# Family Real Estate Investment



## Mandy101 (Dec 7, 2009)

In 2007, my father, my brother and myself purchased a rental property for investment. My brother and I signed up for one mortgage and my father took out a separate mortgage. The mortgage my brother and I took out is covered by the rent coming in from the house. At the end of every year we pay my father back for all the mortgage payments he has made for the year.

Is there a better arrangement that we should have in terms of paying my father back, in terms of tax purposes? My brother and I are both unattached and my father is semi-retired.

Appreciate any comments.


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## the-royal-mail (Dec 11, 2009)

Why are you blasting the forum with this post? This is the 3rd one you've posted.


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## MoneyGal (Apr 24, 2009)

We don't have enough information to be able to answer your question. Sounds like you essentially have a loan from your father. Are you trying to reduce HIS taxes, or yours - or whose? 

Is his income (from you) rental income? 

Why do you and your brother get the rental income, but your dad is repaid by you - why are you not splitting the rental income three ways? 

Do you split the expenses equally? 

What are the goals of each of the participants in this investment: current income, tax-preferred income, long-term capital gains? 

What are your plans for the property? 

Too many unknown variables for me to start wading in with advice, and I'm usually quick (too quick!) to dive in.


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## Mandy101 (Dec 7, 2009)

Yes my father agreed to help us out to build equity however since my brother and I are both working fulltime we decided we should take over all the mortgage payments. We are in a higher tax bracket, so the goal would be to reduce our taxes first.

We are not splitting the rental income 3 ways as this property is essentially an investment for myself and my brother. All rental income and rental expenses are reported on our tax returns (nothing on my fathers).

Goal for this property is long term capital gain and equity buildup.


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## Dana (Nov 17, 2009)

Mandy101 said:


> Yes my father agreed to help us out to build equity however since my brother and I are both working fulltime we decided we should take over all the mortgage payments.


Aren't the tenants making the mortgage payments? Why are you using your income to pay the mortgage?


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## MoneyGal (Apr 24, 2009)

In her first post, the original poster said: 



Mandy101 said:


> The mortgage my brother and I took out is covered by the rent coming in from the house.


It's an incredibly confusing post. The dad has a mortgage on the property, but is also paid by the kids, who say they make all the mortgage payments (dad's? unless they mean they pay their mortgage AND dad's out of the property's cashflow), but dad reports nothing on his tax return, even though he has a mortgage on the property...Also dad has agreed to "help build equity" but I don't know in practical terms what this means. He contributed a downpayment? He took out a mortgage (how does that build equity?)?

I can't figure this out.


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## Mandy101 (Dec 7, 2009)

Sorry for the confusion! We are using the rental income coming in to pay off the mortgage that we took out (myself and my brother). Then since we don't have any more rental income leftover we pay back my Dad for the mortgage payments he is making out of our employment income. We have 2 mortgages on the property - one under the name of my brother and I and the other under my Father's name. The reason for this was that he contributed a downpayment on the house.


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## Dana (Nov 17, 2009)

So, let me make sure I understand:

The rental property has two mortgages against it. The rent covers one mortgage and you and your brother cover the 2nd mortgage which is in your Dad's name? Who is on title of the property? Who claims the income? This is very confusing. 

If the rental income only covers payments for one of the two mortgages, how do you pay property tax, maintenance, etc? Who pays utilities, you or the tenant? 

From what I can piece together, this sounds like an expensive, inefficient and not well planned way to "build equity".

What are your goals with the property? What are you trying to accomplish?


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## Mandy101 (Dec 7, 2009)

Property tax, maintenance etc is out of our pockets but the tenants pay all of the utilities. 

The title of the property is 50/50 - my brother and myself. My Father was thinking of putting himself on the title also but then for some reason decided not to. All rental income and expenses are claimed 50/50 by myself and my brother - this includes the mortgage interest.

My father thought that this would be a good way to give us a start. 
In terms of our goals we just want to hold onto this property so that it will appreciate in value down the road but also so that we can build equity against which we can borrow money if we ever need to.


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## marina628 (Dec 14, 2010)

Mandy101 said:


> Yes my father agreed to help us out to build equity however since my brother and I are both working fulltime we decided we should take over all the mortgage payments. We are in a higher tax bracket, so the goal would be to reduce our taxes first.
> 
> We are not splitting the rental income 3 ways as this property is essentially an investment for myself and my brother. All rental income and rental expenses are reported on our tax returns (nothing on my fathers).
> 
> Goal for this property is long term capital gain and equity buildup.


Do you also live in this house too ?or are you paying rent somewhere else/living with dad ?
What is interest rate of the 2nd mortgage?
Why would you pay your dad at year end instead of monthly?
Did your dad take out a loan in his name for down payment/mortgage his home ?


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## marina628 (Dec 14, 2010)

You should always try to pick an investment property where the income covers all expenses.And IMO if you need to get a 2nd mortgage you should not buy a property.I know this is not your question but maybe you should try accelerating your payments to your dad to get rid of the second mortgage .What interest do you pay on both loans?Did dad use cash or did he get a loan as well.
I would loan my kids money to buy a first house but probably on condition they have be paid back after 5 years .
You indicate you both earn good money ,have owned the house three year ,how much longer do you anticipate owing Dad the second mortgage?


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## kcowan (Jul 1, 2010)

The property has a negative cashflow. How much capital appreciation is expected to "make this an investment to build equity" and how does this compare to the accumulated negative cashflow including maintenance and taxes?


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## MoneyGal (Apr 24, 2009)

This. For a real estate investment, you typically trade-off tax-preferred current income, (non-tax-preferred) current income, and long-term capital gains. An ideal property will give you two of these three benefits; you can't get all three at the same time. 

Sounds like this property has the potential to produce tax-preferred income and possibly long-term capital gains. But it also sounds as though they overbought such that both factors are depressed by the extent to which they overbought.


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## marina628 (Dec 14, 2010)

You also should ask yourself what if one of you get married and want to buy your own home?why didn't you just go with a first mortgage or are you carrying other debts which affected the ratios?

I keep a $5000 float in my acct for my property and when i bought the investment I knew I would want to spend money on it as it was brand new no driveway paved,fence ,deck etc so I had all these funds in cash as well.
Suze would tell you that it is not to late ,buckle up and cut some expenses so you can turn this around.

Another thing troubling me is you state :In terms of our goals we just want to hold onto this property so that it will appreciate in value down the road but also so that we can build equity against which we can borrow money if we ever need to. 
I hope you plan to clear off the 2nd mortgage before you ever consider pulling money out of the house.Also refinancing is costly ,what mortgage rate do you have now?

I have a good mortgage lady at TD bank and when we bought our investment property home last year she got us approved with 5% down and a 35 year mortgage ,as soon as we got the mortgage approved we put about 12% down and we changed the mortgage payment and are doing a rapid bi-weekly payment which now means we will be paid off in 17.9 years.My tenant pays enough to cover all costs but we choose to pay an extra $64 every two weeks to cut a bit of time off the loan.

At the time we bought the investment property i had already bought my new home which had not closed and was living in my old home which did not sell yet so we had to be able to carry all three homes which is why we did not put the full 20% down .We had the three homes for almost three months and that extra cash we held on to really helped us .
I do have a question related to investment property as well ,can we write off the CMHC fee that we paid when we do our taxes? It was about $1500 and how about the lawyers fees for the investment property deal?

Marina


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## Dana (Nov 17, 2009)

Mandy101 said:


> We have 2 mortgages on the property - one under the name of my brother and I and the other under my Father's name. The reason for this was that he contributed a downpayment on the house.





Mandy101;43024The title of the property is 50/50 - my brother and myself. [/QUOTE said:


> How did your father get a mortgage for a property on which he is not on title? What is the mortgage secured with? Did he take out a mortgage against his own property to help you and your brother out?
> 
> I have never purchased an investment property that is not self-supporting. It is outside of my comfort zone. I am aware that some RE investors do this, but I think RE investing has enough systematic risk associated with it - I would not take on more risk than absolutely necessary.
> 
> ...


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## humble_pie (Jun 7, 2009)

when it comes to real estate i know zero from zip. I've never even bought a house. The one we live in is an old ramshackle shack of my great-grandfather's that's been in the family forever.

so i have the eye of a total naif when it comes to a story about a rental house as an investment.

on the other hand i'm the parent of 2 energetic teenagers and an early-20-something, so i have a certain feel for a family story. And this one, i think, is an appealing one, with a few offbeat angles.

in the first place, no one is hard up in this story. Despite their youth, the kids hold decent jobs. Dad is able to forego immediate financial benefit from this investment. It's not necessary for this family to sweep the last dollar out of every broom closet in the real estate.

far more importantly, the family gets along. There's no hint of squabbles or dissension. It's a high-functioning family.

what dad wanted to set up, i think, is a work-study project. MBA case study 101. He wants his kids to learn hands-on how to manage financially. He's not looking for a return for himself, and he hasn't structured the deal very well, so that the sister & the brother now face the eye-opening experience of trying to analyze their mortgages and their cash flow for themselves. Which is the stage that Mandy has reached, and so she's come here for advice.

i see no need to scold or offer disapproval when there is so much goodwill & cooperation in the holistic situation. OK maybe as a real estate deal it has some alarming aspects. But if i've guessed right, it's a remarkable gesture by a wise & loving parent. One who's willing to let his kids make their own mistakes.


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## marina628 (Dec 14, 2010)

We are not being mean but asking questions necessary to give her good advise.Let's assume they are paying $400 a month out of their pocket on a $300,000 house.Dad is carrying a $40,000 credit line @ 4% and after 3 years that is nearly $20,000 out of pocket meanwhile they may have only paid down $8000 on mortgage and house has not gone up at all.without knowing the purchase price ,mortgage amounts ,interest etc we can only guess what answer is but negative real estate is not a good investment no matter how you cut it.There are plenty of good investment properties out there.She also did not say if she rents ,owns another house etc.
If dad came here 2007 for advise we would have told him to have the kids buy a cheaper house ,dad charge the kids interest on his money which kids could then write off .Maybe the reason there is a second mortgage from Dad is because they bought with little down of their own?Home ownership is a good thing in most cases but you have to be smart with how you structure your debt to get maximum ROI.


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## Dana (Nov 17, 2009)

humble_pie said:


> ...no need to scold or offer disapproval when there is so much goodwill & cooperation in the holistic situation. OK maybe as a real estate deal it has some alarming aspects. But if i've guessed right, it's a remarkable gesture by a wise & loving parent. One who's willing to let his kids make their own mistakes.


I am not trying to be mean. I am trying to ask realistic, necessary questions. The questions that the OP is asking now should have been asked and answered before the investment was made. 

The father's gesture may have come from a place of love and good intentions, but it sounds like the kids didn't yet have the tools or knowledge to embark on such an investment. 

I don't think anyone contributing to this post hopes for anything but the best for the OP and her family. Consider it a form of tough love that we are asking her to clarify her statements and consider the possible risks of their plan. No doubt, we all hope it works out well for them.


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## GeniusBoy27 (Jun 11, 2010)

marina628 said:


> I do have a question related to investment property as well ,can we write off the CMHC fee that we paid when we do our taxes? It was about $1500 and how about the lawyers fees for the investment property deal?
> 
> Marina


Yes to both of those.


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## Dana (Nov 17, 2009)

marina628 said:


> I do have a question related to investment property as well ,can we write off the CMHC fee that we paid when we do our taxes? It was about $1500 and how about the lawyers fees for the investment property deal?
> 
> Marina


Here is a thread on this very topic.


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## Square Root (Jan 30, 2010)

Seems like the OP is sorry they asked?


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## humble_pie (Jun 7, 2009)

halloo dana & marina i never used the word mean. There has indeed been a scolding tone to this thread - unusual for this easygoing & hospitable forum - right from the beginning, when mandy posted her 1st message on 2 or more threads & got royally gobsmacked for it.

mandy whoever you are, wherever you are, you are receiving analysis & suggestions from 3 of the most knowledgeable women in finance/real estate in the whole of canada. In downtown toronto you'd be hard-pressed to find any authority as good, and you'd certainly pay a fee well into the 4 figures. Young lady, you are probably not much older than my own daughter. So listen up to these experienced women, dear child, because you have certainly backed yourself into a sticky wicket.

you've already received an excellent suggestion, which is to take a long-term 25-year mortgage because the payments will be less if you have to undergo a period without tenants or any other setback.

next i find myself wondering what sort of havoc your expenses are wreaking on your paycheque and your brother's paycheque. Both of you are reimbursing your dad for his mortgage payments and you're also paying the property taxes and all maintenance costs for the rental house out of your own pockets.

i'm a novice at real estate so i defer to the pros here. Shouldn't the sibs set up a maintenance/repair fund. If their paycheques are overstretched perhaps they could prevail upon all-suffering dad to forego a few months of mortgage reimbursements until some future date so as to get the maintenance/repair fund underway at the present time.

(note to parents including self)
(don't ever take part in a harebrained scheme like this as a way of emancipating the offspring.)


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## Cal (Jun 17, 2009)

marina628 said:


> .
> I do have a question related to investment property as well ,can we write off the CMHC fee that we paid when we do our taxes? It was about $1500 and how about the lawyers fees for the investment property deal?
> 
> Marina


I had thought that you could only claim legal fees related to the mortgage financing, not the legal fees for the transaction of the property...


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## MoneyGal (Apr 24, 2009)

You can claim legal fees associated with the acquisition of a property as a capital expense, added to the ACB of the property. Here is the relevant section of the relevant CRA bulletin FYI: 

http://www.cra-arc.gc.ca/E/pub/tp/it99r5-consolid/it99r5-consolid-e.html#P131_14117


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## Cal (Jun 17, 2009)

Got it, thanks.

It is claimed as a capital expense, part of the cost of the property, and not claimed as an expense of running the property business.


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## Mandy101 (Dec 7, 2009)

Thankyou all for your comments. We are sitting down together as a family to discuss what our next step should be. I'm feeling a little bit overwhelmed with all these questions at the moment. Would it be possible to email one of you brilliant people with all the facts and gain further advise? Appreciate your help!!


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## Berubeland (Sep 6, 2009)

Hi Mandy, 

I missed this thread earlier. 

When I speak to investors I always caution them against cash flow negative properties because long term it is hard for the property to be sustainable. It's also a psychological issue because people who are told they will make money in real estate find that they are paying to own what should be paying them! 

Still is it that horrible to have a negative cash flow property? If you only have one it's not too bad over the long haul and here's why. 

In the beginning... almost none of the money the tenant pays goes to pay down the principle it all goes to interest so you don't build equity at all. Over time this reverses itself and of course at the end of the mortgage all the money goes towards principle and none goes to interest. At one point if you can afford to stick it out you'll end up with a paid off property for the cost of the taxes and maintenance. 

Second rents do rise although they have not in the last 10 years as people have stopped renting and started buying rents have actually gone down certainly when you factor in inflation. This is a trend that is beginning to reverse itself, slowly over the next few years you'll be able to charge more rent for the same property. If the house was built after November 1991 they is no rent guideline increase in Ontario and you can raise the rent using the proper legal form as much as you like once per year. 

Third, you are able to claim and carry forward your expenses related to the property. 

Fourth, I would look at ways of increasing the income of the property, which you can sometimes do.

Fifth, it depends on the type of property, is it a single family home. These rarely cash flow but attract the best no hassle tenants (usually) so your PITA factor is low. In a duplex with a basement apartment the property will cash flow but is often a source of constant headaches and is a management problem that most landlords do not enjoy. A few hundred bucks a month for peace of mind is chump change. I have a few houses I manage that are duplexes but the owners rent them out as a whole house because they had serious problems in the past. If the overall tenant quality increases we may start to see better tenant profiles for basement apartments for now that's the market as I see it. 

Sixth, as inflation works its magic on rent prices over time your property will begin to cash flow. 

Honestly there are many ways to invest in real estate.

I have one owner who now owns 5 properties that do not cash flow. He has money so it's no big deal to him, his condos are all brand spanking new, they attract the best tenant profile and I have 0 management issues with these properties. I do schedule regular inspections and so far we had one washing machine break but so far that's it. He has good income and savings and his idea is to let the tenants pay them off and he is paying about $500 per month for over $1,000,000 in real estate. We haven't even had to paint a suite yet and the tenants even clean before they leave. When he retires he will have the income ( inflation adjusted ) to live on. 

In conclusion, whatever you do don't freak out and sell the place. Your transaction costs for selling will will cost you about 7 years of (estimated) carrying costs. If it's easy to manage and you and your brother can handle it just keep on trucking and you will make some dough over time.


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## kcowan (Jul 1, 2010)

Do you have any guidelines for how much negative cashflow would be acceptable? Is $500/1 million the number? Plus major items.


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## Mandy101 (Dec 7, 2009)

Thankyou everyone for your comments. I realize I have a lot to learn - this forum is a great learning tool! Marina actually helped me out big time over xmas break by answering a whole bunch of questions I had in terms of this real estate investment. As a family we sat down and had a bunch of discussions and feel that we have started off 2011 with a better plan!


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