Oliver Foote, Author at Oliver Foote

Investing in Real Estate With Only $5000

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

Private investment funds. That is the topic of todays discussion. You may have heard of something called a REIT or Real Estate Investment Trust, often these can be public companies who might raise money using capital markets. The goal of a REIT, like a normal “company” is to provide it’s investors a return on their investment, specifically through Real Estate. Frequently, the reason that people invest in Real Estate is due to tax benefits, and REITs tend to benefit from tax benefits as well. However, you don’t necessary have to invest in a public REIT, if you know the right people (*cough cough, call/email me), you can find private companies, some of them quite sizeable with hundreds of millions or billions of dollars in assets under management who operate like a REIT.

The benefits of investing privately rather than on the open market is that it is less costly to operate privately than it is to operate on the open market. The open market has very stringent accounting and financial reporting regulations which becomes costly. But, just because a private company doesn’t have these regulations doesn’t mean they are a bad investment or that they aren’t regulated at all. Many private companies, especially those that are sourcing funds from large numbers of investors, will create internal reports similar to what you would get on the open market, maybe monthly, maybe quarterly, as well as your usual MD&A (Management Discussion and Analysis) discussing what their plans are and how they plan to invest going forward. There is also governmental oversight, and securities regulators that get involved when a company is sourcing funds from investors, so generally they are quite safe to invest in and can provide better returns than open market REITs.

Usually these privately run REITs will have a variety of offerings. The one that I’ve connected with in the past offers a minimum initial investment as low at $5,000, and this “segment” of their business exclusively invests in large multifamily rental apartments. They aim to purchase well, fix up, and create a consistent cash flow as a dividend to investors and have a track record to back it up. They also have another division which focuses on development projects, think new construction condos. But the minimum investment for this is closer to $25,000 and you do not get your money back until the project is fully completed. But the total returns on these projects can sometimes be a doubling of your initial investment. You are effectively a source of funding for a well managed construction company and once the properties all get sold you get a payout. The downside is your cash can be locked up for extended periods of time, but it’s almost as passive as real estate investing gets.

Now you might be wondering, well how do the people who run all this stuff get paid? The answer is that there is a management fee baked into the return that you get back. This management fee depends on the type of project, the sector of real estate in which you are investing and various other things. But this is really where smaller, (i.e. Less than a billion dollar) companies tend to shine. They tend to run leaner operations than public companies and can choose to undergo things like development projects that take multiple years without the investors being able to pull out at any time when they fell like it. There are multiple other ways in which private real estate investing is superior to public REIT investing and I would highly recommend this route for people who want some exposure to real estate, but don’t want to manage it themselves and want to get good value for their investment.

There is no such thing as a guaranteed investment, but real estate is a tangible asset so you know your money is backing something that actually exists. The goal of many REITs is to provide cash flow, as mentioned above. Which means that the market fluctuations shouldn’t have a significant impact on the amount of money that you see, because the price of the real estate only matters when they go to sell it, and as long as they manage the properties well and continue to improve them and attract better rental prices, your investment will pay you dividends for years to come regardless of what the market is doing. Every investment has risk, but well managed real estate can be one of the lowest risk investments out there if you know where to look.

Now if you do have a higher amount of capital, you could do something like this yourself, or even if you just have a few hundred thousand dollars you may after some analysis that you can get better returns if you do it yourself. That’s fine if you have the time invest the money yourself, often if you’re making a high income, you may not time outside of earning that income to put the money you’ve made to use, and in that case this is a perfect win-win situation of you’re that type of person. You may not get as high of a return as doing it yourself, but it’s not a bad way to invest your money while you build up more capital to make your own moves.

Additionally, considering the real estate industry in Canada is so robust with high immigration rates, constrained supply, and interest rates that will (eventually) come back down. It’s a pretty good bet that going forward you will continue to make money in real estate. The only caution I’m going to throw in here is that there is now a concerted effort from all levels of government to get more homes built, which in years to come could slow down the appreciation we’ve seen in prior decades (you may only get 5% growth rather than 10% growth like we saw from 2010-2020). This I think overall will be a good thing as it will get more people into the homeownership market, and I know that myself and lots of other young people still would like to own a home some day so any relief in pricing will be appreciated.

That being said I also do think that a bigger issue is going to be rental prices. As more investors enter the market (which is the trend we are seeing). These investors will want rents to cover expenses and make continued cash flow. But valuations are so high, that from the POV of many investors rents just aren’t keeping up (high interest rates aren’t helping either). So investors either will have to become more creative, or they will have to pool more of their money together to purchase with less debt, since debt is so expensive right now, and this is again, where crowd sourced capital is a very neat idea.

In a way these high valuations and low rents make sense because there is this principle of highest and best use in real estate. The principle asks if a certain lot is being maximized and put to the “most profitable” use within the current laws. If the answer is no then your investment will look like a bad idea and rents won’t cover expenses. Often in order to achieve this highest and best use, you have to take on risk, do some redevelopment of a property (which has city council approval risk) or have private investors that will lend you their money at below market rates and expect a good ROI. Highest and best use can make it more challenging for individual investors in places like the downtown core since competition will continue to heat up for rental properties. The only people with the money to take on conversion projects might just be larger companies like the ones I mentioned earlier in this post.

If this sounds interesting to you and you just want to test out private investing, I encourage doing so with a small amount of money (as little at $5000), into a private REIT project, and then increasing your investment if you like the results. If you send me an email mentioning this blog post I’ll introduce you to the CEO of a company that operates out of Toronto and throughout the greater golden horseshoe area doing basically exactly what I described in this post, he’ll give you a much clearer and concise rundown of how they operate and what their strategy is. They are top notch and very professional and I would highly recommend them to anyone.

Hope you found this interesting.

Keep investing,

Oliver Foote

Newsletter #15: Investing in Real Estate With $5000. Summer is approaching.

This Weeks Blog Post:

Investing in Real Estate with Less Than $5000:

I talk about what a REIT (Real Estate Investment Trust) is
Why and when you should consider investing in one
What the difference is between a private smaller REIT and a publicly traded larger REIT

Read the full blog post here: https://oliverfoote.ca/investing-in-real-estate-with-only-5000/

Real Estate News:

CPI inflation fell as of the report this Wednesday from 2.9% in March to 2.7% in April (year over year changes). The largest driver of the slowdown in inflation was a slowdown in food prices increasing. Meanwhile gasoline (which impacts much of the other components of the index) increased 6.1% in April compared to 4.5% in March. Shelter costs remained high as well showing a year over year increase of 6.4%.
While interest rates remain high, prices for homes have not moved considerably in either direction up or down. Even with more inventory coming onto the market than last year prices remain steady. Notably, lower priced homes have more inventory and fewer buyers, while higher priced homes are trading hands more often. This is an interesting dynamic and is keeping the average price steady, while individual micro markets are behaving quite differently depending on location, even within a few blocks of each other.
The numbers tell one story, but in order to get a clear picture of what is really going on in the particular markets you are interested in a where the opportunities lie it requires some investigation. There are still many opportunities out there if you know where to look.
I am going to continue to stress this in upcoming newsletters, but now is a good time to be an investor (even with the coming capital gains increase). Because you will be buying in a relatively cool market, and inflation is finally approaching 2% and is already within the BoC’s “margin of error” range of 1-3%. Once they cut rates, people will come back, and if you can get into the market before that happens, you will ride the wave of people returning to the market.
Many people are predicting rate cuts towards the later half of this year, I’m inclined to believe the first rate cut will come after the summer and a second one in the winter for a total of 0.5%. We’ll see what ends up happening, since things tend to be taking longer than anyone expects.

Market Performance as of close Friday May 24, 2024:

S&P 500: 5,304.72 (+11.85% YTD)
NASDAQ: 16,920.80 (+14.59% YTD)
S&P/TSX Composite: 22,320.87 (+6.94% YTD)

Canada CPI Inflation Apr 2024: 2.7% (0.2% Decrease from Mar 2024)
Current BoC Benchmark Interest Rate: 5% NC (Next Meeting: June 5, 2024)
Unemployment Rate Apr 2024: 6.1% (0.0% Change from Mar 2023)

Have a great week,

Oliver

Subscribe to our newsletter!

[newsletter_form type=”minimal”]

When Should You Incorporate as a Real Estate Investor in Canada

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

Real estate investing has many levels, when you are just getting started you probably aren’t thinking too much about incorporation, you are just thinking about picking up your first or second property. But, it’s never a bad time to plan and learn about how different real estate investors structure their deals and the age old question of whether or not you should incorporate to purchase an investment property. Why do people even care about incorporating in the first place. Today I’m going to discuss the different structures to conduct a real estate investment and the thought process behind each, when it makes sense and when it doesn’t make sense to incorporate.

Before I get into the meat and potatoes, just a disclaimer, speak to a tax professional, speak to a lawyer, speak to a CPA, in order to figure out what is right for you. Every situation is different. This blog is just for informational purposes and to get you thinking, I am not a lawyer or a CPA (yet). With that out of the way lets get into it.

Small Time Real Estate Investor:

If you are a small time real estate investor, say you own your primary residence and maybe 1 or 2 other residential properties that you rent out. Does it make sense to incorporate? Well you’ll hear this a lot today, it depends, but in this case most likely not. The reason being that passive income in a corporation like rental income is taxed close to 50% in a corporation. So if your marginal tax rate personally is lower once you include the rental income, it doesn’t really make sense. Obviously, there are nuances and considerations if you co-own property with someone else, or your tax rate is higher, then you’ll want to consult your investment team.

There is further nuance to consider, and this relates to refundable taxes on the corporate income. So while you pay 50% up front without getting into details, you can get a refund of about 30%. Making the actual tax paid closer to 20%.

Where incorporation does make a lot more sense is if you are operating your real estate as a business. So maybe you are flipping homes, maybe you are managing commercial property and the income can be realized as business income. If this is the case and the business is making less than $500,000 a year, your corporate tax rate is around 10%. Then you can choose to do what you want with the retained income and either leave it in the corporation for future investment, or pay it out to the shareholders as a dividend which generally speaking has a lower tax rate than earned income. So there are more tax advantages if you are earning active business income. But if you get into estate planning and paying dividends to various family members and shareholders the level of complication can increase even more.

If you want to know how to calculate income and expenses for a personal rental property the CRA has a useful page. Another interesting note, if you are thinking about transferring a property from personal to corporate ownership for legal reasons or tax reasons that make sense for your situation. You have to be careful because you may have to pay a land transfer tax since the property is technically changing ownership. This is why it becomes increasingly important to think about these things ahead of time if you are planning on building a large portfolio of real estate investments.

Larger Portfolios:

There are many more considerations once you begin to get beyond 4 properties. At 4 generally speaking traditional lenders may not give you a mortgage anymore, so you will have to find financing at B lenders for a slightly higher interest rate, or you’ll have to begin investing through a corporation which can sometimes enable you to find additional lending.

Also with larger portfolios, you may begin to bridge into investing in real estate as your businesses primary operations, in which case the rental income and the property management service you provide to your tenants could begin to be considered as business income rather than passive income. If you are considering building out an investment arm and hiring employees and building a true business to manage your company’s investments, then you would most likely be doing so in a corporation and earning business income.

Other corporate structures:

Partnerships (or Joint Venture) and Limited Partnerships:

This is going to be a very basic overview. But if you are looking at a larger project like a development project, or you want to partner up with someone and execute an investment idea, this could be classified as a partnership, which may or may not have an actual corporate structure or legal documentation to back it up. Legally speaking in Canada a Joint Venture is similar to a partnership, both generally share liability and both partners bear equal risk and can both be legally held liable for any debts incurred by the partnership. A Joint Venture is generally limited to a single undertaking, whereas a partnership generally has an intent for continuation of business. These are defined under common law and may or may not involve corporations as part of the Joint Venture or partnership.

A limited partnership, meanwhile, does have a corporate structure and is more well defined. You will often see when there are multiple investors in one or more projects and the project is managed by the general partners, while the limited partners are generally just the funding partners with an expected return. If you are looking into crowd funding a real estate investment, a limited partnership is generally a good structure to do so because it limits the investors liability to the capital they invest, and if a project is properly managed all partners can share in the returns of the investment.

If you are thinking about doing this type of investment as a Joint Venture or Limited Partnership and expanding the type of investing that you are doing, then might be a good time to talk to a tax professional and a lawyer about incorporation and the different structures that you are considering using.

Concluding thoughts:

The most important thing I want readers to get out of this is to plan ahead and have a broad understanding of what types of corporate structures work best for which types of investments. This rabbit hole is endlessly deep and you can get into umbrella corporations if you are doing multiple investments with different partners at one time, or you want to handle and manage trusts and estate planning. For those who are interested in this side of things I would highly recommend checking out the book: Tax, Legal, and Investing advice for the Canadian Real Estate Investor by Cohen and Dube. It covers a lot of the stuff I loosely touched on in the blog in much greater detail and gets into estate planning.

I also want to stress the importance of getting things done. Quite frankly, if all this stuff is confusing and you find yourself in a research rabbit hole and aren’t actually out there trying to find a good investment, or connecting with the right professionals, get your butt moving and start talking with other investors, go to meetups, talk to CPAs and Lawyers who specialize in this type of thing and do your best to get your hands dirty. All this corporation stuff is somewhat icing on the cake, and while it is good to know and could in theory save you money, you need to be making money in order to have money to save in the first place. So the more important thing to execute on your goals if you are seriously considering real estate investment and get out there.

That’s my two cents this week, as always thanks for reading and hope I got you thinking.

Chat soon,

Oliver

Newsletter #14: My Upcoming Pre-Construction Webinar! Mother’s Day! Corporate Structure for Real Estate Investors and More.

Happy Mother’s Day! Hope you all find some time to thank your moms today for everything they do. The big news I want to bring to this newsletter this week is that I will be hosting an event on Saturday May 25th at 10AM! It’s going to be held on Zoom so you can join and sip a coffee from the comfort of your own home. The topic of discussion will be how to get started purchasing or investing in pre-construction. It will be hosted by myself and at least 1 other special guest to help out. We’ll cover everything you need to know about buying “new builds”, why it’s great for first-time buyers to consider, and why they make great investments as well. I’m also going to be talking about how the current market dynamics are proving it to be a very good time to consider making such a purchase. I’m also setting up a new mailing list that will include some of the best project launches of the year, you can opt-in at the link below. I will also be raffling off a $100 amazon gift card at the end of the event for those who attend it live. As another incentive, I’ve also created “an informed buyers guide to pre-construction” for those who register, it will be in your inbox right after you register (if you choose to do so), and of course anyone who can’t make it will get the recording of the whole event afterwards. I’m really trying to make sure you get a good value and no matter your situation you can get something out of it, if you think this might be something you’re interested in you can register at this link. Link removed.

Hope you can stop by!

This Weeks Blog Post:

When Should You Incorporate as a Real Estate Investor:

Talking about incorporation as an investor
Joint Ventures and Limited Partnerships
Mom and pop investors and when they should consider incorporation.

Read the full blog post here: https://oliverfoote.ca/incorporate-real-estate-investor-canada/

Real Estate News:

The Toronto Real Estate Board market stats for April have arrived, here are some of the highlights:
- There were 7,114 sales through the Toronto Regional Real Estate Board – down by five per cent compared to April 2023. Inventory levels or the number of listings of available homes of all types have begun to creep up with over 18,000 available for sale at the end of April, which means there is an increased choice for home buyers. Prices have remained constant, the average selling price was up by 0.3 per cent to $1,156,167 compared to March of last year.
- Many would be buyers are continuing to wait for the Bank of Canada to make a move and decrease interest rates. Once rates do move down there is a expectation that many buyers will return to market and put upward pressure on pricing going into 2025.
- Recently it has been stated that there is 2 years of Condo inventory available for sale when you account for resale, new construction, and developer standing inventory. This will likely lead to a shortage of homes down the line due to the delay that many pre-construction projects are experiencing thanks to slower sales. Opportunities will be available to condo buyers now and in the coming months for buyers willing to take advantage of downward pricing pressures on new construction units.
All provinces expect Ontario see rents increasing an average of 8.8% since last year. https://rentals.ca/blog/april-2024-rentals-ca-rent-report
Many reports are showing that Downtown Toronto’s office market continues to struggle with high vacancies. With fewer people living Downtown, this could be leading to the downward pressure on residential rental prices in the downtown core and surrounding as people have more selection and can move further away from work.
This overall trend of higher office vacancies could also be a contributing factor to slower condo sales and construction in downtown as fewer people have the need to live there and can find more space elsewhere.
Additionally, with international student visas being restricted for the upcoming school year, this could also result in downward pressure on rental prices in various cities as the demand for rentals from students gets cut in half.

Market Performance as of close Friday May 10, 2024:

S&P 500: 5,222.68 (+10.12% YTD)
NASDAQ: 16,340.87 (+10.67% YTD)
S&P/TSX Composite: 22,308.93 (+6.88% YTD)

Canada CPI Inflation Mar 2024: 2.9% (0.1% Increase from Feb 2024)
Current BoC Benchmark Interest Rate: 5% NC (Next Meeting: June 5, 2024)
Unemployment Rate Mar 2024: 6.1% (0.3% Increase from Feb 2023)

Thank you for reading and have a wonderful day,

Oliver Foote

Subscribe to our newsletter!

[newsletter_form type=”minimal”]

Canada’s New Capital Gains Tax ($77,000 per year increase)

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

If you’ve purchased stocks or own some real estate then you’ve likely heard about what changes the federal government has proposed to the capital gains tax. I thought I would go through and talk about this and in a future post I may go over some of the other changes proposed. There was talk of millions of homes getting built which might be what we need to work through our housing problem. But will we have to manpower to accomplish these lofty targets? I’m not so certain.

Let’s begin with the big headline. The changes to capital gains tax. Under the proposed 2024 budget the capital gains inclusion rate, which is the percentage of the gain that is taxed, will stay at 50% for gains under $250,000. However, beyond $250,000, 2/3rds of the gain will be taxable at your marginal tax rate. This would most likely be taxed at the highest tax rate since the gain itself will almost produces enough income to put you in the highest tax bracket.

So lets take an example. You sell a real estate asset and it produces a gain of $500,000 under the current system where 50% of the gains are taxable, you would owe tax on $250,000. If you’re in Ontario the combined federal and provincial tax rate is 33+13.16 = 46.16%. So you would owe approximately 250,000*.4616 = $115,400 total on the gain.

Under the proposed change, your first $250,000 would produce $125,000 of taxable income. I’m going to assume this is still taxed at the highest tax bracket. This means you would owe $57,700. Then on the next $250,000 gain, you would have an inclusion rate of 2/3rds which is $166,666.67 of taxable income. This means you would owe $76,933.33 in taxes. The total tax amount is $76,933.33+$57,700 = $134,633.33.

So the change in taxes owed is approximately 134,633-115,400 = $19,233 increase. As you get into higher gains this number does increase quite a bit. Another way to look at this is as an “effective” tax rate. If you get taxed on 50% of the income at a 46.16% tax rate your effective rate on all this income is .5*.4616 = 23.08%. The effective rate of 2/3rd’s is 0.6667*0.4616 = 30.77%. So this is an increase of around 7.69% in taxes on any capital gains beyond $250,000.

If you are an investor, and you are buying and selling many stocks, real estate, or businesses and making millions of dollars a year doing so, you’re going to owe approximately an additional $76,900 in taxes per $1,000,000 in capital gains. That would be a total of around $307,700 per $1,000,000. Where under the current system it’s closer to $230,800 per $1,000,000 gain. The increase is the equivalent of a pretty decent salary for the average Canadian. Crucially, primary residences remain tax free, which is the majority of Canadian’s largest asset and many Canadians retirement plans.

Many people in the business community are arguing that this change could do a few things. It could disincentivize venture capital from investing in Canada, disincentivize general investment in new businesses, and cause investment money to leave Canada altogether and put us into a further state of stagnation. Our per capita economic output has actually declined over the past year due to our recent population influx combined with higher interest rates. Interest rates impact borrowing costs which is how a lot of business invest, less investment equals less economic growth; generally speaking. Additionally, if companies who are mobile choose to leave the country altogether, depending on the nature of their work, they may or may not be able to keep a Canadian workforce. Which could also negatively impact the Canadian jobs market.

Regardless of your stance on this I do believe that a change of this nature (some type of tax increase) was likely to be proposed at some point as more and more people feel they cannot get ahead for one reason or another and politicians hear about peoples problems and look for someone to come after. With the higher interest rates impacting food, gas, and other essentials. The cost of purchasing a home having outpaced wage growth by almost 4x. It is likely to put a target on the backs of people who have already found their success as governments search for a solution to these issues and try to find people to help pay for their programs and chosen investments.

So if this change does pass what will happen? I think this change most likely won’t cause any major exoduses out of capital markets. It’s unlikely that people with strong ties to their families and communities will end up jumping ship. After this change, capital gains are still going to be taxed at a lower rate than equivalent earned income theoretically still making it a good idea to invest. I also doubt that it will cause any investors to change their long-term plans and sell all their investments this year. Investment is a long-term game and takes detailed planning. So even with this change I don’t see it having an outsized impact on the markets.

I’m not a politician, not an economist either, so I can’t say whether or not this new tax will actually provide a meaningful contribution to the deficit or if maybe the better approach is to simply spend less. There could also be a variety of other solutions out there that don’t require a tax like this. No one enjoys paying higher taxes. Another point I think is worth mentioning is that the current government has lost some popularity among constituents. Therefore, if I was a prudent politician looking at my odds to win the next election, I would likely try to be a bit more aggressive on what could be one of the last budgets I get to table to see if I can push through some final big changes before I get the boot. We’ll see how this pans out, and I will be following the news on this change closely. While I do have further thoughts on this topic it is a bit of a challenging one to discuss so I’ll leave it there for now. Feel free to let me know your thoughts via email or leaving a comment below.

All the best,

Oliver

Newsletter #13: The Proposed Capital Gains Change, Other Real Estate News.

April is coming to a close! The big news the past few weeks has been the federal governments 2024 budget. The big discussion in the business and real estate communities has been the proposed increase to capital gains tax. I write about that in my blog post. As far as real estate goes there were some proposed increases in spending on building new housing. The government also wants to introduce accelerated Capital Cost Allowance acceleration (faster depreciation) for certain purpose built rental housing, which could incentivize more builders to take on those projects. The home buyers plan for using RRSP towards a down payment has increased from $35,000 per person to $60,000 per person.

This Weeks Blog Post:

How the Proposed 2024 Federal Budget Could Impact Investors:

Discussing what financial impact the tax increase will have
Will the change cause lower investment? Maybe some people to leave the country?
If this changes goes through it could send an interesting signal to people who are well off and prompt them to get ahead of further changes by moving elsewhere.

Read the full blog post here: https://oliverfoote.ca/2024/04/28/how-the-proposed-2024-federal-budget-could-impact-investors/

Market Performance as of close Friday April 26, 2024:

S&P 500: 5,099.96 (+7.53% YTD)
NASDAQ: 15,927.90 (+7.87% YTD)
S&P/TSX Composite: 21,969.24 (+5.26% YTD)

See you in two weeks! Oliver

Subscribe to our newsletter!

[newsletter_form type=”minimal”]