Real estate as a legacy

You may wonder what will happen to your children and grand-children and want to leave them a legacy.
The issue is particularly accute when the next generation is financially less sophisticated than you are.

I have a few contacts in this situation and I thought of a real estate product that may be of interest to them.
The idea is simple: byuing a commercial property and that way securing a steady income for the family members you would be leaving behind.

Because the property qualifies as commercial, the financial institution will look at the product and the income it generates, rather than at the investors themselves.
The main requirement is that the investors have the amount required for the downpayment - usually 35% of the property value - in their possession.

We would qualify for a mortgage with a financial institution. The institution would most likely require 35% down payment and would finance the rest - so a 65% loan to value mortgage.

The cash flow generated from the building would initially go towards repaying the downpayment.
Once the downpayment is paid back, you have a property generating income your family can live off once you are no longer there.


Let's take a concrete example:

2 multi family brick buildings totaling 29 unit investment properties in the Eastern part of Canada
Asking price is $1,479,000.
Let's assume a conservative 8% CAP rate (i.e. Net Operating Income (NOI, i.e. the property's yearly gross income less operating expenses) to property asset value), so a Net Operating Income of 0.08 X 1,479,000 = $118,320.
The downpayment would be 1,479,000 X 0.35 = $517,650
The mortgage would be $961,350 at a conservative 4% with a 25 years amortization period. So the monthly payments would amount to $5,056.90, so $60,682.8 per year.

The downpayment would be recaptured after 8 years and 7 months.
The monthly income - independently of the income taxes - amounts to $4,803.1 after mortgage payment.

The most appropriate legal entity to hold the real estate may be a family trust, considering the purpose of the manouvre: securing a legacy for the next generations of your family.