Investing in Canada Real Estate with Genworth
First Time Investors
Purchasing and investing in 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 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”.
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.
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.
See this example below:
In Canada, inter-company dividends are tax-free events (given that cash has not moved outside the larger corporate structure, you still have not triggered a taxable event).
So in this case, if structured properly, John and Jane, the owners of holdco (who, remember, are indirect owners of optco) are paid through two sources. John and Jane are employees of the optco (i.e. they are issued a T4) and receive dividends from the holdco.
This way, John and Jane contribute to CPP, EI etc., have T4 income to show the lender and are taxed favorably paid by the holdco to them. This maximizes all the possible tax benefits and reduced tax opportunities.
The more “advanced” holdco structure involves issuing shares to immediate family members as well. The owner/director (John and Jane) are issued one class of voting shares and their family members (children, grandchildren etc.) are individually issued different classes of non-voting shares entitled to dividends but with no priority over the voting shares.
For example, owners John and Jane (Mom and Dad) are issued common shares with voting rights as the owners/directors. Jennifer (daughter) is issued Class A non-voting shares. Michael and Laura (the grandchildren) are each issued Class B and Class C non-voting shares respectively.
At the end of each year, the directors (John and Jane (Mom and Dad)) of the holdco can elect to pay dividends to any class of shares they want with the determination as to who gets what based on the tax brackets of each of the shareholders. For example, if Michael and Laura (the grandchildren) are paying only a minimal amount of tax, the holdco could pay more dividends to each of them than Jennifer (Daughter) to minimize the family tax burden.
This is also a great strategy for planning for inheritance etc. By making family members shareholders it can assist with estate planning and minimizing the tax burden on the recipients of any inheritance as a result of the death of a wealthy family member (you).
The above strategy is known as “dividend sprinkling” and is generally a safer means to pay family members on a tax-efficient manner than employing them as employees (which run into tests of reasonableness whereas a dividend can be declared as long as the corporation has the ability to meet its obligations as they become due after the payment of the dividend. Hence, the test is less subjective and not as open to audit inquiry).
If you already have a corporation such as an optco for a currently operational business, other than real estate acquisition, you could use this for your real estate acquisition. However, some lenders may not allow this to be the corporation to hold these real estate assets as it’s an optco as opposed to a holdco.
Don’t forget you have to provide a copy of the Articles of Incorporation and by-laws to confirm the “status” of the corporation… holdco or optco. All owners/directors of the holdco or optco that you want the real estate to be held in MUST provide personal guarantees and therefore applications to be approved as borrowers. If there have been any changes to the original incorporation such as changes in directors then we will require the amendments or changes.
Don’t forget to speak to your financial planner and tax accountant to find out the best solution for you and your real estate investment portfolio.
Give me a call to chat about your corporate structure and ensure it is right for you.
Cash is King – Funding your Portfolio
In purchasing real estate there are always risks involved. From the lender, to the buyer, seller and of course managing tenants, you will be responsible for ensuring the risk is minimalized and all parties involved are in a win win situation.
From the lenders standing, whether it be a major bank or a joint venture partner is going to be looking at the overall risk of lending you their funds, and obviously getting it back. Major factors are taken into consideration as you can see in the chart below. The terms of the loan will depend on the overall perceived risk from the lenders standpoint.
As an expert in financing in this area, I know exactly which lenders to utilize, what their guidelines are, will negotiate the best terms and options and most importantly align your financing with your investment strategy… both acquisition and exit strategies. Having an expert on your side that understands this is key to your continued portfolio growth and success. If I know you want to purchase 12 properties in the next two years, then I can build an Investment Portfolio Financing Plan that outlines the financing options with which lender I will select… from the first property… right up to the 12th and more – knowing how much it is going to cost to borrow funds impacts your cash flow. I can work this out with you and provide advice and strategies on how to improve your cash flow and returns and make the right property purchases.
My extensive financing products and knowledge means that I know which lenders will allow vendor take backs, corporate borrowers (one to multiple tier), self-employed investors, finance up to six plexes under residential guidelines, second mortgages on closing, self directed RRSPs, asset based lending, tax benefits (dividend sprinkling) etc. and more. I can walk you thru the process of getting an investment property mortgage step by step, especially if you are a first time investor – it can be daunting and its important your mortgage is in line with your investment strategy.
EVERY Lender and PROPERTY may have a different focus or emphasis on one area over the other:
- Major Banks & Financial Institutions = Best Rates & Best Options: Focused on BOTH the Borrower AND the Property equally
- Alternative Mortgage Lenders = Best Rates & Best Options: Focused on BOTH the Borrower AND the Property equally
- Non Traditional (Sub Prime/Equity) Lenders = Flexible Options: Focused on the Borrower but MOSTLY the Property
- Private, Joint Venture & Hard Money Lenders = Focused MOSTLY on the Property AND their fees & interest rate return plus what property can they seize when you default!
Which applies to you?
Knowing which type of financing you qualify for NOW before you are under contract with a property is key – call me and let me help you.