RBC's head of sales and biz dev in the U.S. says one option outweighs all the others
Canadians have purchased approximately $130 billion worth of U.S. properties since 2010. As America’s largely self-inflicted COVID-19 nightmare drags on, the owners of those properties, the majority of which are in two states, Florida and Arizona, that won’t be winning any awards for their responses to the pandemic, are faced with a decision many of them didn’t expect to make so soon: hold or sell.
Owning a U.S. property, whether it’s a second residence an owner is unwilling to travel to, a vacation rental that has been sitting empty since April, or a long-term rental whose tenants can’t pay their rent, is not the largely frictionless experience it was in January or February. The market’s been hot, and owners will undoubtedly appreciate the appreciation, but if their carrying costs aren’t being met by healthy rents or a level of personal use that justifies paying them, a fair amount of second guessing is to be expected.
Alain Forget, RBC’s head of sales and development in the U.S., says anxious Canadians are currently weighing their property options, but the uncertainty associated with COVID-19 has made making a final decision harder than it would normally be. In Forget’s eyes, there are three options: Renting, selling, and refinancing.
Owners of rental properties, both short- and long-term, are in a tight bind. Tourism numbers are still way off – who besides a Floridian would consider Florida safe right now? – and millions of Americans are both out of work and no longer receiving expanded unemployment insurance benefits. There’s little these investors can do but watch and worry from afar.
For Canadian owners renting to long-term tenants, Forget encourages them to “keep a good relationship with their tenants and understand the programs that are available for them.” It’s not much to go on, but the cost and hassle of finding a new tenant at a time when so many Americans are either out of work or struggling to pay rent at their current residences may outweigh the benefits. If homeowners can secure the forbearance of their mortgage payments for as long as the federal ban on evictions is in place, an ongoing lack of rental income shouldn’t result in catastrophe.
Investors in vacation properties have a similarly limited set of options. Most bookings of short-term rentals in Florida, where Forget is stationed, are on standby as travellers decide whether or not to follow through with their vacation plans.
“It’s 50/50 right now,” he says, adding that many owners RBC has been in contact with are waiting until November and December to see how many of their bookings fall through before deciding whether to hold onto their properties or put them on the market.
Because of the costs and labour involved, selling isn’t Forget’s chosen strategy.
“It’s a cumbersome journey, and if they cannot cross the border and all that, that is a challenging task with a lot of underlying issues from legal, tax and estate standpoints,” he says. “They need to receive proper, professional, cross-border legal and tax advice because there will be capital gains, all the issues they need to address with the IRS and, after that, with the CRA up north.”
The tax concerns are real. Under the Foreign Investment in Real Property Tax Act, Canadian residents who sell real estate the U.S. are subject to as much as a 15 percent withholding tax of the gross selling price. The favourable exchange rate between the U.S. and Canadian dollars will help offset the tax bite, but it’s a hefty chunk of change to have to hand over to the IRS.
Sellers will have to weigh the tax consequences against the opportunity to sell in a white-hot U.S. property market. Despite the pandemic, sales and prices have both been on upward trajectories. In Orlando in July, sales were up 18.6 percent compared to June, helping increase the median sales price by 9.2 percent year-over-year. The current average price of a home in Clearwater, Florida, is 5.5 percent higher than a year ago, while Phoenix’s average price jumped eight percent.
Because of the increase in home values over the past several years, the weakness of the Canadian dollar and the rock-bottom interest rates available in the U.S., Forget says utilizing the equity they have built up in their homes may be the best option for Canadians unsure of how best to use their properties.
“[Refinancing] represents a lot of opportunity for a non-tax event because [owners] can just take that equity and bring it back to Canada in Canadian dollars or keep the money available for U.S. needs, like covering their expenses on the property,” he says.
Forget says RBC allows cash-out refinances of up to 80 percent of a property’s current value, and can provide a lower rate than the current U.S. prime rate of 3.25 percent depending on a homeowner’s credit-worthiness. He says the closing costs on a cash-out refi range from two to four percent, depending on which state the property is in.
HELOCs provide a more cost-effective avenue for accessing U.S. credit. Forget says HELOC borrowers are only required to pay monthly interest (for the first ten years) and will be asked to pay no closing costs – at least at RBC. Some lenders may charge premiums to foreign nationals.
Forget remains bullish on U.S. real estate, and from the looks of things, Canadians do too. He says Canadians have been active in the Florida market this year, visiting properties virtually and closing on them by mail.
“Affordability’s still there, and there will be opportunities as we get closer to the winter as well,” he says, but he admits that uncertainty remains the market’s dominating force.
“It’s better than it was a month-and-a-half, two months ago, but the next few months will dictate what the beginning of 2021 is going to look like.”