This week, I’m answering a reader’s questions about her real estate projects: “I bought land on which we will build rental properties,” she writes. Can the land I own be used as a down payment for a mortgage loan? How to maximize this investment: short-term rental or lease? I also wonder if it is relevant to incorporate my real estate activities or not. »
Let’s start with the first question, which is the easiest. Yes, it is possible to consider the market value of land as a down payment for a loan during construction. In the case that interests us, it is undoubtedly a “self-construction”. When you have real estate projects, whatever they are, using the services of a mortgage broker is essential. Depending on your reality, he can direct you to the most appropriate lender. In real estate investment, the borrowing rate is important, but the arrangement of financing should also take into account your future projects.
The profitability of a rental project
Now it gets a little complicated. Is it more profitable to make short-term rentals, by displaying your property on specialized platforms? Most likely. But before asking this question, it is imperative to check with your city or municipality if you have the right to the land you want. In addition, it is essential to take your investor profile into consideration in your reflection. Short-term rentals require more marketing effort and more time to devote to customer service. You will also need to allocate more resources to maintaining your property.
If you consider yourself more of a passive real estate investor, rent-to-lease is probably more suitable for you. In both cases, the basic exercise consists in correctly determining the fixed costs relating to your building. The market in which the building is located is also a determining factor, insofar as your income projections must be adapted to it.
In the case of short-term rentals, supply is plentiful and your rates will need to represent good value for money to be competitive. In the case of rentals with leases, since you will probably have to “know” your tenants for several years, the cost of rent must be well fixed from the start. Much like a business plan dictates, your business case will need to consider realistic assumptions that allow you to determine if your project is generating positive cash.
Otherwise, you should assume that you will use your personal cash to compensate if you believe the appreciation in value of your investment over the long term is worth it.
What tax structure should be preferred?
The creation of a management company for the holding of a building requires above all an overall financial planning. This must be assessed from a financial and tax perspective, and the question of the relevance of incorporation must be raised upstream.
Do you need the income associated with this real estate investment? If your goal is to generate income and you need to pay yourself an annual dividend to cover your personal lifestyle, the management company is most likely unnecessary. Moreover, even if you do not need this income, you should know that rental income is considered passive income, taxed at 50.17%. To benefit from the advantages of so-called business income at advantageous tax rates, certain criteria must be met.
Your tax advisors will be able to assist you in a precise analysis, but let’s say that if you only own one property and you do not hire employees to manage your real estate activities, the question does not arise.
If our reader aims to acquire several properties, one of the advantages of the property management company is that all the expenses can then be used to reduce all the income, whereas in the case of a personal holding, you can only reduce the income from the building concerned.
As for the legal and inheritance issues, they are quite different. The company can personally protect you against potential litigation that could lead to bankruptcy. If, among your estate objectives, the transmission of this heritage to your children is a priority, then a corporate structure will allow you to freeze the value of your assets in exchange for preferred shares and to integrate your children into the shareholding. ordinary.
Complex, you say? Not so much if you form a solid team with your financial planner and your legal and tax advisors. A personalized analysis will allow you to choose the most appropriate structure.