For many people, buying a house means securing a permanent home for you and your family. But if you want to accelerate your financial future, consider purchasing an investment property to create an extra income stream and create your own empire. Before you jump straight in, it’s essential to ensure you’re aware of the processes involved in managing and navigating a property of this kind.
We’ll run through some key principles involved in buying an investment property in Ontario — including managing your taxes (with advice from your Accountant), choosing the right property type, and why you should work with a lawyer throughout the process.
Buying an investment property in Ontario: The basics
Two of the main considerations you’ll face when delving into property investment in Ontario are your tax status and whether to invest as an individual or a business.
Let’s briefly take a look at how to navigate them both.
In Ontario, you need to pay a land transfer tax when buying a property, which is charged as a percentage of the total value. The exact percentage varies depending on your province. In Ontario, rates range between 0.5% and 2.5% depending on the size of the property in question. However, first-time buyers may be eligible for a refund.
You also have to pay an annual property tax. Again, this is based on a property’s value, and it also depends on your province.
If you’re buying a new home, you’ll also likely face a Harmonized Sales Tax (HST).
The good news is that, when you’re buying an investment property, property taxes are usually tax deductible (along with mortgage payments).
However, when it comes to the finer details, the way taxes will work for you partly depends on how you buy your property. We’ll turn to this now in general terms, but please consult with your Accountant for specific advice.
Individual vs business
When buying an investment property, you can act as an individual or as a business.
If you act as an individual, you will earn rental income and be taxed at the personal marginal tax rate. You’ll still be able to deduct operating expenses (such as depreciation in value of furniture) and capital expenses from your income. If you go down this route, it’s still important to separate business and personal finances by opening a dedicated bank account.
Or, you can register as a business. This can mean you access a lower tax rate if your property portfolio and company size are large enough for your earnings to be classified as active business income. However, not all mortgage lenders work with corporations due to the added level of complexity, and you may face stricter borrowing requirements.
Figuring out which route to go down for optimal finances can be complex and depends on your personal circumstances. Plus, to pay taxes as a business you need to register as a corporation, which involves filing incorporation documents and carrying out regular admin and paperwork. This can be daunting for many, so it’s best to consult a lawyer and an Accountant to ensure that you don’t land into difficulties this way.
Another crucial decision to make is the type of property you invest in. Ultimately, there are two main choices when it comes to residences: Single-family homes and multi-family units (although both options come in all shapes and sizes).
Single-family homes are often an easier option to navigate, and they may be the best choice for new investors. They tend to involve less risk since you’ll own a smaller unit and that costs less money (although typically, they will also give you lower returns than a multi-unit).
You could also consider investing in a duplex or triplex, which have a similar risk profile and may cost even less.
If you’re unsure what route to go down, you may wish to discuss your options with a real estate agent.
If you’re a more experienced investor (or simply prepared to jump in at the deep end from the start), then you could consider investing in a multi-family unit: A building that typically contains five or more units.
This can be a profitable opportunity, but properties that fall under this category are subject to slightly different rules. Since multi-family units are often classed as commercial assets by lenders, you need to use a commercial mortgage loan to buy them. As a result, you’ll face different qualification criteria and may find it more difficult to qualify. This depends on factors such as:
- The experience of the buyer
- Liquidity of the buyer (after receiving financing)
- Location of the property
- Condition of the property
The importance of working with a professional
The decision about whether an investment property is right for you is both a personal and a financial decision. But once you’ve made your choice, it’s a good idea to work with a legal professional to ensure you navigate the documentation correctly.
A lawyer can help you with following:
- leases or negotiations: Negotiating contracts with a client for a commercial property
- Deed transfers: Making a transfer from one person or business to another
- Purchase closings: Preparing and reviewing closing documents
- Mortgages: Reviewing a commitment and registering a mortgage
- Condominium status certificate reviews: Ensuring a condominium meets the relevant requirements.
Plus, buying the investment property itself is just the beginning. Once you own a property portfolio, it’s also a good idea to create a will so it’s clear what should happen to your real estate if something happens to you. A legal professional will ensure you manage your affairs smoothly. This is particularly important if you’re in more of a legal gray area, such as having a common-law spouse.
Your property, your prerogative
Buying an investment property can be a fantastic step toward achieving financial independence, and it could even be the start of a new career. But if you’re in this for the long haul, don’t go it alone — make sure you have a reliable legal professional at your side to avoid possible complications in the future.
Jeffrey Murray Law has been chosen to be part of the McGillivray Trusted Professionals Program due to our experience with the real estate market and commitment to excellence every step of the way. To find out more about how we can help you, contact us today.
DISCLAIMER: This website is for general information purposes only. Readers are cautioned to obtain legal advice as early as possible directly from a lawyer regarding the particular circumstances of their own situation. Do not rely on the information you find here as constituting legal advice as it is not possible to provide complete answers to any given question without a retainer that includes a detailed review of your situation.
A Clear Way Forward
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