You’ve done well for yourself.
There’s some extra money in the picture and it’s time to think about what happens next.
Pay it forward for your kids? Set aside a vacation fund? Renovate the home?
They’re all good options. But real estate is king in Metro Vancouver and that’s likely not changing anytime soon.
The expert financial team at Manning Elliott helps take what you’ve worked so hard for and turn those future goals into stable and sensible real estate investments that maximize profit and minimize tax problems.
“While I don’t pretend to be a real estate expert, I’ve got my hands on the relevant market and tax information, plus I talk to lots of bankers quite regularly,” Manning Elliott partner Matthew Ko says. “I know what’s going on with interest rates and how to develop a great plan.”
Ko begins that process with a few introductory questions to help flesh out the way forward: how much money is being invested, what the intention of the investment is and timeframe associated with that investment strategy – short term versus long term.
Then, Ko works to determine ancillary considerations – if your home mortgage free, along with your income levels or financing abilities.
It’s at this point Ko looks to the future – options around capital gains versus positive cash flow on an annual basis, the timelines for an investment and what kinds of returns a client expects.
Let’s say you’re assessing options around buying either a condo or a detached home. Ko suggests that if you’re looking for positive cash flow and an easier asset to manage, go the condo route. A detached home, on the other hand, requires a much larger down payment but will appreciate more so over time due to land costs.
“Oftentimes it’s going to be a negative cash-flow situation,” Ko says. “You need to have other sources of income to subsidize the investment unless you have a big down payment.”
Then there’s the issue of protecting your money from tax issues. If you’ve got a home with little to no mortgage left on it, Ko suggests an equity takeout – or re-financing – and using that money to purchase an investment property. This makes your interest payments tax deductible.
But always pay down your mortgage first, Ko advises.
While he admits there is no singular formula to deal with sharply rising interest rates, Ko does recommend those applying for a mortgage should do so at variable rates. If you opt for a fixed rate, only do so for no more than two years.
“Don’t fix in for five years,” Ko warns. “We would do this quite often a few years ago, but now it’s a totally different world out there.”
The question around capital gains versus business income is a big one for the Vancouver market. In recent years, the Canada Revenue Agency (CRA) has targeted those flipping properties: a condo purchased and re-sold in under a year could be subject to business taxes in the range of 54 per cent.
To avoid that scenario, Ko suggests keeping rental properties for at least three to five years, if not longer, to reduce that tax burden by half. If viewed by the CRA as a capital gain, the tax rate is about 27 per cent.
“There are no black-and-white rules from the CRA yet in terms of how long you have to hold on to rental properties until they consider it a capital gain,” Ko says. “If you can hold on for longer than five years, you get more appreciation and less tax at the end. At the end of the day, it comes down to how much you have left in your pocket.”
