How to Flip a House in Toronto and Make a (Small) Fortune

House in Toronto by Kevin Morris

It's not a simple slam dunk. House flipping was trendy back in 2007, when the real estate market was hot, but is it a lost practice? Greedy beginners beware: it's not as easy as Home Improvement TV shows have made it look. Besides, the system in Canada has grown more structured, including higher taxes and lower lending periods. Plus, nowadays, buyers are getting smarter and pickier. Those who lack the knowledge and expertise may as well go gambling. Both ventures involve high risk with all favourable factors combined for a hopeful sizeable profit. Regardless of all the risks, house flipping could be keeping steady in Toronto.    

Do you have what it takes?

Whether due to houses, condos, or simply paperwork, if in the end you're receiving a profit, then technically you're flipping the property. There are mainly two different kinds of people who do this. The experienced people do this for a living as their full-time job. Since they’ve made it a business, they'll be taxed capital gains tax for each additional property that isn't their principal residence. For example, they can be DIY-ers or full-on construction companies.

Second, there are enthusiastic beginners. Everyone who gets into house flipping plays a game of chance, but there's a difference between professional gambling and lucky naïveté. Some people believe they can flip a house without even breaking a sweat. Don’t be fooled. It won’t work out just because you may have a good stable job, trust in getting a good mortgage, put a small amount of money down, renovate on the weekends, and then sell. House flipping is a full planning process that you shouldn't take lightly.

The art of renovating homes is a tough dedicated job. It involves being realistic and making a budget, knowing how and what to renovate, what price to charge, whom to hire, and how long it will take. Also, you must stay on top of the trades, know your margins, and make sure to act quickly — otherwise, the carry-on costs will continue eating into your profits.

Villa in Torono by Kevin Morris

Canada’s Rebound after the U.S. Market Crash

Although house flipping may have been an interesting and worthwhile money-making venture, this isn't so much the case anymore. Everything changed in 2008, when the United States' market crashed. One big contributor for its downfall was subprime mortgages, which became a real estate epidemic. Loans were given to people with weak credit scores and bad payment history who otherwise would not have qualified to own a home.

So Canada had to revamp itself after the rebound fear. Belinda Lelli of Royal Le Page commented, 

Many investors were waiting in the wings and swept up properties for hundreds of thousands less than the previous year and resold them in 2009 and 2010 when the markets rebounded for profit.

Since then, lending rules have gotten tighter and more conservative. Before, you could borrow money for up to 30 or 35 years. However, now loans aren't available longer than 25 years.

Alternate to the U.S., properties here are quite expensive and don't have tax sales. Canada’s real estate is run by banks — the excitement is usually not included. They sell for fair market value. In other words, they sell for more than they think the properties are worth. Properties go fast, but any offer is mostly done through agents.

Montreal agent Valerie Girard remarks, 

Banks like TD no longer look at the equity value of a property. They rely on the borrower’s last three years of revenue only, so if your only income is through flipping, it will be a harder sell.

An-Always Booming City

Conversely, some people from other countries, including England and China, have maintained interest in Canada’s market. Their tricks involve having agents who send them a cheque to rent units for them. According to Corinne McCabe, broker of Toronto’s Home Life Realty, 

Foreigners still invest in real estate here because our system is relatively stable as opposed to the rest of the world.

That being said, traffic leads people to come to the downtown core of Toronto. This city grows all the time and has remained strong for many reasons.

I think tons of people are moving into the city from the suburbs to be closer. They don’t have to take two hours to get to and from work. There’s also worldwide immigration coming into the city that is immense. They want to move and live here, and they buy property. That’s the engine that’s rolling along. The attraction of a shorter commute makes a huge difference in keeping the central core’s real estate strong. I think that in itself is countering a change in the economy as well.

Toronto by Kevin Morris

Down to the Money

As far as flipping goes, the two things I’ve found affect people the most in recent years are taxes and down payments. Eight years ago, we were making a fortune doing it because the market just kept going up and up and up. But now it's more steady and stagnant. Unless you know where to save money and cut corners that aren’t going to affect the price after, you can no longer make as much money on a flip.

It takes a pro to be in this business. You have to be able to carry the build. For instance, what if you renovate and ultimately can’t sell? This is a big expenditure — a big investment.

Plus, by choosing to pay anything less than 20 per cent down, you must pay CMHC — also known as the Canada Mortgage and Housing Corporation. This is required for any property over $1 million, providing it’s a second home and therefore opening possibilities for income. Usually, it's a few thousand dollars extra, depending on the value of the property, but it’s worth paying the higher percentage if you can manage to afford it. Otherwise, it's interest that goes into your mortgage. Simply put, it's a bank’s lender insurance security, so in case something happens, they have something to sell the property for.

For the City of Toronto, the final cherry on the cake is known as the double line transfer tax, or DLT, which applies to any commercial purchase, including a realtor’s commission and lawyers' fees. It was implemented by David Miller, the city’s previous mayor. While he was in office, this used to be a tiny 5 to 12 per cent, but it has been pumped up to 25 per cent. Conversely, every other province only has single line transfer tax, or PTT.

And there’s more. The more expensive the home or business, the higher the percentage of sales a buyer has to pay. In the City of Toronto, this is a Municipal Land Transfer Tax, shortened to MLTT.

Subsequently, brand new constructions or commercial real estate are required to pay the harmonized sales tax. Because this is a service provided, this applies to real estate commissions and lawyers’ fees. HST, which is currently at 13 per cent, is a combined mixture of the old GST for goods and services, which used to be 5 per cent, plus PST, which was at 8 per cent. Lucky Alberta has always been exempt from provincial sales tax, or PST.  

Ana Harriott, broker of King Street Realty in downtown Toronto, shared her opinion on the previous "flipping" mania: 

People aren’t interested in doing it now because you can really lose a lot of money. After that time period we had the HST come into effect and we’ve had the double line transfer tax, and that’s a huge deterrent for a lot of people. The problem is you might have the money to invest but you’re not going to recoup that money when you go to sell it—so it doesn’t make sense.

Keep in mind that selling more than one property at a time may result in an additional tax issued by the Canada Revenue Agency, or CRA. If it's not your primary residence, they'll believe you're running a business. In the mid-2000s, people were holding two to five homes at a time. Today, unless you have the resources to cover all the costs, just stick to one for a longer period, such as every three to four years. That way, it technically falls into the normal rationale to say you just like to move frequently. By then, you can argue that you’ve fixed it up enough so you’d like to make some money on it and carry on.

Profit comes at a price, though. Capital gains tax, or CGT, refers to the gain when it was bought at a lower price. Please note that it doesn't apply for a principal residence, as long as you’ve lived there for more than six months. Technically, a house flipper can argue they’re living there while renovating the property.

House in winter Toronto by Kevin Morris

Quality versus Quantity

Since the object here is receiving a worthwhile return in a short time, many renovators put less emphasis on quality. It may look like a decent buy from the outside, but how do you know what faulty mystery is contained behind the walls?

“I’m all for people buying houses and fixing them up and beautifying the neighbourhoods. Because there’s a lot of delectated houses around in Toronto. It’s lovely to see something improve… But it’s the same complaint over and over again that flippers do it cheaply and quickly. There are always exceptions,” remarked Corinne McCabe of Home Life Realty.

A home with “good bones [is what buyers are mainly looking for and] one that requires a facelift […] on the interior and exterior to improve curb appeal,” said Belinda Lelli of Royal Le Page, Toronto.

There are some properties that are still going strong in certain areas of Toronto that might be worth looking into. King Street Realty’s Ana Harriott and Tadeo Sanchez say those “good pockets” include areas along the Danforth, Cabbagetown, and Davisville, anywhere along the Beaches, Leslieville (a new arrival), and anywhere downtown. The famous artistic Queen Street is another that's in further development. Properties there remain expensive, but you can still get a lot of deals. Ana Harriott explained that “a possible break would be if you have a property that needs work as opposed to one that’s already finished (but the break isn’t going to be that huge).”

 A Future in Flipping

Alternatively, other creative ways to replace traditional house flipping revolve primarily around renting and new builds. They may be two completely different kinds of clients, but they remain strong.

An option involves selling paperwork after a building has been completed. You could put 25 per cent down to purchase a property even before it has been built or before it's finished overall and then sell it to someone else.

Another possibility is renting out high-end condo units, especially in brand new buildings. A friend of mine currently lives in an eco-friendly condominium building in east downtown that’s still being finished. The rent she pays will undoubtedly go up once it's fully ready, but she was able to get a great deal for a unit nobody has lived in before. It was a unique package that wasn't only in a beautiful modern design, but also included new appliances that are high energy savers and a great well-lit view of the city.

Eco friendly house by SuSanA

So, what could be the future of house flipping? Perhaps the exclusive term will be replaced with something else, like "condo flipping." But where should you start to look? Belinda Lelli of Royal Le Page Realty also shared her expertise on the good pockets still growing: 

Any condominium on the subway line is a smart investment in that it attracts the working professional who requires an abode, replete with quick access to the TTC and subway, and does not need a vehicle to travel. The condominium user is one that spends very little time of his/her day at home and prefers a low to quasi-non-maintenance home, replete with amenities, privacy and security, for which a condominium is better suited.

There are no shortcuts in life and wealth, but some people will always try to find a way through the loopholes. Buyers are becoming more intelligent when recognizing a cheaply rebuilt kitchen or an uneven countertop or floor, for instance. Although it can provide for a solid source of income, it's an alternative for those who can afford to take high risks and possible losses. The practice requires skills, connections, guts, and time to renovate and revive a fixer-upper to an ultimate state of higher value. Although we're in a different country than the U.S. there are ties that bind, and the United States' loss wasn’t theirs alone. Condos may provide a modern type of "flipping." Overall, there may be too many risks with little gain, making the original house flipping approach an antique trend here in Canada.

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