Episode 55

Ep 55 - Pros and Cons Of Buying A Rental Property In A Corp Or Personal Name

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Show Summary:

In this episode of the "Wisdom Lifestyle Money Show," Scott Dillingham, discusses the pros and cons of buying properties under a corporation (Corp) versus buying personally. The major benefits of buying under a Corp include mortgages not appearing on your personal credit report, allowing investors to maximize their borrowing capacity. Additionally, the Corp structure provides extra liability protection, as only the assets within the Corp are at risk in case of a lawsuit.

However, there are some drawbacks to buying under a Corp. Firstly, properties purchased personally will show up on your personal credit report, potentially affecting your borrowing ability. Furthermore, interest rates on Corp-owned properties may be higher because fewer lenders offer corporate mortgages, resulting in less competitive rates. Setting up a corporation for property ownership may also require all directors of the Corp to be co-owners and listed on the mortgage, which can complicate matters if certain directors only hold shares for tax purposes.

Scott also mentions a "bare trust agreement," a strategy that allows you to close on a property personally and then transfer it to the Corp for tax purposes. This approach can be beneficial from a tax standpoint, but it doesn't shield you from personal liability.

In conclusion, Scott advises seeking guidance from an accountant and lawyer to determine the best approach for your situation. While buying under a Corp can offer advantages like increased borrowing capacity and liability protection, it might not be suitable for everyone. Understanding the implications of each option is crucial to making an informed decision. Scott mentions upcoming webinars in their investor hub that will cover this topic in more detail, providing valuable resources for those interested in further exploring the subject.

Scott's email, if you have any show suggestions or feedback is scott@lendcity.ca.

Scotts office number is 519-960-0370 if you want to set up a call to see how LendCity Mortgages can help you.


Welcome to this episode of the wisdom lifestyle money show. I'm your host, Scott Dillingham. So I have a very good client of mine. And he's asked me to do a podcast about the pros and cons of buying an a Corp. Or if you should buy personally. So that's what we're going to cover today. And for you listening, if you have any questions or you think a podcast episode would be important, just like this one.

Let me know, and I will absolutely make it for you. Pending that I believe it's something that a lot of investors want to know. So by all means, please reach out if you have any questions or comments or potential episodes that you'd like. My email address is Scott. So S C O T T. At lend city. So that's L E N D C I T y.ca.

Give me your feedback and we can make it happen. So as per my client's request, let's go over the pros and cons of buying in the court. So first I'll start off with the good stuff. Okay. Here's some of the major benefits and why people want to buy it in a court as opposed to the personal name. So one of the major things.

Is the mortgages do not show up on your personal Uriel. So I'm not going to call out lenders names here, because I know there's some red tape with that. We've got to get their approval to use their names in here, but we've got some residential lenders. Now they only hold personal mortgages. This lender won't do corporate mortgages. However, they allow us to not factor in any of the corporate mortgages. We're allowed to act as if they're not even there and we can erase them from the application.

So an ambassador could get started. They could max out the amount that they buy. Put them all on the court they're reset and they can keep going. Put them on the court they're reset. Right. And you can keep going and going so you can see how that could be super important. When a lender's not factoring in properties in your court.

So that is a major positive of buying in the court. The other thing. Is you get extra liability protection? Now. The thing is you can buy external or separate. Liability coverage. So you can be protected. But generally speaking, if it's in a Corp and you were to be sued, Only the assets in the Corp.

Are, you know, up for debate. Uh, they can't come after your personal items. So you get that type of liability protection in the Corp. Okay. But there's some key cons here as well. And you know what, there probably is more pros and there's going to be more cons that I'm listing here too, but I'm listing the major ones that impact the most of my investor clients. Right. So when I'm on the phone with them and we're going over the pros and cons, these are the things that we're discussing.

Again, there's probably millions of pros and cons, but these are the big ones that encompass most of the investors concerns. So obviously the negative is if you're buying personally, it's going to show up on your personal credit bureau. Okay. And that's pretty standard. I'm also going to say that.

Uh, con of buying in the Corp name is that you're going to get lower rates. And it's not necessarily that the lenders charge you more. If it's in the Corp, it's just that there's less lenders that do it. So before COVID there was a ton of lenders that allowed you to register your property in the court. So it was very common.

But then COVID came. And most of these lenders froze and stopped offering that product. And then as COVID sort of got behind us or they've reopened back up and, but not all of them. But a bunch of lenders have opened up and now we can do them in the corpse again. And the thing is the lenders are looking at it like, look, if you're buying an a Corp, this is a commercial, like this is a business. So they're not going to give you a residential mortgage on that property. They kind of want to go commercial properties.

And commercial mortgages. So, I mean, we have a commercial team so we can absolutely help with that. But the downside to going with commercial is there's fees. There's many upsides, but that's not what this episode's about. So ideally though, as an investor, if you can buy in the core on the residential side,

You don't have those fees, right? So this is why it's attractive. But so let's go back to the rates, right? Why are the rates worse? Well, again, there's less lenders, so let's say out of a hundred lenders. And everyone does rentals in this hypothetical example. We can really shop those lenders and get the client the best rate when it's in the personal name.

But let's say out of those hundred lenders, only 10 will do properties in the Corp. Right. You can visually see just by those numbers that you're not going to get as good of a rate because those 10 that we have they may not have the very best deal in the market. So your interest rates can be higher if it's in a Corp.

There's some other caveats too, right? Like if you set up a corporation and there's four directors, the lenders are going to want to see that those four directors are on this new mortgage. So sometimes that's a problem because sometimes. And investors and people that own corporations, they set up a Corp and the add people as directors, as maybe family members or whatever, so they can get some benefits, some type of return from the corporation over time.

But they don't necessarily want them to own the real estate. So it's very important to know that if you are going to register in the Corp as well, That all the borrowers that are directors are also co-owners and on the mortgage for that investment property. Okay. So that's really a high level. Those are the major pros and cons.

There is another thing that I will throw out there to you. You have to speak to your lender in this case. If you have questions and you're going to work with us, give us a call. My office line is 5 1 9 9 6 0 0 3 7 0. But if you're working with someone else, the other thing is called like a bare trust agreement.

So what this does. And allows you to close personally. But then it kind of pushes the property to the corporation. After closing. As far as CRA is concerned. So for income taxes, it's in the Corp. Okay. And that's something I really didn't discuss because I'm not a tax professional. You have to speak to your accountant.

On how this can affect you, but incorporations, depending on your personal income, it might actually be cheaper from a tax perspective to keep them personal. But depending on what you're doing, it might be cheaper in the court. Okay. So you need to speak to your accountant on that. I didn't touch on any of that on purpose.

But. The so. With the bear trust, right? It puts it in the cork for taxes. But it does not protect you from liability because it's still held on your personal name. So keep that in mind. Some lenders are fully against us and they won't allow you to do it. It kind of, it makes it weird down the road when you try to refinance, because a lender will say, you know, show me the income and they're not seeing it on your personal tax return. So they're like, are you not claiming this rental income?

And you're like, no, like it's in my corporation. And then they're going to be like, put the properties in your personal name. See what I mean? So there can be some red tape with the lenders after the fact when you're refinancing a property that you. You use the bare trust with but a lot of the lenders get it and they see it. They're like, okay, you know, I understand this makes sense. And they move forward. So keep that in mind too.

I've been told from my clients. And again, you want to speak to your lawyer and accountant on this, but I've been told that they were able to do it without triggering land transfer tax or anything like that. And so it's potentially an option for you and it kind of beats the system in a sense, because then you can access all lenders.

But again, the downside is you don't have that liability protection and your lender could be completely against this. So you want to make sure that everything's good first, but just know that is an option too, that some foreign investors opt in for, and that's what they do. So I hope this episode helps.

I want to keep it short and sweet and give you the information that you needed. We are going to be having webinars within our hub about this. We have professionals that we've already booked to speak. About this. So if this is something that you're interested in, the link will be in the description to access our hub, our investor hub.

And that's where we put our best content. So if you're not part of the investor hub, make sure you join it. Everything's going to be in there. But anyways, I hope this helped and I hope it helps you to determine what's better for you to buy in the personal name or the Corp. Thank you.

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The Wisdom, Lifestyle, Money Show is here to help you make better decisions with your money, learn about life's finer things, access personal improvement hacks and discover how to be a better investor.

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Scott Dillingham