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Just starting up, advice?

IMSTOCK

IMSTOCK

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Jan 22, 2011
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I am looking into buying homes in order to flip in a short term for a profit. I am in Ontario



I have a few questions



a) is there any benefit to starting a business out of it, ie- could i write off expenses on things I purchase for working on and upgrading the property?



b) being as I am obviously looking to keep the property for a short period, should I bother including the yearly property tax into my mortgage payments



c) i noticed banks do not deal with their own reposessed homes and that they are given straight to real estate. How then do I go about finding out which homes have been repo'd, so as I can focus my attention on putting offers on homes that I know I could get below market value.



Any other info you might find useful I would greatly appreciate.



Thanks in advance
 
Some advice:



get educated !!



have some serious cash for this strategy to work ..



have a networth statement with backup in a networth binder.



know what you are doing !



know an area REALLY well .. and a specific property type REALLY WELL TOO ! You MUST KNOW, for example, if

1) a south facing townhouse of equal upgrades and size is worth XX $s more or less than a northfacing one, or

2) what the price difference is between a 2BR townhouse vs. a 3BR (assuming similar street or view), or

3) if houses north of XYZ street are 12% less than south of XYZ street, and every block east of ABC avanue price declines $4000/street etc.

4) how much it costs to upgrade to a certain re-sale standard 1000 sq ft and 2 bathrooms or 1500 sq ft with 2 1/2 bathrooms plus a full kitchen reno



yes, expenses can be written off .. ALL OF THEM that are actual and reasonable (and your view and that of CRA might differ on that topic) ..



Flipping income is taxed as business income .. not capital gain.



Flipping is VERY HIGH RISK after considering costs to: upgrade, land transfer tax (and now also in Toronto: a city land transfer tax .. budget 3% total !!) and to pay utilities, taxes, interest, realtors, lawyers, a spread of 20% is suggested .. and that is hard (but not impossible).



Building relationships is critical: bankers, lawyers, mortgage brokers, buyers, sellers .. and that takes a while !
 
Thanks much for the reply. I have definitely been educating myself. Been constant for the last 2 months.



I have a real estate agent, been pre approved at the bank and asked alot of questions, have looked at many homes, rental units etc. Reading all the websites I can find, aswell as video.



The above were just some of the questions left unanswered and I believe I have answered the final one already.



I do have a fair amount of cash available on hand I am prepared to use.



So if I am not mistaken, as an individual, flipping income is taxed as capital gain (TAX on 50% of profit)

What you are saying is that if I did a flip as a business it is taxed as business income instead?



If this is correct, it is hard to decide then if the benefit of writting off expenses will outweigh the cost of business tax, versus the inability to write it off as an individual who only has to pay tax on capital gains.



I am in northern Ontario fortunately and my LTT isnt as high.



I have a formula I found online that dictates typically wanting to get a home for 65% or so of its value so that you will have enough room after all is done, to still comfortably make a profit.



Then add the closing costs, 4 months of mortgage and utility payments, broker fees, LTT, and upgrades.



I know what you mean about building good relationships with all of these people in the field, and I am getting there and only time now will help me with that.



So right now my only real question would be, if I am correct about the difference in taxes from an indivual to a business. As this will help me decide wether or not to register as a business or just stay as an individual.



Thanks again
 
[quote user=IMSTOCK]I am looking into buying homes in order to flip in a short term for a profit. I am in Ontario



I have a few questions







Hello,

My suggestion is that you read Don Campbell's book before you decide on flipping (Real Estate Investing In Canada). see Amazon link to buy it ---

http://www.amazon.ca/Real-Estate-Investing-Canada-Creating/dp/0470158891



Read this before you jump into flipping, it will be one of the best books you ever read when it comes to real estate investing in Canada.
 
Couple items that you had mentioned:



1. If you are indeed 'flipping' houses, you are buying houses for the purpose of rather immediate fix-sell, then you will indeed be taxed on the full gain as business income (as opposed to those that buy to rent, are fully taxed on the rental income, then get taxed capital gains when the underlying asset is sold down the road).



2. HST is rather irrelevant unless you are buying/selling brand new houses or commercial property. There is no HST/GST on 'used residential property', so you will not pay nor collect tax on the purchase/sale of the houses. That being said, you WILL pay GST/HST on most services for your property. If you're doing renos, paying realtors, etc, you will pay HST/GST and you can not claim it back as you are involved in an exempt activity (unless, again, you are dealing in brand new or commercial properties, but that doesn't sound like the case).
 
[quote user=IMSTOCK]So if I am not mistaken, as an individual, flipping income is taxed as capital gain (HST on 50% of profit)

What you are saying is that if I did a flip as a business it is taxed as business income instead?



If this is correct, it is hard to decide then if the benefit of writting off expenses will outweigh the cost of business tax, versus the inability to write it off as an individual who only has to pay tax on capital gains.


Capitals gains is paid only on gains on an income property held for rentals, where the intent is to hold and rent. if the intent is to buy-upgrade-sell, then CLEARLY it is not buy-hold-rent but flipping, and as such business income.



Whether you sell the property as an individual or as an incorporated business makes little difference !



You can deduct all reasonable and actual expenses in either case, and pay tax on business income in either case, too !



The only benefit of incorporation is that you may pay LESS TAXES if you leave profits (after tax) in the company due to the lower overall corporate taxes in a small business (under 500K profit annually). The federal tax is about 15% and the provincial tax about 10% (maybe higher in Ontario), thus 25% in a corporation .. likely lower than personal tax which might be over 40%. But you will also have to file taxes for you and the corporation, thus higher expenses. Plus it is harder to get a mortgage in a corporation.



Do one to start .. and ensure it doesn't bankrupt you .. as after you pay all these expenses here it may not be such a "wow" business:



a) land transfer tax

b) city transfer tax

c) legal fee - on purchase

d) legal fees - on exit

d) upgrades (be very precise here !!) + cleaning + landscaping/curb appeal enhancements

e) staging cost

f) realtor on exit

g) marketing

h) utilities while holding

h) property taxes while holding

i) mortgage interest (higher than a long term mortgage, if you can get it, easily over 5%) plus potential penalties

j) appraisals

k) property inspection fees

l) your own time

m) your costs to drive around / buy donuts / meals



Can be quite profitable once you know what true value is .. but you will find it takes quite a while to sift the diamonds out of the rough.



I have done a few in my life .. but found that the only consistent way to make money, and not just "do another job" is buy-upgrade-hold-for--long-time+re-fi .. maybe sell ! Usually apartment buildings .. but sill own a few condos/homes.



HAPPY FLIPPING .. may it be profitable and enjoyable for you !!
 
Whatever you do - do NOT purchase anything - for a LONG TIME

If you do - and you might be suprised to read this but I might have a bit of a psychic in me - your future post will be about how much time and money you have LOST AND WILL HAVE A HARD LONG ROAD AHEAD OF YOU TO MAKE BACK
 
One quick correction to the above. An investment corporation is not eligible for the small business deduction and thus will actually pay HIGHER taxes than most scenarios for an induvidual. The only time an investment corporation will get the benefit of the small business deduction is a) if it is in the active business of buying and selling properties (in which case it isn't an investment really, it's a business) but as described, you then loose the capital gains treatment, or b) if your investment portfolio is big enough that it employs more than 6 full time employees. THEN you're considered an 'active business' and can get the SBD.
 
I had originally not understood why everyone kept saying that it would not be considered capital gain, but rather business income. Now after some more reading I understand that it is also based on if it appears you are doing it as a business according to the CRA.



http://www.cra-arc.gc.ca/E/pub/tp/it218r/it218r-e.html



So essentially if a person does a buy fix sell, once a year, you could theoretically get away with paying capital gains, and not business income.



I thank you so much for your reply
 
I will do this. I have realized that I have much to learn.



Thank you for the advice.
 
[quote user=IMSTOCK]So essentially if a person does a buy fix sell, once a year, you could theoretically get away with paying capital gains, and not business income.


... or not ..
 
[quote user=housingrental]Whatever you do - do NOT purchase anything - for a LONG TIME

If you do - and you might be suprised to read this but I might have a bit of a psychic in me - your future post will be about how much time and money you have LOST AND WILL HAVE A HARD LONG ROAD AHEAD OF YOU TO MAKE BACK


I second this opinion .. as the risk of loss is significant if one is too uneducated !



And the 18 months of REIN membership of $3600 will seem like a BARGAIN then !!!!
 
I have just ordered a couple of his books, and would consider the REIN membership.



I am here to learn. I appreciate the advice not to buy, but would also like some positive direction to grow.



Thanks again for the replies.
 
[quote user=IMSTOCK] .. but would also like some positive direction to grow ...


buy a house that can be rented and cash-flows with 25% down (aka 75% mortgage) in case the flipping doesn't happen !



My earlier post I listed a number of things you should do.



for example: know what you are doing !



know an area REALLY well .. and a specific property type REALLY WELL TOO ! You MUST KNOW, for example, if

1) a south facing townhouse of equal upgrades and size is worth XX $s more or less than a northfacing one, or

2) what the price difference is between a 2BR townhouse vs. a 3BR (assuming similar street or view), or

3) if houses north of XYZ street are 12% less than south of XYZ street,
and every block east of ABC avanue price declines $4000/street etc.

4) how much it costs to upgrade to a certain re-sale standard 1000 sq ft
and 2 bathrooms or 1500 sq ft with 2 1/2 bathrooms plus a full kitchen
reno
 
Your time is much appreciated. Would love to be able to pick your brains



Thanks again for the reply
 
I second Thomas's post

You should be taxed at full tax rate not capital gains on this

How did you come up with that interpretation IMSTOCK?



[quote user=ThomasBeyer][quote user=IMSTOCK]So essentially if a person does a buy fix sell, once a year, you could theoretically get away with paying capital gains, and not business income.


... or not ..
 
Two posts we agree on in same thread, this is a very positive development Thomas :)



[quote user=ThomasBeyer][quote user=housingrental]Whatever you do - do NOT purchase anything - for a LONG TIME

If you do - and you might be suprised to read this but I might have a bit of a psychic in me - your future post will be about how much time and money you have LOST AND WILL HAVE A HARD LONG ROAD AHEAD OF YOU TO MAKE BACK


I second this opinion .. as the risk of loss is significant if one is too uneducated !



And the 18 months of REIN membership of $3600 will seem like a BARGAIN then !!!!
 
Give me an email through my website with your cell phone number if you can make it out the next REIN meeting (This Thursday). I'll be there an hour or so before the meeting and I'm happy to provide my perspective on real estate.



[quote user=IMSTOCK]I have just ordered a couple of his books, and would consider the REIN membership.



I am here to learn. I appreciate the advice not to buy, but would also like some positive direction to grow.



Thanks again for the replies.
 
Having some experience in flipping the odd home, a word of caution. Don't be fooled by the American house flipping shows. I have found that I need to purchase at 40-50 cents on the dollar or it's just not worth it considering ALL costs. Buy & hold is the way to long term wealth. Flip the odd house & use the capital/profit to buy for the long haul. Just my 2 cents.

Doug
 
If you read through this: [quote user=IMSTOCK]http://www.cra-arc.gc.ca/E/pub/tp/it218r/it218r-e.html




and interpreted it as this:



[quote user=IMSTOCK]So essentially if a person does a buy fix sell, once a year, you could theoretically get away with paying capital gains, and not business income.




Then I would recommend you consider purchasing professional tax advice before you proceed with this plan.



Regards,



Michael
 
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