Investing in Canada Real Estate
Investing in Canada real estate has always been attractive for those that are looking to generate additional income and benefit from the wealth created with increases in property values and real estate over time. Is investing in real estate right for you?
Diversification is key to anyone’s investment portfolio whether you are talking about mutual funds, TFSA’s, stocks, bonds, RESP’s, RRSP’s etc. Diversification helps balance risk and provides a level of confidence that your investments are still going to be there when you are ready to liquidate them, such as at retirement etc. Some would consider adding real estate, other than their principal home, to their portfolio to ensure full diversification.
A real estate investor can still use a relatively small amount of down payment or capital to purchase a property, and this can provide an attractive return on investment (or ROI). This return is generated from a combination of monthly income and property value increases.
The monthly income is generated by taking the rent collected from tenant and then deducting all the expenses. To ensure that there is a positive cash flow, smart real estate investors work with a mortgage expert and real estate agent that can assist with the analysis.
Equity is built in the property by way of appreciation of value over time as well as with each mortgage payment.
With mortgage interest rates at record lows and an abundance of potential tenants in many areas, there is a high demand for real estate investors to take the plunge.
Here’s another way to look at it as well… real estate investment is also beneficial for those who have a hard time saving money, as it can act as a sort of forced savings account. Essentially, as you pay down the principal of a mortgage, you’re reducing debt and building equity. Then, when you go to sell the property, the money you receive back from the sale is considered your “forced savings”. http://yourmortgagedoctor.com/buying-a-second-home/
So What is the Risk?
Like any investment, there is risk and it is possible to lose money in real estate, albeit relatively low. Real estate has shown to appreciate steadily over the long term, and has for the past 25 years, so the chances of someone losing money on a purchase are pretty slim. However, keep in mind that doing your due diligence before an actual purchase is key… you must take into consideration certain factors when choosing a property, such as desirability of location and stability of the market in that area.
Financing Options and How do I get started?
One more attraction is the fact that it really only requires part of your time, is flexible, and the skills can be learned. The process is relatively easy, and I’ll walk you thru that step by step. The first step is to build your Real Estate Investment Plan which would include talking about your acquisition and exit strategies and what you are most comfortable with to get you started. We will build a Power Team around you that provides you with expert advice and opportunities that you can trust.
Call me for more information on how to see if you are ready to purchase a rental property and build your Investment Plan:https://www.thestar.com/business/personal_finance/2014/06/03/10_tips_for_first_time_real_estate_investors.html
Buying Investment Properties in Corporate Names – Why, How and the Benefits
Many real estate investors are advised to put your investment properties in a corporate name. There tends to be two primary reasons for this:
- Income tax benefits: You can take a dividend income which is taxed at a much lower income tax rate
- Limited Liability on your personally: If you were sued (a tenant is injured on your property) or had a legal case against you as a landlord, it would be against the corporation and not you personally so it can assist in protecting your personal assets in this type of situation.
So the title of the property will be in a corporate name but you, the investor, will be required as the owners of the corporation to also provide personal guarantees. The only time personal guarantees may not be required is if:
- the property is underwritten commercially
- the corporation is established for at least three years
- the corporation can provide three years full financial statements and corporate tax filings that are strong
- the corporation has a high asset base, and
- the corporation has positive cash flow and consistent net profit
Holding Corporations vs. Operating Corporations
Most lenders require that the corporation be a “holding Company” only or “holdco” for short. A holdco, as the name implies, is a corporation which is incorporated for the sole purpose of holding something like an asset. Usually, that “something” is shares in an active corporation (typically referred to as an operating corporation or optco) or assets. When talking about real estate holdco’s, the focus is on the assets which would be the real estate itself and the shares may be in an operating corporation that “manages the property”. This holdco is set up for the sole purpose of real estate acquisition.
A simple holdco structure with say two directors (you) with the real estate as the asset holding is known as a “single tier”. You may have just an operating company “optco” instead… also known as “single tier”.
Example: John and Jane are married and they are real estate investors. They incorporate a holding corporation, (“holdco”), to own their properties. They are both directors and have no operating company.
Personal Guarantees: A personal guarantee means that even though the title and mortgage will be in a corporate name, the owners/directors (you as the borrower) are offering a personal guarantee. You are personally guaranteeing the loan and cannot hide behind the usual corporate protection mentioned above. Should the loan default, the lender can pursue the corporation AND then you personally for full repayment and any default expenses.
Corporate Structures (multi-tier): Some investors will have more than one corporation often referred to as “two tier, three tier” etc. This would involve a holdco and an optco(s). As mentioned above, think of the holdco as the “holder” of the real estate asset for the optco – it just simple holds fixed real estate assets and excess cash transferred from the optco. The optco runs the property management and all transactions and day to day operations. Every time the rent is collected, after deducting all costs and expenses, it moves excess cash from the optco to the holdco. The movement of cash is generally in the form of an inter-company dividend (you should always consult a tax accountant).
Example: John and Jane are married and they are real estate investors. They incorporate a corporation, optco, to run their properties. The optco, in turn, is owned by the holdco. John and Jane own holdco. Thus, the relationship is that the individual owners own the holdco whom in turn own (or hold) all the shares in optco. In other words, a corporation owns a corporation.