California Landlord Woes – Sounds Like Toronto

January 9th, 2018 · Personal House, Property Management

I completely stole this post about a California Landlord from Reddit. It just really goes to show that the problems we have in Toronto are not unique.

There’s another aspect that hasn’t been touched on, California’s landlord/tenant laws. I know a little about this because I’m a lawyer. I’m also an accountant and a landlord with a few properties in California and more in Arizona.

California makes it difficult to evict non-paying tenants. I know this is not a popular topic, but please hear me out. If you want people to invest, they need to have a return. I’m not talking about the profit. The income is necessary to make mortgage payments, property tax payments, insurance payments, utility payments, management payments, pay for maintenance and repairs, and much else.

Also keep in mind that anything left over is taxed, which often winds up being about 50% of the profit. Further, the IRS often wants quarterly payments from businesses. It’s slightly worse than that, though. The IRS estimates your income and expects quarterly payments of that estimate – which includes money that you may not have received. Think about that. Imagine the IRS expects you to make $50,000 in a year, but with all hours worked, it’s more like $40,000. But you still have to pay the IRS taxes equivalent to earning $50,000. The difference will be worked out later when you file, but the IRS wants the estimated tax NOW and you’re in deep shit if you don’t pay what the IRS thinks you should be paying. (The California Franchise Tax Board is a pain in the ass, too, but I won’t get into that.)

OK. Everything we listed are what we call fixed costs. That is, you have to pay them every month and these costs do not vary based on your income.

The rub is that rental income is variable. You will have vacancies. You will have unexpected maintenance costs. And then you have tenants who do not pay.

California makes it difficult to evict a tenant who doesn’t pay. The procedure can be dragged out over three or four months. That is three or four months of having to pay fixed costs (including tax on income the IRS thinks you’re getting when you are not) without any income. In contrast, I can boot someone in Arizona who doesn’t pay in 3-4 weeks. Yes, that includes full due process under the law.

So when you develop apartments, you have to figure in the costs for people who don’t pay. That’s the reality of the business. Some people won’t pay and you’re still going to have to pay your fixed costs. The IRS doesn’t give a rip if someone didn’t pay you, they still want their estimated taxes. The mortgage holder gives zero fucks, as well. And try not paying your property taxes and see what happens. You need to either have deep pockets or you have to raise rents to cover your fixed costs in case of nonpayment.

I’ve run the numbers on developing and renting in California. It ain’t pretty. I can’t make the numbers work for me. No, that doesn’t mean I can’t afford a fractional share of a jet and a Ferrari payment. It means not breaking even and probably losing money. As in I’d have to hold a cardboard sign at an offramp and hope to get enough change to buy ramen.

Simply put, it’s not worth it. I am not going to put time and money into something with no return. I don’t work for free. I drive a ten year old car and a treat for me is hitting a local Mexican place where I can get a $10 dinner. But I couldn’t even afford that by investing in LA.

Something has to change. It will have to be a radical change, because there’s too much wrong to have an easy solution. In the short term, people should leave. I did. I managed to buy a 1,500 square foot house with a pool for $106k down here. It’s an older house and I’ve torn it down to the studs, but it’s affordable. Something like it in LA would be at least $700k or $800k. As much as I love LA, the numbers no longer work.

This is very similar to the problems landlord in the GTA have and certainly a problem with creating additional housing stock. You might not care about losing money if you used to live in the house, or a speculating on capital increases. The point is as an income property it’s just not worthwhile as a business. And it doesn’t scale… and what that means is you can afford one or two money losing properties, but you can’t afford ten or twenty or 100. That’s what we need in the GTA, more affordable housing and we’re not going to get it, unless house prices get a lot more reasonable.

Happy Renting!

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Homelessness Problem Needs More Than Just Affordable Apartments.

January 7th, 2018 · Property Management, Rental Property

There are a lot of homeless people in Toronto and because it’s colder than a witches tit outside, the Mayor had to open up the Fort York Armory, to keep the homeless from freezing to death.

The real question remains what are we going to do about the problem of chronic homelessness in Toronto and elsewhere?

Earlier today I read a very good article about Housing First and It’s Impediments, which is a research report for the Calgary Homeless Foundation. They do a pretty interesting analysis of the Streets to Homes programs, which I considered very realistic. They have statistics about the “rehousing events” which means that they get people housing and they don’t pay their rent or get evicted. There is discussion about how 200 clients were housed in a building and they have all mostly been kicked out because of lack of support and they don’t put 200 clients in one building anymore.

There is also talk about how there is virtually no rent geared to income for people who are homeless, there are just no spots and the City of Toronto seems to be reducing spots not increasing housing.

I don’t think any of the issues surrounding homelessness especially chronic homelessness can be addressed without discussing the unpleasant fact that by the time people become homeless, they’ve exhausted their families, their friends, and all other resources. So you are looking at people with very complex issues, such as addiction, mental health, personality disorders, criminality, lack of employability.

While it is true that housing is a core tenet to stability required to deal with some of the other issues, it’s not going to be maintained on it’s own without support. Certain behaviors are not compatible with community living.

We haven’t even discussed poverty yet.

So let me give you an example, I had a condo for rent, I get contacted by a gentleman named Carlos. He says he wants to come see the condo, the rent is $1800. I set an appointment for X time and give my usual instruction to call before and confirm, I get no such call. The next day, I get a call from the building security, Carlos is at the building. It’s not far, I drive over to show the unit. Carlos smells very badly of poo. I’m not really comfortable in the elevator because Carlos is setting off my sketchy as heck instinct in a significant way.

I give Carlos an application, he says he’ll fill it out. I don’t get anything. Then on the 1st of the month Carlos calls me, and says he’s moving into the unit. I’m like no you’re not. You need first & last. Carlos now tells me that he is on Ontario Works. His income is $630 per month.

So as you can see, housing people with these kinds of complex problems is a major challenge. Carlos lacks the basic skills required to get and maintain housing. First he can’t fill out an application, he can’t follow simple instructions and I can’t imagine what his credit score is like, and his income is so low there are virtually no apartments in his price range. And he smells like poo. No one is going to rent to Carlos.

Even if Carlos did have an apartment, chances are that he couldn’t maintain it, and he needs ongoing help for his mental issues. This is what the Streets to Homes statistics revealed. Further any landlords that have participated in Streets to Homes where they have had to evict a tenant isn’t going to really feel like signing up again, are they?

Then there are further issues like the one this Ottawa landlord had. Again there are no life skills supports in place. The city and province have said that they want to “partner” with landlords but only in the context that they want landlord to take their complex homeless people out of the homeless system, so that they cost less money. Not in the way that they want to have a meaningful dialog with landlords about the real risk of housing difficult to house tenants, and the costs when things go wrong. Instead it’s very popular to accuse landlords of discrimination.

Then there is a major problem with our social services in that they are completely and totally inadequate to provide for the essentials of life including shelter. In Toronto, you simply cannot find even the shittiest room for $325 per month which is the allowed amount for Ontario Works for shelter.

There was a time when there was a “moving allowance” for people on ODSP, that has been clawed back. In fact what I have noticed is that people on Ontario Works and ODSP have to be better budgeters than anyone else, which considering the challenges they have that make them unable to work, is a pretty big ask. It’s pretty crazy. What inevitably happens is the same that happens to all of us, there is some type of emergency, and they don’t have credit cards, and they have to pick between rent and food, and they pick food, or the life of their cat, or a tire for their car and they don’t pay the rent… and they can’t recover because there is no leeway, no wiggle room, in their budget.

Anyhow, I can see landlords making a decision to help a homeless person, but with the caveat that their “partners” in this venture are going to support the person. Making sure they are well, they don’t smell like poo, their apartment is cleaned and sorted. These are the types of supports we need. The problem is that all these supports cost money and people might need mental health care, which is another difficult service to access. You need to have great mental health to have the skills to get mental health care.

From what I can see, there needs to be a lot more supportive housing built kind of in the model of an old age home, where people with lower levels of life skills can live in safety with a simple room, dinette, nursing care and cleaning. In the paper one of the workers espoused a desire for some slum lords, who wouldn’t care too much about their clients were up to and not be too picky about cleanliness. I have noticed a really unrealistic trend, where people have champagne dreams on a beer budget. For people who are presently homeless, any place that is not -20 would be an improvement.

Until the province and the city make significant headway towards realistic programs that increase the amount of rent that people on OW can pay, and support people with complex issues, including paying the rent to landlords and continuing to pay the rent for tenant, and dealing with other issues to help landlords deal with ongoing concerns… we will continue to have a severe homeless problem.

Until the city can admit that the homeless are not an ideal tenant pool, and that landlords are not able to solve these issues just by giving people a place to live, then there can be no movement towards a solution. Eviction is traumatic for the landlord & the tenant. Surely avoiding additional trauma is beneficial?

I’ve been a property manager for 20 years and I have tried many times to help people who have housing problems and I mostly live to regret it. Even now I feel really bad just saying it, but it’s my real experience.

I for one cannot wait until some meaningful actions happen.

Eradicate Homelessness – realistic supports.

 

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Landlord Opportunity – Learning You Need

January 5th, 2018 · Kids & Family

Success is not an accident, it’s hard work. There is a whole industry of people who sell real estate to investors and they tend to gloss over the little details like property management is boring but essential, and that real estate is one of the most legislated businesses there is.

Harry Fine is one of the most respected paralegals that exists, he is a former adjudicator and he’s been working tirelessly for small landlord education forever.

If you consider that this business is one of the most legislated businesses it just makes sense to educate yourself on the basics of what you need to know about landlording in Ontario, and I can’t think of anyone more suited to teach a course about it than Harry Fine. I just can’t.

So if you are serious about the landlording business, it’s time to learn about it and Harry Fine has some webinars, and you should get them, so you can be the smartest person in the room. Don’t let the vacuum of space fill your brain case, put some learning in there.

Legal issues with your rental property shouldn’t be a unpleasant surprise, this is a business not a mickey mouse show.

Finally I’m not being paid to flog Harry’s webinar, but I think every landlord or potential landlord should take it because so many new landlords have no clue what they are doing. They go to the university of hard knocks when their tenant knows more about the rules than they do.

Fix it, be smart, go to Harry Fine’s Landlord Webinar.

Happy New Year!

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Benefits of a Canadian Agent for Foreign Residents In Real Estate

December 27th, 2017 · Property Management, Rental Property

We live in a Global environment, and with all this recent talk about Foreign Investors causing real estate prices to go up, people forget that there are a ton of  reasons for Non-Residents to have property here in Canada.

  1. Working overseas
  2. Falling in love
  3. Travelling
  4. Inheriting property
  5. Investing

About 20% of our portfolio is non residents at this time, not surprisingly property owners that are out of the country do need property management services. It just makes sense.

Most people don’t know what the benefits are of having a Canadian Agent, and since most of the non-residents we represent are Canadian by origin, they just leave the country and continue to collect their rents, in their Canadian bank accounts, maybe changing their address to a UPS mail box or their friends or family. No big deal right?

Declaring Yourself Non Resident

Most people are going abroad for love or money, and no one likes double taxation. At one point if you are working abroad, you will end up paying income tax in that country, and you won’t want to pay tax in Canada as well. So you tell Canada Revenue Agency that you don’t live in Canada anymore, and bingo you’re non resident.

What About The House ?

In most cases, the house is an afterthought, and being taken care of by a property management company or family or real estate agent. You may not want to sell because you plan to come back to Canada to live. In most cases, it’s not about the money, it’s about the ties to Canada. Many overseas postings are for 2-5 years and in some cases your employer covers the cost of moving and maintenance of the house in Canada. The house isn’t primarily an investment, it’s a your home.

The property management relationship should be a primarily custodial one, rather than wringing every bit of income out of the house, it’s about picking the lowest risk A+ tenants and keeping the house in good condition and… complying with Canada Revenue Agency rules about non residents.

NR-6 Getting a Canadian Agent

Technically, “NR6 Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real or Immovable Property or Receiving a Timber Royalty” is the form we fill out as your Canadian Agent, along with a spreadsheet with your property expenses, and then we pay 25% of your net income.

If you do not have a Canadian Agent, you are required by law to pay 25% of your gross rent to Canada Revenue Agency, then at the end of the year when you file your tax return, you get any monies overpaid back.

To illustrate the difference let’s take a sample condo, with a mortgage, Net Income will = $0 That’s right chances are that if your condo has a mortgage on it, you won’t have to pay a cent to Canada Revenue Agency in withholding tax because you have negative cash flow into the property.

However, taking a 2 bedroom for rent at $2000 per month, gross income would be $500 per month payable to Canada Revenue Agency, of course when you file your income taxes at the end of the year, you’ll get the money back. Obviously this can cause some cash flow issues.

Individual Tax Number

If you are actually from overseas, you’ll need an Individual Tax Number before you can get a Canadian Agent. This takes a while to get so you want to apply right away.

Complying is a Pain

I do not have a person dedicated to Canada Revenue Agency because my company is too small, however, I wish I did. Apart from the well documented issues with calling them, you send the forms in, wait 3 months, and hope for the best. Then you get a letter. Sometimes you don’t get a letter, then you have to call them. I’ve taken to both Faxing and Mailing forms. No one wants to know how the sausage is really made so I’ll stop right now, but I’ll tell you there is work involved.

Renters Are Also Required to Send 25% of rent to CRA

Weirdly Canada Revenue has compelled tenants to send them 25% of their rent. Obviously that’s not practical but it is the law. I really don’t know and have never heard of any tenants that actually do this. I’m not saying they don’t exist, I’ve just never heard of it.

We Act As Canadian Agents For Investors

We perform this service for property owners that hire us to manage their properties. We can not take the risk of providing this service if we do not receive the rents. As we look to continued growth of our company in the New Year, we will continue to comply with the rules and regulations of Canada. We’ve been in business a long time, and we prefer long term gain to short sighted speculative thinking. No one should be surprised if shortly in the future we all get word that Canada Revenue and Land Registry combine more closely to force compliance with existing tax laws.

Short Term Pain for Long Term Gain

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CMHC just wrong about Foreign Ownership Percentage

December 19th, 2017 · Kids & Family

So CMHC has just sent out it’s latest report Non Resident Ownership of Condominium Apartments and as usual I have a problem with their methodology.

Why?

“CMHC obtains information on non-resident ownership through telephone interviews of the property management company or condominium (strata) board, or building superintendent, which may be supplemented by site visits if no telephone contact is made.”

So first of all let’s define non resident for tax purposes, a lot of times these are Canadian citizens that have left Canada for love or money, and the rest of the time we have foreigners coming to buy real estate here.

For the Canadians living abroad, they often have family and friends here, and maintain their Driver’s license and passport etc. They often have a Canadian mailing address, mostly at friends, sometimes at family, and that’s how they get their mail. Many are planning to come back eventually and that’s why they keep their house. They have a SIN number. With very little expense and effort anyone can get a Canadian mailing address at a UPS store or virtual office company.

Canada Revenue has relied on self reporting for property sales and income. There is no integration between property registration and Canada Revenue Agency, however, if CRA investigates the information is there. Most of the time they don’t bother.

That doesn’t even count flipping before the property is registered, which is why this lawsuit was important. Frankly the fact that the developer felt this is an issue that required litigation, is important as well.

In Canada, you are not required to even have a TTN (Temporary Tax Number which is given to Non Residents that report to CRA) to buy a property, and your address is whatever you give. No one is checking this. No one cares.I have one owner  that recently had to apply for a TTN but the property has been in his name for years. He applied because I forced him to apply so he could be in compliance with Canada Revenue and withholding taxes. He doesn’t actually have to pay anything, he loses money on his condo expenses every year. All the condo documents go to his brother in law who lives here in Toronto. See?

I have no idea what the banks are doing about non residents who have an account, do you need a TTN to open an account? I don’t know what type of ID you need to have a Canadian bank account.

Simple Problem with Simple Solution

Every property registered in Canada from the initial sale document including condos sold be developers need to have either a temporary tax number or a SIN associated with it. Every property sale needs to have a TTN or SIN associated with it. CRA needs to have a department where you can check if the number is valid within 24 hours for property sales.

Then this needs to be integrated with property registrations and records. Now, it will take a while before all property records are up to date, and all CRA records are up to date, but if we can track payroll taxes like we do and manage to collect 407 ETR tolls through the driver’s license system like we do, I’m pretty sure we can manage the same kind of system for property registry.

Relying on self reporting for sales and rental income of property is stupid and anyone who thinks that third party self reporting is accurate is even more stupid. These numbers mean nothing.

I just want to say, that in my property management properties, non residents occupy 18% of the total.  Yet somehow CMHC is reporting that Toronto condos are only 2.5% foreign owned. Stats Can says its 4.9% using CRA information, and I would say most foreign owners do all they can to circumvent the CRA’s onerous requirements for reporting.

First if you don’t have a Canadian Agent, you have to pay 25% of your gross rent to CRA and then file an income tax return at the end of the year to get the 25% back. Even if you lose money on your condo (most of them do) unless you paid in cash which is pretty rare. If you don’t write or speak English, there’s no way you can understand and fill out the forms.

I would say more people don’t comply, than do comply with CRA, in fact if you have a Canadian bank account and Canadian address, you’re going to have to go out of your way to tell people you’re a non-resident. In one of the most multicultural cities in the world, no one’s going around asking people what their resident status is.

I think we were further ahead when CMHC said they didn’t know, because nothing is more dangerous than a bunch of knuckleheads with bad data and terrible methodology who are reporting error upon error. I can’t ever forget your bad data on vacancy rates, because you still haven’t fixed the problem. I’m a pretty honest person, so can you imagine what people who aren’t have found to exploit in this system?

My guess on non resident ownership in GTA properties? At least 8%. At least.

CMHC is not all it’s cracked up to be.

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