Have you considered using real estate as an investment strategy in your golden years?
According to The Toronto Sun, “Older Canadians are lingering longer in the workforce, some because they can, others because they must.” Data from the American Advisors Group indicates similar statistics in the USA. To make ends meet, 46% of seniors intend to work part-time, and 18% plan to work full-time beyond 70.
Considering the rampant layoffs, two recessions, the pandemic, and few jobs providing pensions, many seniors are looking for creative real estate strategies as retirement vehicles.
There are multiple investment strategies in real estate, including;
- Multi-family/commercial real estate
- single-family dwellings
- vacation rentals
- short-term rentals
- student rentals
- executive rentals
- mid-term rentals
- fix and flip
- underperforming apartment buildings
Before diving in, there are two essential considerations; how will you set up your business, and how will you finance your real estate property.
Should you incorporate or operate as a sole proprietorship? A business can be structured around your investment strategy. Bear in mind each type of structure has tax, liability, and financial implications, so it’s essential to make sure you’ve gotten professional legal/tax advice first. Both sole proprietorship and incorporation have pros and cons.
How will you set up your Set Up Your Business?
Sole proprietorships are attached to you and your income; you simply report your income on your personal tax return. Although accounting is more straightforward, liability is riskier. If your business is sued, you are personally liable.
Corporations are separate legal entities where you have the option of paying yourself a dividend, a salary or keeping the money in the business and not reporting any personal income. Since companies are taxed at a lower rate of personal income, you may pay less tax but will require an accountant to file your corporate tax return. Although incorporating your business can prevent you from being sued for things other shareholders or employees do in the business, you are not free from liability.
If your business grows or you want to scale back, you can convert a sole proprietorship into a corporation or vice versa.
How will you finance the property?
Just as there are multiple investment strategies, there are also numerous financing strategies. Many investors find themselves using a variety of systems during their real estate adventures.
The most common financing option is a cash down payment and a conventional mortgage. But it’s not the only one. Traditional mortgages work well for investors with cash, a great credit score, and who can pass the bank’s stress tests. With conventional mortgages, lenders don’t use their own money to fund your loan; they borrow or resell the funds, thus the stringent lending criteria.
Home Equity Line of Credit (HELOC)
Another type of mortgage to consider for your investment strategy is a Home Equity Line of Credit or a HELOC. HELOCs allow investors to borrow from the built-up equity to finance another property. To qualify for a HELOC, you need to have enough income to qualify for the loan, and banks only lend a percentage of your home’s value.
In an ideal world, if you have cash, you can pay the seller in cash, which makes for an easy transaction. If you have lots of money, you don’t need the banks, and you certainly don’t need this blog article.
Hard Money Loans
These short-term loans are most often used for Buy, Rehab, Rent, Refinance, Repeat (BRRR) or Fix and Flip investments. Instead of borrowing from a bank, a private business or individual lends you the money at a higher interest rate (5-15%) and for a shorter term 6-48 months). If all goes well, once you sell the property, you pay the lender back and still make a profit. There’s a risk, though. The property may not sell or be ready to sell within the due date, so you must put exit strategies in place.
Portfolio lenders are banks or credit unions that lend from their funds without reselling the loans to a larger institution, allowing portfolio loans to offer more flexibility and creativity with their lending guidelines.
Unlike banks, there are no predetermined rules for partnerships. One partner may provide 100% of the financing, and the other may contribute 100% of the property management expertise. Or it could be an 80/20 split. Whatever you decide, make sure your partner is someone you align with ethically and professionally and that your lawyer puts the agreement in writing.
Before banks existed, owner financing was the norm. With owner financing, the property owner acts as the bank, and the buyer makes monthly payments to the owner. Owner financing can happen if the seller owns the property outright or even if they have a mortgage. It can be a creative win/win situation to help both the buyer and seller. The buyer acquires the property they want to live in without waiting years to qualify for the bank’s stress test, and the seller bypasses the bank and realtor fees and defers capital gains taxes.
Here’s a short video from my Facebook Live broadcast on single-family and commercial creative financing.
Commercial loans have entirely different criteria than personal loans. Although personal credit is a consideration to gauge investment skills, the amount of revenue the property produces holds more weight.
For seniors searching for an alternative to working for the next decade, choosing the right investment strategy, business structure, and financing, can offer a viable retirement fund for your golden years.
Do you know what you need to know to keep your rental property profitable? Are you self-managing or outsourcing? Rental properties have legislation that has serious legal and financial consequences. For information on what to do with your Canadian property,– buy my book Canadian Landlords Handbook. The Kindle version is $1.49, and you’d help me out a lot by leaving a favorable review on Amazon.
For an excellent overview of investment strategies and the opportunity to ask experienced investors questions – attend the online Real Estate Resilience Summit staring October 14-16, 2022.
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