bargain and sale deed, which is kind of between a quick claim and a warranty. All these deeds. Right? Doesn't work that way in Canada. Canada has either a [inaudible 00:07:49] transfer, or they have a court ordered transfer. They're just transferring titles. There's only one way to do it. Any time you transfer a title in Canada, you're paying transfer taxes.
Skip Transfer
You want to try to avoid transfer taxes, especially British Columbia, very expensive transfer tax province. This is cool. If you're going to be buying and then selling, we use the phrase A to B, and then B to C. You're B. That's who you are in this little example, as the investor. If you're buying from the seller A, and then you're reselling to the new buyer C, what ends up happening is you can do a skip transfer, and go directly from here to here, not pay the transfer tax, and you get the money in the middle, and you don't have to use transactional funding, and they don't have to know how much you paid for it, or how much you sold it for. It's awesome.
We don't get to do that in the United States. We have to do two closings, have to get transactional funding. You've got transfer taxes. You've got the transactional funding fees. Actually, Canada has a huge benefit when it comes to flips, because you don't have all the expenses. It still means you've got to get the deal under contract, and then resell the property and find a new buyer, but it avoids a lot of the expenses. I love that.
Legal Entities
A drawback to Canada is legal entities. Legal entities is a little bit of a drawback. In the United States, we have something called a LLC. Limited Liability Company, works great for real estate investors. It can be taxed as a sole proprietorship, as a partnership, as a S corporation. You get the benefit there, but it's pass through. The income flows directly to personal.
That does not happen in Canada. If you want to set up a legal entity in Canada, you have to set up a corporation, or you can do a limited partnership, but that doesn't really fit if it's just one person, right? It's a corporation, and here's the thing, the lowest tax income bracket for a corporation is twelve percent, from what I understand. Again, I'm not an accountant. That means you're being double taxes. If you're doing deals out of a legal entity in Canada, and in most cases you're doing a corporation, you have double taxation. You're getting taxed at the corporate level, and then whatever's left goes back to you personal, and you have to pay tax on that as well. Plus, Canada, buy in large, especially for their higher income earners, has a higher tax bracket as well. Canada has really high income taxes in comparison to the United States.
What you can do here, one option is you can maybe get what's called a general liability insurance policy from an insurance agent. You still do your investing in Canada real estate from a personal name, but you also have that liability protection with that insurance policy. That can play a role. Unfortunately, Canadians, you have the double taxation. You save money here, and you give it to the government there. There you go.
Similarities
Shockingly, outside of what I've just talked about, it's amazing how many techniques that I talk about in my videos that apply directly to Canada real estate. Like I said, subject to, the lease purchase flips, all those creative techniques, they all work and you can definitely do them. Definitely want to get your contract. If you get a contract from the United States that's from a real estate investor, definitely have a local attorney there in you province. Go through that document and make sure all the correct language is in there. Again, I brought up that example of a deed. In most of the contracts in the United States, we talk about how that the seller is going to provide a clear title and a warranty deed. Obviously, in Canada, you wouldn't put that in the language.
Right there, I've summarized most of what plays a role in what we do in creative investing. Obviously, there are tremendous differences from other perspectives as well. One thing to keep in mind, in Canada there wasn't much of a real estate bubble bursting. Specifically, I'm thinking of Toronto when I'm talking about this. Toronto has just boomed. In fact, right now it's kind of like California, like San Francisco, or LA. Toronto, it's really high, really expensive real estate prices, because they, again, they didn't have the big run up in the real estate values, because they're very discipline in their lending practices, and then the borrowers were disciplined in what they bought.
Bonus Tip
Another little thing to keep in mind. In Canada, there is no interest reduction for your home mortgage on your income taxes. Canadians aren't as incentivized to have a big fat mortgage on their home loan, or on their primary residence. They're much more likely to want to pay the thing down, where as in the United States we get an interest reduction. Coupled with low interest rates, fixed rate loan of thirty years, and a interest reduction, we Americans, we are incentivized to keep big, fat home mortgages on our primary residences, where as Canadians are not. They're more likely to pay it down. It means that the deals that you work on are more likely to have equity, which can actually be a good thing. Right? It can be a great thing, if the thing's already got equity, so you've got more potential options.
How This Can Help
A thing I like about this, is the majority of Canadian investors don't know that you can apply these techniques that we talk about in the States, you can apply in there. They don't realize you can do things like skip transfers. They don't realize you can do subject to's, lease options, and those sorts of things. They're unaware of that, so what that means is, you Canadian investors have less competition. That's a beautiful thing. In the United States, there's plenty of competition for doing these deals, but you've got less competition in Canada. I've always been a big fan of less competition in our business, because it allows you to negotiate better deals with sellers, because there's not a bunch of other people hounding that same seller. That's a huge benefit, as well.
In Canada Tenants Pay Better
Since your real estate prices have steadily gone up, it means that from the perspective of owning a long term rental property, you have less risk of there being a complete flip downward like there was in the United States. Also, tenants tend to pay. Not always, there's obviously exceptions, but Canadian tenants tend to have a much better payment percentage, or less of a default rate than the United States. If you're looking at maybe owning apartment buildings, or some larger residential type properties like that, that can be another benefit there in Canada, that you've got the stability of knowing that tenants tend to pay better. On the other side, especially with apartment buildings and what not, you're not going to get as much cash flow, because the value of the property is going to be a little bit higher, because of the stability of the tenants there in Canada.
Conclusion
What's my overall assessment? I think you Canadians have a tremendous opportunity. I think you should be jumping on that opportunity. I think you should master the art of creative real estate investing, and become the market leader in your area, and you'd have less competition, you'll make a killing. You can flip deals with the skip transfer and have less of a problem there. If you get the right liability insurance, then that'll solve your liability issues, and not have to run all those profits through a corporation.
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