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After the market crashed in 2008 and with the strength of the Canadian dollar, many real estate investors looked south to purchase U.S. property. Today, with a much weaker Canadian dollar, does it still make sense for Canucks to purchase property in the U.S.?

After the U.S. market crash in 2008 and the resulting strength of the Canadian dollar, many Canadian real estate investors looked south to purchase property. When the real estate market in the States started to rebound in 2012, prices were on the rise again. Today, with a much weaker Canadian dollar, many are wondering if it still makes sense for Canucks to purchase property in the U.S.

The answer can be yes!

With the lure of escaping to warmer climates during the harsh winter weather and the potential for rental investment income for a portion the year, purchasing a home in the U.S. can still make financial sense. Here are the important factors to consider before you sign on the dotted line.

The Advantages of Buying Versus Renting

U.S. real estate prices are still low compared to Canada. For example, while an average home in Calgary costs $456,100 CAD, a comparable home in Fort Worth, Texas averages only $174,400 USD.1 Even when you take into account the currency exchange rate, U.S. home prices are still more affordable.

If you travel to the U.S. regularly and rent a property, you may save money by purchasing a house or condo to use during your visits, and renting it out the rest of the year. The rental income would be paid in U.S. dollars so there’s no exchange rate to consider, and this income could cover your mortgage payment, U.S. taxes, insurance and homeowner association fees.

Should You Consider Financing?

With today’s weak Canadian dollar, it may make sense to finance your property instead of paying cash. “…Financing a U.S. property is a cost-effective alternative to paying cash, lessening the one-time impact of foreign exchange.”2 And, if you find a mortgage lender that doesn’t charge a pre-payment penalty, then when the Loonie improves, you can consider paying down or paying off your mortgage.

Getting Pre-qualified

Before you begin looking for the perfect property south of the border, you may want to request a pre-qualification letter from your mortgage lender. Getting pre-qualified lets your realtor know you’ve been reviewed for financing and provides a general guideline on how much you can spend. When you’ve found that perfect home and you’re ready to apply, keep in mind the application process takes longer in the U.S. — usually 45 to 60 days.

Getting pre-qualified lets your realtor know you've been reviewed for financing and provides a general guideline on how much you can spend.

Down Payments and Other Costs

Down payment requirements depend on how you’ll use the property. Typically it’s 20% of the purchase price for a primary residence or second vacation home; however the down payment is higher usually 40% or 50% for an investment property. Be sure to also budget U.S. dollars for a property appraisal, title search and flood certification which can cost 3% to 5% of the selling price.3

Other costs associated with purchasing U.S. real estate include property tax, utilities, homeowner’s insurance, and sometimes homeowner’s association (HOA) or condo association fees. In some cases the property may require additional fees such as memberships at a fitness centre, pool or golf club, so be sure to ask to avoid a surprise.4 It’s best to budget for all of these costs as you plan your shopping trips.

Insurance

When financing a home in the U.S., you’ll be required to provide proof of homeowner’s insurance. The length of a policy is 12 months, renewable annually, so you or your insurance provider will be required to provide proof of your continued coverage each year. If you purchase a condo or townhouse that is covered by a Master Insurance Policy, you will likely need to purchase a separate policy for the interior of your unit.

Insurance rates can vary significantly by state. For example, homeowners insurance rates are the highest in Hawaii and the lowest in West Virginia.5 If you’re purchasing property for your personal use, the cost of insurance is something to budget for; however for an investment property it could impact your bottom line.

Taxation

As a Canadian who owns a real estate in the U.S., any taxes you may be required to pay will depend on where you’re filing, and how you are using the property. If your home or condo is worth more than $100,000, and you are willing to file a disclosure that you own it for your personal use only, you may not have a tax liability.6

If your U.S. property is generating income, either as an investment property or as a rental income, you’ll likely need to report this income on your Canadian tax return and file tax returns in the U.S. The bright spot is since you are running a business, you can also claim expenses. Your flights to visit and check on the property as well as any repairs or improvements are all expenses that you may claim on your tax return.

There are lots of tax considerations in both countries when purchasing or selling a home in the U.S., so it’s recommended you speak with a tax consultant to fully understand your potential tax liabilities before you purchase.

Management or Rental Company

When you own a property in the U.S. you will want to ensure it is cared for when you return to Canada. You can choose to hire a management or rental company.

When you’re interviewing companies here are a few of the questions you’ll want to ask.

  • How long have you been in business? Select an established company that can provide references from clients.
  • What types of properties do you specialize in? Find out if they have other Canadian clients in a situation like yours and how they manage these properties.
  • How large is the staff? Is this a large management company or an individual consultant who is providing these services? If you own a property for your personal use, employing an individual who can check on the place, pick up the mail or be there to oversee repairs and maintenance may be all that you need. If you are renting the property, you may want a company that offers a full range of management and rental services.
  • What are your fees and what services do you offer? When you’re quoted a fee, look deeper into the services that are provided. When the property is being managed remotely it may be worth paying more for the added peace of mind.
  • Who will take care of your property? Will the company provide a dedicated person or will they send anyone who is available to check on your property? A dedicated individual is preferable as the person will get to know you and your property, so you’ll receive a higher level of service.

 
With a bit of knowledge and planning, U.S. real estate is still a good investment for Canadians, and can also provide a comfortable destination for warm weather getaways. While this article provides general information on purchasing U.S. property, be sure to consult your accountant, tax and/or financial advisor and lawyer for advice on your particular situation.

References

1. Foreign Exchange Advice

2. Make the Most of Your Canadian Dollars

3. Borrowing in the U.S.

4. Mortgage FAQs – Tips from Real Estate Agents

5. Average Cost of Homeowners Insurance in Every State

6. Foreign Income Verification Statement