Buying under a corporate name, pros and cons

As an investor, you may have been advised to put your investment properties in a corporate name.  There tends to be two primary reasons for this:

1. Income tax benefits: You can take a dividend income which is taxed at a much lower income tax rate

2. Limited Liability on you personally: If you were sued (ex: a tenant is injured on your property) or had a legal case against you as a landlord, it would be against the corporation and not you personally so it can assist in protecting your personal assets in this type of situation 

So the title of the property will be in a corporate name but you need to know that ALL lenders will require your personal guarantees on a mortgage.

Personal Guarantees: A personal guarantee means that even though the title and mortgage will be in a corporate name, the owners/directors (you as the borrower) are personally liable for loan to be paid. You cannot hide behind the usual corporate protection mentioned above. Should the loan default, the lender can pursue the corporation AND then you personally (and you assets) for full repayment and any default expenses.

The only time personal guarantees may not be required is if:

•      the property is underwritten commercially

•      the corporation is established for at least three years

•      the corporation can provide three years full financial statements and corporate tax filings that are strong

•      the corporation has a high asset base, and

•      the corporation has positive cash flow and consistent net profit

The key thing here is to remember that from the lenders prospective we are asking for the best of both worlds... we want residential discounted rates and terms but we want the tax benefits and limited personal liability of having the property under a corporate name.  More and more lenders are saying you can’t have both so decide where you want to be either residential or commercial? 

Our recommendation: There are still lenders allowing registration under a corporate name under their residential guidelines; however the corporation may have to be a real estate holding company as opposed to an operating company.  Be prepared that you may also have to increase your down payment depending on the overall application. 

And always remember to seek professional legal and tax advise as your situation might be quite different from others

TOP 10 negotiations techniques

There are probably as many books about negotiations techniques, as there are stars in the sky. Thought many of them have common core, every now and then I find something new or maybe not so new, but not used and forgotten. This week I came across an article like that and decided to create my List of TOP 10 negotiations techniques:

1. First and foremost, whoever starts is always in the less favorable position. In the Real Estate business seller has to make first move - name listing price. Set it too high and no one will be even looking at your property, set it too low and you risk not to sell for as much as you could, set it even lower and you’ll have bidding war without any clue how it will end up. This is exactly why one of the first most important qualities of listing agent is ability to recommend price that is just right.
2. Talk less. The one, who listens more, gathers more information and information is everything. By listening more you also give out less yourself. 
3. Start with asking questions other side wants to talk about, not necessary related to the deal. In big conversations people often mention bits and pieces that later can be linked to important facts. But more often they (myself including unfortunately) talk without realizing what they talk about.
4. Also on the conversation piece, flatter other side. This one is obvious. Any one is more likely to talk openly (i.e. share more information) with some one who is nice. 
5. Take an effective even theatrical pause. Many feel very uncomfortable when conversation suddenly stops and feel obligated to continue talking about anything at all, often they talk about things they shouldn’t. This is also very effective when your opponent announces their offer and you just say nothing in response. For some reason human beings first think that they’ve done something wrong and try to correct it. For example, if your opponent named a price, after a pause they will try to make it more attractive. Do this even when you are happy with what you hear and you will get even better results. And if you don’t – you never said “no”
6. Play dumb. This is such a powerful tool in so many ways! First of all no one likes to be outsmarted. We like to deal with less experience opponents. Sometime we will even feel so bad about taking advantage of this silly guy that we will give them more than normally would. 
7. By showing limited knowledge you get permission to ask questions others don’t, sparking conversation that sometimes leads to very interesting facts.
8.  Also pretended lack of experience gives you excuse to use my next favorite one - limited authority.  “I hope my wife likes this kitchen” or “I’ll have to check with my partner/investor” and other excuses that give you additional time to consider everything, as well as excuse to pull out if needed.
9. Ask for everything, especially for things you don’t want. When there will b`e time to trade or give-up something you have plenty to choose from. “I guess I don’t need snow blower if I can get my price”
10. Let them say no. If you don't like what you are offered, still name what you can go for, even if it's far off. Once in a blue moon other side will surprise you. And if they don't, you were ready to walk away any way.

What if market correction is around the corner?

New 2013 Year is upon us and we all want to know what is going to happen on the Real Estate market in Canada. In my opinion, no one can predict with 100% certainty where Real Estate prices will go in the future. Even the educated ‘experts’ can’t get it right… and they are always offering conflicting predictions.What if market correction is around the corner? Is it good or bad? 

First Time Home buyers 
If you’re a first time home buyer, a slight market correction would be welcome news for you. For now you can still get into home ownership with only 5% down, but since your maximum amortization is now limited to only 25 years, a drop in pricing is exactly what you’ll need to be able to get into this market. Plus in a better market, you would most likely have much more competition for the same house.
Conclusion: A market correction is a good thing for you. 

Current Home Owner - Moving Up or Downsizing
If you are a home owner and you’re looking for the right time to sell your house so you can buy another, you may be concerned that the price of your current home is dropping. But let’s take a closer look at that:Whether upsizing or downsizing, the key to remember in a downturn market is that the person selling their home to you is going through the exact same thing. In other words, if the value of your home dropped 10% so too did the value of the new home you are buying.In fact if you are upsizing you are most likely in a better position because more expensive homes drop in price faster, so you are likely to loose 10% on the sale of your smaller home but gain 15-20% priced reduction on the new bigger house.
Conclusion: In most cases out there, the net effect of a market correction is zero or in your favour. 

Real Estate Investor or Second Home Buyer
If you are buying Real Estate as an investment or as a second home, then this is the perfect market condition for you. When there are more sellers than buyers you have more room for negotiation. Also with the extremely high cost of property, it is difficult to find income properties that will cash flow without a substantial down payment.

Also if more people are selling, more people are moving into rent. Therefore, more clients for you, making your investment more profitable and easier to get a mortgage (with higher rental income)
Conclusion: You should be hoping for a market correction.

Current Home Owner With No Plans To Sell 
If the value of your house were to drop by 10% tomorrow, it would only be on paper unless you sold your house tomorrow. Since you have no intention of selling soon and you can still afford your monthly payments, it would be no impact on you. The truth is that Toronto area is a great place to live, work and play. In an established area with a good public-school district will hold its value.
Conclusion: A market correction may very well have no impact zero you.

Bottom line … market correction is not such a bad thing for most of us. Neither is continuing price growth, which we all enjoyed in the last few years. So whatever happens in 2013 take advantage of it and enjoy the New Year.  

Toronto Market Watch: December

Greater Toronto Area REALTORS® reported 3,690 sales through the TorontoMLS system in December 2012 – down 19.5% from 4,585 sales in December 2011. Total sales for 2012 amounted to 85,731 – down from 89,096 transactions in 2011.

The average selling price in December 2012 was up by 6.5% year-over-year to $478,739. The average selling price for 2012 as a whole was up by almost seven per cent to $497,298.

“The number of transactions in 2012 was quite strong from a historic perspective. We saw strong year-over-year growth in sales in the first half of the year, but this growth was more than offset by sales declines in the second half. Stricter mortgage lending guidelines resulted in some households postponing their purchase of a home. In the City of Toronto, the dip in sales was compounded by the additional Land Transfer Tax, which buyers must pay upfront,” said Toronto Real Estate Board (TREB) President Ann Hannah.

“Robust annual rates of price growth were reported through most months of 2012. Price growth was strongest for low-rise homes, including singles, semis and townhouses. Despite a dip in sales, market conditions remained tight for these home types with substantial competition between buyers,” said TREB’s Senior Manager of Market Analysis Jason Mercer.

Read full report...

Toronto Market Watch: November

Greater Toronto Area REALTORS® reported 5,793 sales in November 2012 – down by 16% compared to November 2011. 

“Transactions have been down on a year-over-year basis since June, after being up substantially in the last half of 2011 and the first half of 2012. Some buyers pulled forward their decision to purchase, which has impacted sales levels in the second half of 2012,” said Toronto Real Estate Board (TREB) President Ann Hannah.

“Stricter mortgage lending guidelines, including a reduced maximum amortization period and a purchase price ceiling of one-million dollars for government insured mortgages, have prompted some buyers to move to the sidelines. This situation has been exacerbated in the City of Toronto because the additional upfront Land Transfer Tax takes money away from buyers that otherwise could be used for a larger down payment,” continued Hannah.

The average selling price was up by 1.6% annually to $485,328. The MLS® Home Price Index (MLS® HPI) Composite Benchmark was up by 4.6 per cent compared to last year.

“The moderate annual rate of price growth compared to previous months was largely due to a different mix in detached home sales this year compared to last, particularly in the City of Toronto. The share of detached homes that sold for over one-million dollars was down substantially, which influenced the overall average price,” said Jason Mercer, TREB’s Senior Manager of Market Analysis.

“The MLS® HPI detached benchmark price, which tracks the price for a home with the same attributes over time, was up by almost six per cent in Toronto, suggesting that market conditions for low-rise homes remain quite tight despite a changing mix of sales,” added Mercer.

Read full report

Can I qualify for a mortgage if I am unable to confirm my income?

If you are self-employed, you already know the benefits that come with making your own decisions and never having to report to a boss. However, there are some disadvantages to generating your own income when it comes to applying for a mortgage. Some of you are likely looking at low mortgage interest rates and thinking about buying a home.

There are two basic methods to show income for self employed people. The first is ‘declared income,’ and the second is ‘stated income’. Declared income is provable. It usually averaged over your last two income tax years. If you have been self-employed for a certain length of time, you may be able to use stated income. This is reasonable income based on the type and size of your business.

Down Payment

Many lenders require a larger down payment for self-employed borrowers because of the uncertainty and variability of self-employment income. Even with good credit, a self-employed person will likely have to put down 20 percent on the home.

If you don’t have a 20 per cent down payment, or third party income validation, you will have to pay a higher CMHC Mortgage Loan Insurance premium. In the below table you will see the difference in CMHC premiums for someone with full ime employment (employee) and self-employed individual:

Down payment	CMHC for  employee	CMHC for  self-employed
35%	0.50%	0.80%
25%	0.65%	1.00%
20%	1.00%	1.64%
15%	1.75%	2.90%
10%	2.00%	4.75%
5%	2.75%	Not Available

Documentation requirements for Sole Proprietorship and Partnerships

• Notice of Assessment for the last 2 years
• Any one of the following must confirm at least two (2) years business-for-self tenure:
• Business License
• GST/HST Return Summary
• T1 Generals with statement of business activities attached for a minimum 2 years prepared by an arm's length third-party
• Audited Financial Statements for the last 2 years, prepared and signed by a CA

Documentation requirements for Corporations

• Articles of incorporation
• T1 Generals with statement of business activities attached for a minimum 2 years prepared by an arm's length third-party
• Notice of Assessment 2 years of recent

Self-employed workers who are looking to get approved for a mortgage should always keep their personal tax returns up-to-date and filed on time. Pay all income tax owning on time, and keep your credit repayment history clean. If you do this, you will be able to demonstrate to lenders that you are serious about your business, and serious about home ownership.

Eligible properties:

• Maximum 2 units where at least 1 unit must be occupied as the principal residence
• Existing and new construction
• Readily marketable residential dwellings, located in markets with demonstrated ongoing re-sale demand
• Older homes (pre 1950) must have been substantially modernized and the estimated remaining property (economic) life must be at least 25 years
• New construction must be covered by a lender -approved New Home Warranty Program

Borrower qualification:

• Strong credit and credit score with minimum 2 trade lines (like credit cards) with at least two (2) years history and at least $2000 credit limit.
• No mortgage, installment or revolving credit delinquencies appearing on the credit bureau in the past 12 months
• Lender to ensure borrower(s) have no tax arrears
• All applicants used to qualify must occupy the property
• Spousal guarantors acceptable

Hopefully this information would be useful for self-employed investors. If you still have questions or need help, leave a comment and I will be happy to assist you.

Low house prices not all bad news, CIBC says

A slowdown in house prices isn't necessarily completely negative for Canada's economy, one of the country's largest banks said today.

"Cheaper home prices could bring winners as well as losers across the economy," CIBC World Markets economist Avery Shenfeld said.

After a multi-year run-up, price gains have slowed down and even started declining in many Canadian cities. The Canadian Real Estate Association reported recently that the average price of a Canadian home was $361,516 in October, virtually unchanged from a year ago.

'A gradual cooling in house prices … will look good in hindsight'—CIBC economist Avery Shenfeld

That slowdown has led to much speculation that a modest price correction — or worse — could be in the offing, and gotten economists thinking about the implications of declining home prices on Canada's economy.

Contrary to conventional wisdom, Shenfeld suggests a decline in home prices would be welcome news for other parts of Canada's economy.

"What of the young newlyweds scraping by on mac and cheese in order to save for their first home? A slip in prices could ease that task, freeing up spending power in the process," he said.

Shenfeld's theory is that every dollar spent on housing is a dollar that could otherwise be spent somewhere else. So if a would-be homebuyer is able to knock $10,000 off the purchase price, that's $10,000 that's likely to be spent somewhere else, instead of pledged to a bank to pay back the mortgage.

The less "house poor" someone is, the more he or she is able to spend money elsewhere in the real economy, the theory goes.

Local examples

Realtors are quick to note that all real estate markets are local, so extrapolating from national data could often be misleading. And indeed, Shenfeld takes the example of the City of Calgary's housing market to illustrate his point.

In Calgary, house prices have trailed the Canadian average over the past five years, including a drop of almost 15 per cent in 2008, when many markets were seeing outside gains.

Yet the data shows despite Calgary's housing market underperforming the national average for the last half-decade, the city has posted some of the largest increases in retail spending over that time period, outperforming the national average in that category handily.

Shenfeld points to the nearby British Columbia housing market to illustrate another point. The province's housing prices led the country on the way up, and are currently doing so on the way down. Before 2003, the province saw a net outflow of people to other provinces, but between 2003 and about 2010, B.C. saw net in-migration.

The rapid run-up in prices was one factor that caused that trend to reverse again, Shenfeld suggests.

"Dreams of retiring in B.C., and taking one’s spending money to that province, might be back in vogue if relative prices of housing are better in line with other provinces," he said.

No crash expected

While the report does acknowledge there's financial pain to be had from lower housing prices, Shenfeld says that doesn't mean Canada's in for the type of calamity that a housing crash wrought on the U.S. and Irish economies in recent years.

In both cases, it wasn't just lower home prices that started it all, but the wave of defaults that followed. That's simply less likely to happen here, Shenfeld says, because Canada never loaned as aggressively to low-income buyers due to much tighter regulation.

Shenfeld notes that while a Canadian homeowner that counted on downsizing to fund her retirement might have to pare spending plans, he doesn't expect any widespread economic pain related to housing on the horizon.

"As a home owner, I'd prefer that one particular Toronto street stays insulated from any house price declines. But to look on the bright side, a gradual cooling in house prices, one early enough to avoid a larger financial sector shock, will look good in hindsight," he said.

Original article