Mortgage Tips and Tricks for Condo Investors with Amit Puri, Mortgage Broker and Chartered Accountant
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Amit Puri, mortgage broker and CA, talks about the historically low interest rates we are experiencing and gets us behind the scenes to learn what is driving the current mortgage rates. He also provides some advice for getting a mortgage if you are a first time condo investor, and he gives his opinion on the key question of is it better to buy your condos in a company name or a personal name?
Amit Puri Interview Highlights
0:34 What We Talk About in Today’s Episode
2:03 Getting to Know Amit Puri
4:35 From the Corporate World to Entrepreneurship
7:27 The Lowered Prime Rate
10:00 Exports Could Be Hurt by a Low Canadian Dollar
11:22 Banks Don’t Follow the Leader
14:35 Banks Working Together
17:30 What Mortgage Rates Are Available and Coming?
22:33 What Do People Need Before Getting their First Mortgage?
26:47 When You Have 20% Saved Up for an Investment Property…
31:15 The Difference Between Big Bank Mortgages and Smaller Banks
35:22 Buying In Your Name vs. Company Name
46:35 How to Contact Amit Puri
How to Leave a Review for The True Condos Podcast on iTunes
Amit Puri Interview Transcript
Welcome to the True Condos podcast, with Andrew la Fleur, the place to get the truth on the Toronto condo market, and condo investing in Toronto.
Andrew la Fleur: Hey, and welcome back to the show. On today’s episode I’m going to be interviewing Amit Puri. Amit is a mortgage broker and he’s also a chartered accountant. And today’s episode is a little bit longer than your typical episode that we’ve done. We really go deep on some issues around mortgages and mortgage financing, so I’m going to get to that right away without a typical intro portion. Some of the things that we talked about were the mortgage market right now, where mortgage rates are, and where they’re likely to go this year. We talk about things that every condo investor needs to know about qualifying and actually getting a mortgage on their investment units, would be helpful for anybody who’s a first time investor to understand how that works and how the banks will qualify you on a mortgage.
And also probably the most frequently asked question that I have gotten over the years about mortgage financing from condo investors is the question of “Is it better to buy a property in your personal name, or is it better to incorporate and buy it in a company name?” And so that is definitely a question that you’ll want to hear Amit’s answer to, speaking as a mortgage broker and also a chartered accountant, so he’s really got a broad knowledge base to speak to you, and I think you’re really going to enjoy this interview. So without any further delay, here is my interview with Amit Puri. And if you want to get the show notes for this episode and links to reach Amit, and everything that we’ve talked about here on this show, you can go to truecondos.com/amit, A-M-I-T, and you’ll see all the links there. So here it is, my interview with Amit Puri.
Andrew la Fleur: Okay, it’s my pleasure to welcome to the show Amit Puri, Amit is a mortgage broker, and he’s also a chartered accountant. Amit, welcome to the show.
Amit Puri: Pleasure to be here Andrew, thank you.
Andrew la Fleur: Why don’t you start by just telling everybody a little bit about yourself, your background, how you got started in the real estate industry and mortgages, and just help us to get to know you a little bit better?
Amit Puri: Absolutely. I went the [Hulu 00:02:28] school of business back in 2000. I graduated, joined KPMG as a chartered accountant, which is completely a 180 from the business that we’re in now. Learned the art of investing, what it means to be a client, what it means to be an investor. Spent a few years at Deloitte, which is another accounting firm, learning transaction business, which means buying and selling businesses, buying and selling property, so I’ve always had a knack for being on the business end of client meetings. In 2008 I joined TD Bank, and over there is where I learned the mortgage systems. I was having a casual conversation with my VP in the strategy department, and said I would like to be more client-facing.
And he pitched me the idea of doing mortgages, and I never thought it would lead to the success that it has, but I decided “You know what? Let’s give it a shot.” And I thought if I didn’t make it in this industry, I could always go back to being an accountant at TD. And within less than 18 months I was a top 20 performer at TD, nationwide. So out of 850+ representatives, I was in the top 20. I was given the rookie of the year award, and that led to me having the confidence to open up my own mortgage brokerage in 2002, as well as my own accounting firm. And that is where we are today. I’ve been in the business of mortgages for almost 5 and a half, 6 years.
And have been an accountant for almost 11 now. I find that those two synergies help me guide my clients towards investments, towards better saving opportunities, whatever the nature of the conversation requires.
Andrew la Fleur: That’s great. Obviously some people might look at that and say “Wow, he was a chartered accountant, he’s working for KPMG and Deloitte and TD, and he’s at the top of the world, so to speak, for the accounting world. And then he became a mortgage broker, what’s up with that?” Obviously it’s worked out very well for you, and you still have your accounting practice as well. But maybe tell us about that transition, sort of going from the, in a sense, the corporate world to the entrepreneurial world, and going out on your own?
Amit Puri: For sure, and you know what? As it sounds, the split comes from both my parents, my mom and dad. My mom came from a business background, her entire family is all full of entrepreneurs. And my dad was a bank guy, he worked at world bank for 25 years. So growing up I had both sides of opportunities to see how it feels to be self-employed, how it feels to work for a company for almost 25 years. And so, one of my parents thinks that’s awesome, and one thinks I’m nuts, so it always depends on which one you’re talking to. What I’ve seen is that when I was in accounting, people would always say “You’re people-oriented, you have the ability to talk to people. Get out there and sell yourself.” And I did that.
And then When I was out there and selling myself and selling PD and selling the mortgage business, everybody would say “You’re an accountant, why aren’t you doing accounting?” Then I would meet people who would say “I’m self-employed, I need financing.” And so when you put all three of those requirements together, that people were demanding of me, being an accountant with the ability to do financing was a home run. And so now my mortgage clients become my accounting clients, and my accounting clients I’m able to service directly, who need financing. And I give it to my professional training that I received at these top 50 companies, like KPMG and TD and Deloitte.
They gave me the skills necessary to be able to handle that workload, to structure my practice in a way where there is automation amongst the staff, there’s the ability to give me the opportunity to still provide that service that my clients need on both the financing and the accounting side. And to me they both go hand in hand, because if you’re in business you need money, and if you’re trying to make money, you need money. You need an accountant, so it’s been a very good offering to my clients. I can make a spreadsheet with my eyes closed on how to make investments, so it’s something that I always give to my clients as well.
Andrew la Fleur: That’s great. Let me shift gears and talk about the mortgage market right now, and what’s happening there. Obviously big news recently is Bank of Canada actually … Too many people surprised, actually lowered the primary. Were you surprised by that? Did you see that coming, or did that catch you off guard?
Amit Puri: You know what, it did not catch me off guard. [inaudible 00:07:50] because of the economic situations that are hung across the world, as well as Canada. So to answer the question, you never know where the interest rates are going to go because no-one has a magic crystal ball. But the interest rates at the bank, they’re only based on a couple of factors. They’re based on the tenure bonds that are being sold by the government, and they’re based on how the economy is doing, if it’s stable, if it’s growing, et cetera. And so when you look at a trend over the past year, or even over the last 6 months, both are on the decline. And then I could talk for hours about it, because my accounting/economics side that’s turning on, but the interest rate is a representative of which way the Bank of Canada believes the market is going to go.
And so there are pros and cons. The interest rate coming down is good for home buyers, it’s good for investors. But it has a negative connotation to it as well, it’s caused the [inaudible 00:08:53] to go down, it’s going to cause exports to decrease because we can’t sell overseas. There’s going to be huge job losses because of the oil industry, which has seen oil at a much lower price these days. So there are pros and cons to the deduction, and the prime rate. And I think the market will decide what it wants to do. We might see a boom in housing, we might see a decrease in exports. And that balance will determine which way the Bank of Canada wants to go over the next few months, but I’ll be a little bit foolish and say that I think they’ll decrease the prime rate again another quarter point.
I’ve heard speculation as early as the next meeting, which is in March 2015. But to be honest with you Andrew, I was telling people the prime rate’s going to be going down for a year, a year and a half. Because it hadn’t moved since September of 2010. So nobody knows what near means to the Bank of Canada, it could be the next meeting, it could be another year from now. I don’t think it’s going to rise any time soon.
Andrew la Fleur: Just going back to one thing you were saying about exports, that was interesting, you were saying you think exports could be hurt, but everybody seems to be saying exports will be helped, obviously, by a lower Canadian dollar, making our stuff cheaper to the rest of the world. So can you expand on what you mean by that, exactly?
Amit Puri: By exports, I’m talking solely on the oil, not consumer goods, not forestry, not technology or anything like that. Just to try to explain it in a nutshell, the price of oil has fallen dramatically to, as of today, maybe 45, 47 dollars a barrel. But the problem is is that what the economy is based on is that the cost to develop a barrel of oil is anything between 60 and 80 dollars. And so we’re going to see a huge, either stoppage in the production of oil, especially in the Alberta shale, and the oil sands and all that. Or we’re going to see a huge pile of supply that’s not going to be sold until the price returns back to normal.
And that’s what is causing the dollar to fall, because of Canada’s huge dependency on commodities, such as oil and forestry, and paper and so on. So when I was talking about exports, I was specifically in my mind talking about oil, which is causing everything else to move in the market.
Andrew la Fleur: Gotcha. Now, I’d like to get your commentary on the fact that, when the Bank of Canada lowered their rate a couple of weeks back, the banks did not follow suite. So can you tell us what happened there, and why you think it happened, and what’s going on with the banks?
Amit Puri: When I was at TD, I used to work in enterprise strategy, which was essentially the consolidation of all the different divisions of TD. So TD is GT Security, GT [Waterhose 00:11:53], GT Canada Trust, the branches, TD Corporate, TD wealth, there’s so many different silos, but everybody knows the bank is TD. So the reason I mention that is banks are solely judged on their NIM, which is N-I-M, which is Net Interest Margin. Stockholders, share price, everything is based on how much net interest the bank generates. Net interest is the difference between what the bank receives from money it loans out, and what it gives customers for money that’s sitting in savings and bonds and so on.
So what happened here is that the banks have mortgages outstanding, let’s use a number of 100 billion dollars, for example. And it’s much higher, actually. But let’s use 100 billion dollars as the amount of mortgages outstanding. Now the cost of those mortgages is now .75 for the bank, plus 2%, which is their cost, which should have made prime 275. But instead the banks only reduce prime to 285. That difference of .1%, which is also called 10 basis points, literally translates into 100 million dollars of additional profit for the year if they don’t pass those savings onto the customers.
Now, you could say are the banks being greedy? Or why are they keeping that much extra money? The reason they’re doing that, or at least I believe it’s not something substantiated, I think they’re trying to save and build up their cash pools for if there’s a rainy day coming up, if there’s any issues. So they are going to cash in an extra 100 million if they don’t change the prime rate, just based on that spread, which is the net interest differential between what they got from the Bank of Canada and what they passed on.
Andrew la Fleur: Right. So 100 million dollars added to their bottom line at the expense of the consumers. Why is it that …
Amit Puri: It’s a billion just to jump in, but the bank is holding probably … The top banks, like RBC and TD, they’re holding like 200 billion in mortgages. The smaller ones could be 80 billion, 100 billion, so when I say 100 billion as a total top 5 bank, I’m sure it’s around 700 billion, so we’re probably talking 100 million dollars of extra profit just sitting at the banks in a single year. But I mean all these [inaudible 00:14:30] numbers, only the banks know we’re working in the accounting [inaudible 00:14:35].
Andrew la Fleur: Why did all the banks act in unison, is it some kind of a collusion cartel scenario, why did no-one break rank and lower their prime rate? Do these guys all talk to each other and say, “Okay, what are you going to do, what are you going to do? Let’s all not do this together,” you know what I mean?
Amit Puri: I hear you.
Andrew la Fleur: In a free market, you’d think someone would say “You know what, screw it, we’re going to give this money to the consumer and we’ll gain more market share because of it,” or something to that effect. But everyone in unison made the same decision, so how does that work?
Amit Puri: I think what happened was the rates were cut about a week and a half before any of the banks decided to change their lending [inaudible 00:15:17]. And the only banks that actually changed it were 4 of the top 5, which was TD, I might be wrong on the information, but it was TD, Royal, BMO and I believe CIBC. And the following day Scotia changed it, and then the following day all the other banks in the country changed. You know, the tangerines and the home trust and the [encaps 00:15:41], and all the other national banks, and all the other banks that are out there to give mortgages. The smaller institutions are going to follow the big guys. Am I going to say there’s collusion among the big guys? I’m not sure.
They probably do discuss the impact of a passing on the savings, and I’m sure there were discussions held amongst senior management at all the top banks, that “Should we not pass the full savings on, and keep a reserve which translates into those numbers we just spoke about?” I think as soon as another bank drops their prime, let’s say from 285 to 280, the other ones are going to follow, it’s a domino effect. Nobody will be left behind. So I think they’ll take their time getting to the full deduction, and if we do see another reduction in the Bank of Canada rate in the next couple of months, who knows, they might keep a part of that as well.
So we don’t know where the prime is going to end up. Should the banks pass it on to the consumer in full? The answer is yes and no. Do you trust the consumer with extra money? Do you think they’ll inject it back into the economy, or do you think that the banks are better suited to lend out that 100 million to businesses that need it? And so that’s going back to our original few questions that the rate coming down is good for home buyers, and people see a difference at the pumps, and people see a difference in their mortgage payment. But you know what, PD Bank can do a lot more with 100 million dollars than each of us would do with an extra 500 dollars a year. And so that’s kind of where the tradeoff is, so I think it’s going to be interesting to see what plays out.
Andrew la Fleur: Very interesting. Speaking of mortgage rates today, what kind of rates are out there right now, on the fixed and variable side? What are people getting now, what do you think the rates are going to be this Spring, if, like you say, rates might actually go down? What’s happening right now?
Amit Puri: There’s a relationship that I always like to explain when I’m talking to anybody, and that is that variable and fixed rates are inversely related. And inverse means they do the opposite, most of the time. A year and a half ago, when fixed rates were being offered for 299 and 289, rates that were never heard of, the variable rate had no discount at the time. It was prime minus 0. So everybody locked into the fixed rates, because it doesn’t make sense to go with a prime rate mortgage. And 5 years ago, when the fixed rates were 4% and 3.79%, we saw variable discounting that we haven’t seen in the last 50 years. Which was prime 9.9, or prime minus .95, which some people still have today.
Now that the market hasn’t, in the past number of years, adjusted, it hasn’t gone up, the GDP hasn’t changed, the prime rate is prime minus 50, 60, even 70, and the fixed rates are staying around 2.99, 2.89, as they were before. And so my answer to your question, where are the rates going to go, I think when the bond yields and the market changes the fixed rates will rise. And that will give us a deeper count on the variable rate. And if we don’t see that, we might need a pullback of the variable rate. And the reason for that is, banks can expect interest rates to go up over the number of years that they lend money. And so if they offer you a discount of prime minus .6, today that means 2.25, but they’re hoping in year 3 and year 4 that goes up to 2.5, and 2.75, so that they can cash in on those interest differences that they were expecting.
I think we can continue to see lower rates over the next many years. Which one will stay low is what I’m saying is always fluctuating. Does that make sense?
Andrew la Fleur: Yeah. So if, let’s say, let’s play the hypothetical game here, if the prime rate drops again another quarter point in say March, what will we likely see? Will banks keep the variable rate discount the same, will it increase or will it decrease?
Amit Puri: I would say that they would keep the variable discount not the same, they’re actually going to reduce it. And the reason for that is it goes back to the banking model. Banks don’t want to provide an interest rate lower than about 2%, and the reason for that is not because they’re trying to make money. It’s because they’re trying to pay for their fixed costs. Branch costs, hours, employees, heating, hydro, computers, equipment, all that stuff. Generally banks are supposed to earn about 2%, so they can just maintain their costs. It’s like a grocery store. The milk is on sale, which is what brings the consumer in, but the rest of the grocery store is built to make sure that the company stays afloat.
So the same thing happens with mortgages. There is a misconception, banks don’t generally make much money on mortgages. Actually, they break even. The money comes from the other divisions of the bank, the savings, the safety deposit boxes, the lending, the investment banking arm, and so to answer your question [inaudible 00:21:24] variable rate, I think if the variable goes down again we’ll see a decrease in the discount. It’ll go to .4 or .5. And the reason for that is, for new mortgages being given out you wouldn’t generally see an interest rate of 1.9, or 1.8. Because it’s below their bottom line in terms of what they need to earn to pay for their expenses.
Andrew la Fleur: Very good tips to think about as people … Anybody who’s listening right now who’s thinking about, or who needs a mortgage, maybe they’re closing on a condo or something they purchased years ago, and it’s coming up for occupancy and closing, some don’t think about it if they’re thinking about going variable, probably a good idea to get approved and locked into something now, as opposed to waiting. Because, like you said, there is a lot of speculation that the rates will actually go down, and so if you’re thinking about getting a variable on particular, I guess now would be a good time to call a guy like you and lock in your rates. Would you agree?
Amit Puri: I agree.
Andrew la Fleur: I want to ask you a couple of specific questions, speaking to the condo investor who may be listening, mortgages on investment condos. Speaking to the first time condo investor trying to wrap their head around getting that first mortgage for their first investment property, how are the banks looking at you, what does a person need to know about what they need to be able to qualify for a mortgage on an investment property?
Amit Puri: I actually have a couple of simple tips and calculations that our listeners can do. The first couple of things that you need to check off on the list is, do you have good credit? And good credit is subjective. Do you pay your bills on time? Is your equifax score above 600, 650, 680, each one has a separate requirement. And do you have a job, have you been working, do you have steady income? These are certain things that, if you can say yes to, the next set of tips actually are easy to follow. As an investor, you can afford 5 times your income as a mortgage. That is the rule of mortgaging. I’m making it simple, it could be 5.2, it could be 5.25, it could be 4.9, but let’s use 5 as a number.
If the average person who’s investing in condo markets earns about 100,000 dollars a year, or 80,000 dollars a year, if you multiply their income 5 that is the mortgage amount that they can have. So if someone earns 100,000, they can qualify for a mortgage for 500,000. That is how the math works, with all the lending companies. The next question that an investor will ask is “What is my monthly payment?” The monthly payment is also an easy calculation. For every 100,000 dollar mortgage, the monthly payment is approximately 400 dollars a month. So if you have a mortgage for 500,000 dollars, your monthly payment is 2,000 dollars.
Those two numbers help you in less than 30 seconds figure out, “Can I buy a property? And how much is it going to cost me per month?” If the average new condo is, Andrew, what would you say, about 300,000, 350,000?
Andrew la Fleur: Sure, yeah, that’s about right.
Amit Puri: The mortgage on that would be 250, or 280. Let’s use 250 as a number. So at 250, the income that you need is 50,000 a year. Because 250 divided by 5 would be 50. And the mortgage payment would be 1000 a year, because every 100,000 is 400 bucks, so 250,000 would equate to 1000 dollars. Those are the numbers that investors need to use to determine, “Do I qualify? Can I afford it? And is this something I can do?” A couple of things to tack onto that, when you are buying a home for yourself for primary use, the banks allow you to put as little as 5% down. Subject to a whole set of rules by the government, which is by an agency called Canada Mortgage House Incorporation, which is CMHC. They also have other companies, like Genworth and Canada Guarantee, which do the same thing.
But the reason I bring that up is, as an investor, if you’re buying a second property that is now not your primary residence, and you are required to put at least, and here’s a range, you’re required to put between 20 and 35% down. Let me just make some clarity there, it depends on if you live in Canada, if you’re self-employed, if you’re working, and I think we can jump on that maybe in another question, but a minimum down payment is about 20% for the investor who’s buying a rental.
Andrew la Fleur: Right. So let’s say, typical scenario, someone owns their own home, they’ve been paying their mortgage for, let’s say, 5 or 10 years. And now they want to get an investment property. They’ve got extra savings paid up, they have the 20%. So how does it work exactly, for the first time investor, to understand if they’ve got that 20% on that investment property, they’re planning on renting it out, do these rule of thumb, the 5 times your income, does that still apply in this case? Or how does it work when you’ve got that 20% saved up for that investment property and you’re planning on renting it out and the rents are going to cover the monthly costs?
Amit Puri: To answer this question, what I’m going to do is I want to try and explain the different strategies you would use as an investor, whether you’re dealing directly with your bank or broker, like myself. The answer to the question is, every bank that is approving the mortgage has different requirements. It’s like a Honda and a Toyota. They’re both cars, they both get you to A and B, but why do people go with one versus the other? The same happens with RBC, TD, Scotia, CIBC, National Bank, the list goes on and on. And I don’t want to single out a single institution, because the rules are constantly changing. But let me give you a couple of examples. Bank A, which could be TD, or Royal, or Scotia, I’m just giving them letters just to keep them anonymous.
Bank A will do rental properties at 20% down. Bank B will only do them at 25, and Bank C will do them at 30. Now if the consumer only has 20%, that tells me, as well as yourself, that there’s only a select few banks that we can go to. If we go to Bank A with a 20% requirement, sometimes the bank you’re dealing with, they might prefer people who are employed. They might prefer people who are self-employed. Sometimes the banks deal with foreigners, sometimes they don’t. So when we’re going through this matrix of “Do I have 20%? So which banks do I qualify with? Okay, I qualify with Bank A, and Bank B. Now, does Bank A offer mortgages to people who are self-employed? Yes or no? If they do, we work with them. If they don’t, we check if Bank B does, and hopefully they do.”
You can get into scenarios where the situation is not possible at all, an investor says “I only have 10%. I am self-employed, I don’t declare any income.” At that point, the options are extremely limited, where you’re maybe even having to deal with a trust company. So to go back to the question of 20% down, with 20% down there is always a solution amongst the top 5 banks. TD, Scotia, National, CIBC, BMO. It just depends which banks policies you fit into, and that is something that it’s difficult for an investor to do on their own. It’s easier to discuss with an agent, like yourself, or a broker like me because …
Andrew la Fleur: It’s different in every case. And so it’s a common question that gets asked, but unfortunately I guess, like you’re just saying, there isn’t a straightforward answer, it’s a case of, like you said, every bank has different rules. And every person will have a different profile, which will be a good match for some lenders, and not a good match for others.
Amit Puri: Exactly. I could talk 100 examples of different scenarios, but the gist of it is, as an investor 20% down is a good rule of thumb. Maybe mentally budget 25, in case you’re in a situation where the bank doesn’t approve you. Because at 25 you pretty much are open to every other bank. But 20% is definitely the number, and the reason for that is simple. CMHC, which does the insurance on mortgages, they don’t insure rental properties. And so because of that, you have to put 20% minimum. That’s where that rule comes from.
Andrew la Fleur: This might be a good question also to ask. What is the difference between getting a mortgage at a big 5 bank, and somewhere else?
Amit Puri: The answer to that is absolutely nothing. The difference comes down to the policies, it comes down to, “Is the bank new?” I don’t want to list the specific banks, ENCAP and Merricks, and Home Trust, and Street Capital, and all these banks that are eligible, there’s about 40 different lenders in Canada that either you’ve heard of or you haven’t. It depends on what their strategy is, are they trying to build market share? They might offer aggressive rates, if Royal Bank is giving you 2.99, these other banks might give you 2.89. Is it worth the savings? Up to the consumer. Do you want the ability to walk into a branch? You can do that with Royal Bank, but you can’t do that with these other lenders.
Do you want the ability to have online access? And all those luxuries you’re used to with all the AAA tier 1 banks, like TD and Royal and BMO. That’s where the differences come, it comes down to your experience with the bank. From a banking perspective, it is FISCO, the financial securities commission of Ontario, I believe. That’s the rules for what the banks are supposed to do when they lend money. And so it’s not a difference of, “Is there a difference with the mortgages?” It’s a difference of what luxuries and comforts do I need when I’m dealing with that bank.
Andrew la Fleur: And obviously, is that something that you would help the client to figure out, in terms of looking at their profile and looking at what they need, you’d say “Well this bank offers you this rate, and these services and these features, versus this other bank, offers you a different rate, with different services, and different features?”
Amit Puri: Absolutely. And just to go back to that, with the other banks, there’s so many of them, each of them often has a very good policy in place that will fit for a consumer. I’ll give you an example. If somebody’s trying to buy their 3rd or 4th or 5th property, sometimes the primary bank that they deal with, they’ve come to a limit with how much that bank wants to lend them. But the alternate banks, they don’t have those limits in place because you’re a new customer to them. So that’s where going to the secondary banking lenders is beneficial, they’ll have policies in place that don’t shut you out of the market.
Andrew la Fleur: And are you giving up anything as an investor going to those banks, or is it just, like you said, you’re giving up things like walking into a branch or online access, but you’re not actually giving up any mortgage features?
Amit Puri: To be slightly cynical, I’ve seen situations where some of the alternate lenders, they’ll charge you 50 dollars to make a change from monthly payment to by weekly. They’ll charge you 25 dollars to send you out a statement. Are these cost excessive? No. But the reason they do it is to make up for the fact that they don’t have branches, and they have to have some of their admin processed by paperwork. Or the fact that they’ve given you such a good rate, and so to go against those savings they’re charging you for that. But over the long run, if you don’t require all that extra service from the bank, going with an alternate lender who is also an A-lender, it’s definitely beneficial. But it also comes down to a customer’s preference, and we’re all victim to it.
We have a bank that we like to go to, we’re used to the people that are there, we feel comfortable being able to walk into a branch and ask questions, or grab our debit card and call the number on the back. That’s where the differences come. That’s where 95% of the differences come down to, in my opinion.
Andrew la Fleur: Another question that often gets asked, buying in your personal name versus buying an investment property in a company name. Is there a difference in the eyes of the lenders, and how do they look at personal versus company name mortgages?
Amit Puri: I think this is a question that was built for me. Being that I’m an accountant as well, right? So, here’s the answer, it doesn’t make a difference any more. And I’ll give you a couple of scenarios, and then we’ll get back to the mortgage discussion on this. When you set up a company, the reason people set up a company is to take advantage of the LLC, which is limited liability corporation. And what that means is when you have a numbered company, 1, 2, 3, 4, 5, 6, 7 on [inaudible 00:36:11], it becomes an entity. It is its own living, breathing person. Let’s talk about an extreme example. Let’s say you own a gas station, and in that gas station you have 5 locations within the Toronto area.
If, and I’m just making up a scenario, there’s a death or an explosion and somebody gets injured, that person can sue the company. Now if the company has separate corporations set up for each of its locations, the person who is doing the suing, they be the plaintiff, the company that owes the money for the injury, they’re only limited to the assets and the liabilities of that single company at the location it happened at. But if as a company you only had one company for all five locations, you put all of your locations at risk. And so that’s the understanding that is transgressed into the mortgage business.
People say, “Oh, I want to buy 2, 3, 4, 10 properties, I want to put it in a company name, if somebody gets hurt at my property, if something happens, I want to make sure it’s in a company name. Unfortunately none of those factors actually come into play because that’s where home insurance kicks in. You are not protected as an individual, you Andrew, me Amit, if we set up a company and rent out a company in its name. What people forget is that when you have that company and you have the mortgage on the property, you are giving your personal guarantee. Unless the bank gives you the mortgage in just the company’s name, which they don’t, you will be personally responsible.
And so setting up a company to hold a mortgage has no advantages than setting it up in your personal name.
Andrew la Fleur: From a liability perspective, there’s no advantage to having the property in your company name. But what about from a taxation perspective, or income perspective?
Amit Puri: From an income perspective, whether you’re a company or a person, if you’re a person you file a personal tax return, if you’re a company you file a corporate tax return, okay? So we’re going to get a little bit technical and I’ll try to keep it simple. As a person, as you file your tax return, there’s a section on the personal tax return for rental properties. And in there you get to claim your rent, and deduct all of the expenses associated with that property. The property tax, the maintenance, any repairs, the cost of setting up the mortgage, legal fees, you name it. Anything that it costs you to run that rental property is deductible on your personal income.
And after that, you pay income tax. And the income tax is dependent on how much money you make. Let’s say the average person pays 30% taxes. Or even 35% taxes. In a company, when you run a company, whether it’s a rental property company Tim Horton’s or a doughnut store or a gas station or a taxi company, it doesn’t matter what company you run, there is a small business tax amount that people are seeking. When your company makes less than half a million dollars a year, you only pay 15% tax. And so that’s a very attractive, taxable amount. So if you create a company, put the rental income in the company and then take the deductions, whatever the income is on that rental company you only pay 15% tax, instead of 30.
Here is the kicker, here’s the part that people either don’t know or can get trapped in. When there’s money left in a corporation, you are not allowed to take the money out just by withdrawing the money, because it either becomes a dividend or a salary or a shareholder taking money out of the company. That money will be taxed as 30% on your personal taxes, so to make a small example, you have 1000 dollars left in the company, you would pay 150 dollars in tax. Now you have 850 dollars left. If you take the 850 from the company, you’ve got to put that 850 into your personal income tax. And on that 850 you’ll pay 30% income tax. So when you work out the math, it almost works out to the same amount if you had just taken the whole amount on your persona taxes.
The other part that I have to explain to clients is, when you’re filing corporate taxes, you’ve got to hire an accountant, you’ve got to pay their fees, you’ve got to register a company, there’s fees for that. So in my experience, the cost of running the company generally doesn’t outweigh the tax savings that people are looking for, because of the scenario that I just described between personal taxes and how much you make on the corporate tax,
Andrew la Fleur: That’s very helpful, I think a lot of people will even want to rewind that answer to there, and listen to that again. Because that’s such a common misconception, like you said, that people think “Well, if I just buy it in the company I’m going to save all this money, because I’m paying less taxes.” Well, yeah, but the money just sits in the company and you can’t access it, and as soon as you take that money out you get taxed on it again, one way or the other. Is there a tipping point? Sorry, I’ll let you finish.
Amit Puri: One more thing to add in, over the past few years almost every one of the major banks has taken away the program of giving mortgages in the company name. And the reason they’re doing that is because they also know this, and don’t want people to fall into that misconception. In the past three years, National Bank, Scotia Bank, have both taken it off their policies and their offerings, just to show the listener that the banks are starting to remove that ability, because they know it’s not beneficial for the client.
Andrew la Fleur: Very interesting. Is there a tipping point though, where … I’ve heard some people say “Well, when you reach a certain number of properties, then it definitely makes sense to incorporate and buy all those properties in a company name.” Does that tipping point exist, and if so, where is that, or when would you personally advise someone to be buying their properties in a company name?
Amit Puri: There’s never a tipping point. This comes down to different strategies. So, the way a corporation is set up is that for people that have the patience as well as the self-conviction to leave the money in the corporation, if they do that over a 30 year career the money that’s left in the corporation they can access it when they’re retired. That is the purpose of leaving the money in a corporation at a lower tax rate, but we’re all victim to the same problem. We see money in a bank account, we want to access it. Or we want to do something with it. In terms of answering the question, is there a number of properties you should have before you incorporate, the answer is no.
Because, on a personal tax return, every deduction that you’re allowed on the corporate side is allowed on the personal side. So whatever deductions you want to make are available there. The reason to transfer it over to the company is, if you don’t want to declare income and you have the ability to leave money in the corporation and not touch it. That’s when you do it.
Andrew la Fleur: Well, that’s been I think worth a listen to this episode, just right there, to get the answer to that question. Because I think that’s something that comes up time and time again, maybe not with the first time condo investor but certainly someone who’s been there, got one or two units and they’re thinking about that question, should they incorporate or not? They’re getting a lot of people telling them, “Oh well, you should incorporate, you’ve got this big real estate investing thing going on.” But I do see it even too with first time investors, you probably do too, they come to you and say “I’m buying this investment property, it’s my first one,” and they really get stressed out about that decision.
“Should I buy it in a company, or a personal name?” And it becomes a big thing for people.
Amit Puri: I will walk them away from buying it in a company name, because I know the saving, and the extra headaches are not worth it. It doesn’t make sense to own rental properties in a corporate name, if it’s for rental purposes. It only makes sense, going back again to the question before, when you have the ability to leave the money in the corporation and then you are not paying as much tax, but we’re all human beings and I’m telling you, 99 out of 100 people, not even 9 out of 10, 99 out of 100 people will access the money. And when they do, the tax savings just got washed away that they were trying to save.
And instead they actually incurred thousands of dollars in accounting fees and setup costs for that company, so when an investor comes to me and says “I’d like to buy it in an investment company,” my job is to educate them and I will try and steer them away from that decision, because it generally doesn’t make sense for the average investor. But if they are adamant on it, it is something that is doable, and the banks do allow it. Some of them that are left. And the advantages are there, again, I sound like a broken record, for those people who can hold the money in the company and leave it for when they want to retire.
Andrew la Fleur: That’s great Amit. Why don’t we wrap things up there, I think that’s a great point to leave it. If people want to get a hold of you, where’s the best place to find you online or otherwise?
Amit Puri: They can definitely contact you, and then you’re definitely a point of contact for me. But you can visit my website, which is amitpuri.ca. You can also give me a call at 4162304499, as well as my email is email@example.com. I’m happy to help anybody who is looking for guidance, whether it’s on the accounting side or mortgage side, or even both. And one thing that I’m a proponent of here, it’s always good to have a strong agent like yourself, Andrew, on the line when we’re discussing this, because getting a mortgage is not just a part of buying real estate. You also want to know which properties are good, where to park your money, which investment condos in the city are worth it, and over the years I’ve seen that you’ve guided clients through the right decision.
I think what makes a great agent, like yourself, is that if you don’t think something’s the right investment you’ll get a client to walk away from it. And vice versa, if it’s a great investment you’ll get them to believe in it the way. So obviously getting a hold of me is easy, and getting a hold of me through you is also easy.
Andrew la Fleur: That’s great, well thank you so much for the kind words Amit, and I appreciate you giving us your time today, hopefully we can have you on the show again soon. And yeah, just appreciate it. Thank you.
Amit Puri: Thank you very much.
Andrew la Fleur: Okay. Have a great week.
Amit Puri: You too. Bye.
Andrew la Fleur: Bye. Okay, that was my interview with Amit Puri, I hope you enjoyed that and I hope you learned something. I really appreciated Amit going deep on some of those questions and really getting behind the why the rates are the way they are, and why he’s recommending you buy in a personal name as opposed to a company name. His depth of knowledge was really on display there, and we hopefully all learned a lot from today’s episode. So once again if you want to see the show notes for this episode, head on over to truecondos.com/amit, and of course, as always, I appreciate your support for this show, appreciate all the listeners out there who are listening.
And if you would like to support the show, you can leave a review on iTunes, or a rating, that would be much appreciated. And of course, make sure you do subscribe to become a True Condos subscriber over at truecondos.com.
Thanks for listening, and have a great week.
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