Residential versus commercial investing

Most real estate investors start off with residential properties: a house or a condo, which they rent out. They qualify for the mortgage: based on their annual income and their credit score and credit history, the financial institution will award them a loan. This has its limits and soon the investor will hit a wall: the banks will qualify the investors for only so many mortgages, such a total amount in mortgage loan.
Technically, a commercial property contains 5 residential units or more (multifamily) or is made of the other commercial categories: industrial, office, retail, hotels. In that particular case, it is the property, not the investor, that qualifies for the mortgage. The purchaser's main worry is to come up with the downpayment. Sometimes the vendor will carry some of the downpayment, if the numbers allow it.

This is how I bought one of my largest properties: an 8-unit building. I had literally none of my own money into the deal: the bank financed 70%, 20% came from a private loan and the last 10% came from the vendor. 

The TFSA Maximizer

A new strategy is gaining traction, meant to help retirees with the tax they have to pay as they withdraw from their RRIFs.

The idea is to move the funds from the RRSP to the TFSA using their primary residence as a vehicle.

Funds from the RRSP are registered as a first mortgage at a regular mortgage rate against their home.
Funds from the TFSA are registered as a second mortgage at a higher interest rate - which is common practice with second mortgages.
As the mortgages get repaid, the funds slowly move from the RRSP to the TFSA.

For more information, please consult this article from Moneysense.

An example of investment: Dutcher

Dutcher was a first for me for 2 reasons:
- the first single family dwelling I bought
- the first time I was investing with a private lender

It is a small 3 bedroom house, 5-minute walk to downtown
Never have problems renting it, tenant pays for all utilities: electricity, oil heating and water sewer

Income =
Rent $700/mth

Expenses =
Mortgage $250/mth
Insurance $40/mth
Property taxes $100/mth

Monthly cash flow = $310

Feb 2014 -
purchased for $40,000
I put $4,000 down

March 2016 -
appraised for $55,000

Increase in value over 2 years = 37.5%

Cash on cash return over 2 years =
- value increase: $15,000
- cash flow: $5,668
$310 X 12 months X 2 years minus 4% vacancy rate $672 minus 1% of value in repairs each year $1,100
- Mortgage pay down $1,835
Total: $22,563

So cash on cash return is 564%

Hiring a property manager

When investing in real estate and dealing with tenants, one of the key elements is property management.

I find the tasks that pertain to property management fall under 2 main categories:
1. taking care of the building,
2. attending to the tenants' needs.

I am in the process of hiring a property manager and am attaching below the questions I will be asking them during the interview process, as I put them together using Google Forms.

The other element I find important is that property manager be present when I personally deal with tenants so they understand my own personal style.

In terms of leadership, it is then essential to let them a great deal of autonomy and let them make suggestions as to how they would see the problems solved.

Form Title

Please indicate your name, phone number and email address.*Required

Pre-requisits: do you have the following items?*Required

•  a truck
•  a phone with which to send pictures
•  tools
•  a push mower
•  a snow blower
•  Other: 

Where do you live?*Required

What kind of handy work do you have experience doing?*Required

Do you have another job? *Required

•  Part-time
•  Full-time.
•  Other: 

Do you have references?*Required

How do you see yourself looking after the properties? What tasks would that involve?*Required

How often do you use Facebook?*Required

•  Not at all
•  Every day
•  Several times a day

What do you think is important when 1. watching over a property 2. dealing with tenants?*Required

What would you do if you were overwhelmed by the work load or were to become unavailable for a certain period of time?*Required

Why do you think you would be good at property management?*Required

Are you ok to work at night and on weekends sometimes?*Required

Are you good at solution finding? Please give an example.*Required

Tenant questionnaire

Chosing tenant is very important for a successful real estate investment business.
Bad tenants can:
- not pay the rent,
- damage the property.

To prevent that from happening, it is essential to proceed to a thorough background check.

You will find below the first 4 questions, designed using Google Forms, I always ask tenants before they move in.

Invest in real estate with RRSP/TFSA money? Yes!

There are 3 main reasons to invest your hard-earned RRSP money into real estate:
- the money is secured against real assets,
- the interests earned are collected on a tax-free (TFSA) or tax-deferred basis (RRSP),
- real estate has outperformed the stock market for the past 10 years and, unlike stocks, the growth is steady.

Canada Stock Market 2006-2015

Historical Index Values Toronto 2006-2015

The Smith manoeuvre, or how to make your interest payments tax deductible

Unlike in the U.S., the interests you pay on your primary residence's mortgage are not tax deductible in Canada. 

The Smith Manoeuvre - from Fraser Smith - consists in borrowing against the equity built in your house to invest in income producing vehicles. The interests can be written off from your taxes.

This way, you can gradually restructure the largest non-deductible debt of one's lifetime (a mortgage) into a deductible investment loan.