The truth about buying and selling U.S. real estate as a Canadian-based investor, and how to account for currency exchange rates.
There are always numbers involved in your deals and miscalculations are expensive. What you may not be aware of and are about to find out is: how to account for your rate of return with Canadian and U.S. currency exchanges so you consistently generate top-profits.
Your Rate of Return
Your rate of return is crucial, particularly when you’re dealing with currency exchanges.
Once you know how your rate of return impacts your ROI, you’ll know exactly how much you’re making on deals without any currency anxiety.
It’s simple math, but it makes a world of difference to your wallet.
You’d be amazed at how much money is lost to a general dislike for simple math.
Last week I was at a swanky restaurant in San Diego having a business lunch with some new partners. When I say ‘swanky’, I mean that none of the food was served in portions larger than my fist, each dish had an unpronounceable name, the chairs were top design (and unforgivably uncomfortable), and all the servers looked like they had sucked on lemons before the start of their shift (it did have a great view of the ocean though).
Anyway, I was leaving the washroom of this swanky joint and decided to offer the bathroom attendant his choice of tip, just to see what he would choose: either a $100 Canadian bill or a $5 dollar American bill. Guess what he chose?
The $5 American bill, because “figuring out the exchange was just too complicated”.
Now for most, that was clearly not the profitable option yet it’s on par with Canadian investors who wait on hot U.S. real estate deals now because of exchange rates!
I’m going to show you right now exactly how not to make this mistake in your real estate investments simply by accounting for your actual rate of return when you’re dealing with currency exchange.
Canadian dollar exchange rates are low: What does that mean for your U.S. real estate deals?
I know it’s somewhat counterintuitive, but it means you should be buying U.S. real estate.
1) There is no better time to strike in a competitive market than when scared rookie investors hang back;
2) Your overall returns are boosted;
3) You have the opportunity to refinance your U.S. real estate assets to use as capital for new deals.
Your ROI on U.S. Real Estate
Currency exchange rates have nothing on your ROI.
Here’s how that works.
Your ROI is a question of raw cost versus profit returns.
If you are buying a commodity that operates in U.S. dollars and you cash flow in U.S. dollars, there’s no loss on your initial outlay. The same exchange that made your CDN outlay go up also makes your USD cash flow and asset value go up. Basically, whenever you’re dealing with exchange rates, keep in mind that the same exchange for costs is applied to the exchange for your return on the asset value and monthly cash flow.
Let’s break this down with the numbers on a deal I closed earlier this month.
Picture you want to buy a triplex in Chicago (hot market right now by the way) at $35,000 and you estimate rehab at $40,000, for a total of $75,000 USD outlay.
With today’s currency rates (and if you have a hookup, like me), that comes to a whopping $97,575 CDN. At first glance, that may seem “too pricey” but that’s only because you haven’t accounted for your rate of return!
To calculate your rate of return, you have to take into account your total costs and your total returns… so let’s dive in.
Once you complete the rehab, your Chicago triplex property value shoots up to at least $170,000 USD (my rehab system is a science at this point), giving you a gain of $95,000 USD and a MASSIVE equity gain of $123,500 CAD!
Of course, when you’re building an empire, the last thing you want to do is convert your gains back to Canadian funds. You use gains to buy yourself another property and grow another $95K USD… But let’s finish up with the rate of exchange because we haven’t even gotten to your monthly cashflow.
With currency rates today, your monthly cashflow profits soar up 30% on your new Chicago triplex.
Here’s how that works.
Let’s say that each of your three units cashflow at a minimum of $1,000 USD every month. When you exchange your monthly cash flow, that works out to about $1,310 CDN each and every month, which translates to a 30% boost on your monthly cashflow profits!
And that’s how you account for the rate of return on your deals. The single most important factor for all your deals boils down to your ROI because it really is your bottom line.
Even more importantly…
Currency Exchange Rates and
The next factor to consider for your rate of return on currency exchange is: operating costs versus profits.
If you operate your real estate business within Canada to acquire properties in the U.S., then you’re really in the ideal situation when the Canadian dollar is weaker than the American dollar.
Because the majority of your operating costs are paid out in Canadian funds while the majority of your profits are collected in USD funds. When the exchange rates increase your revenues, your operating costs shrink in comparison to your returns (this is my happy situation right now and I’ve gotta say, it doesn’t suck!).
Just by virtue of the exchange rates, your ratio between operating expenses and returns changes, making your business exponentially more profitable.
For example, let’s say that your business expenses (like rent for office space, office supplies, salaries and so on) operates at $10K CDN per month, and you collect 30K USD every month, your operating expenses are about one third of your revenues. With current exchange rates, your operating expenses only cost one quarter of your revenues, giving you a 45% boost in profits every month!
For those few expenses that your business does pay in USD funds, you can always use a U.S. credit card or U.S. bank account to cushion against exchanges – but honestly, with a steady and increasing rise in U.S. rental prices and U.S. housing prices still below peak, exchange rates are barely worth any consideration in your overall ROI.
By the time exchange rates change, U.S. housing prices increase too.
As exchange rates fluctuate, remember that U.S. rental prices are on the rise and your monthly cash flow is exchanged to pad your Canadian funds. What’s more, there is less competition in the U.S. housing market with the U.S. dollar going strong but the housing prices are still below peak prices!!
Refinancing Your U.S. Real Estate
Lastly, don’t underestimate the immensely powerful refinancing route. You’re not ‘losing’ on an exchange because you gain the value of that asset in full, with the option to rehab and refinance the property at an increased USD value.
Once you refinance your property, you can use your capital to acquire even more property (while also offsetting any capital gains tax… but that’s getting ahead of ourselves for now).
If you happen to already own property in the U.S., you might want to refinance to buy new property now and keep exchange rates out of any costs to rake in a 30% boost on all your cash flow returns!
There is ONE last bit of information you need to know… keep reading, you’ll be glad you did.
The Canadian Dollar Is Likely To Keep Weakening In The Last 2015 Quarter… This Is A Gold Mine For Canadian-Based Investors!
Waiting around for the dollar to improve is not a strategy in case you were wondering – it’s a good way to miss out on the last of underpriced U.S. real estate.
Remember, currency exchange rates are NOT “bad” for your U.S. real estate investments! Since U.S. real estate is priced and sold in U.S. dollars and most of your company’s operating costs are in local Canadian currency, you receive significant cost reductions and increased returns just by doing what you always do.
Your business becomes more profitable as a result to the tune of at least 30%.
Your costs shrink and your returns increase in that exchange, and your overall asset value and continuous cash flow increases exponentially.
Don’t be the guy who takes the $5 bill because it’s “too complicated”! Read this through five times if you have to and push past analysis paralysis.
It’s a commonly known marketing tool that the vast majority of consumers mistake values that involve partial numbers, percentages, decimals and fractions. Don’t overthink it.