13 Jul

How tenants can help pay your mortgage

Buying a Home

Posted by: Garth Chapman

The single most common and often most significant road to financial security for Canadians is paved by home ownership.  And for first-time home-buyers often the largest barrier to getting started is the monthly cost.  So why not consider a home with a rental suite that would allow you to have a tenant who pays rent, which would lower your home ownership costs?  Such a property might not be the home of your dreams, but if it gets you into the game then it might just be a great way in.  After all, down the road you could move up and keep that first property – now with two renters covering all the costs and then some.

And if it works well for you, then why not have 2, or 3 or more such properties.  It doesn’t take many to, once paid off in say 25 years, to fund your financial freedom.

And for seniors and those on fixed incomes, or those living in high-price markets, the rental unit can make it much easier to stay in your home far longer than you might otherwise be able to.

Read more here: How tenants can pay your mortgage

26 Apr

9 Steps to recession-proof your Real Estate business

Commercial & Multi-Family

Posted by: Garth Chapman

How will you ensure your real estate business prospers in tough times?  What are you doing to adjust your business to our new economic realities?

Here are my practices, built on what I learned in 44 years in business, and as published in REIN Life magazine here http://magazine.reincanada.com/2016_Issue1/ on pages 33 & 34. 

1) Keep a balanced view: take your view from the 10,000 foot level (get out of the forest and above the trees). Don’t be pulled back and forth by the daily news headlines. Do read beyond the headlines; remember that the last paragraph sums up the true story much better than the headline does. The headline’s role is to entice you to read the story. Pay attention to the longer term trends and statistics – they will keep you balanced and help you to make better decisions. Pay attention to both the positive and the negative things that are happening around you. Be realistic as you evaluate of what is going on. Be positive but don’t be mistaken for Pollyanna. A positive mindset is a powerful ally in getting things done, but must be accompanied by a realistic view on things to allow you to focus on that which is achievable.

2) Analyze your business: What are you doing well and what not so well? What can you improve on? What must you improve on? Review your Real Estate portfolio’s financial performance versus your budget. If you don’t yet have a budget then create one now. Measure what is significant so you will know what areas to put your time, effort and money into. Know your true numbers (for each property and your whole portfolio) – if you don’t you are not really managing your business, and that means you have put it at risk. Always know your current cash position and your projected monthly cash-flow going forward – if you don’t you risk running out of cash. Maintain sizeable cash reserves, and/or credit facilities. Positive cash-flow is critically important, and cash reserves will get you through the tough patches.

3) Review your business plan: both the short term and the long term, and adjust it as prudent investors should when the world you operate in changes big time. Be proactive. Don’t be buffeted by the changing seas. Don’t allow yourself to drift. Chart your course and make corrections as needed to keep your business on course.
4) Involve your team and other experts in this process. They are on your team for a reason. Get their input. Ask for their advice. Involve people you respect for their knowledge and experience. Most of your best ideas will come out of those discussions – both your ideas and theirs. And you will awake with eureka moments in the wee hours of the morning. That’s a good thing. It means you have engaged your subconscious mind.

5) Take a break. Get away and relax. Read some books, go sailing, walking, running, diving, flying, driving – whatever works for you. If you take the right amount of time, all that you have done so far in this process will distil in your mind and you will find clarity.

6) Now act to recession-protect your business. A few examples:

  1. Refinance your mortgages to reduce interest costs when any pre-payment penalties are small enough for that to make good sense.
  2. Extend amortization periods on those of your mortgages with shorter amortizations. Most lenders will do this without cost (or a very small processing fee). This can make for significant reductions in monthly payments. And once things improve you can always shorten the amortization periods again.
  3. Look for ways to increase revenues: provide cable TV, internet, other services, add rental units to your properties (suites, garages, parking spaces, coin-op laundry facilities, etc).
  4. Act pro-actively to decrease vacancies. Be creative in your advertising, write excellent ad copy, advertise online, in the neighbourhood and at the property itself. Offer incentives to fill vacant units, preferably one-time incentives so you preserve good cash-flow.
  5. Create new lines of credit where you have equity to provide a cash reserve you can draw on when needed. This could be utilized to fund unexpected costs or to purchase a great new property.
  6. Sell properties that simply won’t perform and those where the return on your equity is poor and cannot be improved. Then re-deploy that cash into good solid cash-flowing assets, or to reduce other debts.
  7. Set expectations for your team and clearly communicate them to each. Then regularly measure and report back to them their performance as against those expectations. Celebrate their successes and address how shortcomings will be improved. If a member just isn’t getting it done – fire and replace them.
  8. Continue to make decisions that fit with your long-term objectives. Don’t take the easy or quick solution as those often cost more in the long run and tend to move you further away from your goals rather than towards them.

7) Do the same for your personal life. Your family’s business also needs your attention. Treat your personal finances much like your business finances. If your personal financial health is good you will reduce financial pressures that often make for poor decision-making.

8) Review and repeat. Review what you did to determine how to do it better next time. Do this all again at least once a year. In these times maybe twice a year is more prudent.

9) Share what you have learned. This will help to make others’ businesses better as was yours. Much more will come back to you than you put out there, including many good ideas from others that you can employ yourself.

We have been managing our Real Estate business like this for years. The process ensures we stay on top of our business and continue to improve its performance year after year.

12 Feb

Rental Property Tax Planning: To Depreciate or Not

Income Tax

Posted by: Garth Chapman

On your tax return you have the option to depreciate your buildings (to claim CCA).  The elements of this to consider include those below, and perhaps others as well.  This is both a tax planning decision and a mortgage qualification capacity decision. Here are 8 key points to understand and consider when deciding whether to depreciate or not:

  1. Claiming the CCA is actually optional and it can be started and stopped from year to year. Note that from a tax perspective CCA cannot be taken on a property that has the possibility of a principle residence exemption. So while CCA may be beneficial from a tax perspective a conversation is needed with the accountant about the ability to qualify for mortgages. Otherwise the tax savings will leave a sour taste in everyone’s mouth.
  2. CCA cannot be taken on a property that has the possibility of a principle residence exemption.
  3. Claiming CCA reduces your ‘cost base’ for the property.  This results in a higher Capital Gains tax when you sell the property.
  4. If you claim CCA you are depreciating for tax purposes the buildings on the land. The land does not depreciate.
  5. If you claim CCA (depreciate your buildings) you will reduce your taxes now, but you will pay more tax when you sell the properties, as you will have to ‘recapture’ the previously claimed CCA.  This means that you are essentially deferring the taxes due to a future date, and you might also be paying at a rate lower than what you would pay without depreciating.
  6. If you claim CCA the taxes currently saved are taxes on income whereas the future taxes are on capital gains, and there may be a difference in rate between the two.
  7. Consider what your likely income will be at the time you sell the properties, and how that might impact your tax rate then as compared to now.
  8. When you claim CCA you thereby reduce your income from the properties on your tax return.  Lower income can have a negative impact on your ability to obtain further mortgages from some lenders. This is a very important consideration, so consult on this piece with both your tax professional and your Mortgage Broker.

These tips are what I have learned over the years from various Canadian Tax Accountants.  Your own situation is always unique, so always seek out professional advice before you make tax decisions.

Articles containing more information on this subject below:

https://turbotax.intuit.ca/tax-resources/taxes-and-rental-properties/dos_and_donts-cca-for-rental-property-explained.jsp

http://business.financialpost.com/personal-finance/mortgages-real-estate/tax-tips-for-investors-clearing-up-real-estate-confusion

What if I move back in to the property later on?  http://www.mnp.ca/en/posts/changing-your-principal-residence-into-a-rental-property

12 Feb

Rental Property Tax Planning: Conversion of home to rental status

Income Tax

Posted by: Garth Chapman

More and more often in the last decade or so when Canadians buy or build a new home they have been electing to keep their existing home and convert it to a rental property. Now not all homes make good rental properties, either for economic reasons or due to location or property type, but in many cases this can be an excellent way to further one’s financial independence goals, and/or retirement planning. A good rental property, once paid off, can often produce as much or more cash-flow as your CPP pension payments will generate. So one or two of these can make the difference between a frugal retirement and a rather more enjoyable one.

So for those thinking along those lines, there are a few key things to understand, so I have compiled a few good articles below to help with that.

You will first need to get a proper valuation of the property, as any gain up to the point of conversion to a rental, is tax free. As the below MoneySense article notes “…to convert one home into an income producing property by renting it out. You will trigger capital gains taxes but only from the time you started renting out the property to the time you actually dispose of the property. That’s because the CRA considers the change in the use of the property as a deemed disposition—tax talk for a change in use of a property is the equivalent as a sale at the current, fair market value.” Can you avoid capital gains tax?

CRA website re ‘Change Of Use’ http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/rsdnc/chngs/menu-eng.html

On designating a principal residence http://www.taxplanningguide.ca/tax-planning-guide/section-2-individuals/principal-residence-rules/

On Depreciation (CCA) https://turbotax.intuit.ca/tax-resources/taxes-and-rental-properties/dos_and_donts-cca-for-rental-property-explained.jsp

This one contains information on Renting Out A Portion Of Your Home http://deanpaley.com/renting-your-home-can-be-taxing/

Good overview here http://www.taxtips.ca/personaltax/propertyrental/changeinuse.htm

This article also discusses Terminal loss rules, meaning what you should look for if you sold at a capital loss. http://www.taxplanningguide.ca/tax-planning-guide/section-3-investors/rental-properties/

12 Feb

Thoughts on Minimizing Income Tax due on Your Rental Properties

Income Tax

Posted by: Garth Chapman

Couples who own rental properties will often have different income levels which can result in sometimes vastly different income tax rates. So when reporting the Net Rent Income on your tax return most will simply split the Net Income 50/50 as that is the usual ownership split. But are there ways to split the income in order to have more of the income in the hands of the spouse with the lower tax rate, and thereby save money? I think there are.

One very simple method of achieving some savings is to pay from the gross rents received a Property Management fee to the person who manages or does the larger share of the property management. I find that this is often the person with the lower income, as often they simply have more time to devote to looking after the rental properties.

Another method is to have an ownership agreement in place describing a beneficial ownership split other than the usual 50/50. Some investors have different percentages of ownership for Appreciation vs. Income & Expenses. Properly documented, this is fine.

Disclaimer: I am not a tax professional. So, as always, talk with your Tax Preparation professional to determine what will and won’t work in your unique case.

12 Feb

RECA Changes How Suited Properties are Listed on MLS

Investment (Rental) Properties

Posted by: Garth Chapman

Of interest to property investors who want to buy Suited Houses in Alberta will be a significant recent change to procedure made by RECA as a result of a recent lawsuit by a buyer of a property that was deemed to be improperly or incompletely described.

The result of all this is that REALTORs® are essentially now almost virtually unable to describe a house as containing a secondary suite.

An article by Edmonton Realtor James Knull describes why and how Realtors are now required to list properties in Alberta that have suites when it is not a legal suite.

Read James’ article here

12 Feb

Beneficial Ownership – a route to financing investment properties

Income Tax

Posted by: Garth Chapman

I have purchased well over 100 residential properties since 2002, and I learned early on that it is much easier to finance a property when it is held in your personal name rather than in the name of your Corporation, and this is especially so when dealing with new Corporations.  In fact these days there are fewer lenders willing to lend on rentals held by a Corporation, and those that do either require the Corporation to be a Holding Company, and others who require it to be an Operating Company.  And this list of lenders continues to shrink.

So I have used the concept of beneficial ownership to allow me to buy and hold properties in my name or my wife’s name In Trust for our Corporation.  To allow me to properly record this for each property, especially in case CRA came calling (and we were audited, and passed with zero changes to our tax filings) I had my real estate lawyer drew up a Trust Deed to clearly define that the subject property will be held by me ‘In Trust’ for our Corporation.  This means that the Beneficial Owner of the property is the Corporation.  The Beneficial Owner (the Corporation) must act accordingly, including the receiving of all revenue and payments of all expenses.  And of course it then follows that the tax reporting is handled by the Beneficial Owner (the Corporation) via its tax return as filed with CRA.  When the property is sold, the Corporation receives the proceeds of the sale, and is responsible for any tax on Capital Gains.

When you take out a mortgage in a Corporation you invariably will have to sign personal guarantees for the mortgage, unlike when done in your personal name. This means that if the mortgage goes into default and the bank forecloses, that the bank has the right to come looking to your other assets to cover for any shortfall they may have in proceeds they receive from the sale of the property.

If you do not already hold rentals in a Corporation I strongly advise you to get your tax advisers to weigh in on the implications of holding properties in a Corporation.  One thing to consider it that the net income derived from rental properties held by a Corporation is considered Passive Business Income and is therefore taxed at the highest rate.  Another consideration is the added complexity and costs associated with the Corporation, especially around keeping the books and filing tax returns.

IMPORTANT NOTE- Be sure to discuss this in detail with your professional Tax and legal advisers.  Each of us presents a unique set of circumstances, and as such, there is no one-size-fits-all recipe.

I have several template Trust Deeds for this, each specific to how many Title owners and Corporations are involved in the property.  Call or email me if you want to discuss this concept in more detail.

I hope this helps as you decide how to move forward in building your portfolio of investment properties.

12 Feb

Capital Gains Explained

Financial

Posted by: Garth Chapman

So what is a Capital Gain, as defined in Canada? Well, Duhaime’s Law Dictionary defines it here as follows:

Capital gain or capital gains is an accounting term but one with substantial relevance to tax law as jurisdictions are wont to tax capital gains when the capital asset is sold or otherwise disposed of, just as tax-payers would then seek tax credit or deduction in the event that, in lieu of a capital gain, the tax payer suffered a capital losses.

Therefore, to the extent that it is not expressly defined in a tax statute, what is or is not a capital gain has become a matter of judicial interpretation, often hotly contested as the tax authority seeks to capture transactions as capital gains, and the tax payer seeks to avoid the designation. The law reports contain complex decisions on the status as capital gains of lottery winnings, royalties, business income and many creative tax avoidance transactions.

In more simple language you have a capital gain when you sell, or are considered to have sold, what the Canada Revenue Agency deems “capital property” (including securities in the form of shares and stocks as well as real estate) for more than you paid for it (the adjusted cost base) less any legitimate expenses associated with its sale.

More on all this this MoneySense article with excerpts taken from it below:

How is it taxed? Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of $50,000 for instance, only half of that, or $25,000, would be taxable. For a Canadian in a 35% tax bracket for example, a $25,000 taxable capital gain would result in $8,750 taxes owing. The remaining $41,250 is the investors’ to keep.

The CRA offers step-by-step instructions on how to calculate capital gains.

How to keep more of it for yourself

There are several ways to legally reduce, and in some cases avoid, capital gains tax. Some of the more common exceptions are detailed here:

  • Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.
  • The sale of your principal residence is not subject to capital gains tax. For more information on capital gains as it relates to income properties, vacation homes and other types of real estate, read “Can you avoid capital gains tax?
  • A donation of securities to a registered charity or private foundation does not trigger a capital gain.
  • If you sell an asset for a capital gain but do not expect to receive the money right away, you may be able to claim a reserve or defer the capital gain until a later time.

If you are a farmer or a newcomer to Canada, they are special capital gains rules for you. The specifics can be found at the CRA website.

For more specific questions and stories on this topic, see the MoneySense section on Capital Gains here http://www.moneysense.ca/tag/capital-gains/

18 Jan

On Protecting Your Home or Vacant Rental Property in Winter

Home Ownership

Posted by: Garth Chapman

If you are a Snowbird, a Landlord, or just want to safeguard your home during a winter vacation, read on. During extended (more than a few days) absences you want to ensure your home or rental property is protected from damage or loss, and also that your property insurance won’t be void during extended absences or vacancies. Before you leave a property vacant in winter (your home or a rental) talk to your insurance broker and find out what they require to ensure your property will be covered if something bad happens. Many insurers require someone to go into the property weekly to confirm all is well. If you have a monitoring system let your Insurance Broker know as it may help you with this.

Above all SHUT OFF THE WATER SUPPLY and DRAIN the water lines. To do this go to the main water line usually in the basement and shut it off. The open all taps and flush all toilets a couple of times. Then once the lowest tap has stopped trickling water shut the taps off starting upstairs and working your way down to the lowest one. I have 2 friends who have recently suffered losses at rental properties due to water leaks or freezing, and in both cases this step would have prevented the damage.

We have a complete home automation and security system in our Alberta home that alerts us to virtually any abnormality in the home (even our hot tub water temp is monitored). It also allows us to control the home while we are away, including security settings, smoke detectors, temperatures, lighting, cameras, doors and more.

Monitoring a home does not have to be complex or expensive. There are online systems like Vivent, or more sophisticated connected systems like Control 4 to name but two. Cameras that you can monitor online are inexpensive and easy to install. Wifi thermostats can be connected to your wifi network and allow you to monitor and set the temperature in your home using an App on your smartphone. We have one of these in our winter home in Arizona. It is a Honeywell thermostat we bought at Home Depot a couple of years ago for $100 CAD. Now they are around $129.

There is a new technology just coming of age called IFTTT (If This Then That) that allows users to control SmartThings of all types. If you’ve read about the Internet of Things you probably know about this. It might just make home automation easy and inexpensive for anyone. Here is an article describing how IFTTT is creatively powering the Internet of Things – http://www.dailydot.com/technology/ifttt-internet-of-things/

SmartThings is a technology that allows you to connect a huge variety of third party devices via its Hub and App. https://www.smartthings.com/how-it-works

Here is a pretty comprehensive review of home automation software and systems and devices http://safesoundfamily.com/blog/best-home-automation-software-products/

Travel safe!

19 Jul

If you purchase a new or substantially renovated residential rental property from a builder you may qualify for the GST/HST new residential rental property rebate.

Investment (Rental) Properties

Posted by: Garth Chapman

You generally pay the goods and services tax/harmonized sales tax (GST/HST) when you purchase a new or substantially renovated residential rental property from a builder. If you are the builder of a residential rental property, or if you make an addition to a multiple-unit residential rental property, you are generally considered to have made a self-supply and to have paid and collected tax on the fair market value of the rental property or addition at the time that you lease or occupy the first unit of the property as a place of residence.
As a residential landlord, you cannot claim an input tax credit (ITC) to recover the GST/HST paid or payable on the purchase of a residential complex or that you accounted for on the self-supply of the complex because long-term residential leases are exempt from GST/HST. However, you may be eligible to claim the new residential rental property (NRRP) rebate for some of the GST or the federal part of the HST if you…read on here Which rental properties qualify for the GST/HST new residential rental property rebate?

RC4231 GST/HST New Residential Rental Property Rebate