Foreign.

You're listening to the Master Passive Income Podcast Network.

Hey, real estate fan, have you considered investing outside of the United States?

Today's the day we get into what it might look like to invest in Canada and to explore the advantages and pitfalls of getting into that market.

Welcome to the Real Escape Investing podcast where we guide you to escape the constraints of time, geography and finance through real estate.

And now, here's your host, Terry Shower.

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Hi there, real estate fan.

So I'm here today, Terri Schauer, host of the Real Escape Investing podcast, and I am here to demystify investing in Canada.

And you know, the first question that people typically, you know, want to understand when they get into the international investing space is why would you be interested in doing this in the first place?

Because, let's be honest, in international investing is an advanced investing strategy and, and it's just off the bat, more complicated than buying within your national market.

From a tax point of view, from a rules point of view, from a financing point of view, there is definitely more complications.

And this is like, you know, maybe level three or four on the video game.

So, you know, that's the first thing to kind of be aware of is that investing outside of your national market can be a little bit more complex.

But the advantages of diversifying and playing national economies and national real estate markets against one another can really be a way of hedging your bets, of making sure that your investments are safer.

Definitely, if you think about the way that, you know, hedge funds or larger investors invest, they will try to spread their risk across multiple different markets.

And investing across national borders is a great way of doing that.

And the other reality, which we'll get into a little bit later on in the show, is that different real estate, different national real estate markets might be going through their cycle at a different rate to each other.

And so for those of you who are tuning in, you know, at the near 2020, the turn of 2025, the Canadian real estate cycle is in a different place than the American one is.

And our national bank has been in the process of dropping and dropping our interest rates, whereas the Fed has been holding steady.

And this is having twofold consequences which we'll be getting into a little bit later.

But those are consequences that now an interesting time for Americans to consider placing some money in the Canadian housing market.

So, exactly, you know, how does this work?

Like, housing markets are based on various different things.

So there will be government regulations, and if you think in the US of something like Fannie Mae or Freddie Mac, we in Canada have a thing called the cmhc, which is the Canadian Mortgage and Housing Corporation.

And what this organization does is that it basically acts as an insurer for, for smaller residential properties and also for multifamily properties to help larger Canadian landlords reinvest money into the real estate park.

And the decisions that get made by those organizations really do affect housing markets, whether it makes it easier to have access to financing or, you know, whether certain things are more difficult.

Like, for example, right now in Canada, it's extremely difficult to make money building new assets.

And so we're kind of going through this boom of people buying existing assets and optimizing them, which actually, interestingly, the CMHC is really backing pretty hard right now.

So without getting too far down that rabbit hole, it's just good to be aware of the fact that different things will be happening in different real estate markets on the ground.

And that might be a space of opportunity if you're looking at a different national market.

So now let's talk specifically about Canada and why that might be an interesting place to put some investment money.

And the first thing that you should realize is that the Canadian housing as a, an asset class has been so coveted in the last 10 years that we have had a ton of foreign capital come in here.

And if you were to look at exactly where that money comes from, whether it's, you know, money from China, even money from the US Money from all over the world has been looking at Canadian assets because actually, for a couple of reasons.

So one is our political stability.

And, you know, even though right now we're about to go through an election cycle where our fearless leader, Justin Trudeau, is hopefully going to have come to the end of his reign, the election cycles here and the swings from left to right tend to be less acrimonious and less, less extreme than definitely a place like the US or even somewhere like France or Britain, where the changing of the political guard really takes the economy for a tailspin because it's just a lot more raucous.

The stereotype of Canada being the polite country to the north is actually borne out in political fact.

Just, you know, where the federal government, when there are, you know, changes.

It's not like, that throws our assets and our economic decisions into a major tailspin.

So stability, and also geopolitical stability.

Because the other thing that's a little bit unique about Canada is that we are really geographically isolated from a lot of the rest of the world.

And with our major, you know, neighbor to the south, which is the United States, it means that our immigration situation really differs quite extremely from a lot of other countries, with the exception of perhaps somewhere like Australia, because on the one side, we have the Atlantic Ocean, on the other side we have the Pacific Ocean.

Underneath us, we have the United States, and to the north, we have the North Pole.

So it's extremely difficult for that whole illegal immigration issue to really affect Canada very much.

And although our immigration policy and our immigration cycle has been going through its own kind of interesting metamorphosis over the past few years, the reality is that we don't have a whole lot of illegal migration into Canada, and we actually have kind of what's called a point system, which means that people who are coming in as immigrants into Canada are coming through the legal visa system.

And unlike the United States, where the green card is a lottery, in Canada, in order to get in here, you have to go through this fairly extensive assessment that shows whether or not you will be able to contribute economically and whether or not socially you're going to be able to integrate when you get here.

This is all done through a point system with our permanent resident program, but it means that even some of those immigration ups and downs will be felt in a less extreme way in Canada than they would be somewhere else.

And so what all of this means is that Canadian housing mar.

Housing assets have really been covered by.

Coveted by foreign capital from all across the world because of their stability and also because of the positive trend in what's been going on with Canada's immigration figures.

So, you know, our government actually decided that some of this positive immigration over the last few years, we have taken in the same amount of immigrants as the United States, even though from a population perspective, we're only as big as the state of California.

And so what that should tell you is that the Canadian population is just growing at a phenomenal rate.

Now, there has been a bit of blowback, and the government has reduced some of those immigration statistics in recent times, the quotas.

But that said, really, we've gone through this incredible growth phase as a country, and this means that all of those new arrivals have to definitely be housed somewhere.

And so that means that in the Canadian housing market, there are definite opportunities because we have record low vacancy rates and there's not a whole lot of building going on.

So it means that the existing assets are really appreciating quite rapidly.

So in a nutshell, that's like kind of the stability argument of why people are interested in investing in Canada and why a whole bunch of foreign capital has come in here.

And so much so that actually the Canadian government has had to, or in 2023, made the decision to put on a foreign buyer's ban.

And what this looks like in practice is that actually foreign residents were barred from purchasing residential property in Canada.

And so what this means more specifically is that a foreign or a non resident of Canada cannot purchase a one, two or three unit property.

So single family home, duplex and triplex in any of the major urban areas.

So if you're looking at, you know, a farm in the middle of nowhere, this might not affect your project.

But if you're looking at what's considered residential property in major Canadian urban centers, there is currently a foreign buyer's ban in Canada that was put into Place on January 1, 2023, and the government first meant that to go until just about now.

So January 1, 2025, and then they've now extended it through 2027.

And this is really because Canada has been experiencing a lot of affordability challenges with that net in migration that I was mentioning earlier on, which has been creating like very tight housing markets for Canadians and for people who are living here.

And so for those of you who are listening to this show, that's an unfortunate circumstance for people who are in Canada.

But for those of us who are considering investing or those of us landlords, that's actually really a good set of circumstances for us because it means that there is upward pressure on rents and that housing markets are tight.

Now the other thing to understand is that read between the lines, because those of us Canadians who were aware of this foreign buyers, Ben, like, as investors, like, we had to kind of chuckle into our hands because really this is affecting people who are looking at, you know, buying single family homes or like very small residential properties.

And what it is in no way affecting are people who are buying four plexes and up.

So that professional class of investor who would be looking at actually really trying to make money in the Canadian housing market, chances are they wouldn't be looking at doing single family home purchases up here.

And so really the professional investors have not been affected a whole lot.

The other thing that you should know is that there are certain exemptions and workarounds for this.

So, for example, international students who are enrolled in an authorized program of study and who will be filing their income tax and being physically present in Canada for most of the year during that time period, international students are allowed to earn property.

So the typical model here might be a foreign family who has a student studying here and they wanted to buy them a condo to live in while they're completing their studies.

There is not a ban on that.

Then temporary residents or people with work permits holding valid work visas that are valid for more than six months are also allowed to purchase properties.

So temporary residents, not permanent Canadian residents, and also refugees and diplomats.

So those are the exemptions personally.

But then the other thing to understand is that as far as ownership structure goes, very clearly, you know, if you did want to purchase that single family home or that smaller residential property in Canada, then you would just need to incorporate a Canadian holding corporation.

And this means that because the entity that is owning that asset is actually a resident of Canada, even though a non resident own shares in it, that then becomes kind of a workaround that will allow you to buy that property anyway.

So, you know, US investors who kind of chuckle into our, our fists or have been chuckling into our fists that Justin Trudeau over this is that really this foreign buyer's ban really allowed our current government to go into the media and, you know, say that they were being seen to do something about housing affordability.

And especially in large urban centers, there was a lot of resentment around, you know, foreign buyers coming in and, you know, maybe purchasing condos and leaving them empty.

Like there was some scandals with this, especially in Vancouver with a lot of, you know, people from China who were doing that to try to get capital flight out of, out of, out of China at a certain point.

But really this was, you know, kind of a publicity stunt that was done by the current government because anybody who actually puts their head into this matter and is determined to own property in Canada, that foreign buyer's ban really is not much of a hurdle for somebody who's in the professional investing sphere anyway, because likely, you know, you typically American investors know that they need to invest anyways through an llc.

And so the fact of investing through a Canadian holding company or even a foreign holding company, because foreign corporations can also acquire Canadian real estate.

And so, you know, the fact that that's a workaround really makes this foreign buyer's ban, you know, more like something that you just need to figure out how to operate around as opposed to something that is actually going to stop you.

Now the other consideration.

And you know, as American citizens or U.S.

residents, the tax considerations are always an issue.

And you know, if you're, let's say a resident of a place like California or New York versus a resident of a place like Texas, it means that those tax liabilities are really going to be a space for consideration in terms of where you decide to invest and where you decide to make money.

So whoever is looking at, you know, the gains or the potential interesting facts of being able to own a piece of Canadian real estate for stability sake or also for some other appreciation, which I will get into a little bit later on, does need to take the tax liabilities into consideration.

And in general there is just Canada.

You must think of Canada a little bit like California, like our income taxes are really quite high and we are, you know, a relatively left leaning country.

And so that means that the government is going to be withholding a lot of, perhaps a lot more tax than the American federal government or state governments would be doing.

So that's just something to consider across the board.

But of course, course, wherever there's money to be made, unfortunately there are also taxes to be paid.

And so you need to weigh very carefully the amount of appreciation or the amount of money that you can make with an investing strategy.

And then tax considerations just become something that you build into your mathematical equation.

And if, as I believe to be the case, it's really quite possible to do very interesting, lucrative things in the Canadian housing market, you just need to build the tax aspect into your business model to make sure that you're really, you know, investing that dollar for its highest possible use.

And for that you do need to speak to a cross border accountant who will be able to walk you through that in a little bit more detail.

The one thing that one should be aware of, and I actually see, you know, as a property manager, I have managed properties for non residents.

I currently manage properties for Canadian non residents.

And there are just two points from a tax perspective that are relevant that I feel like I need to point out on this podcast because I've actually seen a bunch of my CL clients not take care of this properly and then they run into trouble with our tax authorities.

So the first thing is that a non resident who is earning rental income in Canada are subject to a 25% withholding tax on gross rental income.

So this means that on a yearly basis you, if you're doing things, you know by the book, you should be remitting 25% of your gross rental income to the government and then filing that under the special section of the Income Tax act that will allow you to recover that money, you know, at the end of the year.

But so that this is a way that the government uses to make sure that non residents are not tax evading.

So and actually your accountant will be the one who would be able to set that up and then figure it out for you.

The other issue is a capital gains issue.

And this actually you'd be surprised the number of non resident clients that I have who get caught up with this.

And upon selling Canadian real estate, non residents have to remit a certain amount of the sales, the sale proceeds to cover any potential tax liabilities.

And so that is the case for the cra, which is the Canadian Canada Revenue Agency, as well as our provincial governments who also have, you know, things laws in place on that.

And so if you're not on top of this, what can end up happening is that you go to sell a property and then if you have mortgaged it up to the max, the amount that you might have to remit to the Canadian government just while they clear the taxes.

So to be clear, the government is not actually taking that money away permanently.

They are just withholding it at the time of sale and the notary is then keeping it in escrow until you file your taxes.

And actually in practice, what ends up happening is that you can have those tax papers prepared already at the notary and then the whole thing can happen very seamlessly within a matter of days.

But if you have not prepared, had your accountant prepare your tax things properly, you can have a nasty surprise at the notary and actually have a certain amount of the sale proceeds be withheld and then remitted to the government pending your submission of the capital gains required forms at that time.

So those are a couple of things just kind of to be aware of and to want to talk over with an accountant, with a professional if you're considering investing in Canada.

Because like I said in, you know, my non resident clients, these are actually places where I have seen them trip up in the past.

And you know, this is definitely we're in the land of complexity and cross border investing is just inherently a more complex thing than buying in your local market.

But as I mentioned at the beginning of this episode, in general there is a diversification argument to be made for investing internationally.

And then there is also that aspect of playing national economies and national housing markets against one another.

And that's the last thing that I want to discuss on this episode, which really has to do with not so Much the housing context.

I think I explained the housing context a little bit earlier on with there being a lot of interest in Canadian housing assets from a foreign capital point of view, as well as looking at those crazy immigration numbers which have just made our internal housing markets super tight.

So that is all good news for potential landlords eyeing those Canadian assets and the, and the market here.

And then specifically from the point of view of our national economy, if you are currently in the US and you're, you know, feeling a little bit sad about the fact that interest rates are remaining solid and that it's difficult to refinance, it's difficult to find deals that make sense.

Well, US in Canada right now, we are on a interest easing cycle.

So our bank of Canada has dropped for the last six months, has been dropping the interest rate consistently.

I believe we are now somewhere around a 3% borrowing at the bank of Canada, which means that banks are currently lending somewhere around 4%.

So that, you know, you can work with a lower interest rate in Canada, which is already really interesting.

And it means that in the local market, a bunch of investors here are now refinancing properties in order to pull out capital and make new investment decisions given the fact that we are in an easing, an interest rate easing cycle.

And then the other thing that, you know, one should be aware of as a geopolitical or geo economic consequence of these interest rates going down between different currencies is that what happens when a national government or a bank, central bank begins to lower interest rates is that if another country, so in this case the United States, maintains their interest rates stable, what actually happens is that the other currency depreciates.

And if you just want to go on Google and look at the curve of where the Canadian dollar is right now relative to the US Dollar and where even, let's say the euro might be in relation to the US Dollar, the American dollar is right now very high.

And you know, I always like to joke with my American friends that oh, you know, $1 Canadian, what's that?

25 cents US dollars.

So which might be a little bit extreme, but we are kind of at a moment when that spread is widening.

So for those of you who are capitalized in American dollars right now, it can be a really good time to think about making that foreign investment move because the American dollar is so strong right now against the Canadian dollar, against the euro, against a basket of other currencies, that if you are looking at picking up an asset somewhere outside of your home market, you're just going to get a lot more bang for your very powerful American buck.

So you know, in this decision making process where you're considering investing cross border and then, you know, weighing the options of something like placing money in Canada versus buying that vacation rental in Mexico or you know, in some other southern place, there's really like a whole bunch of different factors to weigh here.

And if we were just to recap them really quickly as you go through your decision making process, I think very simply diversification into different national markets becomes necessary beyond a certain size.

And this is just a way of a good investing practice and a way of hedging your bets should there be any local wobbles in whatever you're doing.

This is what, you know, the Warren Buffetts of the world do as they diversify.

And you as a real estate investor, at some point that should be something that's on your radar.

And then the next thing to weigh when you are selecting that location to make the foreign investment is really that market stability and some of those other factors.

And like, you know, I have this conversation actually very often with Canadian investors who are looking at buying what I we call like, you know, sun properties, where they're looking at buying a condo in the latest construction in Tulum in Mexico, or you know, buying something in Costa Rica or like some other, you know, sexy south destination.

And you know, in that case, what you really, those economies and those real estate markets there are really quite risky.

And typically it's not even the local financial institutions that are financing those purchases.

It's often the promoters who are lending themselves.

And then what happens is the person who owns that asset is really held hostage because as they're a non resident, for example, no Mexican bank or no Costa Rican bank is going to lend to them.

And they end up having to either finance, refinance their Canadian property or else pay exorbitant interest rates to the person who has done that construction.

And so just to be clear, this is absolutely not the situation in Canada.

In Canada, non residents and you know, non residents who own Canadian holding corporations that can hold assets here really are not subject to that kind of thing.

A Canadian bank is going to finance you and lend to you perhaps not exactly the way a Canadian would be, but they will still finance those assets.

And so you are able to, you know, do that definitely in the non residential space.

And so those are like some of the factors that you might want to balance with some of those administrative complications of investing outside of your home market.

And then also the tax liabilities that will be generated by being a cross border investor and potentially placing some of your investment dollars in an economy that has, you know, more taxes as opposed to less taxes, depending on what you're looking at.

So real estate fan, I hope that you've enjoyed this little adventure through examining the Canadian housing market as a place to place your dollars and to think through some of the considerations that you might want to explore before going ahead and pulling the trigger on some of that cross border investing and considering investing up here in Canada.

The second exciting thing is that we still have a few more coaching spots available in next cohort.

If you would like to have a.

Little bit more help closing on that next property, please go ahead and fill out the contact form on equitybuildersclub.com and we would be happy to jump on a call and explain to you a little bit more about what we do.

Thank you for listening to the Real Escape Investing Podcast.

I'm your host, Terri Schauer.

If you find that this show has been useful to you, if you've enjoyed the content, if it's done anything to move the needle for you, please go ahead and share it with one person who you think could profit from listening to it.

Until next time, real estate fans.