Managing Insurance Costs for Investment Properties: Tips for Positioning Your Property in the Face of Rising Premiums

As the Canadian real estate market continues to evolve, so does the importance of insurance for property owners, condominium boards, and managers. The insurance market has undergone significant changes in the past couple of years, which continues to have a significant impact on the real estate industry.

Current Insurance Market Conditions

The insurance market in Canada is facing a number of challenges, which have led to significant increases in premiums for property owners, condominium boards, and property managers. These challenges include an increase in natural disasters globally and in Canada, such as wildfires and floods, as well as an increase in claims related to water damage, mold, and asbestos. In addition, the insurance industry is also facing increased costs related to reinsurance, which is insurance that insurance companies purchase to protect themselves from large losses.

These challenges continue to present as a hardening of the insurance market, which means that insurance companies are becoming more selective about the risks and the types of investment properties they are willing to insure. As a result, property owners, condominium boards, and managers are finding it more difficult to obtain insurance coverage, and premiums are increasing significantly.

Challenges for the Industry

Natural Disasters — One of the biggest challenges facing the insurance industry is the increasing frequency and severity of natural disasters. In recent years, Canada has experienced several catastrophic events, such as: the Fort McMurray wildfires in 2016 and the flooding in Ontario and Quebec in 2019. These events have led to significant losses for insurance companies and have made it more difficult for them to offer coverage in high-risk areas.

Reinsurance — Another challenge for the industry is the increasing costs of reinsurance. Reinsurance is becoming more expensive as insurance companies are facing more significant losses from natural disasters and other catastrophic events. As a result, insurance companies are passing these costs onto property owners and managers in the form of higher premiums.

Inflation — Inflation is also having a significant impact on the real estate insurance market. Inflation refers to the general increase in prices of goods and services over time, which can lead to a decrease in the purchasing power of money. As inflation has increased, the cost of repairing or rebuilding damaged property also increases, which is another challenged directly impacting the cost of insurance. This is because insurance companies must pay out more money to cover the increased costs of materials and labor associated with repairs and rebuilding. As a result, insurance premiums tend to increase in response to inflation.

In addition, inflation and current market conditions are also impacting the value of property. As the cost of goods and services increases, the value of property may also increase. This can lead to higher property values and replacement costs, which can further increase insurance premiums. Furthermore, inflation can also impact the investment potential of real estate. As inflation increases, the value of money decreases, which can make real estate investments more attractive as a hedge against inflation. This increased demand for real estate can also impact the insurance market, as insurers may face increased competition for coverage in certain areas.

Rising market values — As highlighted by the impact of inflation, the market value of real estate investment properties and condominium corporations is also impacting the cost of insurance in several ways. In this current climate, as the market value of a property increases, so does its replacement cost, which is the amount of money required to rebuild or replace the property in the event of a loss. As a result, insurance companies may charge higher premiums to cover the increased replacement cost of the property. The market value of real estate investment properties can impact the cost of insurance in several ways, including replacement cost, location, property characteristics, type of property, and market conditions.

Secondly, the location and characteristics of the property can also impact the cost of insurance. For example, if a property is in an area with a higher risk of natural disasters or crime, the insurance premiums may be higher. Similarly, if a property has certain features that increase the risk of loss, such as an outdated electrical system or a lack of fire safety measures, the insurance premiums may also be higher.

Thirdly, the type of real estate investment property or condominium property can impact the cost of insurance. For example, a multi-unit residential building may have higher insurance premiums than a single-family home due to the increased risk of liability claims and the need for additional coverage.

According to a recent articles on their websites, Lloyd Sadd, BFL and HUB International recommend that investment property owners should prepare for continued increases in insurance premiums in 2023 due to ongoing challenges in the insurance market. They note that increased claims related to natural disasters and other events are driving up insurance costs, and that insurance companies are becoming more selective about the risks they are willing to insure.

Overall, all these challenges are impacting the cost of insurance for real estate investment properties and condominium corporations. This is further impacted with the decreased competition and appetite by insurers to provide coverage and capacity. Combined, these challenges continue to have a significant impact on the real estate insurance market by increasing the cost of insurance premiums and impacting the value of property. Property owners should be aware of the potential impact of inflation on the insurance market and work with experienced insurance brokers to navigate these challenges.

Future Forecasts

Insurance companies are predicting that the challenges facing the industry will continue in the coming years. In a recent report, the Insurance Bureau of Canada (IBC) stated that climate change is expected to increase the frequency and severity of natural disasters, which will lead to higher insurance costs for property owners and managers. The IBC also noted that insurance companies are likely to become more selective about the risks they are willing to insure, which will make it more difficult for some property owners to obtain coverage.

In addition, the IBC noted that insurance companies are likely to continue to increase premiums to offset the increasing costs of reinsurance. This could lead to significant increases in premiums for property owners and managers in the coming years.

Tips to Manage the Impact

Despite past indications from Insurers that the market is softening, the insurance market in Canada continues to face significant challenges, which are having a significant impact on the real estate industry.

Property owners and managers are finding it more difficult to obtain insurance coverage, and premiums are increasing significantly. Insurance companies are predicting that these challenges will continue in the coming years, which means that property owners and managers will need to be prepared for higher insurance costs.

There are several tips an investment property owner can do to position their property and help minimize the impact of increased insurance premiums:

Implement Risk Mitigation Strategies: Property owners should implement risk mitigation strategies to reduce the likelihood of claims. This may include regular maintenance of the property, inspection programs, implementing preventative maintenance strategies and starting to accrue for the replacement of depreciating capital items (i.e.) roofs, electrical, plumbing related items, etc., Education of tenants and residents is also key. Especially around the importance of tenant insurance and ensuring that tenants are aware of emergency procedures.
Build relationships: It’s important to build relationships with your insurance broker to understand what the Insurers are doing and how best to position your property for the best coverage at the best rates.
Increase Deductibles: Increasing deductibles can lower insurance premiums. Property owners should consider increasing their deductibles to offset the impact of increased premiums. Gone are the days of using your insurance policy as a bank. Property insurance isn’t a right and management of claims needs to be considered on how it could impact future coverages.
Invest in Property Upgrades: Upgrading the property can reduce the risk of claims and lower insurance premiums. For example, upgrading plumbing and electrical systems can reduce the likelihood of water damage and fire damage, respectively. Reviewing the useful life of items in the property is important. Re-investment into the property pays off from an insurance perspective as it helps to reduce the risk of claims, as well as preserves and improves the equity in your real estate asset.
Consult with a Professional: It’s important for property owners to consult with a professional, such as an insurance broker or real estate lawyer, or property management company to understand their insurance options and legal obligations. A professional can help property owners navigate the insurance market and ensure they have adequate coverage at a fair price.

By implementing these strategies and taking proactive steps to mitigate risks, investment property owners can position their property to help minimize the impact of increased insurance premiums and reduce their overall insurance costs.

Commitment to Navigating the Challenges of the Insurance Market

As a property management company locally owned and operated out of Calgary, Emerald Management & Realty Ltd. is committed to helping their clients navigate the challenges of the insurance market and find the best coverage options at the best price. They understand the impact that rising premiums and reduced coverage options can have on investment property owners and condominium boards and are working to stay up to date on the latest market conditions and trends.

Emerald Management & Realty Ltd. has developed strong relationships over its 50-year history in the property management industry and remains committed to building relationships with experienced insurance brokers who have a deep understanding of the insurance market and can help clients find the coverage they need at a fair price. They are also working closely with their clients to develop risk management and loss prevention strategies, and are re-looking at ways to improve on inspections, education of residents in areas such as regular maintenance and upgrades, to mitigate risk and reduce insurance costs.

The team at Emerald Management & Realty Ltd., is proud of their master insurance program that has been customized for the properties under management. With 50 years of property management service, they continue to leverage their buying power and proven track record to obtain best in class preferred rates and robust coverage for valued clients and property owners.  As highlighted in 2021 and 2022, the insurance market continues to be incredibly challenging for the real estate sector. Emerald’s focus in 2023 remains on advocating for low corporate rates, reasonable deductible levels, and prompt claims management in the event of an approved claim. A large part of their process includes our focus on achieving stability and retaining loyal insurers for our stakeholders on our program.

By staying informed about the changing market conditions and working proactively to manage risk and reduce costs, Emerald Management & Realty Ltd. is helping their clients position their properties for success in the face of the challenges of the insurance market. They are committed to providing the highest level of service and support to their clients and helping them achieve their investment goals. To learn more about how Emerald Management & Realty Ltd. can help you achieve your investment goals and outcomes in this current insurance market, contact their team today!

Additional Resources

Looking for more resources on the topic of insurance market conditions and additional insights on the impact on the real estate market as well as strategies for managing rising insurance costs, visit:

“Real Estate Insights” by Lloyd Sadd Navacord Insurance Brokers
“Insurance Services Market Insights 2023 by BFL Canda
“The Hardening Insurance Market: What You Need to Know” by HUB International.
“How the Hardening Insurance Market is Affecting Real Estate” by Insurance Business Canada
“The Insurance Market and Its Impact on Real Estate Investment” by National Real Estate Investor
“Insurance Market Hardening, Rising Rates Impact Real Estate” by GlobeSt.

How to Prepare a Lease Agreement for a Rental Property

Renting out a property is a potentially profitable venture, but there are also potential issues that could arise. Having a lease agreement in writing can help in such situations.

What is a Lease Agreement and Why Do You Need One for a Rental Property?

A lease agreement is a contract between a landlord and a tenant. Among other things, the agreement outlines that the tenant is allowed to live in a property for a fixed period. This contract binds the landlord and tenant to the terms of the lease.

A lease agreement is important since it clearly outlines the terms and responsibilities for both the landlord and tenant. This can help clarify things if there are any disputes. While the lease does not need to be in writing, it is strongly recommended that it is. This protects all parties involved and ensures that everyone clearly knows what is expected of them.

The Different Parts of a Lease Agreement

There are several important parts of a lease. This includes the names of the landlord and tenant(s), the address and description of the property, the date that the tenancy is to start and length of the agreement, the amount of rent due and the mode of rent payment, the amount of the security deposit and where it is held, how the tenancy may be ended, and more.

What Should be Included in a Lease Agreement for a Rental Property?

Each lease is different, but there are certain aspects that should be included.

In addition to what is listed above, it’s important to include:

Responsibilities for maintenance and repairs
Which utilities are included, and which are not
Insurance requirements
Rules regarding subletting
Information on any other fees
And much more

It is important to note that the Residential Tenancies Act is always enforced over any agreements made between the landlord and tenant. Therefore, if something in the agreement conflicts with the law, the law will apply. However, landlords and tenants can agree to other terms if they are not illegal.

For instance, the act says nothing about pets in a property. Therefore, landlords and tenants can agree to certain terms regarding pets if they wish.

If the property is a part of a building or condominium, there may be rules and bylaws associated with the property that the tenants will need to follow. In these situations, its a good idea for the landlord to provide the client with this information and state in the agreement that the tenant must follow these rules.

How to Protect Yourself and Your Property as a Landlord

Having a lease agreement in writing is one of the best ways to protect yourself as a landlord. Other ways to protect yourself include screening and choosing tenants wisely, doing a full walkthrough and completing a move-in inspection to document the rental properties condition.

It’s also important to be familiar with the province’s Residential Tenancies Act so that you know your rights and responsibilities as a landlord.

What to do if a Tenant Breaches the Lease Agreement

If a substantial breach of the lease agreement occurs, the landlord can apply to end the tenancy or give the tenant notice that the tenancy is being ended. At least 14 days of notice must be provided and the day the notice is given and the day the tenancy ends do not count as part of these 14 days.

A substantial breach by the tenant is typically a situation where a tenant does not pay rent in full when due, causes significant damage to the property, endangers others, or does not vacate the premises when tenancy ends.

In these instances, the landlord can apply to the Court or to the Residential Tenancy Dispute Resolution Service (RTDRS) to solve the dispute.

Managing properties and dealing with tenants can be time consuming and often difficult. We can help. Emerald Management & Realty Ltd. provides property management, property maintenance and rental property services and always provides the best possible support, care, and service. To find out more, please contact us online or call 403-237-8600.

The Underused Housing Tax (UHT) in Canada: Impacts and Implications for Property Owners

As a property owner in Canada, you may be subject to the Underused Housing Tax (UHT). The UHT is a new tax that came into effect on January 1, 2022. This tax targets underutilized or vacant residential rental properties and aims to increase the supply of available housing, reduce real estate speculation, and promote better use of residential properties.

While the UHT was primarily proposed to address issues related to foreign property owners, it also affects private Canadian corporations. If you are subject to the UHT, you must file a return by April 30, 2023, and failure to do so may result in significant penalties. It is essential to understand your obligations under the UHT and seek professional advice to determine how the tax may affect your investment strategies. Please note that the information provided in this summary is for information purposed only, and it is recommended that you seek qualified professional advice to evaluate your specific circumstances.

NOTE: The CRA announced on March 27, 2023 that while filings are still due on April 30, 2023 (May 1, 2023), Underused Housing Tax penalties and interest waived for filings after this deadline, but before October 31, 2023, will not be penalized.
The Canada Revenue Agency (CRA) understands that there are unique challenges for affected owners in the first year of the Underused Housing Tax Act (UHTA) administration.

What is the Underused Housing Tax (UHT)?

The UHT in Canada imposes a tax on certain types of residential properties that are deemed to be vacant or underutilized. UHT imposes a 1% annual tax on the value of residential real estate considered to be vacant or underused that is owned on December 31 or each year. The goal of the UHT is to bring about positive changes in the Canadian housing market, benefiting both property owners and those seeking affordable housing options.

The Canada Revenue Agency (CRA) provides the following definitions for a property subject to the UHT:

A detached house or similar building that contains not more than three units, appurtenances*, and the related land
A semi-detached house, rowhouse unit, residential condominium unit, or other similar premises, along with any common areas, appurtenances, and the related land.

* Common examples of appurtenances are driveways, drainage ditches, fences, and rights of way.

Generally, the UHT applies to residential rental properties that are unoccupied or not being used to their full potential. It is important to note that there are some exemptions and exclusions from the UHT, such as certain types of properties used for charitable purposes, affordable housing, or temporary accommodations. Property owners should consult with their account or legal counsel to determine whether their properties are subject to the UHT and what their obligations are under this new tax.

Who MUST file the UHT?

The tax usually applies to non-resident, non-Canadian owners. In some situations, however, it also applies to Canadian owners:

Foreign investors who own rental properties in Canada
Individuals who are non-residents of Canada
Non-Canadians
Canadian private corporations
Trusts; and
Partners in a Canadian partnership

To determine if you are an excluded or included owner, visit: CRA – Underused Housing Tax and discuss with your accountant or lawyer.

What is the tax?

The tax is based on 1% of the value of the property annually, if vacant or considered underutilized. To calculate what you owe, CRA advises to:

Multiply the value of the residential property by the 1% tax rate.
Then multiply that result by your ownership percentageof the property.

You can determine the value of the property for the year for property tax purposes and by using the most recent sale price. An owner can also elect to use the property’s fair market value as determined at any time during the year up and up to April 30 of the following year. In the later situation, CRA will require an appraisal report prepared by an accredited, professional real estate appraiser operating at arm’s length from the owner.

What is considered “vacant”?

The CRA provides the following definitions for a “vacant” or “underutilized” property subject to the UHT:

Vacant property – A property is defined to be vacant if it meets one of the following criteria:
1. It does not contain any occupants on December 31 of the year in question, and it has not been rented or leased for at least 30 days in a row during the year.
2. It is not ordinarily inhabited by individuals as their place of residence or lodging, and it is not being used for any other purpose.
Underutilized property – A property is defined as underutilized if it meets one of the following criteria:
1. It is occupied by one or more individuals, but it is not being used as a place of residence or lodging, and it is not being used for any other purpose.
2. It is being used for a purpose other than as a place of residence or lodging, and that use is not consistent with the property’s ordinary use or any restrictions or conditions that apply to the property.

It is important to note that the definitions of vacant and underutilized properties under the UHT may be more restrictive than what property owners may consider “vacant” or “underutilized”. Property owners should consult with their accountant or legal counsel to determine whether their properties meet the criteria.

What is taxable?

There are lots of rules to consider. And lots of exemptions. Essentially, a residential dwelling is generally defined by the CRA as a property that is either one of the following:

A detached house or similar building that contains not more than three units, appurtenances and the related land
A Semi-detached house, rowhouse unit, residential condominium unit or other similar premises, along with any common areas, appurtenances, and the related land

Example: Residential units less than 3 units in a single building are taxable. Condominium units are also taxable. So, if you own a 6 Plex, and it is a condominium, and … you own all the units, you will need to complete a separate filing for each unit.

Is there a requirement to file?

Yes, there is a requirement to file, even if there is no tax owing. If the property AND you qualify, you must file even if fully occupied and no tax payable.

Under the UHT in Canada, property owners who fail to file their UHT returns by the due date or who fail to pay the tax owing may face penalties and interest charges. The penalties for non-compliance are significate and can add up quickly.

Here are some details on the penalties that may apply:

Failure to file penalty – It a property owner fails to file their UHT return by the due date (April 30), they may be subject to a penalty of $5000 for individuals or $10,000 for corporations … per unit! This means that if you own multiple units that are subject to the UHT and you fail to file a return for each unit, you may be subject to multiple penalties.
Failure to remit penalty – If a property owner fails to pay the UHT owing by the due date, they may be subject to a penalty of 1% of the unpaid amount for each month that the tax remains unpaid, up to a maximum of 12 months.
Interest charges – If a property owner fails to pay the UHT owing by the due date, they may be subject to interest charges on the unpaid amount. The interest rate is set by the CRA and may change from time to time.

Again, even though you may not have a requirement to pay this tax, you may still have the requirement to file a UHT. In addition to the penalties and interest charges, property owners who fail to comply with the UHT may face other legal or financial implications, such as audits, assessments, or legal action. It is essential to understand your obligations under the UHT and seek professional advice to ensure that you comply with the tax and avoid penalties or other consequences.

As highlighted above, the UHT could have significant impact on property owners depending on how your property and your ownership is structured. It is crucial for property owners to stay informed about the details of the UHT and to review with your accountant how this new tax may affect your investment strategies.

Taking the time to avoid penalty and to verify whether you have a filing and or a tax payment requirement for your properties (or both) is highly recommended.

Here are some additional references and resources for readers to learn more about the Underused Housing Tax (UHT) in Canada:

General CRA Administrative Guidance
Underused Housing Tax Technical Information
Underused Housing Tax Notices
Underused Housing Tax Return
Underused Housing Tax Exemptions
Underused Housing Tax Forms
Underused Housing Tax Vacation Property Designation Tool
Taxpayers’ Ombudsman
Canadian Tax Foundation (CTF):
Chartered Professional Accountants Canada
Legal counsel: Property owners who have questions or concerns about the UHT should consult with legal counsel to obtain professional advice. A lawyer with experience in real estate or tax law can provide guidance on how the UHT applies to their specific situation and help them understand their options for compliance.

As discussed throughout this article, it is important to note that the information provided is for informational purposes only and it is not intended to provide legal or professional advice. While we have made every effort to ensure the accuracy and reliability of the information provided, we cannot guarantee its completeness or suitability for any particular purposes. Therefore, readers should seek the advice of qualified professionals that understand their individual situation and potential exceptions, that can provide advice tailored to their specific circumstances. Emerald Management & Realty Ltd. does not accept any liability for any loss or damage arising from the use of this information.

The properties managed by Emerald Management & Realty Ltd. are primarily located in Calgary and surrounding areas such as Strathmore, Airdrie, Canmore and Cochrane. Emerald Management & Realty Ltd. is proud to managed for local, national, and international property investors, who entrust their investment properties to Emerald Management & Realty Ltd. Our proven history has provided the opportunity to acquire invaluable knowledge and experience that can be passed on to our valued client base. Through the hard work of our dedicated team, we have built a strong reputation as one of the best property rental companies in Calgary. For more information about the property management and maintenance services Emerald Management & Realty Ltd. provides, contact our team today!

A Beginner’s Guide to HOA Fees

As a new homeowner, you may have heard the term “HOA fees” thrown around, but may not fully understand what they are or why they are important. A Homeowner Association, or HOA, is a legal entity responsible for maintaining and managing a community of homes. HOA fees are monthly or annual fees that homeowners in the community pay to cover the costs of these maintenance and management services.

In this guide, we’ll dive into the basics of HOA fees and provide you with all the information you need to make informed decisions as a homeowner.

What is a Homeowners Association?

A Homeowners Association is a non-profit organization made up of the residents in a community. The HOA is responsible for maintaining and managing the common areas, amenities, and overall appearance of the community. They ensure that the community is safe, well-maintained, and visually appealing for all residents.

What are HOA fees?

HOA fees are monthly or annual fees that homeowners in a community pay to cover the costs of maintenance and management services provided by the HOA. These fees are used to maintain common areas and amenities within the community, such as parks, pools, and clubhouses, as well as to potentially cover the cost of security, trash removal, landscaping and other services to residents.

Check Covenants, Conditions, and Restrictions (CC&R) Before Making any Decisions

Before purchasing a home in a community with an HOA, it is important to thoroughly review the Covenants, Conditions, and Restrictions (CC&R) document. This document outlines the rules and regulations of the community, including the amount of HOA fees and what they cover. It is important to make sure you understand the CC&R and are comfortable with the amount of HOA fees before making any decisions.

If you need any assistance deciphering these documents, make sure you contact a real estate lawyer.

Can you avoid HOA fees?

In most cases, HOA fees are a mandatory part of owning a home in a community with an HOA. While it may be possible to opt out of some HOA services, such as community centre usage, the overall HOA fees will still need to be paid.

If you are not interested in paying these fees, you’ll likely need to buy a standard single-family home that does not belong to any associations.

HOA Benefits

Despite the added cost, there are many benefits to living in a community with an HOA. These benefits may include well-maintained common areas and amenities, increased security, and a visually appealing community. HOA fees also provide peace of mind knowing that someone else is taking care of the maintenance and management of the community.

HOA Drawbacks

While there are many benefits to living in a community with an HOA, there are also some drawbacks to consider. HOA fees can add up over time, and there may be restrictions on what homeowners can do with their properties, such as restrictions on paint colours or landscaping choices.

Bottomline

HOA fees are an important aspect of living in a community with an HOA. It is important to thoroughly review the CC&R and understand the HOA fees before making any decisions. Despite the added cost, HOA fees provide many benefits, including well-maintained common areas and increased security.

Contact Emerald Management & Realty Today

If you have any questions about HOA fees or living in a community with an HOA, contact Emerald Management & Realty at 403-237-8600. Our team of experienced professionals is here to help with 24/7 emergency services. For more information, fill out our online contact form online.

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