Category: Real Estate

Dan from Toronto wrote to ask:

I noticed you’ve purchased an investment property that you rent out. I’ve recently purchased a new home, re-financing my existing condominium to help pay the downpayment on the new home, and also renting out the condo. The rental income from the condominium covers quite evenly the operating cost of the condo (essentially – it carries itself, which was my goal from outset).Now in speaking to an accountant, he’s telling me I should NOT have the condo in my name, that I should either incorporate, and transfer the unit to the corp (thereby resulting in Land Transfer tax), or transfer it to my spouse. Others are telling me the accountant is nuts, and that I’m fine leaving it my name and simply claiming the rental income as just that, rental income, on my tax return, and write off the interest expense as well.

Wanted to quickly ping you to determine whether you have incorporated or have all your investment property in your name? ie: rent cheques go to your name? or 123456 Ontario Ltd. etc. The accountant says that since I re-financed my principal residence and put that money into my new residence, that this is a bad thing. Others say hogwash to that! 🙂 Not sure who to believe at this point, but wanted to hear your take.

I have a condo I rent out (which is in my name, NOT in a corporation) and I’m a silent partner in owning a building (which IS a corporation, which I own 50% of).

Whether it would be worth putting the condo in a corporation or not would depend on your networth, your marginal tax rate, your risk threshold and how much income the condo is making. To get the taxes done for a corporation costs about $1K / year, so that’s going to come out of your pocket if it’s breaking even right now. Corporations are taxed more favorably, so the income would be taxed at the corp rate (25%) if you incorporated, or at your marginal tax rate if you didn’t.

Assuming you have a marginal tax rate of 40%, it would make sense to incorporate if the condo made more then $6,667 PROFIT / year (since you’d have a tax savings of 15% from incorporating, but would have a fixed cost of $1000 for having the taxes done). Since your current profit is $0, I’d be tempted to leave it in your own name. The other advantage of incorporating is to shield yourself from liability. Say your tenant tripped, broke his back and sued you for 1.5 million. If you actually have 1.5 million, you could lose everything (and it might be worth $1K / year to avoid this). Incorporating would make the rental unit a separate legal entity, and in a worst case scenario your loses SHOULD be restricted to the condo itself. I say should because its possible to “pierce the corporate veil” and make the owner liable (I have no idea how this works, just that its possible). Its also possible to get insurance as a private owner to protect against things like this.

The fact that your accountant is suggesting you transfer it to a corporation OR your spouse sounds like he’s thinking that it’s better to declare the income under someone who is earning at a lower marginal rate then you are, but it’s weird since the condo is breaking even (there isn’t much to declare).

I’d tend to side with your friends and say your accountant seems to be giving strange advice. I’d try to get a clarification from him, and if he can’t explain his thinking to you, perhaps consider finding a new accountant (I’ve used 2 accountants and was dissatisfied with both of them). Telly makes a pretty good argument that you’re best figuring out your own taxes, and just going to accountants to get specific questions answered.

Remember that the PRINCIPAL portion of the mortgage ISN’T deductible (you’ll pay tax on this at your marginal rate, as if its income), so if a reasonably large portion of the mortgage payments are going to the principle (i.e. if this is approaching $7k / year) then it would make sense to get it in someone else’s name (as your accountant suggests). It would also mean that you’re doing far better than “breaking even” (which would be a good thing 😉 ). When you pay down the principal, you put equity into the property, which is almost as good as money in the bank (and is taxed accordingly).

The re-financing to buy your new home MAY have caused problems with the rental (when you re-financed it to take money out, the interest on the money you withdrew is no longer tax deductible since you’re using it for personal reasons – buying a house for you to live in – and not for investment purposes). Who’s name the condo is in wouldn’t affect this though (unless the view was that you could make it deductible again by selling it to your spouse or your corporation).

Your accountant MIGHT be suggesting this because he wants to earn the $$$ for setting up the corporation and for doing its taxes each year (which would motivate me to find a new accountant, you don’t need people to make bad recommendations for you to generate fees for themselves).

Dan responded and said:

My lawyer gave me very similar advice to yours, his words to me were “I don’t see the benefit of incorporation for you, since you would reduce your income on the condo to zero in any event by prepaying your mortgage, thereby eliminating tax liability whether the condo is owned by you or a corporation.”

I think based on the advice I’ve received from yourself and numerous others, I’m better off doing my own taxes next year.

We covered a lot of ground on this topic, and I’m certainly not up on all the relevant laws (tax and corporate). If anyone has more information (or knows that something I wrote is incorrect), please post a comment!

One of the things every “Starting With Real Estate Investing” book or information source says is to get insurance. Obviously having your investment burn down or getting hit with a multi-million dollar lawsuit would suck. I’ve written before that I’m not a huge fan of insurance (and I really believe if you start buying everything an insurance salesman offers you you’ll be in the poorhouse soon). HOWEVER, insuring against catastrophic loss is what you DO want insurance for. The insurance companies can make money in the aggregate, and you can avoid potentially devastating misfortune.

As I was completing repairs, I started calling agents wanting to buy insurance for the condo. With each one, the conversation went the same way. I’d tell them I’d bought a condo as an investment property, and wanted landlord insurance. They’d ask me who provided insurance for my primary residence. I’d tell them I rented, and didn’t need insurance for my residence, then they’d tell me they couldn’t sell me insurance.

It was very odd.

I’ve had a very few occasions in life when someone just flat out refuses to sell me something that they seem to be offering for sale and it throws you for a loop. I don’t even get angry, just very confused. I asked them who I should be calling to purchase insurance from, if they couldn’t sell it to me, and each of them said they didn’t know.

Finally I lucked out (after calling about 10 agents) and found someone who seemed to understand his business a bit better. He told me he couldn’t sell me insurance for my condo UNLESS I bought tenant insurance too. No problem I said (at this point I was desperate). I ended up getting full coverage for both residences (I’ll never use my rental insurance) for $40 / month, which seems very reasonable to me.

The morals of this story are:

1) Persistence pays off

2) If you want to get insurance for an investment property, get insurance for your primary residence as well (whether you want it or not) to make your life easier

3) Stick with people who know their business / do your business well. The insurance agent who sold me the right product is going to get first shot at all my future business.

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 8 – Condos and Taxes.

Several months into the Search

After a few months of searching for a house, what have we learned about ourselves and what compromises are we willing to make in our quest towards home ownership?

It has definitely been a learning experience as we grow more comfortable with the market and narrow down the neighbourhoods. We are only starting to accustom ourselves to the dizzying whirl by which houses are bought and sold downtown. The majority of houses are sold within a week of being listed. A day or two can mean losing out completely on a house. Oftentimes we were not quick enough to even visit a house before it was sold. Photos while useful, are not always accurate and do not replace an in-person visit. We also find it stressful having to decide on a house within just a couple of days of seeing it.

My intention of taking a practical approach to the house hunt seems to have flown out the door. Hubby and I have had strongly positive or negative reactions to the properties that we have seen. Other times, we have felt indifferent about a property which for us is not ideal considering the half million dollar price tag. Despite the quantity and variety of houses out there, we have not yet been able to match a house to our requirements and budget. I feel like picky Goldilocks trying to find a house that is just right instead of too small, too dark, too far, too much work, or too expensive.

While we recognize that it may be foolish, there are developing areas in large swathes of the city that my husband and I have discounted because they are too rough for our liking. Early evening “stroll tests” have helped us determine if we would be comfortable in a particular area. Some of the downtown areas undergoing transition are rather deserted in the evening and have rundown buildings popular with the homeless.

With our modest budget, is the search an exercise in futility? We are not ready to panic yet. Downtown is still realistic for our budget if we can imagine the potential of a fixer-upper. The trick is in finding the right house with an affordable amount of work. Our real estate agent has advised us to keep the neighbourhood in mind when considering renovations. In other words, don’t put more money into a house than the area is worth. Expensive finishes and renovations in some neighbourhoods will not be recouped when a house is resold, and thus should only be chosen for personal enjoyment.

Our friends have asked us if the over-inflated downtown prices are serving to change our minds about wanting to stay downtown. We have vacillated for months with the idea of moving farther out, but our forays out of the downtown core are showing us that a house is less important to us than staying downtown. Therefore we are definitely more open to condominium ownership than we were previously, but are not yet ready to take that route.

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 7 – A Close Call.

Condo Show

After a dismal period of viewing unappealing and expensive properties, we decided to attend the Metro Toronto Condo Show just to gauge our options. It seemed like a good way to learn about the basics of a condo purchase. And admittedly, a new or near-new development is appealing in that it would be maintenance-free and likely decorated in our style.

If we hadn’t already been aware of the target demographic for many of the new condos, the Condo Show was attended mainly by early 20-somethings and to a lesser extent, retired empty nesters. The show added little to our knowledge as we had already done some research. There were only a few condo representatives on hand, and they had little hardcopy information. The free condo magazine was useful, but much of the information it contained was already online as well. The majority of exhibitors represented flooring, closet and furniture retailers.

What we were able to take away from the experience was that the newer buildings tended to have smaller units. The luxury condos offered larger units and a more mature crowd, but had heftier prices. On the whole, many of the more affordable buildings did not suit us in terms of their locations in the Entertainment District, along the Harbourfront or in Liberty Village. Buildings in the neighbourhoods we do like are not necessarily cheaper than a house. The main advantage is that condos are move-in ready. Older resale buildings do seem to offer larger units so may be the route we choose.

Municipal Land Transfer Tax

It was with great anxiety and inevitability that I read about the approval of the municipal land transfer tax on October 22, 2007. The tax will be levied on Toronto home buyers and is paid in addition to an Ontario Land Transfer Tax.

Just what are the implications of the new tax? It comes into effect on February 1, 2008 and will work on a sliding scale according to the purchase price. Therefore, a $500,000 home would be taxed at three different tax levels.

The exceptions to the new tax are for homes purchased with a signed legal agreement by December 31, 2007 even if the closing date falls after February 1, 2008.

First-time home buyers receive a tax break by way of a $3,725 rebate for properties costing up to $400,000. The portion of the purchase price which exceeds $400,000 is still taxed at 2%. In effect, that means that first-time home buyers of properties costing less than $400,000 are exempt from the tax.

While conscious of the looming December 31, 2007 deadline, we are still at the mercy of market availability. After all, a house is too large a purchase to make rashly just to save some money.

It’s no secret that Mike and I aren’t big fans of real estate agents. A couple times when we’ve gotten together, it’s been clear that the value of agents is a running debate in the Pillars household, and I was delighted to throw my support behind Mike (at least when his wife was out of earshot).

Our general view is that while agents provide value (advertising and showing the house, providing referrals to mortgage brokers and lawyers, and helping explain some of the relevant laws on the seller side) it’s not worth 5% of the sale price. What we REALLY take exception to, if Mike will let me speak for both of us, is that they get a percentage of the sale price, which gives them an incentive to sell as quickly as possible, rather than to get the highest price.

Larry MacDonald wrote about the agent monopoly, and recently sold his house himself (without an agent).

As with many things though, there is another story. Part of the reason agents get paid so well on the sales that go through is that MANY of them don’t. Much as volatile stocks have a greater return, jobs with uncertainty of compensation (such as commission work), often pay better. An agent can easily have a run of bad luck, not make any sales (and therefore not make any money). Additionally, they have to put a brave face on it and not complain (since who would want to work with an agent who was struggling? We all want the best!).

The buyer’s agreement is another double edges sword. It’s an agreement that you’ll only buy from the agent you sign with (if you buy a property on your own or with another agent, they can sue you for part of the commission). Some agents try to sell this as a benefit to the buyer, which is insulting. HOWEVER, some buyers pull a dirty trick where they get an agent to help them find a house, then buy it themselves (or with a friend who is an agent), and cheat the original agent out of their commission. A rant on a real estate agents blog I found recently details her… passionate… reaction when she saw this happen on HGTV’s “Property Virgins”.

Speaking of which, my ex and I were ALMOST on “Property Virgins”. We wrote them a nice little e-mail (attached a picture) and they called us back. Unfortunately my ex spilled the beans about my rental condo, and they said I wasn’t a virgin (which kind of hurt) and we therefore weren’t eligible. In retrospect it might be a good thing, as the show probably would have been about us breaking up rather than buying a property :-).

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 6 – Week One with a agent.

As the weeks went by, the house hunt took us to a nicely renovated semi with rental potential. After taking a second look at the property, my husband and I decided to bid for the house.

Our agent briefed us on the offer process. A bank draft made out to the listing agent’s company for five per cent of the asking price was required to accompany our offer. We were to go in with our best offer as it would be a multiple bid competition. Our agent also recommended that we submit an offer free of conditions or it might not even be considered. Thus we chose to have a home inspection prior to the offer date. As we already had pre-approved financing, we were comfortable with omitting such a clause.

Four hundred dollars is not cheap, but was a small price to pay to evaluate a purchase that we would be paying off for the next quarter century. The home inspection was also a useful primer about home maintenance and helped in estimating the cost of various repairs. Mike and his wife warned us ahead of time that a home inspector cannot see through walls. Therefore insufficient insulation or shoddy construction could not be properly detected. I was fortunate that I was able to be present during the inspection, and that the inspector had a gregarious personality and welcomed my many questions. At the end of the inspection, I was taken through the house with the more pressing repairs explained. Most helpful was having monetary figures attached to the various repairs. I truly felt that it had been money well spent.

After discussing the home inspection findings with my husband, we decided not to bid on the house. In many ways, the required repairs were typical of an older house. We took the advice of the home inspector in deciding if we could comfortably afford to budget in the immediate repairs on top of the purchase price. While we thought the house was lovely, it was not nice enough to warrant the additional repairs which we would have to do before making aesthetic changes. It was near the top end of our budget already. We passed on this house without regret and learned that it had sold later that week for over asking.

Things we learned along the way

Termites have penetrated into the majority of the older downtown neighbourhoods, as the following chart shows.

Aetna, one of the largest pest control companies in the city, maintains a database of termite infestations. Anyone can call and ask if there have been live infestations on a particular street.

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 5 – The Search.

Of four houses that we were to view, two were unexpectedly taken off the market that day. In one case, a home owner’s spouse had died and she no longer wished to sell. The other house was inexplicably closed to further showings. I found out later that a buyer had offered to pay $80,000 over the asking price. Days on the market: four. The prospective buyer had submitted a “bully offer”, an offer which is submitted before the official offer day. Under this scenario, the seller had a very short time frame, perhaps only 24 hours to consider the offer. The listing agent usually informs the agents of clients who already seen the house, of their need to submit their bids immediately if they wish their offers to be considered against that of the “bully”. Because bully offers are often generous, with few if any conditions, they are often accepted by the homeowner who is happy to accept as much as s/he can for the house.

The first house that my husband and I were able to see with our agent was a three-bedroom semi. For $499,900, it was definitely a fixer-upper with dark rooms and a pervasive damp odour throughout the house. Although the wiring and roof had been recently updated, the house most certainly required an overhaul to be habitable.

House number two was one with which my husband and I fell in love. Ideally located for us location-wise, the house was immaculately renovated and even furnished in our style. Despite our attempts to overlook the current homeowners’ decorating style, we couldn’t help being influenced by the aesthetics. While it was well above our budget, the house was very reasonably priced for the neighbourhood and therein lay our dilemma. After an angst-filled day of crunching the numbers, we had to pass on the house. Our realtor had also been able to ascertain that two home inspections had already been booked, and thus there would be multiple offers on the offer date. As the house was already above our means, we would have been unable to compete. In the end, the gem of a property sold for $100,000 above the asking price and after only a week on the market.

The lesson we took from this exercise was to try to avoid emotional attachments and to judge a house more dispassionately. In the weeks ahead, hopefully something will turn up.

Read the next post in this series “A Close Call“.