Implementing a successful property management system is vital to the longevity, health and overall profitability of your growing portfolio of investment properties. Property management systems come in all different shapes and sizes, and can be completely tailored to your specific portfolio needs and wants. Rather than examining these different systems, which could take up an entire magazine, I want to explore three ways to increase your ROI by taking advantage of professional property management.
1. Set realistic expectations from day one
In my view, hiring a professional property manager is very similar to hiring an employee. You wouldn’t give a new hire a vague description of their tasks and responsibilities and then let them manage their job any way they want. You would give your employee a clear definition of their role and show them the kind of results you expect.
The same is true when engaging a property manager for the first time. The following are five simple questions to ask your PM – and yourself – as you’re working out the relationship. If everyone can answer every question definitively, you know you’re on the right track:
This may seem like a lot of work when you’re just getting started, but completing the above exercise will eliminate the roadblocks, misunderstandings and accidents associated with starting a new professional relationship, and will ultimately improve your ROI.
A professional PM will usually have all these roles pre-defined in their contract, but that doesn’t mean they can’t be challenged or negotiated to better suit your needs. Communicate above and beyond to maximize your results.
2. Hire a superintendent
This can be a hot topic depending on who you talk to – some investors dismiss the idea of hiring a super outright, and some absolutely can’t operate without theirs. I believe that if handled correctly, using a superintendent can be an effective management strategy for a medium to large building, especially if done in tandem with professional property management.
The greatest advantage of superintendents is that they live on site. This is extremely convenient when small issues arise that need immediate attention, like a spill in the hallway that needs cleaning or a tenant who needs to give you cash. For small, more regular tasks like mopping hallways and shovelling walkways, a super is usually the most cost-effective and efficient method. In my experience, waiting for your PM to deal with small items can take too long and not be as cost-effective.
I prefer my super to have a smaller role, meaning my PM handles all maintenance calls from tenants, major renovations, rent collection, tenant placement and regular reporting to me. It’s important to ensure the super is not impeding the job of your PM and vice versa. Each have their roles and should be complementary to each other. The PM is in charge, and the super is there to assist when needed, along with tending to a short list of responsibilities.
This PM-plus-super system frees up more time for me to focus on strategy, grow my portfolio and create value in my current assets. My accountant also appreciates the efficient system, as we save a fair amount of money on minor property maintenance with a super in place.
3. View property management as a service, not an expense
This is more of a way of thinking than an operational guideline. This particular piece of advice stems from years of wrestling with the same question over and over with my group of investors: “Paul, I like the property, and the numbers make sense to me, but when you factor in the cost of property management, the cash flow decreases, and the numbers are just average or below par. What do you think?”
There is no way to avoid the cost of property management. Either you are going to engage a professional to do it for you and pay for it out of the property’s cash flow, or you will handle the property management all on your own. You may think this will save you money or make your property more profitable. If you have spare time and energy and want to learn the business, I would encourage you to take on the PM responsibilities. However, if you’re busy with your career, family and lifestyle, like many of us are, by taking on the day-to-day management of your properties, you’re doing yourself a massive disservice.
Whether you pay a professional PM or not, it’s still going to cost you the same or more. By taking on the PM role, you’re going spend your own time, energy and gasoline and take away quality time for other activities you could be pursuing, like spending time with your family, getting some exercise (mowing the lawn doesn’t count), reading a book or sleeping. This may not sound like traditional ROI, but since most investors get into real estate to improve their lives, not just their bank balances, finding a good property manager will provide these other, highly attractive returns.
You cannot avoid the cost of property management. You either pay in dollars or you pay in your own time and energy. Either way, it must be done properly.
Source: Canadian Real Estate Wealth Magazine – 14 Nov 2017
You have a capital gain when you sell, or are considered to have sold, what the Canada Revenue Agency deems “capital property” (including securities in the form of shares and stocks as well as real estate) for more than you paid for it (the adjusted cost base) less any legitimate expenses associated with its sale.
Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of $50,000 for instance, only half of that, or $25,000, would be taxable. For a Canadian in a 33% tax bracket for example, a $25,000 taxable capital gain would result in $8,250 taxes owing. The remaining $41,750 is the investors’ to keep.
The CRA offers step-by-step instructions on how to calculate capital gains.
There are several ways to legally reduce, and in some cases avoid, capital gains tax. Some of the more common exceptions are detailed here:
If you are a farmer or a newcomer to Canada, they are special capital gains rules for you. The specifics can be found at the CRA website.
A Federal Court judge has approved at least one court order that will require a British Columbia developer to turn over information to tax officials about people who bought and flipped condo units before or during construction.
And several similar applications are under way, reflecting the federal government’s efforts to crack down on potential tax cheating in the presale market.
A July 25 Federal Court order requires the developers of the Residences at West, a Vancouver condo project at 1738 Manitoba St., to provide the Canada Revenue Agency (CRA) with documents related to presale flips, also known as assignments, in the building, including proof of payments and correspondence between the developers and people who buy the assignments.
That order followed a June 29 application from the federal government.
In September, the Minister of National Revenue applied for court orders related to One Pacific, a Concord Pacific project, and Telus Gardens, a downtown project developed by Westbank Corp.
Both developers said they would comply with the request for documents.
“Customer information is protected by privacy laws and is not at the developer’s liberty to disclose unless ordered by the Court,” Matt Meehan, senior vice-president of planning at Concord Pacific Developments Inc., said in an e-mail.
“To protect our customers’ information and ensure any release will be compliant with the law, we have asked CRA to obtain a court order, which we will adhere to.”
In an e-mailed statement, Westbank said it would comply with the minister’s application.
The CRA is investigating potential tax cheating in the presale market.
Developers presell units in projects to obtain bank financing. Those sales agreements can be “assigned,” or flipped, to somebody else before the building is finished.
A unit may be flipped several times before a project is completed. But only the transfer of legal title from the developer to the final purchaser is registered with the B.C. land title office.
That means the CRA does not know the identities of any buyer but the final one, and has no way to check whether the others have paid applicable taxes on those transactions.
The provincial government last May announced new regulations designed to limit assigning: Sellers have to consent to the transfer of the contracts, and any resulting profit must go to the original seller. But those new rules apply to single-family homes, not condo presales.
As the CRA heads to court to obtain data on presale buyers and sellers, some observers say the provincial government could cool speculation in the presale market – and support federal tax-enforcement efforts – by changing reporting requirements.
Presale purchasers may include people who are not Canadian residents and whose profit from flipping a presale contract would be subject to a federal withholding tax, said Richard Kurland, a Vancouver immigration lawyer.
He used the example of a person from Iran who buys a presale contract for $100,000 and sells it for $125,000 a month later. Under the Income Tax Act, that profit – because it went to someone who is not a tax resident of Canada – would likely be subject to a 25 per cent withholding tax, he said.
“If nobody knows that you’re from Iran and not a tax resident, and nobody withholds the money, you just walked off with $6,000 tax-free,” he said.
If information on buyers’ identities were routinely provided, the agency could more readily check to determine if, for example, anyone was claiming the principal-residence exemption on more than one property, Mr. Kurland said.
Asked if the CRA would like the province to make changes such as requiring routine disclosure of the identities of presale buyers, agency spokesman Bradley Alvarez said in an e-mail that, “any additional information, including that obtained from other governments and third parties, enhances the CRA’s ability to detect non-compliance.”
The CRA has found some flips are reported incorrectly or not at all and “the CRA welcomes any endeavours to obtain any information that can assist the Agency in detecting non-compliance.”
Developers support the CRA’s goals, but have to take privacy regulations into account, said Anne McMullin, president of the Urban Development Institute.
“It’s not the developers not wanting to hand over information, it’s, ‘Let’s do this safely,’ because of privacy laws,” Ms. McMullin said.
The NDP, which came to power after the May election, had said while in opposition that the Liberals were not doing enough to curb speculation in B.C. real estate.
In its election campaign platform, the NDP promised to set up a multi-agency task force to fight tax fraud and money laundering in the B.C. real estate marketplace.
Finance Minister Carole James was not available for an interview.
In a statement, her office said the province is monitoring the federal government’s court action, and tax fraud is “something that is taken very seriously.”
The B.C. government is working on a comprehensive housing strategy, and any policy or legislative changes will be made public once that strategy is developed, the statement added.
Q: I have five rental properties in my name. Should I switch them to a numbered company?
A: Hi, Travis. Incorporating a holding company to own rental properties has some advantages and disadvantages depending on the objectives you have in mind in both the short and long term. However, you should first speak with a tax accountant about any tax ramifications both personally and corporately to ensure as perfect an integration of the two systems as possible. Then speak with a legal advisor to draft up the appropriate corporate structure before making the transfer.
From a tax point of view, there are two things to consider. While the transfer of real property held personally should qualify for a Section 85 election to rollover the properties at their cost base, you will want to be sure the CRA will not consider your properties to be held as “inventory”; that is property, held primarily for resale rather than rental. If so, they will not qualify for a tax-free rollover or capital gains treatment. Therefore, the transfer could trigger unexpected tax consequences. Your history of receiving rental income from the property will help you avoid this.
Second, you’ll also want to understand the difference in taxation rates both inside and outside of the corporation. Recent tax changes may have made it less desirable to own passive investments inside a corporation, depending on where you live in Canada.
Some advantages of incorporation include limited liability and creditor protection. However, if you are holding mortgages, most financial institutions will still require personal guarantees. Corporate directors and officers can also be held liable on default, so proper insurance protections for these instances is critical.
From a retirement planning point of view, incorporation may provide more flexibility as to when income is taken as dividends. It could help you to avoid personal taxes or spikes into the next tax bracket, and benefit from the recovery of refundable taxes in the corporation.
Consider also that there will be costs for setting up and annual reporting of the holding company. Transferring the properties from the taxpayer to a holding company may have tax consequences, other than income taxes. If your province has a land transfer tax (or equivalent), you may have to pay the land transfer tax when the properties are transferred.
The bottom line is this: you’ll want to be thoughtful about the transfer, and you’ll want to match your investment objectives and desired tax outcomes as closely as possible.
Source – MoneySense.ca – Evelyn Jacks is a tax expert, author, and founder and of Knowledge Bureau in Winnipeg
Source: The Globe and Mail
Take some advice from rookie home owner Desirae Odjick about houses as an investment.
As a personal finance blogger, she ran the numbers on the cost of owning a home and concluded that breaking even would be a good outcome when it comes time, many years down the road, to sell. “A house is not a long-term investment,” she said in an interview. “It’s not a miracle financial product. It’s where you live.”
The idea that owning a house is an investment is so ingrained that a recent survey found one-third of homeowners expect rising prices to provide for them in retirement. But rising prices do not necessarily mean houses are a great investment.
Ms. Odjick lives in a suburb of Ottawa, where the real estate market’s recent strength still leaves it way behind price gains seen in the Toronto and Vancouver areas. But her point is relevant to all markets where prices aren’t soaring, and probably to hot markets as well if you’re just now buying a first home and understand that continuous massive price gains are unlikely.
In terms of home upkeep costs, Ms. Odjick and her partner have had an easy time of it since they bought in the spring. But they’ve still had expenses that surprised them. “You can use all the calculators you want and you can plan as much as you want, but until you’re in it you really don’t know what the costs are going to be.”
One example is the $3,000 spent at IKEA to equip the house with furnishings as mundane as bathmats. Another was the cost of term life insurance, which, incidentally, is a smart purchase. Term life answers the question of how the mortgage gets paid if one partner in a home-owning couple dies.
Estimates of the cost of upkeep and maintenance on a home range between 1 and 3 per cent of the market value. Her house cost $425,000, which means that upkeep costs conservatively estimated at 1 per cent would come out to an average of $4,250 per year and a total $106,250 over 25 years. Ms. Odjick is too recent an owner to have much sense of these costs, but the housing inspector she used before buying warned her to expect to need a new roof in two or three years.
She and her partner don’t have grandiose plans to fix their place up right now, but she did mention that they are looking at having children. There will almost certainly be expenses associated with getting the baby’s room ready.
In her own analysis of housing costs, Ms. Odjick estimated the cost of property taxes at 1 per cent of a home’s value. That’s another $4,250 per year. This cost would add up to $106,250 over 25 years, and that’s without annual increases factored in.
The biggest cost homeowners face is mortgage payments. Ms. Odjick and her partner made a down payment of 10 per cent on their home and chose a two-year fixed-rate mortgage at 2.71 per cent. Assuming rates stay level and no prepayments are made, this would theoretically work out to a total of $542,122 in principal and interest over the 25-year amortization period.
But rates have crept higher since mid-summer and could increase further in the months ahead. In a post on home ownership on her Half Banked blog, Ms. Odjick said the idea of rates staying level “is bananas and will not happen.”
Let’s add up the costs of home ownership as likely to be experienced by Ms. Odjick over 25 years. There’s the $42,500 she and her partner put down to buy the house, the $106,250 cost for each of property taxes and upkeep/maintenance and $542,122 in mortgage principal and interest. Total: $797,122.
Now, let’s imagine the $425,000 house appreciates at 2.5 per cent annually for 25 years. That’s in line with reasonable expectations for inflation. The future price in this case would be $787,926, which means Ms. Odjick and her partner would have paid a bit more in costs than they get for selling their house in the end.
Houses can be sold tax-free if they’re a principal residence, so there is something to the house-as-an-investment argument. But the numbers comparing what you put in and what you take out over the long term don’t exactly scream “financial home run.”
Ms. Odjick’s fine with that, because buying her home was a lifestyle decision. “If we’ve lived here for 25 years, even if it does end up costing money, then it will have been a great place to live.”
Are you a Canadian family that has made a financial decision to remain lifelong renters? If you would like to share your story, please send us an email.
Wasim Elafech of Century 21 Bravo Realty in Calgary is among the banner brokerage’s top sales agents in the world. Century 21 operates in 78 countries with over 100,000 agents, and Elafech managed to become their number one unit producer in 2015 and number three in Canada last year, so he knows a thing or two about getting the best bang for your buck out of a rental property. He shared some of those tips with us.
1. Maintain the property
Elafech says some he’s sold properties to clients who in turn rented them out, but without putting in the necessary work. “The work you do doesn’t have to be expensive, but it has to be brand new,” he said. “It will be liveable but it won’t look good. The floors will be cracked or peeling, and when people walk in they get the impression it’s a rundown property, but they won’t if you do the work. Make sure all the fixtures work, that they’re not broken; make sure door handles are loose or need to be replaced. If the place is well-maintained, 100% of the time you’ll get more money for your rental.”
Elafech added that properties are often reflections of the people who live in them.
“A really good tenant won’t look for a rundown place, first of all, so they wouldn’t take that place. You’ll attract the type of people your property looks like. People who accept living (in shabby properties) aren’t the best tenants.”
2. Bungalows yield higher rents
Bungalows are excellent rental properties because the top and bottom floor can be rented out as separate units. “One guy I know pretty much made his whole house different rooms with a common living room, couch and TV.”
Typically, however, the upper and lower floors of a bungalow can be rented as separate units. “Bungalows are the easiest houses to sell in certain areas here because you can rent the upper and lower levels, if it’s properly treated. In an area where you’re renting a whole house to a person, you’d get, say, $1,600 a month, but if you’re renting the floors separately, you can get maybe $2,200 a month. It’s about volume.”
3. Screen your tenants
Screening tenants adequately ensures your rental investment doesn’t become a nightmare. “I see it a lot,” said Elafech. “They don’t want to lose a month on the mortgage payment, so if it’s been sitting for a couple of weeks they’ll rush into a deal and rent it to whoever comes next, and sure enough the people either do a midnight run or don’t pay. I’m going through that now with my client.”
Elafech recommends waiting it out, even if that means the property sits empty for a month or two. Ask tenants for references and their job history. “If the tenant is reluctant, there’s usually a reason. Keep a look out for red flags.”
He also suggested hiring a rental management company if an apartment building, rather than two or three properties, needs to be maintained. While pricey, they’re well worth it – and they screen tenants.
Sometimes, though, less is more.
“I have a client that’s renting out a house with a garage for $1,000 month that usually goes for $1,800, because he has a good tenant. He cuts the grass and maintains the property. He does everything for the landlord, so that peace of mind is worth more than the money he’d get from renting the parking pad and garage in the back.
4. Rent the garage and parking spot separately
Elafech mentioned a rental property he’s currently showing. “The owner is going to park his trailer on the parking pad, rent out the garage and both floors of the bungalow separately – rental income from upstairs, downstairs and the garage.”
5. Location, location, location
Location is everything in real estate, so Elafech recommends investing in a property that’s surrounded by prime amenities like transit and schools.
“In Calgary, we have LRTs and buses. Even having shopping centres and schools nearby is important. A client had a condo with an LRT across the street, and he got more for it than a similar place he owns that had a similar layout but was a bit bigger, because it was six or eight blocks away and farther from the LRT. In Calgary, when it’s minus-40 outside, you’re not walking, or waiting for a bus when it’s cold. People pay for convenience.”
Source: Canadian Real Estate Wealth – Neil Sharma