Setting up your real estate business

[Stephen Michle]

I came across a great article about an accountant who is also a real estate investor. He gives great advice on setting up your real estate investing business. I will have to read it over to really but some pieces together. What do you guys think ? The link is below, check it out.

http://www.businessgrowthstrategies.ca/448/kelowna-accountant-tips-on-real-estate-investments/?utm_content=buffer9b453&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

[Roy N.]

Gary,

I'm going to have to respectfully disagree with some of your above post:

Originally posted by @Gary McGowan:

Of the 100s of Canadian Real Estate Investors that I know, have worked or partnered with not one of them have their Real Estate Business's set up with a Three Tiered system. American trainers will come to Canada and preach this system then train their Canadian trainers to do the same thing.... Don't listen to them and here's just a few reasons why.

While I agree that a multi-tiered corporate organisation is not necessary, especially when starting out ... if your name is Bronfman, then perhaps you would start here. Where I do disagree is that a holding company (corporation) will never be needed.

It you plan to only own one, two, or a few smaller rental properties, then holding them in your own name is probably easier; though not necessarily better. Holding properties in your own name can be advantageous when first starting out as you will be able to deduct {some} expenses against your other income, if your operating expenses exceed your rental income {though one could argue means you bought the wrong properties }. If your primary income is low, then having the rental income taxed in your hands will result in less taxes due than paying the full corporate tax rate.

However, if you have a good income from your employment, then there is little advantage to having the rental income taxed in your hands. Furthermore, holding properties inside a company allows you to control when, and to some degree how, the retained earnings are brought into your income. Having properties in a corporation also provides a means to income split with your spouse and other family members {Note: there are some unfavourable rules here when paying dividends to minor children (the Kiddie Tax)}. If you plan to grow your real-estate holdings beyond one, two, a few small properties, then a corporation can be part of succession planing {here is where a tiered corporate structure and, possible, trusts, may come into play}.

This is more a function of the lender and the quality of the deal than whether the property is being held by a corporation or natural person. We presently have five residential (1-4 unit, up to 6 at RBC) mortgages with Big-5 banks. The properties are all corporate owned and the downpayment was 20% in all cases. We also have commercial mortgages with a Big-5 banks where the down payment was only 15% in one instance.

Now, some lenders have rules - which appear arbitrary and silly when first experienced - around lending to corporations. While we have never encountered an institutional lender who will not lend to corporation, they likely do exist. What we have encountered are:

• Lenders who will not hold a HELoC with a corporate borrower and others who will simply not entertain HELoCs on rental properties;
• Lenders who will only allow a corporate borrower to refinance a property to 75% and others who place this restriction on rental properties in general;
• Lenders who will not allow a corporation and natural person to be co-borrowers on a mortgage or to hold title as joint tenants or tenants in common on the mortgaged property. In some instances, a bare trust, will get you around this situation.

Not quite true. While it is true you will pay more for corporate tax filing and production of unaudited third-party financial statements, it is not orders of magnitude greater than what you would pay for a complicated personal tax preparation. If you do your own bookkeeping and have your ducks in a row when you go to your accountant, then the costs are reasonable ... and they are also a business expense.

When you are first starting out and the corporation has no assets or a proven revenue stream sufficient to cover its liabilities, institutional lenders are going to ask for one or more directors of the corporation to give a personal guarantee on mortgage notes. This is a risk mitigation {read: CYA} move on the part of the lender to provide recourse on the loan; they do the same with any small business who wants a loan or operating line of credit. As the corporation grows in size and as your deals grow in size, the expectation of personal recourse by the lenders actually diminishes. With the exception of Québec, the laws involved here are fairly uniform across the country - but as Gary pointed out, there are differences.

Here we do agree. Meet with corporate/real estate lawyer and accountant to plan for your future. Your end-goal may require a multi-tiered corporate organization and family trust, but you will not need to have those in-place on day one. While you may start out holding your first property in your own hands, your up-front planning will provide you with a roadmap to ensure you do not inadvertently do something that will prohibit you from - or make it extremely expensive for you to - evolve your ownership in the future.

In any province, the transfer of property from one individual (natural or otherwise) to another (with certain exceptions around transferral to a spouse) is deemed a sale at FMV and is a taxable event. This is where your upfront planning comes into play - if you have planned for this eventuality, you will have taken measures to mitigate your tax exposure at this transition {i.e. you would not have claimed CCA on properties you held personally}.