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CN Tower

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I’ve been investing in real estate for well over a decade and credit my success primarily to independent thought. I have not blindly purchased property every year, but selectively (some years much more than others), and basically limited to central Toronto (I live in the UK and could have purchased here or the US, as others have mistakenly done). I’ve built my Toronto property portfolio well into the eight figures, but am growing more and more concerned (mainly due to tighter bank credit). However, I still see opportunities, albeit very few.

^Most interesting comments that I've seen in this thread in months!

John, you live in the UK and have chosen our little hamlet as your safe haven? Do tell! What attracted you about Toronto, Ontario, Canada so much that in 2001 and post you saw it as an attractive place to acquire $10,000,000+ of property here?

Thanks for sharing.
 
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Johnzz

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I had the good fortune to live in Toronto for a few years during the late 90’s. I quite honestly loved it. Great people, food, attitudes, quality of life, festivals, etc… It was also clearly undervalued. There have been many positive attributes to purchasing property in Toronto, which I’ve posted here over the years. Of course Toronto’s not quite so undervalued today, but many positive attributes remain. There’s a reason so many foreigners continue to buy.

Canada is an incredibly rich and safe country by international standards, and maybe a little underappreciated by most Canadians. It’s under appreciation which creates value IMO. :)
 

vz64

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One of my favourite books, along with his "Fooled by Randomness". I also recommend Freakanomics and SuperFreaknomics by Levitt.

I am glad you like it :) Then you would agree with me that we are constantly bombarded with either gloomy or overly optimistic predictions from numerous analyst, economist, etc, whose predictive accuracy is not better than random. We are discussing if there is going into a burst, a flat-out or growth. A few months down the road one of these scenarios will materialize, but it might only indicate that the proponents of this specific prediction were correct by chance.
 

interested

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I had the good fortune to live in Toronto for a few years during the late 90’s. I quite honestly loved it. Great people, food, attitudes, quality of life, festivals, etc… It was also clearly undervalued. There have been many positive attributes to purchasing property in Toronto, which I’ve posted here over the years. Of course Toronto’s not quite so undervalued today, but many positive attributes remain. There’s a reason so many foreigners continue to buy.

Canada is an incredibly rich and safe country by international standards, and maybe a little underappreciated by most Canadians. It’s under appreciation which creates value IMO. :)

Johnzz,
Congratulations on your smart investing and the vote of confidence in Toronto. If I could ask, are you still a buyer of property at these prices...I am thinking in particular of Preconstruction in Downtown TO at $600-800/sq.ft. which is mid level product now?
Also, I am quite sure being in Britain has served you well as your previous very strong British Pound has allowed capital appreciation by virtue of the C$ appreciating towards most currencies in the past few years.
 

interested

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Johnzz,
One further question.
Without revealing how much beyond your 8 figures you have invested in TO realestate, could you perhaps give some indication of what % you are putting down. Is it minimal 20-30% or 100% equity or somewhere in between. I am not asking to pry but rather to get an idea of how much risk foreign investment in TO really is adding. If it is a minimal 20%; then a 10% drop wipes out 50% equity. If it full cash purchases, 10 or even 20% while not welcomed would I am sure be largely irrelevant.

Even if you are unwilling to inform further about your situation which I would fully understand and respect, perhaps you might be able to shed some light on what you and other foreign investors if you know them are doing in terms of how much down payment vs. mortgage foreign investors are carrying. In other words, what do you think the "average foreign investor" in our market is putting as downpayments. I appreciate there will be large variation but I am just asking you for a gut reaction to what % downpayments on average you think real estate investors place.

I ask since this would help to answer a long questioned theme on this post....what would happen if there is a downturn and how likely are foreign investors to "dump and run".
 
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TheSpeculator

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Johnzz, it’s very nice to see others with the same view on economists. I don’t believe in “experts”, they are usually wrong and one’s better off flipping a coin than listening to them. I try to avoid listening to their reports as they may distort my judgment. With all the reports stating interest rates will be going up over the past 2 years, I’ve stuck with short term rates for the past 10 years, knowing if rates in USA and globally are to remain low, Canada would likely stay put. I’m still going forward with choosing variable or 1-2 year rates as you can still secure them at 2.39-2.49%.
I’m holding on to my property, not purchasing any NEW ones only because of the same reasons, being tighter credit as I’m still closing other units I purchased from years ago.
I for one am putting down the 25-30% required by the banks, which makes it tough but I am happy for these new restrictions, as it will avoid any sort of meltdown in my opinion. I am still waiting for 5 pre-construction units to complete on top of the many more I have accumulated over the past 18 years and I have no intention of walking away from any property, even if it goes down 25%. I said it before and am one of the very few that predicted prices increases for 2011, and I’m predicting rising prices for 2012 once again, but at the 2-3% level in the GTA. I am not an economist so I may be correct in my assumptions.
 

KA1

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Johnzz, it’s very nice to see others with the same view on economists. I don’t believe in “expertsâ€, they are usually wrong and one’s better off flipping a coin than listening to them. I try to avoid listening to their reports as they may distort my judgment.

Even the bank's lending departments ignore 'Economic Reports' of their own economic departments.

Over the past few months, there have been reports of consumers taking on too much debt and ever increasing prices turning housing market into 'bubble' territory. Then about 2 weeks ago, war in mortgage lending rates erupted. Banks were offering mortgages as low as 2.99%. Last week,there was a report that under OSFI pressure, banks have discontinued offering 2.99% rate mortgages.

There is a news item in today's The Globe and Mail that despite higher posted mortgage rates, 2.99% mortgages are still available -- but only through mortgage brokers.

Now, it is your turn to be 'devoured' by perinnial 'doom and gloomers' who make regular posts in this thread -- Interested, Daveto, Redfirm etc.

Watch for your skin:eek:
 
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interested

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^^^
Interesting Speculator.
I hope the bulk of the real estate is held with people of like minds. If so, even a downturn of 25% while not pleasant would not be disastrous.
However, as others have pointed out, real estate is a market that depends on the marginal investor. The 95% or so of real estate that is held presumably long term is stable. The last 5% dictates the price for most of the market. If in that 5% there are a lot of poorly capitalized speculators, there will be a major downdraft and rapid. That said, it could recover very quickly and show up as one of the great buying opportunities. On the other hand, if the downdraft catches effect, the effect could drag down everyone with it as more people, even those well capitalized, get drawn in with the downward evaluations.
 

interested

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Even the bank's lending departments ignore 'Economic Reports' of their own economic departments.

Over the past few months, there have been reports of consumers taking on too much debt and ever increasing prices turning housing market into 'bubble' territory. Then about 2 weeks ago, war in mortgage lending rates erupted. Banks were offering mortgages as low as 2.99%. Last week,there was a report that under OSFI pressure, banks have discontinued offering 2.99% rate mortgages.

There is a news item in today's The Globe and Mail that despite higher posted mortgage rates, 2.99% mortgages are still available -- but only through mortgage brokers.

Now, it is your turn to be 'devoured' by perinnial 'doom and gloomers' who make regular posts in this thread -- Interested, Daveto, Redfirm etc.

Watch for your skin:eek:

I believe if one looks deeper into this statement Ka1, one has to ask themselves objectively (not doom and gloom nor rosy view, just objectively): Why does a bank decrease interest rates to the lowest value in 50+ years?
Is it because there is a lot of demand out there? If the answer is yes, why lower rates?
Is it because the world is not doing well and there are fears and no demand for money, hence a need to reduce its cost to get it lent out? Maybe but that is not a good thing either.
Is it that BMO wanted to increase its market share of mortgages? I don't know but it may have been a way to "buy" business that would have gone to other institutions.
Please provide a scenario or more scenarios if you can as to how exactly interest rates at these low levels signifies a "good case scenario" to support further price increases going forward for the long term. I appreciate in the short term it may well trigger sales by buyers who look at present rates and say "it is too cheap to pass up"
 

interested

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From the Globe and Mail:
http://www.theglobeandmail.com/life...h-hopes-for-torontos-high-end/article2332298/

Sotheby's has high hopes for Toronto's high end
carolyn ireland
Toronto— From Friday's Globe and Mail
Published Thursday, Feb. 09, 2012 11:40AM EST
Last updated Thursday, Feb. 09, 2012 12:37PM EST

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At a time when pundits are watching for signs that Toronto’s housing market is cooling down, Ross McCredie is gearing up.

The chief executive officer of Sotheby’s International Realty Canada is adding a second Toronto office and new agents are signing on.

Mr. McCredie is sanguine about the top tier of the market, where Sotheby’s agents already glide between polished marble foyers.


Mr. McCredie was first drawn to Toronto by the opportunity to attach the Sotheby’s banner to condominium units in the Four Seasons Private Residences currently under construction in Yorkville.

The largest units were the quickest to sell – at prices as high as $1,500 to $1,800 a square foot, he says.

That venture went so well, and he has such high hopes for more such lucrative deals, Mr. McCredie says, that he has brought about 25 new agents onboard and expects to add another 25.

He points to the injection of capital from overseas, the line-up of five-star condo towers nearing completion, and a projection by Deloitte Services LP that the number of millionaire households in Canada will swell by 38 per cent in 2020 from the 2011 tally.

A lot of attention is focused on investors based in China, he says, but other factors are at play too: The huge transfer of wealth from aging parents to their baby boomer offspring and the expectation that more homeowners in tony neighbourhoods such as Rosedale and Forest Hill will downsize and move into those Four Seasons condos.

“There’s a lifestyle change going on.”

There are a lot of Canadians with money and a lot of successful ex-pats are returning. They are the ones buying in Whistler, he points out.

And for those who don’t choose the Four Seasons, there are plenty of other ensuite dressing rooms being readied for the unpacking of Tom Ford moccasins and Christian Louboutin heels. The Residences at the Ritz-Carlton, Trump Tower, and Shangri-La are ready for occupancy or nearly so. Toronto has more condos coming on-stream than any other city in North America.

Oh and then there are the vacation properties in Florida or California that these buyers will be able to escape to when they are ensconced in their new turn-key lifestyles. Mr. McCredie wants Sotheby’s to help with the purchase of those too.

Mr. McCredie is not put off in the least by agents who say the high end of the market is slow – has been for months. Some say buyers in the upper echelons are wary amid all the turbulence in global financial markets. As for high-priced houses for sale in Rosedale that may go weeks without a showing, Mr. McCredie characterizes that as a perennial lament that can be explained by seasonal doldrums.

“Everything starts firing up in the spring again,” he says.

If there is a segment he worries about, it’s the mid-range condo market in Toronto. Those buyers, he cautions, are the most likely to be hurt if interest rates rise.

“I don’t see fire sales happening in Rosedale; I don’t see anything happening in Forest Hill.”

Those areas, along with traditional bastions like Westmount in Montreal or Shaugnessy in Vancouver, tend to fare better because homeowners are mostly well-established.

“Those are the markets that will hold up.”

He also travels the world and, in the past two years, the fervour of people who want to talk about investing in real estate here has only intensified.

“Canada is absolutely the darling of international markets now.”

-------

If Mr. McCredie’s optimism is one measure of the Toronto market, another more literal benchmark is a new home price index unveiled this week by the Canadian Real Estate Association.

CREA and its partners developed the index to gauge price trends in properties sold over the multiple listing service in different markets and their various segments. The first cities on board are Greater Vancouver, Fraser Valley, Calgary, Greater Toronto and Greater Montreal, with more to come.

Sub-indices will track different housing types. People looking at trends in prices of single-family homes, for example, can drill down further to compare one-storey versus two-storey houses. They can stack that information up against townhouses or row houses and apartment unit trend lines.

CREA chief economist Gregory Klump says house price changes can swing dramatically based on changes in the mix of property sales.

“Prices are open to misinterpretation,” he says.

The MLS HPI, as the composite index is called, will reflect quantitative and qualitative housing features.

Some of the qualitative elements that influence the price a property fetches include the number of rooms above basement level, the number of bathrooms, the age of the structure, availability of parking, and proximity to schools and shopping.

The qualitative measures will also include renovations, which is important input, Mr. Klump says, because Canadians spend so much on improvements each year.

“The index will identify turning points sooner,” says Mr. Klump.

Two observations:

Regarding the first bolded quote: The fact that one can choose to ignore that the high end market has been grinding to a halt and explain it away as just the winter when other product is still moving is a bit disingenuous in my opinion.

The second one echoes somewhat my concerns that I expressed in previous posts... that the mid range condo market could be more potentially hit if interest rates rise.
 

Johnzz

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are you still a buyer of property at these prices...I am thinking in particular of Preconstruction in Downtown TO at $600-800/sq.ft.

Am I currently buying pre-construction? Short answer is no.

My last pre-construction purchase was at FIVE. I purchased some 2-bed units at the initial VIP event in early 2010 for $585-$590/sqft. Great building, location, developer, finishes and design.

Without some very unique unit characteristics though, I find investing $700-$900/sqft for mid-level product today difficult to justify. However, my biggest concern regarding pre-construction is failure to build. I’m quite certain within 1-2 years from now construction costs will skyrocket beyond most projects economic feasibility. Developers will either cancel their project entirely or return deposits and re-sell units at higher prices to recoup higher building costs. Particularly with so many 50+ building currently planned with estimated completion dates beyond 2016. Sure you’ll get your deposit back, but at a much lower purchasing power. This is a material risk which exceeds my risk tolerance.

could you perhaps give some indication of what % you are putting down.

My initial deposit has always been 25%, primarily due to risk, but secondly it’s cheaper (no extra insurance premiums). When a properties deposit value exceeds 40% (after some capital appreciation), I refinance back to 25% and use the extra 15% equity to reinvest elsewhere. This extracted gain is also tax free (until you sell the property) which helps facilitate the magic of compounding.

I don’t see the point in 100% cash down (no mortgage). Part of my strategy is taking advantage of extremely attractive “real†interest rates. If my mortgage rate is 4%, and inflation is 4%, my effective cost of borrowing is zero. Currently real rates are negative in most countries, thus you’re paid to borrow. I know most people focus on nominal interest rates, but for me, real rates are what’s important. Keep this in mind when determining a properties investment potential.
 

James

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Johnzz, how do you find the profitability of Canadian investments as a foreign investor given the tax laws for non-residents? Do you think the appreciation and operational profits of the properties will offset the substantial withholding tax applied by the CRA?
 

Johnzz

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Johnzz, how do you find the profitability of Canadian investments as a foreign investor given the tax laws for non-residents? Do you think the appreciation and operational profits of the properties will offset the substantial withholding tax applied by the CRA?

The 25% withholding tax only affects me when selling a property (after submitting an NR4 form annually, my gross rental income is not withheld, only net income). I’ve only ever sold one property. Once the capital gain tax was paid, CRA refunded the balance withheld (but admittedly took over a year to do so).

Thus, I ultimately pay the same level of tax as a resident.
 
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interested

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Thanks Johnzz.
I fully understand your investing philosophy. I appreciate your candor in sharing
Makes sense. And of course all of us have had declining interest rates and increasing property values to help make this stategy an overwhelming success. Not only have you had increasing values but leveraged 4:1 increasing value.
I am also intrigued with your suggestions in the post in which you suggest both cancellation of a number of projects (which I do believe will happen) but more interestingly about the cost arguments of future projects.
In 2008, when a number of projects were cancelled, I believe for the remainder there was less demand for construction materials and labour and in fact I know of at least one project where the costs are coming in lower than originally projected.
Also; 50 storey projects mean that the land costs may come down somewhat as you are spreading the cost over more units. I believe costs for mid range projects today are in the $400 range to build though I may be wrong. There is quite a lot of fat built in presently and also Precon is about 25-30% higher than existing rates for resale. I appreciate developers have to be rewarded for risk to build but I also feel that prices are out of line for many locals. Your philosphy worked in the past but I am not so sure it can be applied going forward at present cap rates. You have all but acknowledged this with the statement that you are not buying precon beyond $600/sq.ft. I guess everyone has their limit where they draw the line as it where for price/sq.ft.
I understand your opportunity cost issues because I had bought a unit prior to 2008(in 2007) in which they cancelled the project in 2010 to return the money only to relauch at 15% higher prices. They offered me 10% discount as a previous buyer but it was still 5% higher and further I did not like the new project design (It was to be for future personal use: large unit on the water) so I got out. But you are right about the loss of the opportunity to invest that money elsewhere.
 

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The 25% withholding tax only affects me when selling a property (after submitting an NR4 form annually, my gross rental income is not withheld, only net income). I’ve only ever sold one property. Once the capital gain tax was paid, CRA refunded the balance withheld (but admittedly took over a year to do so).

Thus, I ultimately pay the same level of tax as a resident.

That's interesting. I'm a Canadian citizen and all my investments are in Canada so I have no first-hand experience of a disposition outside my country of residence, however just to confirm what I understand, the withholding tax is 25-50% of the gross sale price, however you can submit a certificate of compliance to the CRA, indicating you've paid all your Canadian taxes to date, thereby reducing the withholding tax to 25% of net capital gain instead. Is my interpretation accurate?
 

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