# Business / Real Estate Philosophy



## Retired at 31 (Apr 20, 2009)

I've always believed that if you take care of your company, it will take care of you. In some cases I've applied extreme frugality to them and myself to get ahead of the game. Delayed gratification is an approach I follow and I think it's worked out well for me. I've spent the last few months looking at commercial real estate and have gotten more sideways looks and rolling eyes than I care to count from agents, banks and potential partners.

My ideal corporation (including one that would own an investment building) would be debt free (external - mortgages, loc's, etc. and internal - shareholder loans and intercompany loans). The sooner I can make a new corporation and ideal corp the better.

In an attempt to diversify the holdings, I've been attempting to find similar minded partners with virtually no luck. What's with real estate "investors"? Everyone wants to leverage to the max, stretch the amort as long as they can and yank income. Should they see the good fortune of an appreciation in the property they either want to re-finance and pull the new equity or flip it.

Here's a snippet of an email I sent to associates outlining my my views on things. This isn't intended to find partners (though if this rings true to you, drop me a PM), but more so to get inside the heads of other investors and try to understand why they all think I'm on glue with my approach....


* I am seeking 3 to 5 additional partners with 50 to 80K to complete the purchase of a currently available building. This would represent bank financing of 50% of the property in question.
* I would prefer partners who have or anticipate to have additional capital to deploy in the future for additional properties as opportunities become available for acquisition via the same holdco.
* I have a long term view stretching into a period measured in decades. The property would need to show a double after inflation before I would even entertain the idea of selling.
* I believe in short term sacrifice for long term gain, regardless of current interest rates.
* The funds I plan on investing are funds I do not currently need and I do not require any income from these funds.
* I would like to shorten the mortgage term/amortization to a point where all income from the property is used to repay the mortgage as quickly as possible.
* As I don't need the principal or income from it, I would also be prepared to inject additional funds into the corp to meet it's requirements should a situation arise in the future where the building was partially or entirely vacant.
* Once the property is mortgage free, income from the property would be used to repay the investment partner's original amounts, be they in the form of shareholder loans or inter-company loans.
* Once those amounts are repaid, the short term sacrifice is over and 100% of the income can flow to the respective partners.


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## NorthernAlex (Jul 26, 2009)

Hi Ra31,

first at all- Englisch is not my first language and I came to Canada roughly 18 months ago- sorry if I have some blurbs sometimes. It is not the beer, but the strange translation... hahhaa. I am investing in RE in Ontario (so far only residential) for over 6 years with in total 17 positive cash flowing income properties.

You still seem active and not retired at all! )))

What you want to do is something what I started to do a couple months ago: Joint Ventures with others. There a a few possibilities which are given. the classic JV (few parties share and pay the same amount down) or the JV, which I was using where you have a "Money Partner", but also "Finding Partners". This actually could work for you, too, very well.

This way of JV (which was invented by Rein/Russell Westcott, I think) is very new, but quite established. I am in one JV the money partner (no work with the RE) and with another JV the finding partner, were I am taking care of the everything around the RE/money. Where I am a money partner we share the profit/loss 50/50- the other where I am the finding partner, I pay my money partner 10% of his investment anually.

I could continue to refer a bit more about my experience here and how it was created, legal trap holes aso, but don't want to dilute your thread! 

Send me a PM if you want to touch base and we could go from there as I also am interested in RE opportunities and liked your (for some others) boring approach as I use a boring (for others) approach, too.

(Hey, if I want excitement, I go play poker)

BR,

Northern Alex.


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## Rickson9 (Apr 9, 2009)

Interesting angle! 

As for myself, although I have the capital and long-term horizon that you're looking for, my circle of comfort has never been real estate - real estate is in my portfolio only because I've had to live somewhere (and when the RE market tanks again I'll find another place to live ). I've always loved stocks. 

I've also invested with a partner before but it didn't work for me. I like the flexibility of not having to touch-base with other people so that I can go forward and make my biggest blunders  

I totally agree with pushing the income from the property into a short amort mortgage to de-leverage as soon as feasible. With rates at 40-year lows it feels like the right thing to do.

Good luck! I wish you great success!


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## Berubeland (Sep 6, 2009)

It makes a lot of sense to me retired at 31. Without a mortgage expense it would be amazing !!! 

I don't know the exact math but if a regular mortgage pays the house three times over in 25 years that's a huge savings. 

I don't have the dough to get in on it but would love to work for people like this. Not overleveraged maybe have money for capital expenditures to take care of deferred maintenance sound like heaven. 

Good luck trying to find a like minded person thought.... real estate investors love being mortgaged to the hilt for some reason. I have never worked in a building without a mortgage and i've been doing this over 10 years now. And you'd be surprised how many small investors tell me I got to rent their house this month or they can't pay their mortgage.


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## NorthernAlex (Jul 26, 2009)

Berubeland said:


> .....
> Good luck trying to find a like minded person thought.... *real estate investors love being mortgaged to the hilt for some reason.* I have never worked in a building without a mortgage and i've been doing this over 10 years now. And you'd be surprised how many small investors tell me I got to rent their house this month or they can't pay their mortgage.


Because of the leverage.... like I explained in my example of my latest purchase. I could pay 100% of the building, but than the return wouldn't be that good as it is after a DP of 25% (5% - 15% are possible, too, but I like it simple. So no CMHC). Most important is the positive cash flow. Most unexperienced RE investors are paying too much, have a too small downpayment and don't have their numbers in place (Repair& Maintenance? Management? SecurityFunds? Vacancy aso). 

RE is, fmpov, not a get rich fast way, it is wealth in a long term for long term! And this is what I like!


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## Retired at 31 (Apr 20, 2009)

Looking at your example, does the mortgage payment include principal and interest? Or just interest?


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## NorthernAlex (Jul 26, 2009)

Talking about the latest project, I included there (and like anywhere else) principal and interest. As I don't plan to sell after 5 years, my mentioned "long term" wealth factor will only be possible with annually rising principal/dropping interest. Due to the fact that I don't need the BOSS suite to wear or the BMW to drive I know that I will pay down more when due or buy more. Depends, what my comfort zone tells me! 

[email protected] here in detail:

Mortgage Amount: $190,000.00
Interest Rate Type:Fixed
Payment Amount: $1,019.11
Amortization Period: 25 years 0 months
Payment Frequency: Monthly
Interest Term: 5 years 0 months
Interest Rate: 4.190%

My approach is definitely not a "get rich quick"-scheme and I heard it often from other RE investors to "adjust my settings" (lower down payment, longer amortization, aso) to buy more, but my way still gives me long term wealth growth, now an income I live good from, fmpov very low risk and a portfolio growth I can handle.

There is tons to buy and I drive by every couple days at new listings which "survived" my pre selection. The down side when you work with conservative numbers like I do, is that you need a long time to find a good property and mostly you won't find it via MLS. Happens, as I have an excellent Realtor, who knows what I am looking for, but not often. 
I use adds in Kijiji (paid) and once a month in the local news paper.


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## Berubeland (Sep 6, 2009)

I was just talking to an owner tonight. 

He was saying something which I neither fully understood or can explain. 

He was saying he would prefer an even longer term mortgage than 25 years because as you start paying more and more of the principle down on the mortgage you begin to incur significant tax liabilities on the portion of the rental income that is paying your mortgage. Your cash flow did not increase but your tax bill did. For him this year it was $44000.

So that is something I did not consider.


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## specialk (Jul 14, 2009)

Berubeland said:


> I was just talking to an owner tonight.
> 
> He was saying something which I neither fully understood or can explain.
> 
> ...


So he would rather give tons of money in interest to the bank in order to save a bit in taxes?


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## FrugalTrader (Oct 13, 2008)

Berubeland said:


> I was just talking to an owner tonight.
> 
> He was saying something which I neither fully understood or can explain.
> 
> ...


I do the same thing for rental properties (when I had them). I first make sure the numbers make sense (cash flow positive after all expenses and vacancy) then I stretch out the tax deductible mortgage as long as possible.


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## Rickson9 (Apr 9, 2009)

specialk said:


> So he would rather give tons of money in interest to the bank in order to save a bit in taxes?


The interest can be deduced from his taxable income. It can be worthwhile.

Personally I like the idea of a 20 yr amort since it can act like a "release valve" if things get hairy, I'll have room to go to 25 yr.


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## Berubeland (Sep 6, 2009)

Rickson it's not a bit of taxes it's a lot.

The NOI on the property is $97,000 
The tax liability at year 10 is $44,000

Every year it continues to go up 

The interest is tax deductible but the taxes are not. 

Here's another thing I have noticed working for larger residential landlords for years. 

They are without exception some of the most frugal people I have ever met. Cheap in fact. They do not pay extra for anything. I have learned a lot from them about saving money.

If it made financial sense for them to pay the buildings off and not refinance they would. 

Maybe an accountant type guy could chime in here and shed some clarity


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## Rickson9 (Apr 9, 2009)

Berubeland said:


> Rickson it's not a bit of taxes it's a lot.
> 
> The NOI on the property is $97,000
> The tax liability at year 10 is $44,000


Why doesn't he just slap on another mortgage? What is benefit of taking a long (eg 35 yr) amort.?

Some RE investors prefer to have more control - longer terms and shorter amorts. to give them more certainty and a release valve if unexpected things happen. If you had a shorter term (eg 1 yr) and a very long (eg 35 yr) amort. you have very few places to go if things move against you. Flexibility and certainty > tax liability IMO. I'm no expert but that's what I'm thinking.


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## Retired at 31 (Apr 20, 2009)

My understanding is that once you have "several" properties inside a holdco, that's considered when the income is considered active and the rate drops to the low teens depending on your province with a limit of 300 or 400K. 

Before you have "several" properties, it's considered passive income and even with a corp you're looking at a tax rate of the mid 40's. With this high rate, it could potentially make sense to have a deduction like a mortgage (and with the mortgage payment, only the interest portion is deductible, the principal isn't).

I'm not aware of how things would work personally (outside of a corp), but I'd expect it would be similar.

With a holdco that was getting taxed at the active rate, I'd want to minimize the mortgage and hammer it away as quickly as possible.

"Several" sounds like 3 or 4 according to my accountant - there doesn't seem to be a set limit or dollar amount associated with it.


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## Berubeland (Sep 6, 2009)

According to the discussions I have had it is not enough to just slap on a new mortgage to take the money out. 

The mortgage must be reamortized. It has something to do with the way that paying down the principle is taxed. 

I am speaking to him tomorrow I will ask for specific details. It was considered so important to him that he is willing to pay CMHC fees again to get it. We all know that CMHC isn't cheap


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## Rickson9 (Apr 9, 2009)

Berubeland said:


> According to the discussions I have had it is not enough to just slap on a new mortgage to take the money out.
> 
> The mortgage must be reamortized. It has something to do with the way that paying down the principle is taxed.
> 
> I am speaking to him tomorrow I will ask for specific details. It was considered so important to him that he is willing to pay CMHC fees again to get it. We all know that CMHC isn't cheap


I would be curious to know. 

If a person has a long amort already (eg. 35 yr) what would they reamortize to? Anything shorter will boost the mortgage expense and reduce the portion paid to interest and increase the portion paid to principal; and you can't go longer. If the goal is to increase the interest portion of the mortgage because interest is tax deductable, this would be backwards.

To me, it makes more sense from a business standpoint to have a shorter amort. and move longer (if necessary). For example, it would make more sense if the individual obtained a 25 yr amort and moved to 30 yr amort. This would reduce the total mortgage payment but increase the interest portion and decrease the principal portion. In that scenario he would be able to soften his tax load (if that was his goal). Nobody ever accused me of being smart, but my educated guess says that this is what your friend is doing.

You are correct that CMHC isn't cheap and wealthy people are (very) frugal when it comes to their investments.

I have a friend who invests in apartments and I haven't learned this one (perhaps I never asked). He's definately never recommended going so low as to incur CMHC anyway. Keep us posted!


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## NorthernAlex (Jul 26, 2009)

Rickson9 said:


> ....
> You are correct that CMHC isn't cheap and wealthy people are (very) frugal when it comes to their investments.
> 
> I have a friend who invests in apartments and I haven't learned this one (perhaps I never asked). He's definately never recommended going so low as to incur CMHC anyway. Keep us posted!


I saw numbers in one of the latest Rein Meetings that CMHC would pay after min. 6 years or so because of the leverage.

So far I never used CMHC because of the hassle to deal with them and the time frame which comes with it until decision is made. 

.... and by the way: Did I mention that I like it simple? ;-D


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## NorthernAlex (Jul 26, 2009)

Retired at 31 said:


> My understanding is that once you have "several" properties inside a holdco, that's considered when the income is considered active and the rate drops to the low teens depending on your province with a limit of 300 or 400K. ......


[email protected], you mean if you have several (5+) properties in your holdco, your Rate (you meant the _Tax Rate_) would drop in the low tens, depending province and max income of 300-400k? 

Interesting. Maybe I should spend the time and money to visit a good accountant.


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## Retired at 31 (Apr 20, 2009)

NorthernAlex said:


> [email protected], you mean if you have several (5+) properties in your holdco, your Rate (you meant the _Tax Rate_) would drop in the low tens, depending province and max income of 300-400k?
> 
> Interesting. Maybe I should spend the time and money to visit a good accountant.


That is my understanding. I'm awaiting clarification of what criteria is used to determine when a holdco stops being a passive investment vehicle and becomes a "regular" company who's active income stream happens to be via landlord/real estate. Dollar amount, # of properties, # of tenants, etc.

Rates for active vs passive income are outlined here: Check out the last pages - it combines the federal and provincial (which are broken out in the first pages)

http://www.kpmg.ca/en/services/tax/documents/2008-2009 CCPC_English_Mar 31, Final.pdf


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## Retired at 31 (Apr 20, 2009)

Retired at 31 said:


> That is my understanding. I'm awaiting clarification of what criteria is used to determine when a holdco stops being a passive investment vehicle and becomes a "regular" company who's active income stream happens to be via landlord/real estate. Dollar amount, # of properties, # of tenants, etc.


So it seems that you're not in the business of real estate until you have 5 full time employees working for the holdco - which means you're pretty big. It'd be interesting to see how companies over come this hurdle - from little landlord to big landlord.


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## Gregreid (Oct 26, 2009)

holdco rental income remains passive (~50%) despite the number of properties. holdco can however hire opco to manage the properties. opco now earns active income.

Why do RE invesors maintain large mortgages? LEVERAGE. 

With a cap rate of 8% I can earn 8% on one property OR (8%-3.5% mortgage interest) on 4 similar properties with 25% down on each. So easy to leverage RE vs stocks.

Maximum amortization also means lowest payments - most flexibility - you could always pay extra if you have the cash.

As mortgage payments become more principal than interest you have to reserve cash to pay your tax bill on the repaid principal. Alternately, you could extend the amortization, lower your payment, and use the freed up cash flow for your next venture


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