Key Points:
- This webinar is targeted for professionals who want to make real estate investing part of their portfolio, either for income reasons or for diversification
- An investment property has different tax implications and mortgage qualifications than a traditional home, such as capital gains exemptions and down payment requirements
- When investing in pre-construction, a mortgage is not required until the building is registered, which can take years
Investing as a professional
I was recently part of a webinar hosted by Lawrence Mak, a Mississauga-based real estate broker, and joined by Kha Dang, a chartered account from Dang & Associates. We discussed investing as a professional, including when to invest, and investing in real estate and pre-construction. Join us for the full conversation.
Lawrence Mak and Kha Dang’s contact info:
Lawrence Mak:
Phone number: 416-276-4895
Website: https://www.lawrencemak.com/
Kha Dang:
Phone number: 905-232-0722
Website: http://dangassociates.com/
Don’t feel like watching? Find the full transcript below!
Lawrence: [00:00:02] Great, and so I guess I’ll just start it as … Yeah, I guess I’ll start here. Hey, everyone, it’s Lawrence Mark here, real estate broker out of Mississauga, and I’m here with two amazing guys: Chris Molder from Tridac Mortgage, and Kha Dang from Dang and Associates. Hey guys.
Kha: [00:00:26] Hey, Lawrence.
Chris: [00:00:28] Hey Lawrence.
All about professional investing
Lawrence: [00:00:28] Nice. Thank you very much for joining me. Today, we’re going to have a panel here to talk about investing for professionals. I get that question a lot from different professionals and clients who are always looking to invest. And I thought, you know, instead of keep referring people over to Chris about the mortgage and keep referring people to Kha about whether you want to put into a corporation, I thought, we just have everybody together. Yeah, well, dog back there, not a problem. So, first of all, just wanted to introduce myself. So my name is Lawrence Mak. I’m a real estate broker out of Mississauga, and I service the Toronto area. Kha, can you please quickly introduce yourself?
Kha: [00:01:07] Sure. My name is Kha Dang and I’m a CPA/CA here. My practice is located in Mississauga, and we specialize in servicing, providing accounting, tax and assurance services to owner-managed businesses.
Lawrence: [00:01:23] Awesome. And Chris?
Chris: [00:01:26] My name is Chris Molder. I’m a second generation mortgage broker based out of Toronto on the Danforth. And I also am the president of a private mortgage investment corporation. And it’s a family business that we’re very proud of running for the last forty five years on the Danforth.
Lawrence: [00:01:46] That’s awesome. You know, I have a lot of family and friends and clients that all work with both of them, so you’re in good hands if you choose either of them. So just a quick idea about who this webinar is ideal for. So typically speaking, we’re going to be, I guess, talking if you’re a professional family who makes more than one hundred and fifty thousand dollars per year and you want real estate as part of your long term portfolio, either for diversification or to make money in the long term. And the main reason for that is because tax mitigation is part of the equation, and we’re going to talk about that later on about everything. In general, there’s a lot of detail in each of these individual topics. So although we are going to briefly gloss over the different topics, if you need specific help, you really should contact the professional and talk in more detail about your specific situation. So these are the four things are going to be talking about today. The questions are going to be, whether you should even invest at all. We’re going to talk about investing in residential resale. We’re going to talk about investing in pre-construction. And lastly, we’re going to talk about whether or not you want to invest with a corporation.
Should you invest at all?
Lawrence: [00:02:56] So the first question is whether you should invest at all. And the main reason why I bring this up is because there’s a few other considerations. It’s not just about looking for real estate and then just investing in it. There’s a lot of other considerations you have to think about, and a lot of them has to do with tax. So I want to pass this off to Kha, if you can quickly give us an understanding of what the principle residence tax exemption in Canada.
Kha: [00:03:20] Yeah, yeah, sure. So if you know, if you live in your own home and so and when you sell that home, the capital gains on the principle residences, there’s no tax on that. So there’s an exemption that allows for the family or the the owners to qualify for a capital gains exemption.
Lawrence: [00:03:43] Great. So basically speaking, you know, normally you have to pay tax on like, everything, but if you own your own home and you live in it, then you don’t have to pay tax on it. So then very quickly, the things I want to talk about here is that a few people have came up to me and wanted to look at investment property, and, but they’re actually renting their existing home. And my first suggestion would be maybe it makes sense to buy your own home instead of trying to buy an investment property while renting a home. So for tax purposes, that might be a better idea. And secondly, in terms of upgrading, this is another thing that, from my personal philosophy, I do feel that it makes sense to upgrade your home instead of thinking about another investment home first. That’s because, again, depending on your tax bracket, the principle residence tax exemption is very good in that you save on the taxes, so you might as well have a bigger home that appreciates faster and tax-free in a nicer location so that your family can enjoy it. So that’s quickly about whether you should invest at all.
When to invest in residential resale
Lawrence: [00:04:43] And now let’s talk about when you actually want to invest. So let’s talk about investing in residential resale. First of all, what is residential resale? So residential resale is really buying over somebody else’s home. So in general, it would be like buying over somebody’s condo and then renting it out. That’s the typical process that somebody does. So if that was the case, they were doing it. Let’s pass it off to Chris. What are you looking for in terms of to qualify for a mortgage that may or may not be different from qualifying for your regular house?
Chris: [00:05:15] Yeah. So when, in any credit application a mortgage, there are really four cornerstones of any mortgage application, and that is the income of the borrowers, the liabilities of the borrowers, where the down payment money is coming from, and then the fourth cornerstone is the property itself. Is it a residential home? Is it a condo? Do we have to consider condo fees? And the whole purpose of a mortgage application is to determine the ability of a borrower to cash flow a property or carry a mortgage debt, that they have sufficient income to carry mortgage debt. In general, I’m going to generalize here and say that based on current interest rates, a borrower will qualify for roughly four point seven five to five times their household income. So to translate that into more practical terms, per hundred thousand dollars of income, a borrower can qualify for somewhere between four hundred and seventy five thousand to five hundred thousand dollars of mortgage debt. When it comes to applying for a mortgage on a rental property, one thing to be aware of is that you are required to buy with at least 20 percent down payment. That’s one requirement as opposed to if you’re buying a home for yourself for personal use, provided that the purchase price is under a million, you can buy with as little as five percent down. So 20 percent down. And then in addition to that, the obvious question is how does the rental income factor into the application? And this, we won’t have enough time to go through all the different scenarios. But in general, lenders will credit anywhere between 50 percent of the rental income to 80 percent of the rental income. They’ll add that to your income on the mortgage application to help you qualify.
Tax and capital gains implications
Lawrence: [00:07:27] Awesome. So that’s how the rental income and qualification for mortgage occurs, and then next question is more about capital gains and like, how tax is treated there. So I would like Kha to just give your opinion about that.
Kha: [00:07:42] Ok. Sure. You know, if, if you’re buying a rental property, obviously when you sell the property, it results in a capital gains and there is taxation on the capital gains. So there is, if you qualify for the capital gains exemption, it’s not a total capital gains exemption, it’s a 50 percent capital gains exemption. So the inclusion rate is 50 percent. So 50 percent of the capital gains gets added to your income in the year you sell the property. And if you, if both partners or both spouses own the property, then you split it between the two spouses.
Lawrence: [00:08:24] Right, and then what about rental income? How does that factor into people who have an investment property?
Kha: [00:08:32] Yeah. So rental income, so the net rental income, so it’d be the gross rental income from the property minus all the related expenses resulting in the net rental income. So the net rental income then gets added to the total income of the, the owners at the end of the year as well. And again, if both spouses owned properties, it gets split to the two spouses. And then tax is added and then the results and the tax is calculated based upon the total income of the of the owners.
Lawrence: [00:09:08] Okay. So these are these are things that everyone has to, I guess, take into consideration when they’re thinking about doing an investment property, which is how tax input, the tax implications of owning a property and what to do during those years.
Investing in pre-construction
Lawrence: [00:09:21] So next, let’s talk about investing in pre-construction. So what is pre-construction, first of all? Pre-construction, just to give you an idea, is when you see the condos that are being built and then you put in a deposit today and then maybe three to four years from now, it gets built. So that’s what we mean by pre-construction or pre-con. And there’s a lot of different qualifications and different things that you have to think about for those types of investments. So let’s just start off with Chris. So how do you qualify for a mortgage for a pre-construction?
Chris: [00:09:53] Yeah. So the thing about pre-construction is that it has a very long timeline, a very long time horizon. Because when you go into a sales center, it’s just a drawing, it’s just a plan. The actual construction can take many years. Three, four, five years is not unusual. And the critical thing is to understand that the mortgage is not required until the building is registered, which is different than the building being complete. Because there’s something called occupancy, which is when your specific unit is done, you will pay occupancy fees and then once the condo corporation is formed, is when you can actually register a mortgage on it. So you have a very long time horizon. But one of the important things that you should be prepared for in pre-construction is providing a pre-approval. The builder will be very interested in determining that all of their purchasers can qualify for a mortgage. So in order to make a pre-construction purchase, you need to talk to your bank or a mortgage broker to ensure that you can get the required pre-approval to satisfy the builder.
Lawrence: [00:11:12] And typically, is that in the form of just, like, a letter from you, and then we go in and we go by the preconstruction.
Chris: [00:11:17] Correct. Yeah. Every, every builder is a little bit different. Some are happy with the generic letter from a mortgage broker or bank, and others will actually have a short list of specific lenders and specific information that is required on that pre-approval letter. So it really depends on a case by case basis.
Lawrence: [00:11:37] And so since mortgages isn’t actually due, does that mean in theory, I could put a deposit on many, many different condos and not have to pay for them yet until like five years from now?
Chris: [00:11:48] Yeah, I mean, it goes against the spirit of the pre-approval, of course, because you should technically disclose every time. But in theory it is possible to do that. And I mean, if you are concerned about the pre-approval and getting the financing, there are many investors that participate in pre-construction that buy the paper, buy the contract and then assign it before the building is actually built. And of course, over two or three years, the value may increase and so you can sell it for a higher price via assignment, provided you’re allowed to from the builder. And that way, you don’t actually have to close on it and don’t require your mortgage. So in theory, you are correct, Lawrence.
Tax process for pre-construction investing
Lawrence: [00:12:36] Okay, just curious. We’ll talk about assignments later. So that’s the qualification for the mortgage. And then how is capital gain treated if you just put in money for a deposit right now and five years from now, I own the place and then I sell it.
Kha: [00:12:52] So I guess that’s my question, right, Lawrence?
Lawrence: [00:12:54] Yeah.
Kha: [00:12:57] So, so pre-construction is actually quite a, you know, if you can believe it, it’s actually quite a complicated topic for tax. The reason why is because you’re not actually selling a property because you actually haven’t closed on the property yet. So this is where, you know, it’s probably worth another discussion at some other point. But in general, I just want to point out that you’re actually selling a contract and not an actual property. So there are definitely capital gains implications for that. Maybe, you know, the treatment could be considered capital gains or the treatment can also be considered as business income. And also, there could also be HST implications along with this contract as well, because you’re not actually selling a property, you’re actually selling a contract.
Lawrence: [00:13:49] Right. So so just to reiterate what it is. So we’re talking here about assignments. So so there’s two different parts with pre-construction. So first of all, you put in the deposit and then after it, you’re just waiting for it to be built, like four years later, kind of thing. In between now and when it’s being built, you can actually sell the contract to someone else who will just take over your contract, and that thing is called an assignment. So there’s two different things that we’re talking about here, one is like assignment in that you’re selling the contract to somebody else. And the other thing is actually closing on the condo and then maybe renting it out and whatever. So I guess, could you talk about the, I guess, tax implications if somebody closed on the property fully? And then now I guess, everyone says something about like, a one year wait period of renting it out before they sell it so that they could do it for capital gains. What are your thoughts on that?
Kha: [00:14:38] Um, so, you know, from from our practice there, from the law’s perspective, there is no, there is no specific requirements that you have to have to hold it for a year or two years or three years, right? But there is definitely a holding period test from our practice. We’d like to see people holding it for a couple of years because it’s, you know, if you want to get the capital gains exemption, then you know you’re supposed to be investing in the property, right? You’re not supposed to be flipping on the property. It kind of goes against the spirit of the law when it comes to capital gains, you’re getting, the 50 percent inclusion rate is supposed to be applicable to your investments, right? So but if you’re buying property after property and just holding it for a period of, a short period of time or no period of time and you’re flipping it, then it seems more like, instead of an investment, you’re really doing business and selling it. And then so it results in definitely different tax treatment to these transactions.
Lawrence: [00:15:49] Yeah, so to quickly go through the capital gains. An example of someone told me before was that if you were selling Christmas trees versus apple trees, right? So Christmas trees, you just grow Christmas trees, and you sell the tree, and that would just be taxable normally. But an apple tree, you’re actually selling the apples as part of your business and then later on your selling the apple tree, and then that would be OK for capital gains. Is that roughly how it works?
Kha: [00:16:11] Yeah, definitely. That’s not a bad analogy, for sure.
Lawrence: [00:16:16] Well, thanks, heard it from somebody. So anyway, yeah, so there’s definitely a lot of different issues with pre-construction, especially if you’re going to be assigning it with the tax treatment, especially with HST and with all the different ways they’re treated. So definitely you want to talk with Kha about that.
Investing with a corporation
Lawrence: [00:16:33] And lastly, we want to talk about and we’re talking about investing with a corporation. So this is another can of worms that I’m sure we could spend hours and hours on. But let’s just quickly, you know, Kha, why would somebody want to buy property with a corporation versus by themselves?
Kha: [00:16:52] So, you know, we get this question all the time. So obviously with accountants and lawyers right, and I guess it depends, it’s very case specific, but just to generalize where we see our clients investing in corporations is is when the family income is, is quite high, when they’re, you know, at the top tax bracket. And so it, you know, it makes more sense to, so it doesn’t really have a big impact when it goes inside a corporation. So when investments goes inside a corporation, the rental income get taxed at the highest tax bracket. So there is really no tax advantages to investing in the corporation, but there are other factors to consider. One of them being for estate planning reasons, putting it inside a holding company. And then that would be a good way to plan for estate transitions in the future.
Lawrence: [00:17:52] Right. So maybe setting it up as some type of holding company or just buying it directly or whatever. But either way, you should be talking with Kha about the best way of setting that up. And in terms of the mortgage, how exactly does qualification for mortgage happen in terms of corporation versus personally?
Chris: [00:18:10] Yeah, it’s a, it’s a very niche area. Not every mortgage lender is actually comfortable lending to a corporation, so you really have to discuss with your bank or mortgage broker to navigate your way around, to figure out what the best mortgage solution is going to be. What I can tell you, though, is that the, while the corporation is named on title for the benefits that Kha explained, the corporation in this case, if it’s a holding code doesn’t have any income. So the lender is not lending necessarily based on the strength of a corporation that was formed just to hold real estate. They’re still lending based on the strength of the borrowers. And so the application for any mortgage that involves a corporation is still focused entirely on the personal covenants of the guarantors of the of the owners of that corporation. So anybody who is wholly, who owns that corporation also has to go on mortgage and provide their personal covenant as well. So they’re not necessarily on title, which has tax implications that Kha is talking about, but certainly they still have to qualify for that mortgage based on their personal income and liabilities.
Lawrence: [00:19:44] Great. Well, that basically covers everything I wanted to cover today, thank you very much for answering those. Does anyone have anything else to add about either four of those? Chris, in general?
Chris: [00:19:55] No, I think obviously in a city like Toronto where real estate has performed so well, it’s very popular to pursue investment opportunities in real estate and there are exciting opportunities. But we’ve also seen, and Kha and Lawrence, I’m sure you have personal experiences as well of people who get into trouble. So you do need some good guidance around you and a good team around you, and just make sure you’re you’re getting professional advice, whether it’s from us or anybody else in your circle. Do seek the guidance of professionals.
Lawrence: [00:20:35] Excellent. That’s great. And Kha, anything else to add?
Kha: [00:20:38] As you say, in our practice right now, we’re seeing a lot of, you know, definitely a lot of assignments. So I just want to let everybody know just to be careful. Please definitely be careful with those assignments. They are tricky and so definitely do try and seek help with those. If you’re definitely planning on on selling the assignment contracts, please do seek professional help. Definitely from the broker and from the accountants as well.
Lawrence: [00:21:10] Excellent advice. I’ve heard some very bad advice floating around in terms of, oh yeah, you just, you know, get the assignment and flip it and you don’t even have to declare it as income or whatever. And you know, things like that. It’s like, just make sure you have the right advice from the right professionals just so you don’t get any trouble down the road. Anyway, thank you very much for joining me, gentlemen. So just as a wrap up, my name is Lawrence Mack, a real estate broker in Mississauga and a service real estate around the GTA. And Chris?
Chris: [00:21:40] I am Chris Molder, mortgage broker off the Danforth. I believe here on the screen you have my phone number. You can also Google me. I’m very transparent, very easy to find and look forward to talking to you.
Lawrence: [00:21:54] Excellent, and Kha?
Kha: [00:21:56] Thanks Lawrence, for inviting me to the panel. I really appreciate it. Again, I’m my name is Kha Dang. I am from Dang and Associates CPA. And if you have any questions regarding taxes for investments in real estate, please give me a shout, and I’d be happy to answer any questions you have.
Lawrence: [00:22:15] Sounds perfect. Thank you very much. Bye, everyone. And done.
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