If you’ve been looking forward to trying something new in retirement, flipping houses might be the ticket. If you want to be a successful house flipper, follow these steps from Financial Independence Hub to get your business off on the right foot.
1.) Figure out Funding
Funding for house flipping generally comes from two places: investors or hard money loans. Each way has its benefits and drawbacks.
Investors can be a great option because you are bringing someone into the business who wants it to succeed. The money investors give you can also be used more freely than funds from a loan. Auctions, for instance, are an excellent place to pick up homes for cheap, but they often require cash. Most loans won’t cover auction purchases, so investors are an excellent way to open up the world of foreclosed auction homes for you.
The downside to investors is that because they also have an investment in the business, you might have less freedom than you would if you were on your own. Their opinions become as weighty as yours, and you may have to bend to their will when your opinions differ on what to do because they have the money.
Hard money loans are another option for business financing. Instead of basing their approval on you, lenders consider the potential value of the house after repair, called the ARV. If approved, they’ll give you not just the purchase money for the house but what you’ll need to flip it, too, and if the loan goes south, they can get their money back by selling the property. The main drawback to these loans is steep interest.
2.) Know what to look for
The ideal house for flipping is located in an up-and-coming neighborhood, meaning young families and professionals are looking to buy there. It’s located on a good street with low crime and is near nice schools.
According to HGTV, the best houses have areas that can be improved immensely simply by painting. They have solid builds with an attractive layout and unique pieces that give them character. Although it can be tempting to choose homes that could use extreme renovations, those kinds of fixes can take significant time. It’s important to remember that every month you spend working on the house is time that you’re losing money through your loan or paying bills to keep the house up and running. Continue Reading…
The Covid pandemic has led to unprecedented government spending with a deficit that has reached record heights.
Sooner or later someone has to pay for this and that usually means the taxpayer. Don’t look now but when you start your tax planning it’s probably best to assume that tax rates are going up in Canada.
However, even before Covid the federal government was talking about increasing the capital gains tax.
Capital gains inclusion rate could go back up to 75%
Currently, only 50% of capital gains are, in fact, taxable but this was not always the case. In fact, from 1990 to 1999 75% of capital gains were subject to tax! It’s logical to assume that tax revenues will be increased through a higher capital gains portion that is taxable, since capital gains are perceived as ‘passive’ income from investments. In theory, this means taxes should be generated by wealthier taxpayers.
Loss of Principal Residence exemption?
Also, the big fear of every Canadian is that government will remove the principal-residency exemption. Currently, taxpayers can sell their primary residence at a gain and not pay any taxes. Many taxpayers rely on the appreciation in value of their homes as their main source of retirement income. The impact of making gains on principal residency taxable would be devastating to many, if not most, Canadians.
Before discussing what to do about all this, let’s make sure we understand what capital gains are, how they are different from your other income, and when these gains become taxable.
So, what exactly is capital gain? In a nutshell it’s the growth in the value of an asset being held for investment purposes, so that asset is not for resale. A long-term holding period would indicate that the gain is capital. Currently, only half of the capital gain is taxable, while most other income is fully taxed.
In most cases the capital gain is subject to tax when the asset is sold, but there are also times when you may have to report capital gains without an actual sale occurring. For example, at the time of death there is the deemed or assumed sale of all assets, with any capital gains included in the tax return of the deceased. This would, of course, affect beneficiaries.
It’s important to note that increases in personal tax rates will also result in you paying more tax on capital gains. This is because the tax rate on capital gains is applied at the same tax rates in Canada as on employment and other income. In addition, reporting a higher overall total income would also result in more tax because a higher income puts you in the top tax bracket.
Defence # 1: Timing
So, now we see that many tax-reducing strategies primarily revolve around two things – 1) timing, and 2) reducing your taxable income. First, let’s look at timing.
If you have higher overall income from various sources in 2021, and expect lower taxable income for 2022, consider disposing of the asset(s) in 2022 wherever possible so the gain attracts a lower marginal tax rate for you.
You can also use time to advantage by deferring the cash outflow – the tax you pay to the government – and disposing the assets early in the year. Your tax bill is due April 30th of the following year, so if you sell the capital asset in January of 2022 you still have 15 months until tax must be paid on that.
Staggering gains over multiple years
Now, let’s assume you have a large capital gain. How can you stagger that gain over several years? One strategy is to defer cash receipts from the sale over multiple years. The Canadian Income Tax Act allows you to spread that gain over five years (and in some cases over ten years), provided you receive proceeds from the sale over a number of years. For example, if you receive 20% of the proceeds in 2021, you only need to include 20% of the gain in your taxable income as it can be spread over five years.
RRSPs and TFSAs
All these strategies are of a short-term nature. If the assets are disposed of in the long term, consider holding them inside your RRSP. You don’t have to declare those assets as income until you make a withdrawal. Likewise, you can use your TFSA so some of the gains are not subject to tax at all. Either way, your tax advisor can help determine if assets can be transferred to your RRSP or TFSA. Continue Reading…
[Editor’s note: this blog originally appeared on the Hub in 2017 and is being republished in the wake of the Colonial Pipeline ransomware attack of 2021 and, just this week, JBS meat plants.]
In 2016 the University of Calgary got hacked. The university was hosting a conference with thousands of professors and on the first day problems started to appear with the databases.
The school’s IT department said this was due to a type of malware called ransomware. Before long, people on the campus had to communicate with one another via walkie-talkies, since the email system was suspended. Then it came back up again. How? The university paid the hackers a $20,000 ransom.
Both Windows and Mac PCs targeted
Although ransomware has been around for some time, it just now is becoming well known. It targets computer operating systems like Windows 7, 8 or 10 and Mac OS X, which means any organization using such operating systems is potentially vulnerable. And that’s a lot of organizations. Continue Reading…
It’s possible that the game has been changed for the better, for Canadian retirees. Purpose Investments has launched a retirement funding mutual fund that is designed to deliver an annual payout at 6.15% annual. That is, the fund would pay out a minimum of 6.15% of your initial total fund value. For every $100,000 that you have invested, you would receive an annual payment $6,150. Introducing the Purpose Longevity® Pension Fund.
The Purpose Longevity Pension Fund offers the pension model, now available to the typical investor. Advisors will also be able to use the fund and will collect a modest trailing commission. For many Canadian retirees it will certainly be a game changer.
Income for life.
One of the greatest fears for retirees is running out of money. And most retirees don’t want to manage their own investments. They want to enjoy life, without financial worry. The Purpose Longevity Pension Fund will allow Canadians to top up their Canada Pension Plan and Old Age Security payments. Retirees may have other private pensions and other assets within the mix. The fund will allow a retiree to pensionize a large percentage of their liquid assets. They approach would remove much of the stock and bond market (volatility) risk.
And more importantly perhaps, it would remove the risk of investors messing up their retirement portfolio (and retirement funding) by way of bad behaviour.
The Purpose fund sits between the Vanguard VRIF ETF retirement funding solution and the traditional annuities. The Vanguard ETF is designed to pay out at a 4% rate of the portfolio value, adjusted each year.
An annual 6.15% payment (at age 65) is a big step up the retirement funding ladder.
When a retiree manages their own investment portfolio they will often use the 4% rule as a benchmark for the level that the portfolio can safely deliver retirement income, including an annual inflation adjustment. On Boomer and Echo I had offered …
Life changes and priorities change when we switch to the retirement or decumulation stage. Retirees just want to get paid.
Purpose Investments Presentation
Canadian retirees are not necessarily well served by the financial institutions in the retirement stage.
Purpose Investments Presentation
The pension model for the masses.
How does a fund pay out at a 6.15% rate (and potentially to increase) while studies show that a balanced or conservative investment mix can only ‘safely’ pay out at a 4%-4.5% level? Once again it follows the model used by pension funds (public and private) around the world.
I asked Som Seif, CEO of Purpose Investments to deliver an explanation.
It is based on what they call Longevity Risk Pooling. The difference between the required return on the fund (net 3.5%) and the income paid to investors (6.15%+) is because when people buy, they get their income, but as some people redeem/pass away earlier, they leave behind in the pool their returns on their invested capital (ie they get their unpaid capital out upon death or redemption). These returns left behind reduce the total return required to provide the income stream for all investors.
Som Seif
It is the pooling of funds by the collective group of investors that will hold the fund, that delivers the secret sauce. There is retirement funding strength in numbers.
This is called Longevity Risk Pooling (or Sharing).
And as per the above quote, the underlying fund holdings only have to deliver at an annual 3.5% rate of return for the Purpose Longevity Pension Fund to deliver on the 6.15% funding level. Here’s ‘the how’ …
If you put in $500,000. After a number of years you receive distributions of $200,000, but then you pass away. Your estate would receive the unpaid capital of $300,000 ($500k-$200k). The return on the invested capital would stay in the pool for the benefit of all of the investors remaining. This return would reduce the overall required return for everyone.
Som Seif
The approach as been back tested.
Morneau Shepell conducted extreme stress testing on the model, which included the use of their economic scenario generator (ESG) that produced over 2,000 different simulations of future paths of economies and financial markets.
Probability of success (i.e. not having to decrease the income payout):
Over a 25 year period: 91%
Over a 35 year period: 86%
Purpose Investments can reduce income levels to ensure that the assets are never depleted and that income payments can continue to unitholders for their lifetime.
Net, net, the payments could move higher or lower. The risk will be managed, while any benefits offered by the markets will be passed along to investors.
The fund series.
There will also be a D-series available for self-directed investors.
The game changers combo offering.
On MoneySense and when we put together the Best ETFs in Canada, we often refer to the one ticket asset allocation ETFs as game changers. For use in the accumulation stage (wealth building) Canadian investors can hold comprehensive all-in-one portfolio ETFs with fees in the range of 0.20%.
And now enter the Purpose Longevity Pension Fund that might turn out to be the next piece in the game changing investment landscape.
Accumulation: one ticket
Decumulation: personal pension mutual fund
I’ll continue to do more research and I’ll add to this post. And I would invite reader questions. What do you want to know about this new offering?
I’ll get you the answers and I’ll add the responses to this post.
Thanks for reading. We’ll see you in the comment section.
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Dale
Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on Dale’s site June 1, 2021 and is republished on the Hub with his permission.
What is one investment option that a small business should consider? Why?
To help your small business take on different investment options, we asked financial experts and small business leaders this question for their best investment ideas. From consulting a tax expert to getting into stocks and shares, there are several smart investment tips that may help your small business.
Here are eight investment options that small businesses should consider:
Learn About Objectives & Preferences
Consult an International Tax Expert
Invest in Your People
Help Fund Your Home Base
Find Companies That Improve Lives
Build Wealth with Index Funds
Think About Retirement Early
Get into Stocks and Shares
Learn About Objectives & Preferences
As any sound advisor will say, the best investment options for a small business truly are based on a personal situation. Some small businesses want more flexibility and control with their savings. Others are looking for less risk and fees. Before looking at investment options, small business owners should learn about their objectives and preferences. Then, they can see how investment options like life insurance or annuities can improve their financial position by safely growing their money while protecting it from tax and market risks. —Chris Abrams, Marcan Insurance
Consult an International Tax Expert
Investment options depend on a small business owner’s situation. Small business owners located overseas must understand that tax laws can differ considerably from country to country and impact their assets, financial accounts, and investments. That’s why consulting with an international tax attorney on issues like cross-border tax structuring, and compliance needs to be a part of the process. Investments aren’t just about the return; they’re also about the tax ramifications and savings by making the right choices. — Jason Kovan, International Tax Attorney
Invest in your People
Some of the most successful businesses tend to have a people-first mentality. An investment in people, whether that is putting in the time to make your customers happy or providing the resources necessary for happier employees, is an investment in your business’ success. If your customers are happy, they will recommend your business to their family and friends. If your employees are happy, they will be more willing to invest their time and efforts into the company’s goals and vision for the long term. — Brianna Vaughan, LendThrive
Help fund your Home Base
Invest in municipal bonds to help fund and develop your home base where most of your customers are located. These types of bonds offer a way to build interest while preserving your capital. They also have some tax benefits. Many municipal bonds are exempt from federal income tax as well as state and local taxes. — Rronniba Pemberton, Markitors
Find companies that Improve Lives
Investing in tech companies and products like ours helps to advance the industry and improve our daily lives. Predictive text and real-time spelling correction capabilities help to open doors for more opportunities not only for your business, but also your customers and employees who struggle with text. It also helps to improve overall productivity to maximize daily efforts. Continue Reading…
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