Oliver Foote

Investing in Real Estate With Only $5000

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

When Should You Incorporate as a Real Estate Investor in Canada

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

How to Set up Property Management Systems for your Real Estate Portfolio

This post is going to be more of a guide on how to set up a Property Management System. This can work even if you just have 1 property to manage although the payoff is a bit better where you are dealing with more than 1 property. I’m going to assume a few things in the post, that we are mainly talking about property management for residential rentals, this could be any number of rentals, single family, multi-family. I’ll even have a section on short-term rentals like AirBnB or self managed BnBs. I do plan on discussing commercial real estate property management in a later post, but that will be focusing more on people who own retail, industrial, or office spaces.

Property Managers:

So you own a few residential properties and it’s starting to become a bit much to self-manage, or maybe would just rather have someone else handle tenant issues when they come up. The first and most important thing you will need is a property manager. They usually charge between 8-12% of rent in order to look after the property for you. You will still have to pay the expenses to hire the professionals if/when something breaks. But the property manager basically steps into your role and handles the coordination for you. There are different forms of property management. You can hire it out to a larger company who manages multiple properties for multiple landlords. You could try to find someone who operates more independently, small business style where it might just be one person that you sub-contract out the property management to. Finally, you could outright hire your own property manager on a salary, if you have the properties to warrant it.

Regardless which option you choose, it’s important to interview whoever you’re thinking of going with and do some background research on them. Make sure they already have pre-existing systems and a good track record of success in place. I’d also recommend interviewing some other people they manage property for to make sure they are good at what they do. Lastly, I would recommend whoever you work with putting some rules in place for the way that you want problems handled, you are paying them after all. Ask them if they already have standard operating procedures, if they don’t you can always work with them to build a manual of operations dealing with problems that come up at your properties specifically, spend limits on small issues, etc. Building a manual for dealing with problems is a good practice anyway especially if you’re planning to expand and hire your own in house property manager at some point. If you have a smaller number of properties it may be worth asking your Realtor. If you’ve bought an investment property with them in the past there can be some benefits to working with your Realtor. They have access to the MLS for finding tenants, they have worked with many investors and may even have investments of their own, and they may already have a property management wing to their business. From a Realtors perspective its good business to continue working with their past clients in any capacity so down the line you buy or sell your investments or primary residence with them, this can sometimes include property management. Either way they are likely to have some recommendations for you if you are looking for property management and they themselves don’t provide that service.

Tenant Screening:

With the value of properties across Canada continuing to climb, it is important to find great tenants. There are many different ways to screen Tenants, you can add this to your property managers manual. Nowadays the “standard” rental documents are last 3 paystubs or income tax return, Photo ID, landlord reference letter, employer letter, credit report and score, and occasionally bank statements to verify income. That’s a lot of stuff to sort through and depending on the market and the amount of demand in the market, you may not want to be the one doing the background checks and calls to employers. That is where your Realtor or Property Manager comes in. They can do a round of preliminary screening for you, and once they have found a candidate and screened them they can leave the final decision up to you, or you may decide to allow the property manager to handle the entire process. Nowadays it is also prudent to see what you can find from Googling or checking social media platforms to verify what you can about the tenants you are considering. Again, all of the steps of doing this should be added to an manual of operations if you want a property manager to handle everything.

There are many software’s out there nowadays that can do a secondary check, and I would recommend using one of these, the one that I have been using recently to screen tenants is called SingleKey. It costs about $25 per tenant to screen, but it goes in depth and checks criminal records, credit scores, and more. It gives that extra layer of security that makes sure the tenants are who they say they are by doing a deeper dive into databases that the public general doesn’t have access to.

Trusted Tradespeople:

When you are first starting out you many not have a list of tradespeople that you can trust to do a good job if something comes up at your property. Again, if you are unsure where to find someone I would recommend asking your Realtor if they have someone they can recommend. Otherwise if it is your first time using a particular tradesperson I would do a bit of a background check online about their business and see if they are established and legitimate, see if you can talk to past clients about their work. Over time you will build up a list of tradespeople that you know can get the job done right, on time, and at a good price and this would again be something you add to your manual of operations and who to call if something or other breaks, goes wrong, or needs to be repainted after tenants move out. A list of tradespeople that you might want to consider gathering are as follows: painter, plumber, electrician, cleaner, movers or junk removal (to swap appliances etc.), lawyer or paralegal (in case you need to evict a tenant), and Realtor to help find tenants.

Student Rental Property Management:

If you are planning to run a student rental near a University or College campus, the property management of this can get a bit more complicated since you are likely to get calls that maybe working professionals wouldn’t make, like changing lightbulbs, or fixing a hole in the wall. When working with student rentals it’s very very important to factor in the extra expenses that you will come across. This means painting every year if needed, possibly hiring cleaners every quarter to make sure the property stays in a liveable condition, having the correct (more expensive) property insurance, and ensuring the property is above and beyond fire code standards with regards to alarm systems. Student rentals can be a very profitable enterprise, but the management of them also requires more work. The manual of operations for the property manager will likely be different from a traditional rental and take a bit more time to develop. You’ll have to consider getting co-signers on the leases, which is twice the paperwork and twice the screening. You’ll have to make sure that you either come to an agreement with the tenants about garbage, lawn maintenance, and snow removal, or you hire that out as well. You’ll have to consider to a greater extent how you want to manage utility expenses, baking it into your rent, or requiring each tenant to pay a portion (again adding overhead and time to the process). There are many considerations when dealing with student rentals, and you may get charged a bit more by the property management to manage these types of properties, but the one great thing with student rentals is that their rent default rates are extremely low. Parents are supporting them, the government and banks are happy to hand out loans. So it’s more unlikely you’ll be in a situation where someone isn’t paying their rent, but they may forget once in a while so you’ll have to stay on top of things. I will likely make a longer post detailing student rental considerations in the future and how to retrofit and property for it, finding good deals etc.

Medium or Short-Term Rentals (AirBnB):

If you are considering a short term rental business, you will again have different considerations from the other types of rentals I mentioned above. The biggest change is that you will have to have a cleaner basically on call all the time after each persons stay. Many companies exist that specialize in short term rental cleanings, and they will even send pictures after each cleaning, which I would recommend you request no matter the cleaner you work with. This can be even more profitable than the Student Rental business, but it also comes with more risk. If you are considering doing this and hiring a property manager, the fees will likely be closer to 20%. You also have to look into the area you plan to host your AirBnB and see what the rules are for doing so. For example Toronto has tried to crack down on AirBnB’s requiring a license, and only allowing people to rent out their primary residences. There are also many condo corporations in many cities that ban AirBnB or short-term rentals in their bylaws, so if you are looking to purchase a property in a condo specifically for short term renting, you have to confirm whether they allow this.

There are also many many intricacies to getting your AirBnB at the top of the rankings; such as uniqueness of the property, photos of the property, reviews etc. There are websites that can assist in your market research if this is something that you are considering doing. One website that is well known for researching the AirBnB market is called AirDNA. There are also software’s and websites that are built specifically to assist people who are looking to manage or operate their AirBnB’s which can help with managing bookings, cleanings, etc. You also want to make sure that your guests have someone responsive they can contact at all times to deal with their issues in a timely manner since your reputation is everything.

There has been a lot of talk about AirBnB fees becoming a bit excessive in recent years, and while it is a great search engine for posting your short-term rental, once you have more experience and more properties you may want to consider creating your own website, with your own booking system to avoid these fees. This works very well for many kinds of short-term rental operators. For example, there are many “mom and pop” more traditional bed and breakfasts that have minimal websites, a phone number to call, and an email to send an E-transfer to. This can work surprisingly well, and seems to be somewhat more common in rural areas that have been hosting people this way since before AirBnB’s were a thing. Niagara Falls or Niagara on the Lake are great examples of areas where this is more common. But this can also work in more populated areas like Toronto for example. There are some pros and cons to doing things this way, AirBnB has a system of dealing with guest issues that somewhat circumvents you as the host, but if someone is booking directly you don’t have that extra layer of security. But on the flip side, you get a direct line to people, and have more control over their experience and what happens during their stay and depending on the vibe you are going for some people may prefer the feel of a small local booking, compared to booking through AirBnB. Did I mention that this saves on the AirBnB fees? This does come with it’s own host of challenges, where instead of competing on the AirBnB rankings, you are competing on the Google rankings, which could arguably be more difficult. You are also going to have to work harder and operating your business this way will likely require a lot of word of mouth, whereas getting started with AirBnB is very low barrier to entry. Many people choose to do both, or start with AirBnB and then find a way to transition once they have become more established.

Conclusion:

There are many approaches to property management and many different types of rentals out there which is great as an investor because that means you can have a number of strategies for a property that you are considering purchasing, if one doesn’t work out, maybe the other will. Look out for slightly more in depth posts about each of these types of investments in the future. As well as posts about investing in retail or other commercial properties and how to go about evaluating those properties as investments. Hopefully you found this short Property Management overview useful and at the very least it got you thinking about the various ways to property manage and building out your own systems for your portfolio. If you have any comments or questions I’m available by email: oliver.foote@royallepage.ca.

Thank you for reading and have a great day!

Oliver Foote