Financial Nuggets – March 29, 2017

What Qualifies As A Good Credit Score?

A score represents a moment in time and can change based on your behaviour.

Missed or late payments or lots of “maxed out” credit accounts will lower your score.

The best way to increase your score is to pay back debts on time and consistently. Which means, of course, you need to first have some debt to repay.

Scores typically range from 400 to 900; Good scores are typically 650 and higher; Anything over 750 is considered excellent.

Whether it’s 750 or 850 doesn’t really make a difference. For an institution like a bank or credit union that’s examining your credit, anything over 700 is “a no-brainer.” Because the makeup of your credit files is a bit different, your scores will also be different.

Get a credit card – and use it wisely – in order to establish a good credit history. We live in a country where you can’t do much without having credit, and if you’re being responsible about it and not overextending yourself, then it’s always a good thing to have.

Credit scores are only one of several tools that credit agencies use to determine your credit-worthiness. Your score is a check on your character. In this day and age, when we often can’t meet face-to-face, how do we determine someone’s character? We do it through looking at their past history, to see how they’ve re-paid debt.

You need at least two open and active credit files to establish a credit rating. As long as you’re being responsible and not overextending yourself.

On the other hand, if you’ve done the opposite of this, “meaning” you have had hardship and certain circumstances have gotten in the way of your finances- its ok life happens, but it doesn’t end there. You have rights, according to the Fair Credit Reporting Act. You have the right to tell a collection agency to stop harassing and calling you. The right to dispute a debt, claim or items that appears on your credit file is also yours.

If you are suffering because life’s s circumstances are the cause of your bad credit and low credit score, there are several ways that you can deal with your situation. The two that are best to avoid however are consumer proposals, and bankruptcy. These are the two options that can hurt you the most, and yet these are the two options most credit repair companies will offer you as your best solutions.

A consumer Proposal will cost you more than you expected to pay, you’ll be signing documents you don’t even understand and which will hurt you in the long run. It also stays on your credit report for 7 plus years and will prevent you from qualifying for your car loan, mortgage, a line of credit or a simple rental lease. It will even harm you from getting suitable employment.

As for bankruptcies, these stay on your credit report for 10 plus years and pretty much acts the same as a consumer proposal. There are several more effective and faster ways that you can resolve your debt and other issues that are on your credit report. For example, Minimal settlements can be negotiated and arranged, and with certain techniques your credit report can be new again with an increased credit score and derogatory comments removed. You can be on your way to financial recovery. Talk to the right credit expert that deals with credit repair, they have the knowledge and experience. Consultations should be free from a credit analysis that specializes in cleaning your credit, they should be able to guide you, and help in re-building your credit.

Bad credit is not a crime, it’s a situation which is forgivable.

If you have any questions or need to learn more, feel free to contact us 905 426 2121

“Need To Know’s” Before The Investing Dive!!!

After working with a lot of investors, my favorite part of the job is helping guide them to make solid and profitable decisions. Whether you’re just considering getting on the real estate ladder, or you’re a seasoned investor, read on to find out 12 Things You (probably) Don’t Know About Investing in Toronto Real Estate.

  1. If you’re buying an investment, it’s all about the math – don’t let emotions get in the way. I know, granite counters and bamboo floors are awesome, but how much they add to the monthly rent? Real estate investing really does come down to numbers, and it’s not just price that matters. How much are the condo fees? How much are the taxes? What kind of maintenance should you expect? What kind of rent can you expect? An agent experienced in investments will be able to guide you to the profitable ones and encourage you to run from the ones that look great but don’t give the best returns.
  2. You’ll likely need a minimum 20% down payment. If the property you’re buying isn’t a primary residence (a primary residence is defined as one you live in at least six months of the year), then the bank will require you to have a bigger down payment. In most cases, that’s 20%.
  3. The good news? In Toronto (as of writing), most investors reach the break-even point with a 20% down payment. What does that mean? Your rent should cover your mortgage payment (at 80% financed), your taxes and your condo fees. If you can only become cash flow positive with a 30% down payment, something is wrong with the property you’re considering- keep looking.
  4. Most lenders will consider 80% of the rental income when calculating how much you can afford. When banks decide how much mortgage they want to give you, they’ll look at your income, your debts, and your credit score. If you’re buying an income property, they’ll add 80% of the projected rental income to your income, so you’ll qualify for a bigger mortgage. Keep in mind that some lenders won’t consider rental from illegal apartments [Related: Is that Apartment Legal?] and may require an actual lease in place or an appraiser to confirm the amount of rental income that will be generated.
  5. As an investor with a down payment of more than 20%, you’ll likely qualify for a 30-year amortization on your mortgage. This will keep your mortgage payments low (and don’t forget, you can write off the interest on your mortgage against your rental income come tax time). Example: If you have a $300,000 mortgage at a 3% interest rate amortized over 25 years, your mortgage payment is $1,362 per month. Increase the amortization to 30 years, and your payment decreases to $1,211 per month. That an extra $151 in cold hard cash flow a month!
  6. Good investment properties provide 4 ways to make money:
    Monthly cash flow – During the time you have a mortgage, your monthly cash flow from the property (cash flow = rent minus expenses) is likely to be minimal. In Toronto, is not uncommon to see properties that are $50 or $100 cash flow positive each month, and there are plenty of investors out there who bring in less rent than their expenses (cash flow negative). Negative cash flow investors are betting on the benefits of appreciation, equity build-up and/or improvements.
    Appreciation – Appreciation in an investment property is the amount it increases in value during the time you own it. The real estate market in Toronto during the last few years has been on fire, with 4-5% annual appreciation for condos and 10%+ annual appreciation for houses. Don’t be naive and think that’ll always be the case – during the time you own the property, there will likely be years of zero growth and years where prices go down too. Be prepared for that and remember that investing in real estate – like investing in the stock market – is best viewed through a long-term lens.
    Equity Build-up— every month, a portion of your mortgage is getting paid by your tenant, and you’re building up equity in the property. That $300,000 mortgage at 3% interest will have shrunk to $265,000 by the 5th year, to $216,000 by the 10th year, $160,000 by the 15th year, and so on. The difference between what it’s worth and what you owe is the equity.
    Improvements – Depending on the type of property you buy and how long you keep it, there may be an opportunity to renovate and increase its value. Many house investors renovate and improve right away (for example, they may make a 2-unit house into three units, or they may upgrade the finishes to justify higher rents). Other investors will choose to renovate right before selling (this is common in the condo market). Just be careful: a $50,000 condo renovation may not pay back $50,000, so talk to your REALTOR before renovating pre-sale.
  7. Usually the best cash flow properties are the ones that are appreciating more slowly than average. When choosing your investment property, you’ll need to give some serious consideration to your goals. For example, right now in Toronto, there are some condos that sell for less per square foot than the average, yet rent for nearly the same amount of money – so you can pay $350,000 for a condo or $400,000 for a condo and get the same amount of rent. There are lots of reasons why the $350K condo may be cheaper (location, finishes, quality of the building, supply/demand in the building, etc.) and that may impact the resale value of the condo. What’s more important to you: monthly cash flow now or long-term value?
  8. The short-term rental market is pretty much over in Toronto. While renting out properties for a few days or weeks at a time was a cash cow for years, the short-term rental market’s days are numbered in Toronto, at least for serious investors [Related: How Airbnb Killed the Short-term Rental Market].
  9. There are three kinds of taxes you’ll need to consider when buying an investment property:
    Land Transfer Taxes – There are two types of land transfer taxes: Ontario and Toronto (if you buy in the city of Toronto). Land transfer taxes are paid by the Buyer when they take possession of the property and are a percentage of the sales price. Click here to calculate land transfer tax. [Related: All About Land Transfer Taxes]Income Tax on the rental income – Rental income is considered taxable, and the net profit you make will be added to your income and taxed. The good news is you can write off a lot of expenses to decrease your profit (mortgage interest, property management fees, condo fees, utilities, etc.).Capital Gains taxes – When you sell your investment property, you’ll be subject to capital gains taxes. At the time of writing, capital gains taxes are 50% of profit, meaning that 50% of the profit you make (after selling expenses) will be added to your income and taxed at your regular income tax rate.For Example:
    Purchase price: $400,000
    Sold price: $500,000
    Costs to sell: $25,000
    Gain in value = $500,000-$400,000- $25,000 = $75,000
    Under current capital gains rules, an investor would pay taxes on 50% of the $75,000 profit.There are lots of intricacies when it comes to taxes, so make sure to talk to your accountant to determine your individual tax scenario.
  10. If you buy a duplex (a house with two apartments) and live in one of them yourself, be careful. If you live in less than 50% of the house, you’ll pay capital gains tax on the whole house and lose your primary residence tax exemption. This is one of the most-missed points, and one that could cost you tens of thousands of dollars: if you rent out more than half your house (and declare the income, and write off the expenses), when it comes time to sell, the CRA will consider it an investment property (notwithstanding #12 below) and you will pay capital gains tax on the increase in value since you bought. Again, talk to your accountant.
  11. As an investor, your qualification for government Buyer programs is limited. The First Time Home Buyer RRSP Plan and Land Transfer Tax Rebate for first time buyers [Related: Government Programs] both only apply to your primary residence. Sorry.
  12. If you live in it, it doesn’t really count as an Investment Property from the bank’s perspective. If the house is your primary residence, even if you only live in one part of it, then you can’t run the mortgage numbers as an investment property from the bank’s perspective (although that’s usually a good thing). If there are leases in place or the bank’s appraiser can back up the potential rent from an apartment, then they may be able to use 80% of that income to reduce risk, but that’s all.

Have questions? I have answers, so don’t be afraid to get in touch! 416.282.2444