Canadian real estate investing has become an international sensation. With Canada’s stable government, the firm establishment of the rule of law and a relatively stable economy, Canada is a very attractive place to invest. Canadian real estate has a particular attraction for foreign and domestic investors alike. Real estate investments are tangible. You can see what you are getting. It’s real and you can touch it. It’s also easy to understand. It seems that almost anyone can make money buying real estate – whether you buy for yourself, buy to flip or buy to hold and rent. But, there are legal considerations that investors must be aware of in order to protect themselves from costly litigation or other financial or legal liability down the road.
Buying your Pre-Construction Dream Home (or Condominium)
Many purchasers buy from builders before the house, townhome or condo is built. Often the transaction is completed years in advance of the move-in date. We all look for areas that are likely to appreciate in value. But this does not always pan out. Areas that are underdeveloped can be an excellent bargain – or appear to be. However, sometimes investors purchase homes in areas that do not become the hotspots they hoped they would be. When the time comes to close the deal, the value of house, townhome or condominium may have even dropped.
If you are relying on a mortgage to complete the purchase, this will likely cause problems getting financing. If you are self-financing the purchase, then you have now agreed to pay more than for what the property is worth. Neither is a good situation. Once that Agreement of Purchase and Sale has been signed, the vendor has a right to the purchase price agreed to. Negotiation out of the deal is a purchaser’s best bet. But, there are no guarantees that the builder will be willing to negotiate. The lesson to take from this – be very careful about the location of the pre-construction home you purchase. Do your research well. Speak to real estate professionals and gather as much information you can before you get locked into a bad deal.
Often there are issues that arise during construction that can delay your occupancy in your new unit or home. Each Agreement of Purchase and Sale of a new house, townhome or condo contains a Tarion Addendum that outlines how delays must be managed. Builders and vendors of new homes and units must comply with these rules. So long as they do so, purchasers can find that they are not able to move in until quite a bit later than they expected. It’s always a good idea to contact a lawyer familiar with the Addendum and Tarion’s warranties when you receive notice of a delay to discuss your options.
Buying to Rent
Many investors purchase properties to hold with a view to future profits. This usually involves renting the home or unit out so that your tenant pays the mortgage. This is a great option, but you need to be aware of the legal requirements of doing so. First, in Ontario, the Residential Tenancies Act is a very strong piece of legislation that tends to favour tenant’s rights. The law has very strict criteria about raising rent or even evicting bad tenants. Thus, it’s important to do your research about the rental market conditions in order to set a reasonable rent that will cover the property’s expenses. It’s also critically important to do thorough background checks on potential tenants. Once a tenant moves in, it is very difficult to evict even the worst tenant.
Short Term Rentals
Importantly, Toronto has specific restrictions on short term rentals (less than 28 days) such as Airbnb or VRBO. In fact, at this time, short-term rentals are not specifically permitted by the City of Toronto at all. City Council approved regulations for short-term rentals which require a licence and registration with the City for operators. Council also approved a Municipal Accommodation Tax of 4% for each short-term rental.
However, these regulations have been appealed and the hearing was postponed until August 26, 2019. Currently, the City of Toronto takes the position that short-term rentals are not allowed. Legally speaking though, until the appeal is heard and the decision released, the regulations are not in force. While the short-term rental companies will continue to flourish in the absence of regulations, be advised that there are risks to using this approach with your property.
Another consideration if you buy for the purpose of renting out a condo, is whether or not the condominium corporation has restrictions on rentals. Some condo corporations have concerns about the additional wear and tear, as well as security, with increased numbers of people accessing the building. These restrictions vary from building to building. Examining the condo’s status certificate early in the purchase process can save you time and complications down the road.
Buying to Flip
Purchasers often buy new homes, townhomes or condos with the intent to sell them before they move in. Depending on the development and the market, this can often result in an attractive profit. However, if you do this, the law requires that you register with Tarion. In Ontario, it is the vendor of a new home that has warranty obligations – rather than the builder. So, if you intend to flip a new property, you need to be aware of the risks. By selling a new home without first living in it or renting it out, you are open to charges under the Ontario New Home Warranties Plan Act. This is certainly something best to avoid. It’s important to discuss this with a lawyer if this is your intent as there may be ways to avoid violating the law while still allowing you to “flip” the property.
Real estate is still a strong investment and there remains a lot of profit potential in buying properties. It’s best to be well-informed of the risks and regulations ahead of time so that you can make a more informed decision. Speaking with a lawyer with expertise in these issues can be very helpful while you navigate these tricky, but potentially lucrative waters.