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Canada Still Mining The U.S. Real Estate Market

An article from the Globe and Mail.

It’s been exactly a year since Thomas Hunt and Rodney Hynes took a gamble and mortgaged their home to the max so they could purchase a Brooklyn brownstone.

The Vancouver couple, who live in a Craftsman-style fixer-upper on the east side, mortgaged 80 per cent of their house to purchase the Brooklyn three-unit building for $725,000, in September 2012. Their plan was to rent out the building’s three units, which would cover payments for their second mortgage on the Vancouver home.

Last week, they consulted a real estate agent who works in the up-and-coming Bedford-Stuyvesant neighbourhood. She’d recently sold the rundown property next to theirs for $760,000, so they asked what she would appraise their house at. Mr. Hunt says he couldn’t believe the figure that she sent him by email.

“She said she would list it at $1.295 million,” says Mr. Hynes. “At first, I was ecstatic, and then I thought it seemed a bit inflated. But she said she’d priced it at the top of the market by looking at the house next door, which sold for $750,000 and it needs at least a $400,000 renovation because it’s uninhabitable.”

Also, three-unit buildings, which are increasingly scarce, are in high demand with investors.

“Buying that brownstone is the best investment we have ever made,” says Mr. Hunt. “Way better than RSP mutual funds,” he adds, laughing.

It was an even better investment than their Vancouver home, which they purchased in 2003 for $268,000 and renovated for $200,000. Today, they’d probably list it at more than $900,000. With their New York venture, if they chose to sell it, they’d likely make at the very least $400,000 — in the space of a year. The building was in move-in condition, and they rent all three suites for $5,775 (U.S.) a month, which covers their mortgage payments totaling $2,745 (Cdn). They obtained a locked-in rate below 3 per cent. They also have a basement rental suite in their Vancouver home.

I wrote about the couple when they first purchased a year ago (full disclosure, I know Mr. Hunt, who is a television producer, and Mr. Hynes, who works for Aboriginal Affairs.) I recall mentioning their gamble to high-profile condo marketer Bob Rennie, and he said, “That’s a really good move.”

But they had their share of naysayers. And yet, Mr. Hynes and Mr. Hunt say they were never scared to leverage their Vancouver property to purchase the New York walk-up.

“We knew that they had had a crash, and it had gone as low as it could, and the only way to go was up,” says Mr. Hynes.

They also felt that Brooklyn real estate was tame by comparison to Vancouver’s “ridiculous” market.

“People were like, ‘Woa. Isn’t that difficult? Is that a good idea? Why would you do that?’ That was a very common reaction,” says Mr. Hunt. “Because it’s the unknown. A lot of people were like, ‘Can you do that, as a Canadian?”

“But we were confident we would cover our expenses, and over time, the market would go up. When you buy an investment property, the tenants are paying your mortgage, so they are buying your equity for you. We knew that. We weren’t nervous at all.”

It hasn’t been without its challenges. They expected to pay $300 a month on repairs, but instead, they’ve spent about $500 a month. And they pay a lot in taxes and insurance, and about $2,000 a year for water alone. As well, they did about a year’s worth of research prior to the purchase, attending seminars on buying stateside, scoping out neighbourhoods, and spending a lot of money travelling to New York. You’ve got to know your market.

Toronto’s Topher Stott was also looking stateside last year, partly because of his music business, League of Rock. He was considering purchasing a condo in music mecca, Austin, Texas, but he decided against it.

“The condos, when we saw them, were not kept up very well for such new developments,” he said in an email. “When I did research… I saw a gong show of issues.”

But as far as Canadians taking advantage of the U.S. economic downturn, they are a success story. Their investment potential is why Canadians represent about 25 per cent of foreign purchases in the U.S., according to the American National Association of Realtors. We are their biggest foreign buyers.

Last week, I had lunch with William Bone, a major California developer who’s the president and founder of Sunrise Company, which develops luxurious, master-planned, gated golf course communities around Palm Springs. He founded the company in 1963, and since the economic downturn in the U.S., he says one-third of his buyers — or, club members, as he calls them — are from Vancouver and Calgary. That would explain his visit to Vancouver last week. Mr. Bone is a regular to both cities, where he courts wealthy Canadians who’ve got about $2 to $3 million to spare for a secondary home. The Harvard MBA graduate has been building out Toscana Country Club, in Indian Wells, Calif., since 2004, and has sold more than half the planned 650 or so single family homes. Sales slowed in 2008, but in the last five years business has picked up, thanks largely to Canadians. It helps that WestJet now has a direct flight to Palm Springs. It also helps that a lot of Canadians have cash to spare, especially Calgarians.

“You’ve got the proximity, you’re close. And you’ve got money,” says Mr. Bone. “Canada didn’t mess up its banking system and housing market, like the U.S. did. And now, with the Canadian dollar strong, it’s better value. People come down here with less debt, they fly non stop, and it’s easy.”

West Vancouver’s Howard Addison purchased a 4,500 sq. ft. house at Toscana.

“I feel very confident,” he says. “It might take them six or seven years to finish, but in the meantime, there are 27 holes of golf there, and good facilities.

“I don’t’ see much difference between purchasing in the U.S. and Canada.”

As for Mr. Hunt and Mr. Hynes, they don’t plan to sell. They’ve become emotionally attached to the neighbourhood, which is quickly gentrifying.

“We thought things would go well. We just didn’t know they’d go this well,” says Mr. Hunt. “I just wish we’d bought two houses.”