How banks can help you build your business

Yesterday I had a call from one of the banks which holds a mortgage on a rental property we own. Branch manager asked if we write off interest that is paid (this is an income property after all) and because we do, paying more interest would help us pay less taxes, right? For rental business they have a special offer – take higher rate (for example 5% instead of 2.99%), pay more interest, write it off and they will give you the difference as a cashback. I am definitely brining this one up in my next conversation with my accountant!

Banks quite often offer you creative solutions to keep your business. Just a couple of examples they can help you save:

-         Transfer existing mortgage from the property you are selling to a new property. This can become handy if there are quite a few years left on your mortgage and you don’t want to pay discharge penalty. New mortgage can be for the same or larger amount. In order to take advantage of this offer both closings have to be in the same month.

-         Offer you line of credit with attractive interest rate (sometimes less than the rate they offer on mortgages!) instead of refinancing, especially if your plan to go to a new bank.


-         Set you up with an automatic cash withdrawals. That way your tenants will never forget to give you a check and you will save time going to the bank to deposit them.

Bottom line, build relationship with your bank, talk to them, have them call you with new offers. They want your business, help them build yours!

Why invest outside of large cities?

When thinking about buying a rental property for a long term many investors are naturally drown towards big cities.But way too often investors forget the most important factors – cashflow and ROI (return on investment). Let’s look at a few examples in Toronto. 

First one is a 2 bedroom condo. You might be lucky to find something for $300K and maybe even rent it for $2000 (unlikely but never the less). Your mortgage is $1142 (4% interest 30 years amortization, we will use it going forward), one month vacancy is $167 ($2000/12), $200 taxes and of course there is condo fee, say $400. So your income is

$2000 – ($1142 + $167 + $200 + $400) = $91

assuming no repairs need to be done (and there is always something). This adds up to $1092 annually or 1.8% with 20% down payment.

You probably have better luck with a house where there are no condo fees. Let’s say you found something in the outskirts of Toronto for $400K and you can rent a basement, not just house itself and get $2500 total income

$2500- ($1523 mortgage + $150 insurance + $250 vacancy + $300 taxes) = $277

Again with a house you are more likely to need repairs, but we leave it out of equation to be consistent. So we have 4.2% annual income with 20% down.

Not very impressive if you ask me. Of course many would remind me about property value increase, but I still don’t have my crystal ball and can’t speculate on this. And after all I’ll have to sell the property, pay capital gains and lose my asset to get that money. Aren't we looking at a long-term investment plan?

So what to do if you want to secure your money in a real estate but get high ROI at the same time? Look a bit further, not big cities. We recently acquired a duplex for under $100K in Sarnia which rents for $1300. So here is what we have:

$1300 – ($380 mortgage + $100 insurance + $108 vacancy + $100 taxes + $130 management fee) = $682

With 20% down we are talking 40.1% annual return or 10 times more than in the big cities. Notice that I pay 10% property management fee, so I don’t have to worry about broken toilets or finding new tenants. As you can see we have better returns and fewer headaches.

Of course there is more to this, but details of remote property ownership is  a topic for another article. Let me know if you are interested.

Best Practices When Setting Up Real Estate Investments

Today I came across an article by Ken Davidson an accountant from BC about corporate structure every investor should consider. This is the structure used not only in Real Estate investments but any business area. If you have inventory, if you have assets, if you deal with clients (what business doesn’t?) you are a potential target for law suit. This structure gives you maximum protection and tax benefits at the same time. Here is what Ken suggesting:

For many real estate investors that are purchasing apartments, commercial properties and multi-family homes I suggest a high level of protection from liability in a three tier system.A three tier system would consist of:

• Operating Company – Business operation
• Holding Company  – To building your family wealth
• Property Company – To hold each Complex

The operating company is where you have your day-to-day project management, and property management group – all your active business components are within this company. This is where your risk lies…if you do something wrong, it’s going to cost you. That’s why I often call this the risk company.

We first heard about this structure in one of the seminars about Real Estate few years ago when we were just starting our business. Of course we took it to our account. She like the idea of separating operating (active business) and company that holds assets (passive business) because they would have different tax rates and some other tax advantages. She even mentioned that this would make it tax beneficial for us if we decide to sell one of these corporations. But she couldn’t really understand why we need holding company in there.

So next we took it to our asset protection lawyer. He was very happy to see additional layer of protection between us and assets, making it harder to sue us but he didn’t see a real benefit of extra company under it. So our lawyer and accountant spent very entertaining 2 hours looking at different scenarios to optimize our money and help us safe it. They tried more and less complicated structures. But after all that time had to admit that this one is the best of the best.

So take it to the members of your Power Team, see for yourself what they have to say!

Are Credit Card Balance Transfer Cheques Good or Evil?

On March 4th Department of Finance announced a ban on unsolicited credit card cheques. You know, the checks you get with your credit card statement? The ones that promise you very low or no interest if you consolidate you debt on the giving credit card? These are the ones! The proposed regulations would require federal financial institutions to obtain consent of borrowers before distributing credit card cheques to a card holder.

Our government believes (and I am with them on this one) that receiving these cheques encourages people to borrow money without realizing that there are additional fees (like upfront points to be paid) as well as interest to be paid not only on this payment but other transactions on the same credit card and other ways for us to get into financial trouble.

Special offers from credit card companies can be very useful if you know what you are doing. For example, you might be paying much less interest than any other way, including mortgage (which traditionally is considered lowest in interest). If you decide to use one of these offers, make sure to follow these rules:

1. Know well how you are going to pay back this loan. This is the first and most important rule! As tempting as  low rate looks, you have to remember that is not permanent and if you don't pay it back on time, interest will increase to 18-21% (or in some cases even more). It's OK to use balance transfers to delay payment until project (like property renovation before a sale) is finished, but if you expect no income from this loan in the next 6 months, you probably shouldn't use it.

2. Do not use this credit card for anything else. Thought you will be getting a low rate on balance transfers, anything else will be charged at regular interest (18% and up) from day one. You are not paying any interest on a credit card transactions only if all outstanding balances are paid in full by due date. But as soon as you used a check (or transferred funds any other way) you acquired outstanding balance on which interest is charged. This means that any additional transactions only add to the card's balance with interest.

Also when you pay off part of the balance, payment will not be applied to the most expensive transactions. Different credit cards my have different rules, but at the end of the day they want you to keep paying interest and the higher the better.

3. Make sure that balance on your credit card is zero. For the same reason as above, you don't want to pay high interest on anything else other than balance transfer you are doing.

The smart way to fund your project is to pay for services using credit card, take advantage of interest-free period then transfer balance to another credit card that is used only to consolidate credit under low interest.

4. Check if there is upfront charge. This might not be a deal breaker, but you have to account for it. For example if there is 1% upfront charge and you need to borrow money for only 1 month, it's like paying 12% annual interest on top of interest they will charge later. However for longer terms, it might make sense

5. Check for how long the term will apply (usually 6 months max) and mark your calendar or set a reminder to pay balance off by this date. If you have multiple credit cards you might transfer balance again to another card and this will be considered paying off balance on original card.

6. Last but not least. Do not max out your credit card. Try to keep balance within 80% of maximum. This will help your credit score a lot!

Speaking of the new ban, doing transfers over the internet or phone is always a better idea than check because you control timing (when transfer will be applied) much better than through the mail. Bottom line with or without checks balance transfers can be powerful source of finance, but you always have to know what you are doing!

Now how long do you think we have to wait for these checks to stop coming? Just in a week after this ban was introduced I got two sets of them :(